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Defying Gravity How ambitious businesses can achieve growth in the age of uncertainty

Achieve more. Together.

Achieve more. Together.

part 1: time for a finance revolution

Achieve more. Together.

contents 3 4 5 6 8 10 12 15 17

about the study an introduction from our managing partner foreword from the CBI a mid-market facing downward pressures businesses remain confident in their own ability holding back financial firepower finance unfit for purpose time for a finance revolution find a way forward for your business

about the study Our Defying Gravity report series will help to explain how medium sized businesses (MSBs) can achieve high performance in complex and uncertain times. Research is based on interviews conducted in 2017 with 500 leaders of UK MSBs across a representative range of industry sectors. A “medium sized business” is defined as having a turnover of between £10 million and £300 million while a high growth or high performance business is defined as having achieved turnover growth above 20% last year. Participants were CEOs, CFOs or Board Directors. You can find out more at:

about Foresight

about Mills & Reeve

Foresight is forward looking and insightful content produced by Mills & Reeve. Designed to help our clients better understand the key issues they face, it offers broader commercial acumen in addition to legal expertise.

Mills & Reeve is a national law firm with more than 500 lawyers and 900 staff across six UK offices. We’re one of the most successful law firms in the UK as a result of our highly commercial approach, the deep relationships we develop with our clients, and the quality of our people and culture. We’re the only firm to have been named in the Sunday Times 100 Best Companies to Work For 14 years running, and 97% of our staff would recommend Mills & Reeve as a good place to work. You can find out more at:



an introduction from our managing partner We are living in increasingly complex and uncertain times. As the impact of Brexit threatens to destabilise the economy and political landscape, and globalisation and disruptive technology bring rapid change, how are businesses meeting the challenge?

We set out to understand how these businesses can achieve high performance in challenging times, speaking to 500 mid-market leaders who shared their growth and investment plans, international expansion strategies and innovation priorities.

The mid-market is the unsung powerhouse of the UK economy, with pre-referendum studies forecasting that MSBs are set to be the fastest growing segment of the economy over the next three years. Our own research reveals the impressive resilience of the UK’s middle: two thirds of MSBs (66%) grew turnover last year, at an impressive average rate of almost 20%.

Our campaign, Defying Gravity, explores the issues that leaders are facing and possible steps to success through a series of reports and roundtable events. This first report turns the spotlight on finance and calls for a revolution across the funding landscape to ensure companies can access the right solutions to supercharge their growth.

But can the mid-market continue to defy gravity in the face of deteriorating market conditions? And how has this unstable external landscape impacted mid-market leaders’ confidence in their ability to invest in and generate growth?

Despite very real and recent hurdles, it is encouraging to see mid-market leaders remaining defiantly ambitious about growth, determined to beat market conditions and to hold their position as the driving force of the British economy. More than four in five (83%) mid-market businesses plan to increase turnover in this financial year (2017/18) by a confident average of 22%. Defying gravity indeed!

At Mills & Reeve, we want to champion these MSBs and help unlock new opportunities for growth to help them achieve their full potential. As a mid-market business ourselves, we understand the landscape and experience many of the same challenges as the leaders we spoke to. In 2015, our Full Scale Ahead report explored paths to growth for mid-market businesses and the question of whether to scale or sell. Now, following a period of upheaval and disquiet, there are many other considerations on the minds of mid-market business leaders. We would like to thank everyone who participated in our study. I hope their insights help you to find a way for your business to defy gravity in these challenging times. Claire Clarke Managing Partner Mills & Reeve


foreword from the CBI The UK’s medium sized businesses (MSBs) are the heroes of our economy. Without the contribution of fast growth MSBs the UK would have slipped into recession between 2010-13. Indeed, in 2013 just 4% of fast growing companies were responsible for nearly 20% of productivity growth in the UK economy – a truly remarkable statistic. Put simply, what matters to medium sized growth companies matters for the UK economy as a whole.

Innovation will also be critical, and in the uncertain times ahead we need to encourage investment in technology adoption. The UK lags behind its international peers on research and development spending, which is vital for innovation. Raising our combined Government and business R&D spend to 3% of GDP by 2020, coupled with exploring greater export opportunities, will help to fill the order books of MSBs.

This latest report from Mills & Reeve is an important reminder of what MSBs need to succeed. The findings highlight the important principle of a flourishing finance environment that supports MSBs to grow and scale.

Making progress in these areas will give our growth firms the best possible environment in which to thrive, by driving productivity and helping to create an economy that works for everyone. We face challenging times ahead – but there are opportunities as well. The UK remains a vibrant and open nation, and one of the best countries in the world to do business. Now is the time to take advantage of opportunities for productivity growth to make it even better. Carolyn Fairbairn Director General CBI


a mid-market facing downward pressures Our study reveals defiant ambition in the UK’s mid-market. However, far from being bullish about their operating environment, mid-market business leaders are concerned about a number of gravitational factors pulling them down, including lack of support from Government, an unstable economy and the impact of Brexit.


a mid-market facing downward pressures Three quarters (74%) of business leaders believe the mid-market lacks targeted policy support from Government. The only ask of Government from eight out of ten leaders is “a stable economy and decent tax conditions”.

More than half (59%) of business leaders do not believe that the UK economy is “strong and stable” and two thirds (64%) of business leaders expressed frustration that the economy in its current state presents yet more hurdles to growth.

Economic uncertainty will disproportionately affect the mid-market.

Two thirds of mid-market Boards are also concerned there is now a real risk of recession (64%), and more than half (55%) of mid-market firms have already experienced falling demand as a result of the Brexit vote.

Yet two thirds (65%) of companies express frustration that, far from enabling them, Government keeps presenting obstacles to their growth.

“ All our business needs from Government is a stable economy and decent tax conditions”

Most significantly of all, two thirds (66%) of MSB leaders believe that while major corporates have the resources to navigate turbulent times, economic uncertainty will disproportionately affect the mid-market.

Regional variations: Businesses that have experienced falling demand since the Brexit referendum (against average of 55%)

60 - 69% fall in demand 50 - 59% fall in demand 40 - 49% fall in demand

58% Scotland

North East 55%

Northern 64% Ireland

North West 44%


Yorkshire & Humberside


East Midlands 62%


of mid-market businesses agree


of high performance businesses agree

Wales 58%


44% Midlands 62%

South 44% West

East of England


South 48% East


businesses remain confident in their own ability While the mid-market is far from blindly optimistic, leaders remain confident in their own ability to succeed against the odds. Indeed, it could be argued that mid-market leaders have no choice: growth is not a luxury, with nearly two thirds of companies (59%) focused on growing turnover to maintain profitability.


businesses remain confident in their own ability While more than half (54%) of business leaders believe they lack the economic conditions required to supercharge their growth, just 7% of mid-market firms have scaled down their growth ambitions in response to economic uncertainty.

Despite market challenges, leaders are confident that they will achieve their objectives: of those that plan to grow this year, nearly two thirds (62%) would be willing to bet their house on meeting their growth target.

Indeed, more than four in five (83%) mid-market business leaders are aiming to grow their turnover this financial year (2017/18) by an average of 22% (up from 20% last year) with a corresponding 23% increase in their workforce.

Mid-market high performers, companies that grew turnover by over 20% last year, demonstrate even higher levels of confidence, aiming to grow turnover by 30% this year with a corresponding 29% increase in their workforce. Confidence amongst these leaders is high, with 71% willing to bet their house on meeting their growth target this year, compared with just 45% of those that achieved low or no growth in 2016/17.

Offensive and defensive strategies Capitalising on opportunity versus managing risk

On average: 58% versus 42%

High performers: 65% versus 35%

Growth targets for MSBs in 2017/18 “How much is your business aiming to grow in this financial year in terms of turnover?”

Average increase in turnover 22%

Average increase in turnover amongst high performers 30%

Low performers: 55% versus 45%

Offensive and defensive strategies have a significant impact on mid-market performance. Two thirds (65%) of companies that achieved high turnover growth last year have focused their strategy on the upside - capitalising on opportunity - while nearly half (45%) of businesses with low to no turnover growth last year are focusing on managing downside risk.

Average increase in turnover amongst low performers 14%

“ We have set out ambitious growth plans and are confident we will achieve our target. The grocery sector as a whole is unlikely to grow much above 2%, but we are aiming to expand the company much more quickly than our competitors by embracing technology, creating new ways of working, retaining talent and winning new customers.” William Burgess, CEO of The Produce World Group, one of the largest expert growers and suppliers of high quality fresh vegetables in Europe


holding back financial firepower Despite mid-market business leaders setting impressive growth targets, many are also hesitant to make the full investment required to fulfil these ambitions.


holding back financial firepower Recent economic and political instability has taken its toll on the mid-market: two thirds of leaders admit that they are more risk averse due to economic uncertainty (65%). As a result, mid-market capital isn’t being invested to generate return.

Two thirds (65%) of mid-market companies are holding onto increased cash reserves in response to heightened economic uncertainty, indicating an underlying nervousness, despite bold plans.

Indeed, more than half (54%) of business leaders admit that they are not investing enough to generate significant growth but are evidently not prepared to take the leap at the moment - with 57% admitting to reducing their investment in growth due to economic uncertainty.

On average, these cash reserves equate to a quarter (26%) of the mid-market’s annual turnover, or more than six months’ worth of operating costs - a sizeable stash to be storing under the mattress with no expectation of return.


On average, a quarter of the mid-market’s annual turnover is being held as cash reserves.

This capital not being put to work is costing the mid-market in terms of growth, with more than half (57%) of business leaders admitting they would have grown the business faster if they had invested more of their cash. Stockpiling cash is perhaps an understandable reaction to uncertainty. Mid-market leaders ranked looking after cash flow as the number one lesson learned from the last recession, and more than half of leaders (54%) fear that banks may withdraw credit if economic conditions deteriorate.

More than half (57%) of business leaders admit they would have grown the business faster if they had invested more of their cash in growth.

Why are businesses holding on to so much cash?

70% 65% 65% 60% 59% 56% It makes our business feel more stable



In response to economic uncertainty


£ £

So that we don’t have to borrow money


£ £

Since the recession

In response to the behaviour of the banks in the recession






Since the Brexit referendum vote




£ £

finance unfit for purpose Companies are being prudent with their cash reserves, but external funding is also found to be lacking.


However, more than half (56%) of business leaders told us they don’t believe mid-market finance is fit for purpose, a figure that rises to 63% amongst high

More than half of mid-market leaders can’t find the flexible capital they need to finance their business in the long term (54%) and complain they have experienced difficulties raising long term finance in the past (53%).



Financial services





Food and agribusiness


49% 49%

Real estate

Raising long term finance is a particular challenge. Almost three in five midmarket leaders (58%) believe that their company can’t achieve its potential without better long term finance.

Professional services

The mid-market is between a rock and a hard place when it comes to debt and equity funding.

growth companies. As a result, these ambitious businesses lack the finance required to supercharge their growth.


More than half (58%) of MSBs plan to raise external finance this year, with 57% planning investment in growth and 43% planning to finance existing operations.


finance unfit for purpose

54% 59% 60% 61% 65% 70%


Two thirds of mid-market leaders believe that the UK funding environment is great for startups, but not for the mid-market.


Businesses by sector that believe they cannot achieve their potential without better long term finance options (against average of 58%) 13

finance unfit for purpose As we found in our Full Scale Ahead study, the UK’s mid-market is under significant pressure to grow companies for sale, rather than to achieve sustained long term performance. However, only a sixth (16%) of business leaders plan to sell their business in the foreseeable future. But two thirds (67%) believe that current finance solutions are designed to favour companies that want to scale fast and sell, rather than businesses generating sustainable performance and employment.

The mid-market is between a rock and a hard place when it comes to debt and equity funding, with neither presenting a perfect solution. In addition to a lack of trust in banks following the recession, two thirds of mid-market leaders are reluctant to take on debt due to rigid repayment terms (62%). Meanwhile, a similar proportion (64%) believe equity investors expect a higher return than is realistic in the current market conditions, and exactly half of mid-market leaders believe they will struggle to meet investor expectations this year. And finance is fundamental to realising mid-market ambition for growth. Our study demonstrates that leverage is strongly correlated with turnover growth.

22% 17%

Gearing ratios amongst MSBs High performance mid-market companies had an average 22% gearing ratio compared with 17% gearing for those with low or no turnover growth.

Just 16% of business leaders plan to sell their business in the foreseeable future.



Companies with high turnover growth (above 20%) in 2016/17 are likely to have sold more equity than those with low or no turnover growth (33% of total equity sold as opposed to 25%). A similar pattern is reflected in companies’ gearing ratios (i.e. debt in relation to shareholder funds) with an average 22% gearing for high performance mid-market companies (with annual turnover growth above 20%) compared with 17% gearing for those with low or no turnover growth.

67% 67% But two thirds of business leaders (67%) believe that current finance solutions are designed to favour companies that want to scale fast and sell.


time for a finance revolution Financing mid-market growth should be of concern not just to business leaders, but to Government. As the dynamic powerhouse of the UK economy and an ambitious force for job creation, mid-market leaders deserve finance and Government incentives on terms that are tailor-made for MSBs.


time for a finance revolution


£ £

However, two fifths (40%) of the business leaders we interviewed were unaware of the Industrial Strategy, so there is work still to be done to ensure that mid-market leaders have sight of and can access the right solutions for their business.

Whatever the options, and whoever brings them to the table, we need to see the same level of Government support offered to small businesses and the same breadth of innovative finance solutions suitable for borrowers with larger, longer term and more complex financing needs.


“Although traditional high street banks can be more reticent to lend money and apply covenant suites that place pressure on your business to produce immediate returns, there are alternative providers that have funding available. We take a long-term view of investment, knowing that many projects may not deliver a return for three to four years, but by choosing the right financial institution for the right project, we have found our approach pays dividends in the end.”





It is high time for a finance revolution.


Will Roles Finance Partner Mills & Reeve




Jon Stump, finance director at Mick George Ltd, one of the leading suppliers to the construction industry.


Government also has the ability to be a catalyst for change, but improved communication will be essential. The 2017 Industrial Strategy Green Paper recognises under-supply of long term funding as a barrier to businesses scaling up and suggests that more local funds could be made available as part of the devolution agenda.

On a positive note, the landscape is evolving rapidly, with new entrants and products increasingly joining the market. We also anticipate there being concepts from developments in early stage funding that may translate up to the mid-market. For example, an aggregation model, where MSBs with similar profiles and funding requirements club together to issue a bond via an online platform.


The startup funding landscape and the legislation that supports it has changed rapidly to meet the needs of the market: the Government’s tax relief scheme for startup investors, the funding available via the British Business Bank, and crowdfunding and peer-to-peer lending platforms were all key developments in early stage funding.

Top 10 finance options that MSBs are planning to use in the next 12 months 1. An overdraft facility 2. A bank loan (secured) 3. Invoice finance 4. Property mortgages 5. Selling equity to private equity fund 6. Crowdfunding 7. Trade sale of the business 8. Leasing / hire purchase 9. Peer to peer lending 10. Corporate loan from existing shareholder/s


Achieve more. Together.

find a way forward for your business

Achieve more. Together.

Get in touch to discuss the right finance solutions for your business. Call us on 0344 326 0000 or email

Achieve more. Together.

You can also find out more about the research and case studies referenced in this report, register for one of our roundtable discussions and sign up to receive forthcoming insights by visiting our website: Follow us @rocketfuel4MSBs

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Defying Gravity report part 1 - Time for a finance revolution?  

Defying Gravity by Mills & Reeve LLP is report series which will help to explain how medium sized businesses (MSBs) can achieve high perform...

Defying Gravity report part 1 - Time for a finance revolution?  

Defying Gravity by Mills & Reeve LLP is report series which will help to explain how medium sized businesses (MSBs) can achieve high perform...