We’ve all heard the statistics on how many small businesses fail in the first five years. Although this may be one of the most daunting things with regards to starting or purchasing a business, it need not be so. If you devote a high degree of thought, planning and professional advice, you can increase your prospects of success greatly.
The first thing that I consider when clients ask me to analyse a business for start-up or purchase is what are the individual’s personal attributes that will assist them with making the business a success? How do these attributes fit in with this business model? Are they good at selling? Have they done a SWOT analysis on themselves to work out what their shortfalls may be in business? Can they get help with regards to the shortfalls? And are they so great that they will be unable to be overcome?
Secondly, I look at the market in which the business will operate. Is it one where there is a high barrier to entry so that new competition won’t start quickly? Is there a large demand for the goods and services, and is there going to be growth potential in the future?
Thirdly, I look at the financial capacity of the client, to consider whether they will be able to “see the project through” at least three years, and preferably 5 years. Such things as building work in progress and debtors, as well as paying wages, rents, advertising and licensing may be all expenses which are incurred well before you write your first invoice. For this purpose, a budget is almost always the best way to answer this question. It not only communicates the thoughts of the accountant, the business owner and the bank between each other but it also highlights the timeframe of deficits and whether the client has the ability to fund these deficits from non-business sources.
Fourthly, I ask the client why they want to do this? Is it for esteem or prestige? Is it for money? Is it so they can spend more time with their children, or is it so they can live comfortably in retirement? These goals need to be considered in order so they have a realistic view of the quantum of success (in these areas), and the physical capacity required to take over or set up a business. Almost certainly if the business owner has not considered their goals and if the business, these items will have negatives next to them rather than positives.
Lastly, get advice. Get experience, talk to people in the industry. Talk to your financial advisers, Accountants and your legal practitioners. Talk to people who have started businesses for themselves about their challenges, their successes and their fails, and ensure that you are in a position where you can relate to them.
By: Allan Vickers