⏱ 17 Minute Read ✍🏻 05 April 2019
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In an age when the aspiration to be an entrepreneur has exploded—egged on by all those Apprentice-esque TV shows that make such a mockery of the profession—it’s hardly surprising that the gap between fantasy and reality now resembles the Grand Canyon. This article is intended as an antidote to those typically saccharine popular portrayals.
While starting a business may have the potential to provide you with a more rewarding life, there are no guarantees and no shortcuts. Taking the plunge is not for the faint of heart – the mortality rate remains dauntingly high. Of the half a million businesses that will be launched in the UK in 2019, a quarter will fail within the first year. Half will not see the end of the third.
Assuming that you are still reading this (having resisted the urge to gingerly retreat to the safety of gainful employment), the good news is that new businesses do survive, and whether you become a positive or a negative statistic is—mostly—within your control. Laying a solid foundation with meticulous planning, before building on it with a diligent work ethic, remains the cornerstone of commercial success.
ASKING THE QUESTION >
Before taking the first step, I urge you to examine your true motivations for embarking on such a difficult journey. I say this because more and more people these days feel an overarching need to be busy. Pathologically busy people equate being busy with being important and of value, i.e their self-esteem is inextricably linked to their level of work activity. Their manic mantra is: “I am in the business of busyness – the busier the better!” If this describes you, you are perfectly suited to the micro-management model of business building, whereby you are both the employer and the employee. Robert Frost hit your nail squarely on the head when he wrote: ‘By working faithfully eight hours a day, you may eventually get to be boss and work twelve hours a day.’ In fact, if you work frantically enough, you can successfully avoid any meaningful engagement with your personal life whatsoever!
If your motivation is purely monetary, you may be interested to know that numerous studies conducted over the past decade have conclusively proven that money really can buy happiness….but only to an extent. The vital footnote is this: the plateau is approximately £60,000 per annum; anything you earn beyond is likely to make little or no difference to your level of happiness. Furthermore, chronically high levels of stress (like those that come with running your own business) tend to be a real happiness-buster over time. Incidentally, the ‘Buying Happiness’ research also shows that the way in which you spend your money makes a significant difference to how happy it may make you. In particular, a life experience such as a restful holiday provides considerably more lasting happiness than material goods. This presents quite the Catch 22 for the aforementioned perpetually busy business people, who are surely too busy to take a holiday (and would only spend the holiday thinking about work anyway). Off to Louis Vuitton they go!
If, like me, your motivation is freedom in terms of your time, quality of life and—eventually—financial security, my recommendation is that you design and build your company as a machine that will not ultimately require you to be its operator (for those whose long-term goal is an exit, it is also worth noting that companies which are not owner-dependant often achieve higher valuations). The idea that you can own a business but choose not to run it is incomprehensible to many people, but take it from me: this is the mindset that leads to the Holy Grail of personal freedom. Think of Richard Branson putting the world to rights on his own Caribbean island. Branson doesn’t sit on the board of any of the companies within the Virgin group, namely because he understands that his passion—and talent—is for creative entrepreneurship rather than business in the conventional sense.
Our modern culture of instant gratification is saturated with self-proclaimed entrepreneurs. The meaning of the word entrepreneur has been lost; very few fit the bill, and the pursuit of a ‘get-rich-quick scheme’ is no different to chasing rainbows in the hope of finding a pot of gold. Producing a real pot of gold takes time, tenacity and eye-watering amounts of work. Be under no illusions about the sacrifices you will need to make to establish a successful business – there is a strong argument that a sane person would not even attempt it. Elon Musk famously said: “a friend of mine has a good way of describing doing a startup: ‘it’s like eating glass and staring into the abyss’. If you don’t eat the glass, it won’t work, and if you go into it thinking it will just be fun, you will be disappointed; it’s not, it’s incredibly painful.”
Answering two fundamental questions will help you to decide whether you would be best suited to a full-time, part-time, spare-time or seasonal business, or indeed whether you are cut out for starting any business at all: 1) How much time are you willing and able to commit to it, and 2) how little money can you afford to earn in its formative years? (the likelihood is that you will earn none at all).
In the slurry of syrupy ‘entrepreneur’ memes that pollute the internet, there is one that actually captures the essence of building a successful business very well: “Entrepreneurship is living a few years of your life like most people won’t, so that you can spend the rest of your life like most people can’t.” The only caveat I would add to this, and it is a big caveat, is that anything that is going to significantly improve the quality of the rest of your life is most probably going to take more than a ‘few’ years to build. I would set aside five, but even then, you will be lucky.
FORMATION FLYING >
There is plenty to be said for having a wingman. They may have the skills or experience that you lack and / or the capital that the business needs. Either reason justifies entering into a partnership.
The ‘complimentary skills’ rationale is particularly useful when starting a business organically, when it is unlikely that you will have the money to employ someone who can fulfil an essential role that you are not suitable for. Having said that—if you are mercenarily minded and have the funds to pay someone to do the same job—an employee is usually preferable to a partner in the long term; it means that you are not obligated to share any profit that your business may make, or the proceeds of sale if you ever execute your exit strategy. Bear in mind however that nobody will ever be as motivated and energetic as a business owner who has everything to play for, and building a business is a lot more fun if you have a climbing partner to share the thrill of the ascent with. If you remain convinced that you possess the broad spectrum of every skill required and can do it all single-handedly, then good luck to you, Narcissus.
Should you find yourself in the position of ‘founding partner’, structuring your partnership in a responsible and realistic way enables you to retain control of the business while sharing the profits with your partner fairly. A true 50:50 division of ownership is the kiss of death – the business arena is inherently Darwinian, and all the hardwired traits of human individualism are sure to come to the fore. The norms of human nature dictate that the partners will disagree on key issues at some point, spending endless amounts of time attempting to convince each other of their views. For as long as this chaos continues (which can be indefinitely in a true 50:50 partnership), the Board is deadlocked and literally cannot move forward, damaging both the Company and all those who work within it. Successful partnerships require a clear decision-making framework on which to grow. For decisions to be made dynamically and in order to get things done, responsibility must be allocated within a business to give each partner the controlling authority for the appropriate field. For fundamental issues that affect the entire business, one partner—usually the ‘Chairperson’—must have final say, if ever a final say is needed. Who this power falls to is usually dictated by a historic disproportion in the investment of money, experience, and burden of risk borne. In my opinion, the closest you can get to the spirit of a 50:50 partnership in any professionally run company is 51:49 and, if you take it that far, you should ideally believe that the business will not work at all without your partner.
Never take on a partner simply because they are a friend. This is a lethally effective way to ruin a friendship; many people pour their heart and soul into their business and very much view it as the concomitant of their self-worth. The potential for conflict when ego and money are involved should not be underestimated.
20 / 20 VISION >
Most successful entrepreneurs identified the niche to be filled before dreaming up a vision and making it into a reality – not the other way around. Any examples of exception are simply those that prove the rule, and will almost certainly have been flukes. Beware of randomly searching for ideas to suit your inclination to set up a business for the sake of setting up a business. It has been my experience that when somebody wants something, or likes the idea of something, there is an unfortunate tendency to imagine that which is not there. Bearing in mind that whimsical ‘blue sky’ thinking is responsible for some of the worst business ideas in history (though it certainly has its place), I strongly advise you to allow your open-on-impact parachute concept to marinate somewhat before you plough your life savings into it.
Innovation is not a prerequisite for success. Many a stellar business has flourished by simply taking an existing offering and making it better. Pure originality is useful, though not essential; you can simply be better, or cheaper, or—ideally—both. It is wise to avoid competing on price alone however, because doing so may not be always be enough to win customers over. Being cheaper is of course always a huge selling point in certain markets, but the consumer must believe in your brand in the first place and have the confidence that you are the real deal. Nothing will debase your brand kudos quicker than prolific discounting. If it transpires that the price point of your offering is so low as to make turning a profit all but impossible, it is likely that your business model was never viable to begin with.
WRITING THE BLUEPRINT >
As stiff and boring as it may seem, writing a comprehensive business plan is wholly worthwhile, regardless of whether you are applying for any funding and even if the only people who actually end up reading it are your friends and family. The process of putting pen to paper, particularly when it comes to projecting the figures for your profit and loss, cash-flow and balance sheet, will focus your thinking by forcing you to explain exactly what your business is, how it will stack up financially, where it fits into the market, who your customers are, what you will sell, how you will sell it, and what you plan to do with your business in the long term. Even if you are only mirror-pitching, subjecting your idea to this structured scrutiny may well reveal that it is barking lunacy. That is not the realisation that you want to be having when you have just invested your last pound in it, and publicly stated that it is going to be the next Facebook. Far better to have this little eureka moment before you do any damage; when you can still make any necessary adjustments in sandbox mode.
CRYSTAL BALL vs GRIM REAPER >
Nothing is more important in business than having a sound grip on your finances. Anybody who blunders through each day without knowing the whereabouts of every penny is not ‘in business’ at all. They are asleep at the wheel, careering down the motorway in the wrong direction. Getting the figures wrong will destroy both your finances and your reputation, and the ripples will spread much further than you can imagine. Most people underestimate the weight of the responsibility that comes with owning a company. I may have cut my teeth the hard way and learned invaluable lessons through humbling failure, but it took me many, many years of painstaking work to rebuild it all. You can avoid that pain by doing your homework properly first.
Accurate cash-flow forecasts, updated in as close to real time as possible, are the proverbial crystal ball, and the only real defence against the Grim Reaper of many a fledgling business. Be pessimistic when it comes to your projected figures: under-forecast your revenues and over-forecast your costs. The essence of business is really quite simple – income must exceed expenditure and you must track every single penny obsessively. The equation for success in business is as straightforward as the one for losing weight (eat less, move more) yet there are morbidly obese people making themselves miserable at every turn. It is the same in business: the theory is proven, the practice requires self-awareness and staunch discipline.
A common area of fiscal ineptitude arises from misunderstanding the difference between cash-flow and profitability. A profitable business can fail due to negative cash-flow, whereas a loss-making business will survive for as long as cash-flow is positive. For that reason, monthly profit and loss reports that correlate with your cash-flow forecast are a necessity. Understanding these two fundamental elements, and how they interrelate, are the only things that can give you the foresight with which to steer your ship. Essentially, these tools enable you to see the oncoming iceberg—giving you the chance to figure out how to navigate around it—before crunch time.
SPEAKING THE LANGUAGE >
If you cannot read and interpret accounts, you simply do not understand the language of business. There are countless self-help books on the subject out there, but the most straightforward and user-friendly I have come across is ‘Understanding Accounts’ by Stephen Brookson. The prevailing misconception that the accountant is responsible for financially steering the business has become the obituary of many a venture. You must accept the fact is that the only person that is ultimately responsible for the financial welfare of your business is you.
FEIGNING INNOCENCE >
Financial cross-contamination is a deadly sin. Countless business owners have sunk the ship, and all the poor souls won board, by treating the company coffers as their personal bank account. This behaviour is born of building upon foundations of sand; a catastrophic oversight that occurred at the planning stage (if any planning took place at all, which it probably didn’t).
The way it should work is this: Assuming that you don’t have sufficient personal reserves to enable you to wait until the business is profitable and cash-flow positive so that you can draw money by way of dividend, your start-up capital must include a modest survival salary for yourself. Alternatively, provided that you have good reason to believe that your company is on target to make sufficient profit before the end of its financial year, you can take modest director’s loan drawings in lieu of declaring sufficient dividends to clear the outstanding balance (providing of course that cash-flow is positive enough to tolerate such ongoing payments in the first place). The key word in either scenario is ‘modest’ and the salient point is that payment should be made as strictly and as professionally as any payment to any other member of staff.
ACTUS REUS or MENS REA? >
It is much easier to forgive the actus reus (guilty act) if it was committed in the absence of the mens rea (guilty mind, i.e understanding or intent). What you will often see instead is the unscrupulous business owner jetting off on holiday, quaffing champagne, eating lobster, paying the mortgage on the house, meeting the finance payments on the car(s)…..yet all the while the staff are paid late or not at all, the overdue supplier invoices are piling up, and their premises are falling further into disrepair. When the guillotine inevitably falls, the business owner pleads sympathy and waxes lyrical about the blood, sweat and tears he claims to have poured into the venture, blaming everyone except himself for the failure and taking shelter from the carnage he has created under the coward’s umbrella of limited liability. Staff have lost their jobs (often having worked without remuneration), suppliers have provided products and services for which they have not been paid (sometimes to such an extent that they themselves go bust in turn) and taxpayers lose out on the monies that the owner should have been holding on trust for HMRC. In the face of such dire consequences—arising from dishonest and irresponsible actions—the mens rea defence doesn’t hold much water.
Company law leaves itself wide open to abuse. This is one of the failings of modern Capitalism. The table is set for the amoral business owner to have his cake and eat it; to suck the lifeblood of the company’s cash-flow to fund his lifestyle, safe in the knowledge that the statute of limited liability will most likely protect him from misappropriated monies being clawed back.
Moral issues notwithstanding, the legal reality is this: a Company, enshrined as it is in commercial law, is an entity all its own, just as though it were a person. Your duty as a Company Director will always be to act in the best interests of the company, not in the best interests of yourself. Understanding this separation is crucial; one of the criteria that the government use for prosecuting or disqualifying a Company Director on the grounds of unfit conduct is ‘using company money or assets for personal benefit’. The fair warning in this could not be clearer.
YOUR STAFF TRUST YOU >
As Benjamin Franklin famously wrote: ‘in this world nothing can be said to be certain, except death and taxes’. If you employee people, you are obliged to operate a payroll; you must deduct their PAYE tax and—if they earn more than £162 per week—National Insurance from their pay. You may also need to deduct things like student loan repayments or pension contributions. Every time you make payment to an employee, you should provide him or her with a payslip that shows exactly how much they have earned and what deductions you have made.
All of the above involves a large element of trust: the government trusts you to pay the employee’s income tax and any other required contributions; the employee trusts you to pay their income tax and things like National Insurance on their behalf. That money does not belong to your company, nor does it belong to you – the money belongs to your employees, and their money is due to the government, via you. Quite simple really.
Unethical business owners often deduct such amounts from their employees pay, but rather than paying it over to the government, swallow that money into the company’s beleaguered cash-flow, or even pocket it for themselves. Incredibly, it is the unfortunate employee that is held legally responsible in these circumstances; HMRC’s somewhat peculiar stance is that the money is ultimately owed by the employee, regardless of the fraudulent behaviour of the business owner. Again, the law seems to leave itself wide open to abuse here, but it is important to remember that such laws are predicated on the theory that business owners are honest and upstanding members of society. In practice, it can be more like giving guns to monkeys.
HMRC TRUST YOU >
You have a duty to understand how VAT works and whether your business will be required to charge it. Broadly speaking, when a business reaches the point of taking £85,000 in one financial year, it must be registered for VAT. At this point you will need to charge 20% on top of everything you sell (unless you sell reduced or zero-rated goods, which I will not go into here) and show the breakdown on all the invoices and receipts that you issue. Again, the key point is that the VAT you charge is not your money; it is HMRC’s money – your company merely holds it on trust for the government. The classic error that business owners make is banking the VAT they have been charging as though it is some sort of Brucie Bonus. They have somehow convinced themselves that they have taken £X, when in fact they have only taken £Y. Lo and behold, some three months later, the VAT man comes knocking for his £Z (being £X minus £Y). “How unreasonable!” cries the business owner, having spent all the money that was never his to begin, thereby bankrupting his fledgling Company.
POWERED BY THE PEOPLE >
The most powerful asset of any business is the people who work within it. A business is nothing without solid people, and this holds true for all the strongest businesses that are known for generating goodwill. Your team members should be happy in their environment and naturally motivated. A successful Company is, by definition, a community.
It pays to be obsessively selective about recruitment, because if you don’t employ idiots, you won’t need to rule with a rod of iron. Dictatorships are unpleasant and unnecessary; intelligent human beings, operating on a level playing field, rarely need to be told what to do. The key is to establish a meaningful and incentivised structure with a clear route to success – human nature will take care of the rest. I am proud to say that the staff of my companies have always seemed to treat the business as their own, working largely under their own steam. Many have been on the team from inception and have steadily worked their way up, elevating themselves on their own merits.
FALSE PROPHETS >
Before you taxi to the runway, please undertake your own primary research on what starting and running your own business really involves. There are several excellent websites that offer free advice for start-ups: Business Link, Smarta, Start Up Donut and Startups.co.uk are all worth a visit. As these sites contain all the information you need, there is absolutely no need for you to pay a ‘business consultant’ to give you overblown advice that is already free of charge and in the public domain. Let’s face it: if the consultant were genuine, they would advise you not to waste any of your start-up capital on such tripe. The new wave of ‘business coaches’ is to be treated with scepticism – the vast majority talk the talk, but have never even come close to walking the walk.
FORTUNE FAVOURS THE BRAVE >
Nothing happens overnight; it is estimated that it took at least a million days to build Rome. Like anyone starting any business, you will need an abundance of grit if you are to stay the course. Dogged determination and adaptability will be of more use to you than God-given intelligence, but there is of course a fine line between bravery and recklessness. Make no mistake about the fact that there will be dark days when things seem hopeless, but knowing exactly what you are working towards, and why, is what will see you through.
While it may be true that running a business is pointless if the aim is not to turn a profit, the sole motive should not be money. Freedom, independence and the satisfaction derived from creating a community and making a difference are the key motivators that have stood the test of time. Money is of course a welcome by-product, but there will often be easier ways to make considerably more of it (albeit less exciting ones).
Personally, I enjoyed myself the most in those formative years, when everything was touch-and-go and we were desperately trying to get the aeroplane off the ground before we ran out of runway (and in the case of one company, sellotaping the wings back on after take-off). I think it more than likely that the adventure you are about to embark upon will bring you some of the best and the worst years of your life. I envy you that first flush of entrepreneurial youth and I urge you to savour every minute of it – this is as good as it gets.
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