While the start-up phase of a company’s life can be make or break, the next step in the evolution of a growing business can be even tougher. GrowthBusiness’ Breakthrough Clinic gives one company at a crossroads of expansion the chance to gain free advice from an expert business adviser on the possibilities for growth.

Company history

From an early age, Hannaford worked in the family seafood business owned by her father, which specialised in supplying frozen prawns. This business was sold in March 1988 as a going concern, but the new owner closed the operation in September 1988 following a reorganisation of the production activities. Sadly, 50 people – including Hannaford – were made redundant. Unperturbed, she took her £3,500 redundancy money and, with some help from the bank and the local council, approached a number of her father’s former customers and set up Paramount 21, a thriving Southwest-based company supplying frozen seafood and vegetarian dishes to the catering trade.

Now, 17 years later, Paramount 21 has turnover of £4 million, employs 50 staff, and supplies its products to some of the largest retail organisations in the UK. Currently operating from leased premises in Brixham and Totnes in Devon, the company has reached a pivotal point in its development. The first stage of growth is imminent – relocation to a single-site freehold factory that has a special history for Hannaford. It’s the original property her father built for his business, so this is a symbolic and significant step in Paramount 21’s expansion.

The company’s production is split 70:30 between seafood and vegetarian dishes and supplies independent and national wholesalers, as well as many national restaurant and pub chains. It is passionate about developing innovative products, such as the seafood sausage, and has a commitment to additive- and preservative-free food. Quality of life is important to Hannaford, who believes the business should not just be about money. As such, she promotes work/life balance and rewards her employees well.

Current challenges

Paramount has grown steadily over the past few years, with strong cash and profit generation. Hannaford wishes to expand both the product and client bases, so is now investing an estimated £150,000 a year in developing new product lines. This strategy has identified potential new business opportunities, such as supplying national supermarkets with branded product ranges, and turnover is estimated to increase to as much as £8 million over the next few years as a result. This rapid growth will challenge the company’s small-business culture and strategic approach.

The business is in a niche market with only a few direct competitors – a unique selling point upon which the company’s growth strategy is based. Hannaford says she wants the company to be ‘first in mind for seafood and vegetarian dishes’. However, marketing and profile awareness has been fairly weak in the past and the company has relied heavily upon Hannaford for generating new business contacts. A fresh marketing plan is now being compiled, with input from an experienced consultant.

Paramount has in place a well-defined and competent management team, including two recently appointed directors, which will enable Hannaford to take time off with her husband, Reggie. This will mean that she will need to relinquish some of the control she has exercised over the day-to-day running of the company. Yet, little consideration has been given so far to succession issues or exit strategy.

Breakthrough Clinic’s Advice

Matt Bracher, a director at PKF (UK) LLP, has discussed the issues surrounding Paramount 21’s growth with founder Alison Hannaford. Here, he offers his views on the expansion issues that need to be addressed in order that the company’s objectives – and those of its founder – may be achieved.

Overall strategy

Paramount’s progress in the wake of the disappointing closure of Hannaford’s father’s business is a true tale of entrepreneurial spirit. The business has been guided mainly by her enthusiasm and ambition to succeed, backed by the competent and loyal team she has built around her.

This drive has ensured that the company has excelled and expanded during the 17 years of its existence and, when problems have been encountered they were dealt with competently. However, this has developed into a culture of focusing on the here-and-now business decisions rather than viewing both the long-term objectives of the company and of the owners (Hannaford and her husband) as an integrated issue.

All these objectives need to be brought together into a cohesive plan for the future. This should not only encompass the ambitious expansion plans for the business mentioned earlier, but also ensure a satisfactory exit strategy for the current owners that is tax-efficient and meets their personal preferences. This could be anything from a sale of the business, a flotation or simply passing ownership on to children or employees.

Without putting a plan in place, the business may be successful in the short-term but might fail to maximise value in the long run. For example, it could lose key management who are the logical choice to take over the company. And the need for planning ahead when it comes to major strategy decisions is illustrated by a recent event – buying the new premises. It may have been better to consider a SASS (self-administered superannuation scheme) to purchase the freehold property, rather than the way it has been bought through the company.

Financing

It is vital that Paramount has appropriate resources to fund its expansion strategy. Currently, the company is financed by a mixture of bank overdraft, invoice discounting and director’s loan. In addition, the freehold property purchase is to be financed by a commercial mortgage.

Interest payable on these various forms of financing appears to be rather high for the amounts involved, so the directors should consider whether the funding structure in place is the most effective. With a detailed strategy in place, they may find a long-term financial instrument is more appropriate to their funding needs. This could be linked to the property mortgage, since they appear to have negotiated a particularly good deal on the price and the interest rate.

Finally, I think Hannaford should consider reducing her director’s loan to the company. While it is a particularly flexible form of finance and offers her a lucrative interest rate, she should think about reducing her personal exposure. She indicated to me her reluctance to give a personal guarantee to the bank, but she is taking an equivalent level of risk by leaving the money within the business.

Management incentives

One of the key strengths of Paramount is its people. They are rewarded by good rates of pay and bonuses via a pool scheme determined by a fixed share of the annual profits. While this is certainly motivational for the employees, it does not necessarily give them the sense of ownership that could be achieved via an employee share scheme or share ownership plan.

I suggest Hannaford considers the introduction of a scheme that ties key management personnel in for the long term through equity participation. After all, a long-term strategic plan really does need long-term commitment from key members of the team. If Hannaford believes the individuals she has on board now will play an important role in the company’s future, she should do what she can to lock them into the business to ensure continuing success.

Matt Bracher is a director at PKF (UK) LLP, based in the Southwest and Wales region. He is also a Fellow of the Institute of Chartered Accountants in England and Wales. He has been advising owner-managed businesses across a wide range of sectors within the Southwest for over a decade, and has an acute understanding of the variety of needs and requirements of growing businesses.