Small businesses are the backbone of the UK economy, pushing growth rates, creating jobs and providing access to new markets and therefore their contribution is vital.
'Small businesses accounted for 99.3% of all private sector businesses at the start of 2018 and 99.9% were small or medium-sized (SMEs). Total employment in SMEs was 16.3 million; 60% of all private sector employment in the UK.'
Simply put, SMEs are good for UK plc and they should be positively encouraged to flourish. And many are. However, there are still numerous challenges to be overcome for SMEs on the path to success including increasingly complex regulation, an ever-changing funding environment and an inability to access impartial advice.
According to Zeqr, out of the estimated £60 billion spent on professional services in the UK each year, £12.6 billion is wasted on unnecessary or poor advice. Whilst small businesses should not seek to source the expertise they require internally as this simply is not affordable, they are often left with little alternative owing to the fee-driven culture of the large consultancy practices. More often than not, the material is recycled from another assignment, and very little thought is given to the true needs of the client. The report goes on to say that 49% of small businesses avoid hiring external professional advisers due to concerns over inflated costs and 39% were sceptical about their level of expertise and service received.
Professional services consultancies including legal firms, accountancy practices and financial advisers claim to be supportive of SMEs and many even have dedicated departments to serve this segment of the economy. The reality could not be more different, with poor client service, opaque fee structures and confusing advice being among the many issues experienced by SMEs. These statistics are alarming and despite their crucial contribution to the UK economy, SMEs are manifestly unable to access clear professional advice that represents value for money.
The reality is that the vast majority SME's are not going to be able to seek professional advice for all aspects of their business due to the prohibitive costs and growing mistrust in 'professional' advisors. Accordingly, below are the three areas we would recommend prioritising as a startup or SME:
1) Corporate structure optimised for future capital raises
Many corporate structures can preclude certain forms of equity investment such as EIS & SEIS.
Tax planning for SMEs is not always straight forward but bad advice, or no advice ultimately costs money. One of the most effective ways for SMEs to raise growth capital, particularly from angel investors is via the Enterprise Investment Scheme (EIS). However, for the business to qualify for this scheme, certain conditions must be met for investors to benefit from the tax relief.
2) Shareholders Agreements
Business partnerships are far more akin to a marriage than can be anticipated at the outset. (42% of marriages end in divorce).
The process of creating a shareholders agreement is one that forces the unpleasant questions to be asked whilst there is still the backdrop of positivity about a new business. Having an open discussion at this stage is of enormous value in the event that challenges arise down the line.
Any incoming investor or potential purchaser will want to know there are no ongoing disputes or litigation outstanding, particularly among founders and existing shareholders.
3) Risk Management
SMEs are increasingly becoming more risk aware. According to Zurich, 53% are spending more time on business strategy and risk management than they did before the global financial crisis.
Simple steps can be taken to compartmentalise risk where certain activities within an organisation carry an inherently higher risk profile than others. This risk can be mitigated by separating business activities into individual limited companies under a holding company structure.
SMEs should also implement a business continuity plan that is subject to regular review and updated at least bi-annually.
SpringRock opinion
High-quality professional advice must become more readily available for everyone, and particularly for SMEs who contribute significantly to the UK economy.
Rather than leaving business owners to ‘wing it’ or force them to pay over-the-odds, professional services firms should be actively courting this market and winning over SMEs.
Taking the right professional advice is not something SMEs can risk taking a chance with and they should thoroughly test the market before deciding who to work with.
Quantum of fees and structures can vary greatly. Where possible, seek to agree fixed-fees that are proportionate to the scope of work and measured against defined outputs.
The key is accessing this advice at a cost that isn’t ruinous and the professional services community must respond to this clear demand.
Rory Chichester