UK: Private enterprise - small is painful. (3 of 3)

UK: Private enterprise - small is painful. (3 of 3) - The MBO at Coventry Gauge was one of the last of the 1980s series. Although meant for the end of 1989, it did not actually take place until March 1990. The timing could hardly have been more disastrou

Last Updated: 31 Aug 2010

The MBO at Coventry Gauge was one of the last of the 1980s series. Although meant for the end of 1989, it did not actually take place until March 1990. The timing could hardly have been more disastrous. As the economy lurched towards recession the business plan went out of the window. Today, Gracie says grimly, "we are in survival mode". Cash is being closely watched, and nothing spent that can be saved. Stocks are being run down. All thought of product development has been abandoned. Redundancies have already trimmed the payroll to about 70, and employees have been warned there will be no pay rise this year. Even so, the continuity of the business is not yet assured. It is heavily burdened with debt: some 65% of the purchase price consisted of borrowings. Up to now the principal provider, 3i, has been "very supportive - but they haven't a lot of choice".

"I hope we're going to survive," says Gracie, who is "personally very exposed". Longer-term survival as an independent business is hardly on the cards, since the agreement with 3i provides that management should strive for a trade sale within 10 years. If Gracie can nurse the company back to health, it might prove a tempting morsel for some other large group, or perhaps for a continental manufacturer. Naturally Gracie has no quarrel with that. He is the biggest shareholder and stands to be amply rewarded. That's capitalism.

In the eyes of many, however, the absence of a truly steady pillar of financial support is among the worst shortcomings of small business: exposing it to every tremor of economic instability and all the evils which go with that (in the way of wildly fluctuating interest and exchange rates, long-delayed payment of debts, etc.). Venture capital is seen as the financial tail that wags the industrial dog. Besides, complains Hunter, "it doesn't help people like me who have low margins". The high street banks, frequently the only source of funds available, are generally more supportive than in the past but still inclined to treat a small business "just like a household".

Richard Brucciani, founder and chairman of Pal International, a leading supplier of disposable wear for the food industry and a substantial neighbour of Bute Fasteners in Leicester, is equally scornful about the banks' "simplistic approach". Years ago Pal wanted to finance the purchase of a machine, which it was happy to offer as collateral. But when the bank was told what the machine did ("It makes paper hats"), the response was predictable. The fact that the equipment would also generate cash seemed irrelevant. Fortunately the company was able to borrow in order to buy a property which became available across the road. It then arranged a financing deal on the property to raise money for the machine.

"What we lack in this country is a source of development capital," says Brucciani (it is pronounced Brusi-ani), one that does not force owners to dispose of equity. Capital constraints have held Pal back, he insists, even though the company has been outstandingly successful, increasing turnover and profits in every year since it was founded 20 years ago. Moreover, the difficulty of financing growth increases with size. Two years ago Brucciani had accepted the inevitability of parting with equity, and was leading the company to the stock market. But having set that objective, today he is not sure. "The Stock Exchange is not as attractive as it used to be."

Last year Pal bought a manufacturing company in France. Brucciani is now thinking hard about expanding in Germany. Within five years he expects overseas revenue to overtake that of the UK. "With so much of our growth coming out of Europe, it may be possible to get funding there." Very few small companies are taking 1992 as seriously as that.

Business forecasts are notoriously liable to error, but if one were to speculate, on the basis of the recent past, about the situation of a certain microcosm of British small business 10 years from now, the following scenario looks at least possible. Elta Plastics will by then be a thriving subsidiary of the giant Nifco Corporation. Coventry Gauge will be distributing the products of its new parent, a middle-sized German engineering company (called something like Messgeraet-u Maschinenbau Augsburg), and manufacturing a few bottom-of-the-range items itself. Pal International, heavily backed by Deutsche Bank and with its main factories in Germany, France and Czechoslovakia, will be a pan-European leader in its field. And Bute Fasteners will still be endeavouring to sell a few nuts and bolts in Leicestershire.

It could easily be worse.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

When should you step down as CEO?

Bob Iger's departure poses an unpopular question for bosses.

The death and resurrection of the premium customer

Top-end service is no longer at the discretion of the management.

What HS2 can teach you about project failure

And how you can prevent projects going astray.

35 Women Under 35 2020: Nominations open

Management Today's 35 Women Under 35 showcases the country's rising stars in business. Here's how...

Practical steps for breaking silos

Briefing: Adam Williams, former CEO of influencer marketing agency Takumi, shares what he has learned...

The Power 50: Proof that you can be a part-time CEO

Just a few years ago, executives were reluctant to admit they worked part-time for fear...