The recent business failures are due to the approach to group expansion.
Thomas Cook Group expanded on a wave of optimism. Servicing the debt would be easy in those market conditions.
The expectation that assets remain stable and creditors won’t get nervous is the common view. However, the reality is that lenders aren’t interested in the long term.
Thomas Cook PLC establishes this, first the banks require an additional £200 million then they increase this to £250 million. This action cascades the demise of the business.
Borrowing versus Investment
My personal approach to expansion has always been pragmatic, never buy another business, it adds to the risk. Use new money to expand, never link it to assets alone. Never borrow from a bank, high street or commercial lender.
A new investor requires some equity or incentive to join the journey. They stand to lose and need to engage to protect the investment. Also, they understand the risk.
Therefore, my approach is self-fund expansion, where that isn’t the option, find the right investor.
The “Right” Investor
- The investor understands the business
- The Investor recognizes that they profit from the expansion
- The investor has a real stake in the success
- The Investor must be involved
Borrowing against a business plan is viewed as a safe option for business owners. However, actual versus projected performance complicates matters.
Banks protect investor funds, therefore, reducing the risk. Consequently, the Bank is forced to react.
Therefore, cut out the bank!
Expansion through Investment
The need for a clear approach to staged growth and expansion underpins the investment strategy.
Ask simple questions: why the expansion is required? who will gain? how long will it really take?
Therefore, use three lines of projected performance, the:
Explain the risk factors. Report performance monthly.
Consequently, planned expansion needs a clear strategy.
“Like a joke, it has failed when you have to explain the punchline!”
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