‘We were young, but we had good advice and good ideas and lots of enthusiasm.’
– Bill Gates, founder of Microsoft Corporation
You don’t necessarily have to be young to start a business, but you most definitely need to have a good idea, a ton of enthusiasm and very good advice.
A business is like an addition to the family. You live it, you breathe it and it consumes a lot of your waking (and sometimes sleeping) hours.
Self-employment and a business aren’t the same thing. In my opinion self-employment is where you ‘buy yourself a job’ e.g. a tradesman leaves an employer and sets up as a contractor or you buy a franchise and work in it twelve hours a day.
You have a genuine business when you generate revenue without the need for you to be there e.g. Lorna Jane migrated from self-employment (making and selling leotards herself) to having a fully-fledged retail business. Another is Ralph Lauren, who began selling his own ties in the Empire State Building and is now an international fashion business. Boost Juice is yet another example.
Not everyone makes the transition from self-employment to businessperson. There are a number of reasons for this:
a) A large percentage of start-up business ventures fail;
b) Some don’t have the drive or skillsets necessary to take a business to the next level;
c) Some are quite happy being a sole operator and not having to deal with staff;
d) Everyone has different levels of ambition and once they attain a certain level of income they are content; and/or
e) Some people are in business for a certain lifestyle e.g. running a café by the beach.
Going into business can be exciting and a little nerve-wracking. But most of all it’s a lot of hard work.
When you leave full-time employment you’ll forgo some or all of the following benefits:
The trap most people fall into when considering a business is they look at replacing their income only and forget to place a value on all the other benefits they receive. The added benefits could account for a further 30% to 50% of your regular income.
You generally derive the income and added benefits from working a forty to forty-five-hour week. Self-employment, on the other hand, is usually significantly more than 9am to 5pm. In addition to the time you spend in the business there is the extra time you spend on the business (book work, business planning, managing cash flows etc.).
This isn’t meant to scare you off from ever starting a business because there is an enormous sense of achievement (and not to mention wealth) in creating and building a successful enterprise.
What I’m trying to do is ensure you aren’t a statistic for small business failures. My guess is a good percentage of people who go into business think it will be easy being their own boss and believe there are all these ‘tax perks’ associated with owning a business. They underestimate the capital, attention to income and costs, discipline and effort required to operate and manage a business successfully.
You could be a brilliant lawyer/engineer/electrician etc. but if you are lax in keeping records on the time you spend with clients and tardy in sending out invoices, your business will soon run into cash flow problems. The staff, landlord, electricity bill, phone bill all need to be paid — these are concerns you don’t have when you’re an employee.
Being good at a particular profession or trade is only one of the ingredients for business success (this is the ‘good idea’ component of Bill Gates’ quote).
We’ll look at the other ingredients later on, but first let’s assume you have settled on your good idea for a business. There will be three options available to you to implement your business idea:
This option can be appealing. Someone else has done a lot of the hard work — there is income from existing clientele; fixtures and fittings are in place; advertising; brand establishment etc.
However there are many traps to be aware of when buying an existing business. You should move very cautiously before committing to buy an established business.
The theoretical benefit of a franchise is you’re buying a proven business model backed by a head office that will provide marketing assistance, business guidance, negotiation of leases, bulk buying and brand awareness.
Depending on how well known the brand is will determine the cost to acquire a franchise. A McDonalds franchise can cost in excess of $1 million, whereas a mowing/cleaning/dog washing franchise may be $10,000–$20,000.
In addition to the upfront expense to acquire a franchise you must pay an annual royalty fee of 7%–12% of gross revenue to the franchisor (this is to cover head office expenses and a contribution to marketing).
Statistics indicate franchises have a better success track record than independent small businesses. However, buying a franchise doesn’t guarantee business success. You must still work smart and hard to ensure the business runs profitably.
Prior to committing to buying a franchise you must undertake the usual due diligence and don’t just accept the figures and projection the franchisor provides you with (these can be slightly inflated to make the business proposition look attractive). Talk to other franchise owners so you can gauge whether the business system is all the franchisor says it is.
Starting your own business from scratch avoids the risks of buying a business and a franchise i.e. paying too much for something that may not deliver.
Starting a business from scratch requires the following:
Going into business (either established or new) requires careful thought and planning. The reason most businesses fail is due to lack of planning and failure to understand that the ‘buck’ (financial responsibility) stops with the business owner.
Having an in-depth appreciation of the financial structure of your business is crucial. Knowing where your money is coming from (revenue) and where it is going to (expenses) are essential to your business success.
Remember the old saying: ‘there is no new way to go broke — it’s always too much debt.’ Be careful to not over-borrow or commit to significant ongoing expenses (e.g. lease on elaborate premises). Locking in expenses (interest costs and/or leases) can place your business in jeopardy when the economy softens and demand for your product or service shrinks.
For some entrepreneurs the financial side of the business is boring. They prefer to spend their time on the areas of the business they’re passionate about (who can blame them, as they didn’t go into business to be an accountant). This is a mistake.
In my opinion you must teach yourself the financial basics, otherwise you run the risk of becoming one of the statistics for business failure.
In addition to your basic knowledge on finance and law, it’s vital you seek expert guidance from a competent accountant and solicitor.
There are a number of ways to structure the ownership of your business:
As to which is appropriate for you will depend on your situation and ambitions. A good accountant can guide you through a process of elimination to decide on the best structure.
It’s essential to get the business structure right. This will save you a lot of money in later years.
Remember that before you sign anything always seek professional advice. Better to know upfront what you’re liable for than to have a nasty surprise at a later date.
Good advice costs, but not paying for advice could cost a whole lot more.
Another form of advice you’ll find invaluable is that of a trusted mentor. Seek out successful business people (preferably in the same line of business) who are happy to share their insights and wisdom. Better to learn from other people’s mistakes than make them yourself.
The other types of advice you may seek from time to time are:
Successful, well-run businesses don’t happen by accident. They are the product of ideas, energy, innovation, a determination to strive to improve, a willingness to learn and develop; and finally, a genuine desire to add real value to their customers/clients lives.
Vern Gowdie
Editor, Gowdie Family Wealth
[This was an extract from a book by Vern Gowdie written for his three daughters. The book’s title is A Parent’s Gift of Knowledge.
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