Have your cake and eat it
Article Date: Jun 20 2006
Banking on the virtuous circle
Of course, the most obvious way to avoid losing control of your business and future rewards, is to build up a venture with strong foundations and good cash flows (easier said than done), and then borrow from the bank to fund organic and acquisitive growth.
This is exactly what chief executive Vin Murria of thriving software consolidator Computer Software Group (CSG) has done over the past three years.
As well as being CEO, Vin is also a partner at Elderstreet Investments, which owns around 25 per cent of the business. She has been at the helm of CSG since 2002, steering its turnaround from a loss-making, moribund business to one that has just posted a 79 per cent improvement in sales to £25.9 million for the six months to February. Profits leapt even more, from £0.9 million to £2.35 million.
‘We have combined acquisitions with organic growth, buying seemingly weak businesses that actually had real value and underlying profits, but which had been run as lifestyle companies. What we have done each time is release the potential within.’
In all, CSG has completed ten acquisitions in the past three years. The first three were a mixture of cash and equity, the fourth was a pure cash deal, the fifth entailed ‘a little bit of equity’, but from there on in, all the acquisitions ‘have been about cash and debt, with no dilution’.
‘In the early days, you will need an element of dilution to get the ball rolling,’ concedes Murria, ‘where an acquisition is structured perhaps as 50 per cent equity and 50 per cent cash. But if you’ve got the model right, as you go along, you will end up with a bigger chunk of debt [or cash] and a smaller slice of equity, because the business should be generating sufficient resources for you to use cash flow to fund the bank debt. It then becomes a virtuous cycle.’
Invoice discounting and loans help Leapfrog advance
Entrepreneur Lee Bevan overcame certain growth hurdles through a savvy combination of invoice discounting and £100,000 from the Small Firms Loan Guarantee (SFLG) scheme. These helped him improve cash flow and growth prospects at Leapfrog, the IT equipment distribution company he set up in 1999.Under Bevan’s stewardship, Leapfrog quickly started upon a growth curve, but knowing how rapidly the IT sector can and does evolve, he was quick to spy an opportunity and decided to make a move that would see the company become involved in the supply and installation of interactive whiteboards – like a projector used with a special pen – in schools, and achieve preferred supplier status with Local Education Authorities.
To fully exploit the situation, the company needed to secure an injection of finance and improve ongoing cash flow. Like many entrepreneurs before him, he found support from the bank lacking.
Undeterred, he approached Venture Finance, an invoice discounting facility. Invoice discounting enabled Leapfrog to release funds to pay suppliers promptly, which in turn strengthened its negotiating power and aided the company’s continued growth. Simultaneously, he applied for a SFLG loan, which Venture Finance arranged to be provided in two advances of £50,000 – timed to coincide with the growth of its sales force.
