Don’t go into business with your head in the clouds...

be aware of the problems and pitfalls that await the unwary new business owner

By Bob Power

In this first segment we look at the major problems typically encountered when entering business. Buying a business and making the move from employee to employer can be extremely stressful, placing financial constraints on the buyer and causing tension amongst the family.

Once you have accepted the challenge you must also accept the risks and liabilities. Get it right and you will be rewarded, but get it wrong and a business that is destined to turn belly up may be where you are headed. At present the failure rate of small businesses is regrettably high, with some estimates suggesting that as many as 70 percent of new businesses go bust in the first two years.

The good news is that many now successful business owners failed in their first, and sometimes subsequent business endeavours. It is in learning from each experience that they eventually achieved their objectives and rewards. Important to remember is that while you may be the boss, not acknowledging that the bank manager and clients/customers control your destiny, is the pathway to disaster.

Well known financier Warren Buffet has stressed that going into business is akin to marriage, and his words of wisdom are “Don’t rush into marriage, take your time”. In approaching a business opportunity “Don’t rush where angels fear to tread” may also be considered good advice.

Whether you are starting or buying a business, consider the following points, bearing in mind that often when a business fails it is because these factors have been ignored:

• If you have no understanding of the business, its products/services, or the sector in which it operates, or if you have any doubt, walk away. Also understand the legal entity, such as close corporation, under which the business trades.
• Be aware of the jargon and legalese used in legal documents. Let the signer beware - under no circumstances put your signature to a document when you do not understand all the terms. If there is anything you don’t understand, ask for clarification.
• The essential requirements necessary for success centre around, but are not limited to, having the necessary business knowledge, sound management skills, adequate capital and access to sufficient resources.
• Be honest with yourself. Take the time to submit to an evaluation to satisfy yourself that you have the right mental approach, aptitude and financial resources to enter into business.
• Attaching an inflated value to and paying too much for a business.

Q: What is a business worth?

A: Whatever the buyer is prepared to pay and the seller is prepared to accept.

• Understanding that the seller will tell you the truth, the whole truth and anything but the truth. Let the buyer beware – the seller will dress up the business to hide vital flaws. Do your homework and with the help of professional advisors conduct a thorough due diligence. Understand what you are buying, and part of that is understanding why the business is for sale. As the saying goes – why sell the goose which lays the golden egg?
• Recognise that cash is king, information is power, profit is sanity, turnover is vanity and the spoken word is cheap. Safeguard yourself by noting down agreed upon points and have it signed off by both parties as soon as is reasonable.  
• Know your competition and how long they have been in existence. A niche market is the ideal, but often there are many businesses in competition to you.
• Increasing incidence of crime and fraud in small businesses has rendered it necessary to become knowledgeable about security and implementing prevention measures. You have a legal obligation to protect your staff, family and yourself.
• Build good habits, and keep a clear conscience. Be honest with yourself and with others and don’t be afraid to speak your mind. Sadly, many small business owners are guilty of some form of crime, be it tax/VAT evasion, using the business credit card for personal use, or overcharging for fees.
• Negotiation skills can either cost or make you a lot of money. Negotiate everything, but be prepared and avoid committing to costly concessions on your part.
• From a financial perspective it is necessary to –

ü  know how to earn money, cost products, prepare a budget, control spending, and manage income, expenses and profit.

ü  keep to the business plan and understand the difference between income and cash flow.

• You are in trouble if your profits or dividends don’t cover you loan repayments.
• Don’t be penny wise and pound foolish. Pay for advice when it is necessary.
• Cultural differences, especially in BEE partnerships, can cause discontent.

There is no doubt that the rewards for running a business can be great, far greater in fact than anything you can achieve as an employee. However, you must know the risks you are taking. If you are prudent in building your business it will gain in value, and when the time comes you will be able to sell it at a good price. At the same time, the experience gained will qualify you to move onto bigger things, or perhaps even expand your existing business, if that is your desire.

Bearing the above overview in mind, one needs to know how to enter business successfully and then how to stay in business, manage, succeed and expand.

In following segments we look at how to manage, succeed in or expand your business, in short, we reflect on the “how to” of how to stay in business.

Power Corporate Consultants

+27 11 880 7850

www.powerconsulting.co.za