Are UK entrepreneurs more prone to building or selling their business?
UK businesses and entrepreneurs have often been labelled as preferring to ‘scale-out’ and exit quickly, compared to their US, German, and Japanese equivalents, where they tend to build for the longer-term and focus building an empire and establishing a legacy.
Whether a company remains private and aims to grow, or they join the trend of firms that exit – there are many factors to consider for business owners.
The life of an entrepreneur involves many ups and downs throughout the journey, but for many, the end goal is either to scale and create a legacy, or sell up once a suitable offer is presented. But what is the better option? And how does the UK compare to the rest of the world? Business Leader investigates.
Why do UK entrepreneurs exit so soon?
Every major market has trends within its scaling community, and the UK has become known around the world as a hotbed of innovation – making it an appealing opportunity for domestic and global investors.
However, there are several key reasons why UK entrepreneurs aim to scale-out rather than create global, generational companies.
Matt Eves, Head of M&A in the South at EY, comments: “Entrepreneurs’ exits are often led by the need to access finance to grow. To raise the necessary growth capital to take the business to the next step, entrepreneurs need to engage with alternative finance providers such as private equity (PE).
“PE works by investing for a set period of time, so providers will always have one eye on exiting the business and will sell to realise a return on their initial investment at an appropriate and planned time. An exit will be dependent on the growth of the business.
“The majority of business growth money in the UK comes from some form of PE provision, and unlike some of the financial systems in other countries, such as Germany, there are fewer options to engage family finance, or other types of finance. Businesses do have the option to raise finance through debt, but as a consequence, this may hamper business growth activity. The UK’s entrepreneurial culture is heavily linked to equity investment. Another common reason for entrepreneurs wanting to sell their business is a failure to properly plan
Alpesh Patel OBE, Founder of Praefinium Partners, agrees with this assessment of the importance of PE, in relation to UK entrepreneurs’ growth and exit plans.
He comments: “UK entrepreneurs usually look to exit quickly because investors like me in private equity want an exit ourselves, and want to sell the company to a bigger one who have their own management.
“Other reasons include serial entrepreneurs who want to sell their shares and cash out for the next big thing.
“Alternatively, some are lifestyle entrepreneurs who love their business and never want to exit. However, most in the UK get bored, I think, and want the next thing, or know they are good at scaling and better jump before the more difficult phase kicks in when the hype dies down. There is also another reason for exit – a bucket load of money!”
Another reason why UK entrepreneurs wish to exit is due to international growth plans.
Henry Whorwood, Head of Research and Consultancy at Beauhurst, comments: “It’s often said that UK businesses exit too early, but there are some natural reasons for this, including the size of the UK as a market. Having expanded nationally, an exit to an international acquirer can be a natural way to expand internationally.”
However, sometimes there isn’t a ‘theme’ around the exit of UK businesses. Barry Jackson, Head of BGF in Yorkshire and the North East, comments: “It’s often said that ‘companies aren’t sold, they’re bought’, which is a helpful perspective for an entrepreneur or investor when considering an exit strategy and timeline.
“It makes sense for an entrepreneur to have a plan and a desired timeline in place, but the most successful exits are likely to have been those which have been considered over the long-term. This allows solid foundations to be put in place, with the business having reached an optimum stage of maturity and had a strong management team appointed, so it can continue to succeed without its founder.”
One of the primary reasons why UK business owners don’t replicate the legacy of companies in other leading nations, is the entrepreneurial environment and levels of support that are available.
Jackson explains: “Historically, the UK funding landscape hasn’t always offered the options for entrepreneurs to achieve scale while keeping control of their business. BGF was launched after the financial crisis to invest in businesses with long-term growth potential by taking minority, non-controlling stakes.
“There has been remarkable progress over the past decade in terms of the UK funding options available and the mindset and ambition of the entrepreneurs we meet and invest in. The US and China lead the way in creating the most unicorn companies and the scale-up ecosystem around these hubs is more well-developed as a result.
“We’ve also seen a positive move towards levelling-up of the UK distribution of capital and, in turn, the number of growth companies based in the regions. The availability of this funding and success stories created by regional entrepreneurs means more business owners are going for growth and creating companies of scale.”
Why are UK businesses appealing to acquire?
Unlike many of the other leading nations around the world, a trend within scaling businesses in the UK has been around selling to larger businesses from abroad. But why is this happening? And why is this increasing in value and regularity?
Patel comments: “UK businesses are appealing to international investors due to their track record of getting good ROI. This is because the UK has good ease of doing business, a large economy and somewhere with a history of taking companies global. Investors also know that their money is safe due to strong regulations and laws.”
Jackson expands on this: “The UK benefits from some exceptional homegrown, high-potential businesses, which are extremely attractive to investors and buyers. First and foremost, investors will look for a good track record, strong leadership, and growth potential.
“It will often come down to a buyer or investor’s particular growth strategy as to what makes a company appealing. If I look to our own portfolio and our recent exits, Coppergreen Leisure Resorts was acquired by a business looking to expand its UK footprint of holiday parks. Coppergreen Leisure Resorts was particularly attractive because of its prime locations, leadership in sustainability and growth track record. Buyers also look to UK businesses as providing access to the UK market. J&B Recycling was bought by a Spanish-headquartered business to enhance its UK presence.
“Buyers are also drawn to innovation, companies leading their markets and strategic acquisitions which will enhance their own offering.”
Innovation and the UK’s world-leading tech sector has also kicked international acquisitions into a new level. Stephen Kelly, Chair of Tech Nation, explains: “This is a golden decade for UK tech, coming off the back of a record-breaking year for scale-ups, with over 120 unicorns and almost 40 UK IPOs last year. There’s never been a greater time for scale-ups to grow and create value for their stakeholders and investors.”
However, the reasons countries like the US, France and South Korea still have many of their own companies, but the UK doesn’t, has been years in the making.
Alison Owers, Global CEO at Orient Capital, explains: “Privatisation in the UK has been a large driver of the current global ownership landscape, as many of our big public companies have been taken private over the last 40 years. In Europe and Asia, there is more state ownership, and a slower or near non-existent privatisation push. We must exercise caution when it comes to value judgements here – one strategy is not necessarily better or worse than another, and a thriving global economy should benefit everyone.”
Other countries may be taking note, as France begins to loosen its corporate governance laws. However, anxieties remain.
While foreign investors are not prohibited from acquiring shares in a Korean company, there are limits on foreign ownership in Korean companies engaging in certain industries considered to be vital to the national interest, such as defence, broadcasting, telecommunications, publishing, and public utilities.
Andersson continues: “The active M&A market in the UK indicates the positive view that investors and corporates have of the country. Following on from a bleak outlook in the wake of Brexit and the pandemic, foreign buyers are displaying a vote of confidence with not only their feet, but also their wallets.
“An influx of capital may well give struggling UK businesses the boost they need to continue to expand and grow.”
Are attitudes changing?
With the entrenched model of scaling and selling, taking a different view to growing a business is starting to happen in the UK.
Kelly comments: “There are a range of factors causing UK entrepreneurs to exit prematurely, but one of the key reasons is the UK’s need for greater cultural ambition. The ambition for UK scale-ups must be to win accolades on the global stage, rather than exiting quickly and prematurely.
“In the UK, we need to reset our ambition levels to nurture and support global market leaders, and this vision must come from the top of the company (the Board, founders and CEOs), who should aspire to win on the worldwide stage.
“I have seen the power of this kind of fearlessly ambitious leadership first-hand during my time in Silicon Valley, where I was in the founding team of a tech unicorn that became a global market leader. As a nation, we have to be more ambitious about expanding overseas, growing faster, and achieving market leadership globally. The key phrase to remember must always be ‘grow fast or die slowly’.
“We are now reaching that stage in the UK, as we have a rich talent pool of CEOs, founders and Board members who have scaled successful tech companies many times before and won on the global stage. All of the ingredients are there now for the UK to power on, to acquire companies overseas, and to choose growth and expansion over an early exit.”
Does more need to be done to support scaling businesses?
Changing the traditions of scaling businesses looking to scale-out is slowly starting to happen, however, one of the main challenges opposing this is the level of support available to entrepreneurs.
Eves explains: “A reasonable, fair, and supportive taxation system is critical to encouraging more entrepreneurs to build their businesses, and so is access to funding with longer term horizons rather than the typical private equity fund cycle.
“Ideally, an increase in family offices and buy and hold opportunities here in the UK has the potential to be more beneficial to entrepreneurs seeking growth finance, but for the moment, the majority of entrepreneurs will continue to see PE as the best option to grow their business.
“PE usually allows the entrepreneur to retain an influential part in the business and provides access to a support network of trusted advisers and experienced sector specialists. Any exit, and subsequent investment by a different financial institution, should be managed closely to ensure that the entrepreneur maintains some autonomy as the business grows.”
Juliet Barratt is the Co-founder and former Chief Marketing Officer of Grenade, a fast-growing sports performance and active nutrition brand. Grenade was sold to Mondelez for £200m last year.
She comments on what support is needed to encourage entrepreneurs to continue scaling: “Mentoring, support, and transparency are key. For example, with Brexit, nobody really knew what was happening.
“Also, a lot of people get frowned upon for doing well, which doesn’t seem to be much of a celebration for people who have worked hard and really achieved something. It almost seems to be a bit of a jealousy thing in the UK, so it would be nice to see people being more supported. There are some great awards out there and some new ones coming out where entrepreneurs and entrepreneurship is really celebrated. This is so important because it does take balls to start your own business as opposed to being PAYE.”
Another exponentially-expanding UK business is innovative flower retailer Bloom & Wild.
Aron Gelbard is the Co-founder and CEO, and he is a part of the new wave of UK companies looking to grow domestically and on the global stage. He concludes: “I am definitely not looking to sell our company. I feel extremely privileged to have this job and I love what I do. I love the fact that we are able to delight customers at scale, and I think there is so much opportunity to continue to scale our business in Europe, especially having made a variety of acquisitions. I am really motivated to continue to build this company for many years. We expect to continue to grow very rapidly going forward as there are loads of opportunities out there.”