What do you look for when investing into a business with an annual turnover below R50m?
Investing in a small-medium enterprise (SME) is a tricky business. Getting this right means getting the focus of your evaluation right.
Businesses with operating annual turnovers below R50 million remain founder-driven and -led. In fact, this is increasingly the case with most businesses with annual revenues below R120m as a general rule of thumb, based on our experience of having worked with the business owners of more than 1,500 SMEs.
Seldom do you find a set of books that are accurate and reliable, customers that are locked in, suppliers that are reliable and staff that are able, capable and sufficiently engaged to ensure that the business can hold itself together without the founder’s leadership. In addition, the commercial systems that build and maintain operational and growth momentum are often weak, if not non-existent, and the market positioning of the enterprise is often tenuous.
Additionally, the business model of the enterprise at these turnover levels will most likely change to accommodate or enable further growth: such is the nature of building an SME into a scalable business – one that can cope with accelerated growth. These factors plus others make investing into the SME space a challenging task.
Investment decisions, as a result, should focus more deeply into and on the leading team, with particular emphasis on the founders. After all, if the business is mostly driven, managed and controlled by the founder, it’s the way the founder thinks, acts and learns that drives the ability of the business to withstand the risks faced by SMEs. This is even more important in today’s world of socio-political and economic uncertainty. Finally, this is amplified by the rate and pace of technological access and innovation being faced by us all today – a perfectly good business (on paper) could be redundant tomorrow.
Aurik was established by starting, building and selling 12 businesses over a nine-year period. With two failures, two listings on the JSE and eight sales, the portfolio returned an IRR of 44,2%. We understand entrepreneurs, business development and SME funding.
Let’s work together and bring our expertise to your funding objectives and build your SME portfolio.