In this economic downturn, budgets are tightening and investors becoming increasingly protective of their wealth. Yet some businesses are tripling their wealth after going private. Is becoming a private company a viable option for successful expansion?
Capital is scarce in the current financial climate, and the decision for a business to rely solely on private investors to fund the growth of their company is one not taken lightly. We are told that investors are growing nervous about the safety of their wealth, and are taking more precautions than seen in the past before selecting where to place their funds. One of the biggest challenges facing businesses today is the obstacle of how to achieve expansion in today’s tighter economy.
However even in these times of taut budgets, some businesses are experiencing phenomenal triumph while being funded by private investors. The secret to financial success and growth as a private company lies in the relationships that are formed between the business and its stakeholders.
Australian owned and operated home fire prevention company Spectrum Fire have emerged victorious from their first two and a half years as a private company. In this short space of time, Spectrum Fire has increased their revenue from an initial $30 million to $160 million. “The secret to Spectrum Fire’s success,” Chief financial officer Edison Bayas says, “is the partnerships that it formed along the way, right from its inception.”
For the national fire protection service provider, being a private company supplied Spectrum Fire with the capital that they needed to acquire smaller businesses under their umbrella to expand. “Our first key stepping stone,” Bayas explains, “was buying three well established very successful companies. Once we got those businesses on board which were well managed locally, that set up the platform to form the culture of the company. What we’ve tried to do with each acquisition is to pick the best of the best and then mould them to the culture of Spectrum.”
The funds to take those first steps in expansion were provided by two key stakeholders. Bayas stresses that in Spectrum Fire’s case, forming good relationships with investors was of vital importance. “We actually researched, and came up with two key partnerships,” Bayas says. CHAMP Venture Capitalists were the first providers of initial capital. “They were able to provide us with the capital for expansion and they continue to be our biggest supporters, and the biggest believers in our model.” The second relationship at the core of the financial security of the business is that with its main funder, Westpac Bank. “Without both of them, we wouldn’t be here. I believe that if you have a sound model and you continue to prove success, and you form the relationship with your funders and your key stakeholders, that funding will always be available.”
Like relationships between people, communication is the key in the opinion of Bayas to the health of business relationships. “We work on a No Surprises Basis.” While Spectrum Fire could branch out and get a panel of lenders, which may need to happen in the future to reach the next level, Bayas says that at this point the company is comfortable enjoying reciprocal trust with several secure investors. “We have formed very solid relationships where we are very comfortable with each other. We are very up front and transparent with our finances so they are always in the loop and there are no surprises.”
The business model of Spectrum Fire is straightforward. About two years ago there was an opportunity to create a third national fire service company. “We thought that we could provide a better service by having local management for decision making and therefore a quick turnaround for clients. Our model is based very much on having the operational knowhow and operational expertise at a local branch level. From a head office perspective obviously it takes a lot of corporate governance, efficiencies and disciplines.”
The desire to expand is the aim to grow a business. “If you put all these businesses together, the value of the whole business was leveraged off a lot higher.” The main challenge in expansion was integrating existing businesses together in to one new larger whole. “The biggest hurdle to jump is that you’ve got to integrate systems, people, procedures, and licenses.” A successful integration on a national level is “not an easy thing to do,” Bayas advises, “but if you’re able to do that very successfully then there is the value added to form a national company.”
In terms of human resources, one of the biggest challenges was getting everybody involved to believe that the sum of the smaller parts led to a greater whole. Purchasing businesses across Australia meant that each company was expert in its own local state. “They know the market inside out in terms of their state but trying to get the bigger picture across can be a little bit difficult at first.”
In order to avoid such conflicts in expansions going forward, Spectrum Fire developed a detailed set of criteria to follow when acquiring new business. “What we do now,” Bayas explains, “is as soon as we acquire a business we’re actually there from day one. The integration is almost immediate to the Spectrum ways and the Spectrum systems.” This approach benefits not only Spectrum Fire, but the newly acquired business and its staff also, who see it as a way forward and hopefully not too dissimilar to what they’ve been used to. In this manner, any anxiety on the part of a recently acquired business can dissipate more quickly during the transition phase. “Then,” Bayas says, “people tend to concentrate on the business.”
What are the risks involved as a private company? “Everybody talks about the global economy slowing down. I think one of the things we’ve been blessed with in Australia is we haven’t really been hit with a slow down of economy to our capital projects. Our non residential construction continues to grow overall nationally.” Bayas perceives that there are not many negatives. “Where I find the risks are is actually acquiring good people. There is a lack of qualified good skilled labour.”
Towards the future, Spectrum Fire would consider becoming a public company. “Hopefully sometime down the track,” Bayas says, “we’ll almost double in size and be able to offer the Australian public the opportunity to invest in what is a great success story.” In starting out and achieving such enormous and rapid growth, being private has been of immense benefit to Spectrum Fire. “I think as a public company you tend to get caught up in a lot of compliance issues. When you’re just starting out and you’re trying to grow that could be a deterrent and that could take quite a bit of time in terms of management.”
In order to grow a business at a high financial level across the nationwide marketplace, Bayas recommends setting goals and focusing to achieve them while sticking to your plan. In Spectrum Fire’s case, the company works on a three year plan. “While we continue to update that, our basic goals have not changed so we will continue to get that critical mass in terms of market shares.” Proving to be a reliable and focussed company by sticking to those goals is crucial to encouraging investors to believe in the business. “Whether people are funders, shareholders, employees, venture capitalists, senior executives or the people out in field; once they believe in the company everything falls in to place.”
Originally published in Property Australia magazine