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In our “Active Growth Strategy: MD Medical Group Case” article we recently discussed three strategic growth pathways with varying capital structures: internal growth strategy, sustainable growth strategy, and active growth strategy. In this article, we take the next leap – using a financial model we illustrate how capital structure choices impact the pace of business expansion, future enterprise value, and founder’s returns.

Most business owners believe that growth potential is primarily driven by product quality, team capabilities, production and sales technologies, and market trends. In practice, however, the growth trajectory is also determined by how the expansion of business is financed. Capital structure affects scale, financial stability, and long-term valuation as much as product quality, marketing efficiency, and customer relations.

Founders have differing interpretations of the role of external capital – and these assumptions shape their view of available growth strategies.

Some prioritize complete independence and therefore rely exclusively on internally generated funds, approaching debt with caution. Others perceive debt as the primary – if not the only – instrument for funding expansion. A third group sees equity investors as a strategic opportunity.

In reality, the choice of capital structure – the balance between equity and debt – defines the long-term growth rate of the company and its future value. Decisions in this area are often made intuitively, rather than analytically, even though the financial consequences of such choices are substantial.

To demonstrate this, we built a financial model showing how the same business evolves under different growth strategies over both the medium- and long-term horizons.

We took a hypothetical mid-sized private company and modelled its performance over a ten-year period across several scenarios, each corresponding to a specific growth strategy.

The underlying logic for costs, capacity utilization, and working capital remains consistent across strategies. However, the pace of scaling and operational performance differs depending on how the business expansion is financed.

As the company scales, its profitability, asset turnover, and infrastructure efficiency evolve. These effects manifest differently in each scenario – capital structure determines how quickly the company reaches the scale at which operating leverage begins to materialize.

We examined three fundamental strategies for a company operating in a growing market:

• Internal Growth – funded solely through internal resources
  The company expands gradually, reinvesting earnings. Scaling is constrained by the pace at which capital accumulates – operating leverage and scale effects materialize slowly.
• Sustainable Growth – a combination of internal funds and moderate financial leverage
  Debt financing accelerates launches of new project and helps the company reach the effects of scale faster. Leverage remains within acceptable limits (Debt/EBITDA ≤ 3.0x).
• Active Growth – a combination of equity capital and financial leverage
  Raising new equity enables the company to scale significantly faster and unlock operating efficiencies earlier. As a result, both the pace of development and the company’s future valuation increase substantially.

The financial model allows us to compare three growth scenarios – Internal Growth (Strategy A), Sustainable Growth (Strategy B), and Active Growth (presented in two versions, Strategies C1 and C2). All strategies rely on identical starting operational parameters, enabling a clear comparison of how capital structure affects the pace of business scaling.

The financial model captures the dynamics of key financial metrics, the rate of the investment program roll-out, cash-flow generation, and the overall financial stability of the company. This approach makes it possible to define the optimal balance between the speed of growth and financial stability in a growing market.

The analysis shows that the choice of capital structure is one of the most critical strategic decisions. Capital structure significantly impacts the company’s ability to raise external financing, which in turn determines the speed of scaling and the realization of economies of scale. Ultimately, these factors directly influence the company’s valuation and the returns generated for its owners.

Financial Modelling Results

Our modelling demonstrates that, under identical operating parameters in a growing market,the difference in the speed of scaling becomes the primary driver of future financial performance. The more investment resources are available to the company in the early years, the faster it scales – and the higher is its ultimate enterprise value.

The effect is particularly pronounced in the scenario with Strategy C1: raising equity allows the company to expand its investment program in the first year and establish the foundation for even larger-scale investments in subsequent years. The company reaches the scale at which operating leverage begins to materialize much earlier – resulting in faster EBITDA growth and stronger free cash flow generation.

This strategy enables the maximum increase in shareholder value (Equity Value) while maintaining financial stability. Although the founder’s ownership share is diluted, the value of that share increases multiple times due to accelerated business growth and a lower cost of capital (WACC).

Strategy A and Strategy B both underperform relative to Strategy C1 because of their investment capacity constraints, while Strategy C2 is clearly inferior to Strategy C1 due to excessive leverage and the resulting concerns over financial stability.

The capital structure decision made by the founder at the starting point effectively determines the company’s long-term valuation trajectory. The impact of this choice becomes especially visible between Years 5 and 10, when the divergence of financial outcomes across scenarios reaches its peak. Technology, product quality, team, and other important factors determine business success – but it is the capital structure decision that ultimately elevates the company to the next level or undermines it.

The financial model allows for a comparison of the three considered strategies under comparable conditions and illustrates the impact of capital structure on the pace of business scaling. Key assumptions:

By the end of Year 10, the company’s Equity Value in Strategy B will exceed that of Strategy A by a factor of 2.2 – creating an additional ~₽ 8.6 b in value due to the use of financial leverage and the following factors:

• Business scaling speed. With the ability to complete more investment cycles (3 vs. 1), the company in Strategy B is able to grow sales and assets faster than in Strategy A;
• Capital efficiency. Strategy B uses capital more effectively (ROE) through financial leverage, enabling a higher positive EP Spread (ROIC minus WACC);
• Financial flexibility and risk management. The debt cap (Debt/EBITDA ≤ 3.0x) helps control risk while maintaining access to borrowed capital. Strategy A, by contrast, limits flexibility in responding to market opportunities;
• Cost of capital (WACC) factor. In the sustainable growth scenario, WACC decreases due to optimized capital structure and controlled debt utilization. In the internal growth scenario, WACC is higher because the company relies entirely on equity financing.

Active Growth Strategy (C) uses the idea of raising capital from multiple sources – a combination of equity and debt financing. Unlike Strategy A and Strategy B, business scales significantly faster, as it is not constrained by internal resources or the pace of profit accumulation.

By flexibly using external financing, the company can execute larger investment programs on a regular basis and grow at rates comparable to – or even exceeding – market growth.

• Option 1 (Strategy C1) – the company raises ₽ 1.8 b in equity capital (in exchange for a 49.9% stake) along with financial debt.

Key Idea: Maximize growth through equity injection while maintaining financial stability. The company launches new projects rapidly and reaches economies of scale sooner. Debt levels remain under control (a moderate Debt/EBITDA of ≤ 3.0x).

The investor may contribute not only capital but also industry expertise.

• Option 2 (Strategy C2) – the company raises only debt.

Key Idea: Maximize the effect of financial leverage – active growth is funded exclusively through borrowed capital.

This approach is fairly common, particularly when companies receive subsidized loans. That is why we included this alternative scenario in our analysis. The founder retains full control of the company but assumes all risks associated with debt financing.

Initially, the strategy may appear attractive, especially if subsidized loans are used: business grows rapidly. However, high leverage (Debt/EBITDA above 4.0x) significantly undermines financial stability, makes the business dependent on creditors, limits operational flexibility, and complicates further investments.

Any slowdown in sales or increase in interest rates can put business in jeopardy. This option is the riskiest and least promising for the founder, as it does not create value and can result in the loss of capital.

Most company owners prefer the strategies they understand best – internal or sustainable growth –and, if they consider active growth strategy, they tend to rely on debt financing they are familiar with.

As a result, they either dismiss the active growth strategy entirely or overlook the option involving equity. This is often due to a lack of understanding of many underlying processes. Below is a list of common misconceptions that limit the growth potential business.

The financing structure in active growth strategy predetermines not only the company’s financial stability but also its operational potential.

With moderate leverage (Strategy C1), management can focus on business development, maintain investment pace, and develop new products and services.

Comfortable debt repayments in Strategy C1 reduce pressure on cash flows, provide financial flexibility, and allow the company to execute strategic initiatives without the risk of falling into debt trap.

In contrast, if active growth relies solely on debt financing (Strategy C2), the business quickly faces negative consequences: increased financial risk, falling business valuation, and potential loss of control over the company.

High operational efficiency cannot offset the effects of excessive debt – debt servicing becomes the key factor determining company stability.

In Strategy C2, even a slight decline in operational efficiency can make debt repayment impossible. We assess the likelihood of successfully implementing active growth strategy solely through debt as extremely low: the ability to repay debt and achieve profitable operations is highly unlikely.

Even if the company navigates financial turbulence successfully, its equity value will remain lower than under Strategy A, Strategy B, or Strategy C1.

Thus, an “aggressive growth at any cost” approach funded entirely by debt is unjustified and will erode shareholder value in the coming years.

Despite the dilution of the founder’s share, Strategy C1 delivers the best financial outcome for the founder: the highest equity value by Year 10 (₽19.3 billion) and the highest investment return – 27.3% per annum, including dividends.

Strategy C1 is the most favorable option for the founder, even though it reduces ownership share in the business to 50.1% while allocating 49.9% to the investor:

• Maximum return and equity value for the founder by the end of the 10-year horizon, driven by faster business growth and realization of economies of scale;
• By Year 10, Debt/EBITDA falls to 0.9x, creating potential for further growth through additional debt financing.

Strategy C2, based solely on debt financing, leads to value destruction.

• The company operates at the limit of its leverage capacity and may capsize. Any deviation in sales or increase in debt costs can result in the loss of the founders’ capital.
• Consequently, the company’s value approaches zero, and the business becomes dependent on creditors, potentially falling under their control through restructuring.

A growth strategy works only when followed by disciplined execution: capital management discipline, a transparent financial model, control over the investment program, and the ability to adapt quickly to market conditions.

From ideas to planning, from planning to action

Our research demonstrates that the capital structure decision made today determines the company’s future opportunities – its scaling pace, financial stability, and returns for the founder.

To translate a chosen strategy into measurable results, the company must move from intuition-driven decisions to data-driven decision-making.

Other key findings of our research:

• Strategic planning and financial modelling. Long-term planning and forward-looking financial modelling make it possible to anticipate how capital structure, scaling intensity, cost of financing, and economies of scale will affect the business. This approach changes how a company is managed: strategy becomes a systematized process rather than a set of isolated initiatives, reducing the risk of poorly thought-out decisions.

Long-term plans and financial models are always built on assumptions that lose relevance over time. Therefore, a critical element of management is the regular review and adjustment of plans and financial forecasts in response to external changes. This mechanism allows the company to revise decisions in a timely manner, adapt its strategy, and maintain a balance between emerging opportunities and new risks.

• Capital management and decision justification. Sustainable company development requires transparent rules for managing capital: investments, debt, dividends, and the ability to generate cash flows.

Regular planning, data-based decision-making, and discipline in these areas provide predictability and control over business.

• Optimal capital structure as the business evolves. Leverage, cost of capital, and the availability and composition of financing sources change as the business grows.

Financial modelling is a critical tool for adjusting the balance between debt and equity, maintaining the optimal trade-off between growth speed and financial stability.