Growing a business by acquisition is not a new idea – but did you know there's a way of doing it that attracts the best recruits, tickles clients pink and gives your staff a reason to sing on their way to work?
Big companies can learn a great deal from smaller businesses. By investing in them, they can also reap the rewards of their entrepreneurial spirit. Being a well-established operation is not enough to attract the high calibre of staff firms need to keep up with the rapid changes affecting the construction industry. To drive the business forward, expansion and diversification must be on the agenda. The achievement of one or both of these gives companies the scope to be more creative and entrepreneurial in their management structure. It also allows them to offer smart graduates and school leavers sexy options. High- flyers are not only looking to make their mark, but to make their fortune, too. The goals of both can be satisfied through one simple concept – ownership.

My group, Henry Riley, has expanded into project management, construction consultancy and M&E design by helping to finance small and growing businesses. Usually, about 50% of equity is retained by the original founders and the rest is owned by the group's partners/directors. There are also opportunities for other group companies to buy into the new venture. Although the companies remain separate entities, the smaller organisation is brought under the "group umbrella" and given access to central services and marketing.

The advantages of this approach are too numerous to list, but by expanding on a few points, the general pattern will emerge.

  • Those entrepreneurial enough to start their own consultancy will, nine times out of 10, go out on a limb to provide their customers with that bit extra.

  • Successful consultancy depends on thinking outside the box. By having the temerity to start up a successful small business, this capability is certainly developed.

  • Many companies want to encourage staff to take ownership of their working lives in the belief that this will improve their problem-solving abilities. What better way of doing this than by giving them the chance to become a partner in their company?

    This ownership approach enables the businesses to remain personal and service-oriented while benefiting from the backing of a larger group. Any conflicts of interest can also be dealt with by using separate companies within the group, and having speciality or boutique companies within our resource enables us to exploit niche markets.

    Finding the right partner is of paramount importance. Due diligence usually takes about six months to ensure that there is a viable business plan and a meeting of minds. The initial investment is something like £25 000-100 000 with a payback period of two to three years.

    A good example is our investment in Engineering Services Partnership. After a three-year period, shares in the company increased sevenfold in value.

    By acquiring substantial stakes in start-up companies, the group is acquiring not only extra staff and a bolt-on client base, but enriching the service offered to clients across the board. We invested in Paradigm Management, a start-up company formed by two directors, Colin Ingledew and Paul Lindsey, in July 1999. This construction consultant provides project, process, strategic and construction management, typically for projects of between £2m and £40m.

    This company was attractive because of its approach to clients. Rather than straight construction, the directors saw themselves as a business consultancy whose job was to devise and implement construction solutions. Paradigm's approach works best as part of the client's decision-making process. This is not a prescriptive approach, and therefore works best on the intimate basis associated with small business. The result was that Paradigm had new resources to push forward its business plan, and the group has a highly personal and speciality consultant to offer its client base.

    Paradigm is now funded as a 50/50 joint venture between Henry Riley Group's partners/directors and Paradigm Management's directors, and has 10 employees. Concentrating on a personal involvement with clients, the company has three projects on site, and we predict a growth in turnover of 200-300% this year.

    There is a risk factor involved in this approach; after all, we are a construction consultancy, not a venture capitalist. However, these companies are not dot-com fly-by-nights; we deal with bricks and mortar, and bring this no-nonsense approach to the management of the group. However, "no nonsense" does not have to mean "no vision". And as we all know, only vision will take us where we want to go.

    Why entrepreneurial growth works

  • Investing in start-up companies is relatively cheap – the initial stake can be a low as £25 000
  • It gives the start-up additional marketing and financial resources to fuel its growth
  • It allows the investing company to bolt on additional value for its clients
  • The possibility of taking an ownership stake in high-growth, high-risk businesses enables companies to attract bright, ambitious staff
  • Other companies in the investing group have the opportunity to make high growth investments

    • Postscript

    Jim Hendley is a partner in construction consultant Henry Riley Group.