Start-ups face a unique set of problems that business owners only ever experience once in their life time no matter how often they start a new business from scratch. The reason is because that experience stays with them forever, it is impossible to forget and immediately comes to the fore if they even decide to go through it again! This life changing experience or more correctly – inexperience- is the reason that approximately 80% of all new start ups fail within 3 years.
You see, the three things you need after the initial rush of blood to the head, to have any chance of your start up ever getting into the game are:
- The technical knowledge for the product or service you will deliver
- Cash to put into the business together and
- A market
Lack of any of these and you’re finished before you start. There are various ways to sort out the first two relatively easily e.g. you could hire in the technical knowhow if you don’t have it yourself or buy a franchise or outsource the work.
As for cash, you can beg borrow or steal that but when it comes to a market – it’s either there or it isn’t. The real problem is that it can be very difficult to tell whether what you think a market exists at all and even when you are certain it does, how do you know
(a) that it’s big enough and
(b) that you can capture enough of it to make your business a success.
Here are some examples of recent experiences I’ve had with clients to illustrate what I mean:
Client No.1 is a well known person in business at senior management level in the city for a long number of years, highly respected and with a high business profile. He decided it was time to run a business for himself. He had negotiated a deal to buy a franchise in the fast food sector, organised premises in a good location and had the cash to do the deal. He came to me for advice on the business structure and compliance requirements for payroll and sales, taxes and management information systems. I walked him through the business plan and established that he had the bases reasonably well covered. However, I wanted to run on a few ‘what if’ scenarios to check how robust the business plan was and whether it would see the company through to profitability.
When I drilled down into his numbers I discovered that his basis for concluding there was an adequate market for his offering, was the experience of the franchise and the fact that there were a number of other successful food outlets within a half mile radius of where he was proposing to open, and it was close to both the business and the night life centres.
This is not an unreasonable assumption although it’s always better to test the market. On the basis of my ‘what if’s’ and several conversations with him about contingency planning over a short number of weeks, I advised him not to proceed with the investment and I explained why. He chose not to follow the advice.
Eleven torturous months later he said he wished he had followed the advice and asked if I could help him to wind up the operation. I advised him what he needed to do and took him to an insolvency practitioner who explained the process to him, told him how long it would take (12 weeks) and what he would have left at the end – nothing!
Client No.2 is a story of a different kind. A client in Greater Manchester recommended me to a friend in North London who was just about to go into business on his own account for the first time. He had identified two shops on the same street in his line of business which were for sale. In fact they were directly opposite each other on the street. One was a retirement sale after 30 years and the other was for sale because the owner wanted out after 3-4 years because she felt unable to make the business work the way she wanted.
The retirement sale had a solid turnover with an aging customer base, old fashioned premises and staff which would need refurbished and retained and there was a hefty price tag. The second shop looked great, very modern and professional looking, a good range of products and was a really classy set-up. It was for sale at a third of the price of the first shop. The only problem was the owner struggled to raise the turnover which was also about a third of the first shops’. However, my man was sure he could fix the marketing and the new customers- mostly from across the street. And the really good thing about it was he had the money in the bank to do the deal with no borrowings!
From his point of view it was an absolute no brainer – buy the modern shop, no debt, do the marketing and grow the business. After all, he knew what he was doing and had been working in exactly this kind of business for 15 years for other people. I wasn’t so sure, so I took the numbers he had for each business and ran a few scenarios. My thoughts were confirmed- he would be better off buying the retirement sale and converting it to the kind of business he wanted. He would have to borrow a lot of money and it would take a lot longer to have the great looking shop he wanted but he would be earning profit while he did all this and he would have the opportunity to test different things along the way without betting the whole business on one strategy.
We had a few challenging conversations around various aspects of each deal but he finally decided that I was right- the risk was much lower with the retirement sale and he would still get to where he wanted to be.
As I recall the clincher question was ‘How would you feel if someone as good as you and as determined as you bought the retirement sale and you bought the modern shop and all of a sudden your competition was transformed? Would you still be certain that your business plans would deliver as quickly as you would need it to?’
He bought the retirement sale and is doing very well and is transforming the business to the way he wants it, he is confident about the future and will have his borrowings paid off in about half the time we initially planned for. The modern shop is still languishing across the street.
So what is the difference between client 1 and client 2? Both had the where withal to do their deals, both came looking for compliance and business structures advice. In addition to this they both were given sound business advice based on over 30 years experience – number 1 didn’t pay heed to it sure enough whereas number 2 did. Could number 1 have ever succeeded- yes, but it would have required more time and more money.
In my opinion the greatest contribution to new business owners failing in the first 3 years is the failure to get and heed advice on what really makes a business work and what are the most dangerous pitfalls.