Ask Richard: Capital

Richard Harpin has had a hugely successful career in business. Having founded HomeServe in 1993, he helped build it into one of the UK's largest home emergency businesses. He served as CEO until its acquisition in 2022 by Brookfield Asset Management, in a deal that valued the business at £4.1bn.

He has since founded the investment fund Growth Partner and purchased Business Leader to help leaders grow their businesses. Here, he covers all things international expansion.

Do you have a view on equity versus debt? What’s better at what stage?

Having some debt in a business is a healthy discipline, so long as it’s not overburdening the business and it’s not at a really high interest rate. But equally, having equity can also be the right thing to do.

Generally, if the business is big enough and profitable, and it’s not looking for help and advice, then taking some debt to help grow more quickly is a sensible thing to do. Typically, I wanted to be running a business that was at two or two-and-a-half times EBITDA profit geared, not at three, four or six times, where you might not sleep at night.

I always say to an earlier-stage founder, ideally bootstrap the business until you prove the model. If you take money at an early stage, there’s a tendency to go off and spend it and try to grow the business before proving the core business model. The ideal is not to borrow money and not to dilute the equity until the model is proven.

Then you might want to press the accelerate button or you might want to take a bit of money off the table to de-risk yourself and enjoy your success. Then you need to look at bringing in investors.

How do you know when you need funding and do you think every business needs funding to scale?

Not every business needs financing. I think the best example is Ben Francis at Gymshark. He brought in a CEO in Steve Hewitt who was an expert in running businesses with other people’s money, i.e., the clothing suppliers that funded them for 90 days’ credit.

Ben never needed any money to get Gymshark to a billion-pound valuation. And it was only then that he brought in General Atlantic, the US fund manager, who gave him £200m for 20 per cent of the business. He told me himself: had he not brought in Steve, he wouldn’t have run the business as well and he would have needed to go out and get some equity funding.

What are your rough guides, do’s and don’ts, regarding equity dilution and valuations?

First, don’t sell a majority stake too early. Second, don’t get an investor if you can bootstrap in the early days. Third, if you are selling a minority investment, it’s not always about maximising the multiple and the amount that you get. And fourth, it can be more important to focus on the end multiple when you come to exit.

Typically, private multiples now range from five to 10 times EBITDA. That is with the exception of software, tech and marketplace platform businesses where those EBITDA multiples would be anything up to 20 times if they’re hitting what’s called the rule of 40, which is the percentage profit margin added to the revenue growth rate.

Is there anything we can do about the fees associated with raising capital?

Raising money in the right way is really important, so it is the right thing to get advice. Only 21 per cent of businesses, according to the British Business Bank, get an adviser to help raise money. And I think that’s partly because it is not always clear who the best adviser is. But it is important to find the right one.

You can always go back to an adviser you have already used and ask them to give other advice that maybe they wouldn’t charge for, say on sources of equity finance. Otherwise, it’s about using your network – for example, speaking to other Business Leader members.

It’s important who the individual is, whichever advisers you go with. You need to get comfortable with them. Ask yourself if they feel like the right cultural fit.

Ask them specific questions, like: “Give me some examples of where you’ve managed to improve the terms,” and ask them who that was with and the specifics of that better deal. Also, make sure you get independent references. Don’t just use the ones they give you.

Make sure that they’re telling you whether they’re taking any hidden commissions, get full transparency on what they are charging and whether there are any additional commissions. And be cautious. Don’t give away too much confidential information before you have the right adviser.

If you could fund growth into a new country with current profits, but that growth would be much slower versus raising funds to grow faster and giving away equity, what is the best play?

The key thing is it’s often not just about the money. If it was, then you’ve got the money and you shouldn’t be seeking an investor. The key is: can you find an investor who can really help you with the business, in this case growing internationally.

If you can find somebody who has been through that and is prepared to put in some money, then it could be worth selling a minority shareholding. But you need to weigh up the balance of those two factors. The secret to a successful minority investor is somebody who can show but never tell.

Do you have thoughts about the advantages and disadvantages of trade funding?

The vital question with a mid-sized business is, if you bring in a trade investor, would they want to dictate how you run your business? Will they want it to fit with their business and agenda? Also: selling, say, a 25 per cent stake to a trade investor, there’s a good chance that will put off another buyer in the future if you want to sell.

In an early-stage business, particularly a tech business, having a trade investor could significantly help the prospect of success. That’s because it could bring expertise, knowledge and market access, which is incredibly valuable; particularly in sectors where there is a high failure rate, such as tech.

What is one thing founders should avoid doing when they’re looking for funding?

Thinking that it is just about the money. And raising too much money, which can mean that you become undisciplined and you end up funding too many innovative ideas. We all know as entrepreneurs that we have too many ideas and we need to be more focused.