The economy is not only in better shape in the first half of 2021 than expected post COVID, but a significant segment of Australian businesses have boomed, with mid-sized businesses growing their annual revenue by 7.63% in the past 3 years, according to a recent report by accounting and consulting firm BDO Australia in collaboration with the Commonwealth Bank.
The BDO Growth Index 2021 also records that in 2020 businesses with annual turnovers between $10 million and $1 billion have also increased their profits. Notably the transport, postal and warehousing sector, together with retail, achieved the highest revenue growth of around 27% each, and nearly 3.5 times faster than the market average.
With mid-sized businesses typically more established than smaller enterprises they are in a stronger position to adapt to external influences. These largely privately owned businesses have been critical to Australia’s economic recovery, punching above their weight in generating growth.
This is due to being large enough to invest and make an impact but small enough to be entrepreneurial and nimble, often with a clear market niche. In fact while innovation is generated by start-ups, it tends to be commercialised in the mid-market.
The ability to adapt and quickly respond to changing markets are key characteristics of successful mid-sized businesses, enabling them to capitalise on short-term opportunities while at the same time adjusting their business models to ensure resilience.
“Every business is unique in terms of the risks to be covered,” says Gallagher Business Development Manager,National Sales, Nathan Rayner, noting that obtaining insurance cover in hard market conditions is challenging. Risk strategy and positioning to insurers is critical and having conversions about “What makes your business a better risk than the company next door or your competitor across town?”
Matching insurance cover to revenue and operational growth
Key to this is growing businesses updating their insurance cover as their operation expands, he warns. “You don't get a second chance with insurance. When a claim occurs the insurer will check to make sure that the business activities which resulted in the claim are fully declared in the description the business provides.”
He cites the example of a business that in recent years had grown from 1 location to 4 (with a fourfold increase in revenue as well) that had only $1m cover for directors and officers’ liability, and the policy had a number of key exclusions. The industry sector had also been the subject of a recent royal commission. Against this background the business was in the process of inviting senior business executives to join a newly created board to steer the direction of the company over the next 10 years. But, Rayner says, it would need to increase its D&O cover to match its level of expansion. “In this case attracting talent to their board would require a sufficient level of cover,” he says.
He observes that risk tolerance and the ability to retain risks vary greatly in mid-sized businesses, and this is an important aspect of broker client communications. A business with strong revenue could be buying potentially unnecessary levels of cover if their broker is unaware that they are in a position to retain up to 10% of insurable risks due to their strong balance sheet, for example.
Meeting obligatory insurance requirements
Another consideration that businesses shouldn’t overlook is ensuring regulatory compliance during expansion or to satisfy investment requirements. Insurance brokers are abreast of compliance requirements across Australian states and territories, and regulations in overseas jurisdictions, and can help advise on suitable risk covers.
Middle market investment and mergers and acquisitions opportunities
In the past year there has been a surge in capital raising activity, with investors particularly interested in growing mid-sized businesses in the technology, healthcare and food and agriculture sectors. Overseas investors are also interested in Australian mid-sized businesses with high value intellectual property.
Some mid-sized businesses are taking advantage of this interest to fund geographical expansion or vertical integration through investments from private equity.
Positioning your business for investment or sale requires an appropriate organisational structure to facilitate growth and minimise risks, such as operating under holding or umbrella companies that separate the business’s assets from the operational risks associated with hiring employees, engaging with suppliers and selling to customers.
In terms of mergers and acquisitions the deals that were delayed last year are picking up pace, due in part to good trading conditions, available capital and a very low interest rate environment. Businesses seeking to take advantage of these opportunities can improve their position though buyer and seller mergers and acquisitions insurance guarantees that enable a clean exit for buyers and sellers.
Australian mid-sized business growth statistics broken down
Almost 60% of medium sized businesses in Australia are concentrated in 5 core industries
manufacturing and wholesaling (36%)
financial services (9%)
professional services (8%)
More than two-thirds of mid-sized businesses in Australia (68%) have grown revenues over the past three years.
Fastest revenue growth: the transport, postal and warehousing (logistics) industry, mirrored closely by retail, both with average three-year CAGR of just under 27%.
Fastest profit growth was in agriculture, forestry and fishing, with profit improvement of 12.41% before tax, considerably higher than the sectors’ revenue growth at 3.91% (3 year revenue CAGR).
Privately owned mid-sized businesses have grown faster (in revenue and profits) than compared to public companies.
Manufacturing and wholesaling are the most predominating mid-sized businesses in Australia.
The financial services sector is the most profitable, followed by professional, scientific and technical services.
With the exception of Amazon Web Services Australia the top 5 most profitable companies are Australian owned.
Recognise your changing needs
As trends and markets continue to evolve and change we may see closure of some businesses and opportunities and growth for others who are nimble, open minded to change, and have the ability to adapt their business model to a changing environment. Equity
If you’re ready to take the next step to developing your business we’re here to help make sure your insurance keeps pace with your growth and optimise how your risks are presented to the insurance market.”
Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective.