The two essential ingredients for success in any new venture are a good proposition and the right people to turn that idea into a business. Your business plan must therefore not only include a description of your purpose or mission, but give full details of your and your prospective partners’ experience and ‘suitability’ for this venture.
You also need to explain the name of your business, why you chose it, and under what legal form you propose to trade. If your business has been trading for some time, you should give a brief description of achievements to date and a summary of financial results. Full accounts can be included in an appendix to your business plan. Let’s look at each in turn.
To launch a new venture successfully, you have to be the right sort of person, your business idea must be right for the market, and your timing must be spot on. The world of business failures is full of products that are ahead of their time.
The entrepreneur is frequently seen as someone who is always bursting with new ideas, is highly enthusiastic, hyperactive and insatiably curious. But the more you try to create a picture of the typical entrepreneur, the more elusive he or she becomes.
Peter Drucker, the international business guru, captured the problem clearly with this description:
Some are eccentrics, others painfully correct conformists; some are fat and some are lean; some are worriers, some relaxed; some drink quite heavily, others are total abstainers; some are men of great charm and warmth, some have no more personality than a frozen mackerel.
That said, there are certain characteristics that successful newcomers to business do have in common, and you should emphasize these in respect of yourself in the business plan.
Entrepreneurs are rarely geniuses. There are nearly always people in their business who have more competence, in one field, than they could ever aspire to. But they have a wide range of ability and a willingness to turn their hands to anything that has to be done to make the venture succeed. They can usually make the product, market it and count the money, but above all they have self-confidence that lets them move comfortably through uncharted waters.
CASE STUDY Sir Paul Smith
Sir Paul Smith, who left school at 15, launched his clothing business and within a decade had opened three shops in London – one of which was in Covent Garden – and a further one in Tokyo, and turnover was above £2 million pa. Now ‘Paul Smith’ is an internationally recognized fashion brand.
Explaining his success, Sir Paul states, ‘It’s not that I’m a particularly brilliant designer or businessman, but I can run a business and I can design. There are so many excellent designers or excellent people but so often the designers can’t run the business and businessmen do not have the right product.’
Rising from the ashes of former disasters is also a common feature of many successful entrepreneurs.
Henry Ford had been bankrupted twice before founding the Ford Motor Corporation with a loan of US$28,000 in his fortieth year.
CASE STUDY Timothy Waterstone
Timothy Waterstone, founder of one of the fastest-growing bookshop chains in the West, was fired from WH Smith’s US operation in the most bloodcurdling circumstances. He took the first plane back to the United Kingdom and spent two months wondering what to do.
Until this time Waterstone’s career path had been smooth and unmeteoric. After Cambridge he did a spell in the family tea-broking business in Cochin, followed by 10 years as a marketing manager for Allied Breweries. Books had always been his obsession, so he went to work for WH Smith. He was quickly sent to New York, where he remained for four years. His wife was in the United Kingdom for long periods, so he spent his spare time wandering around Manhattan bookshops. They were brilliant places: lively and consumer-led with huge stock, accessible staff and long opening hours. He felt there was a gap for similar bookselling in the United Kingdom, but at the time did nothing about it.
A trip to the dole office acted as a catalyst. It was the most horrific experience of his life. Not waiting for his turn, he rushed out and sat in the car. Instead of trying to get a new job, he formulated the Waterstone’s concept. High street banks turned him down. He then went to a finance house and struck lucky. He pledged his house, £6,000 savings, £10,000 borrowed from his father-in-law, and the rest was raised through the government’s loan guarantee scheme.
Three months later the first Waterstone’s opened, based on a simple store plan an art student sketched out for £25. He filled the shops with the type of books that appeal to book lovers, not best-seller buyers. Midnight hours, Sunday trading (where possible) and bonus schemes for staff led to dazzling sales and the company employed 500 people in 40 branches, with a turnover of £35 million a year. The ultimate achievement was to sell back the company to WH Smith for the modest sum of £50 million. Don’t get mad, start your own bookshop!
Almost by definition, entrepreneurs are innovators who either tackle the unknown, or do old things in new ways. It is this inventive streak that allows them to carve out a new niche, often invisible to others.
CASE STUDY TomTom
The first quarter of 2017 saw TomTom having over 4,700 employees and 58 offices in 35 countries worldwide. Since 2011 the company has sold over 2.7 million of its new Sports Products, a category fast approaching its success in the navigation arena. With revenue approaching the billion dollars a year mark the company has come a long way since 1991 when TomTom was founded and began a journey that would change the way people drive forever.
Harold Goddijn and Corinne Vigreux, married for more than two decades, are the co-founders of the satellite navigation device that has come to define the sector. Vigreux studied at a Paris business school starting out at a French games firm before moving to the UK to Psion, then a FTSE 100 technology company famed for its handheld PDA (Personal Digital Assistant). Goddijn read economics at Amsterdam University and while working for a venture capital firm came across some of Psion’s handheld computers and organizers and was impressed. He approached Psion suggesting a joint distribution venture selling the company’s products in the Netherlands. Vigreux was sent to the Netherlands to negotiate with Goddijn, the first time the pair had met. They married in 1991 and Vigreux resigned from Psion and moved to Amsterdam.
A brief spell working for a Dutch dairy co-operative saw Vigreux suffering from technology withdrawal symptoms. With Peter-Frans Pauwels and Pieter Geelen, software wizards, she started Palmtop Software, later to become TomTom, designing software such as dictionaries, accounting packages and diet books that could be loaded on to Palm Pilots and Pocket PCs. In late 1998 Goddijn and Vigreux saw a navigation system built for a computer and gradually the idea took shape. Three years and €4m later the quartet had created the TomTom launching it at €799. Even at this price it was far cheaper than existing products and superior in that it featured a touch screen, a first for the sector.
The year after launch the business floated, selling 50 per cent of the business to fund the growth and acquisition. But 2008 saw the business hit turbulence. The credit crunch, market saturation, a high level of debt, and Google starting to offer maps for free represented more serious problems in a single year than many face in a lifetime. The company restructured, reduced debt and now generate half their revenue from selling licences to their maps, constructing in-built systems for the car industry, and telematics. TomTom Telematics is now recognized as a leading provider of telematics solutions.
Successful people set themselves goals and get pleasure out of trying to achieve them. Once a goal has been reached, they have to get the next target in view as quickly as possible. This restlessness is very characteristic. Sir James Goldsmith was a classic example, moving the base of his business empire from the United Kingdom to France, then the United States – and finally into pure cash, ahead of a stock market crash.
The high failure rate shows that small businesses are faced with many dangers. An essential characteristic of someone starting a business is a willingness to make decisions and to take risks. This does not mean gambling on hunches. It means carefully calculating the odds and deciding which risks to take and when to take them.
You will need complete faith in your idea. How else will you convince all the doubters you are bound to meet that it is a worthwhile venture? You will also need single-mindedness, energy and a lot of hard work to get things started; working 18-hour days is not uncommon. This can put a strain on other relationships, particularly within your family, so they too have to become involved and committed if you are to succeed.
CASE STUDY Innocent
In the summer of 1998 when Richard Reed, Adam Balon and Jon Wright had developed their first smoothie recipes but were still nervous about giving up their jobs, they bought £500 worth of fruit, turned it into smoothies and sold them from a stall at a London music festival. They put up a sign saying ‘Do you think we should give up our jobs to make these smoothies?’ next to bins saying ‘YES’ and ‘NO’, inviting people to put the empty bottle in the appropriate bin. At the end of the weekend the ‘YES’ bin was full, so they went to work the next day and resigned. The rest, as they say, is history. Virtually a household name, Innocent Drinks has experienced a decade of rapid growth.
But the business stalled in 2008, with sales slipping back and their European expansion soaking up cash at a rapid rate. The founders, average age 28, decided that they needed some heavy-weight advice and talked to Charles Dunstone, Carphone Warehouse founder, and Mervyn Davies, chairman of Standard Chartered. The strong advice was to get an investor with deep pockets and ideally something else to bring to the party to augment the youthful enthusiasm of the founders. They launched their search for an investor the day that Lehman Brothers filed for bankruptcy. In April 2009 the Innocent team accepted Coca-Cola as a minority investor in their business, paying £30 million for a stake of between 10 and 20 per cent. They chose Coca-Cola because as well as providing the funds, the company can help get Innocent products out to more people in more places. They’ll also be able to learn a lot from Coca-Cola, who have been in business for over 120 years.
All too often budding entrepreneurs believe themselves to be the right sort of person to set up a business. Unfortunately, the capacity for self-deception is enormous. When a random sample of male adults were asked recently to rank themselves on leadership ability, 70 per cent rated themselves in the top 25 per cent; only 2 per cent felt they were below average as leaders. In an area in which self-deception ought to be difficult, 60 per cent said they were well above average in athletic ability and only 6 per cent said they were below.
A common mistake made in assessing entrepreneurial talent is to assume that success in big business management will automatically guarantee success in a small business.
You can find out more about your likely strengths and weakness as an entrepreneur by taking one or more of the many online entrepreneurial IQ-type tests. A couple of sources are listed below, but an entry in Google will produce a small torrent!
Not surprisingly, an investor’s ideal proposal includes an experienced and balanced management team, who have all worked together for a number of years. That will ensure management in depth, thus providing cover for everything from illness to expansion, and guaranteeing some stability during the turbulent early years. For this reason management buy-outs are a firm favourite.
At the other end of the scale is the lone inventor whose management skills may be in doubt, and who is anyway fully stretched getting his or her product from the drawing board to the production line. This type of proposal is unlikely to attract much investment capital. It has obvious risks beyond those every company expects to experience in the marketplace. In any case, without a management team in place the business is ill-prepared for the rapid growth required to service an investor’s funds.In practice, most business proposals lie somewhere between these extremes. Your business plan should explain clearly what the ideal composition of key managers should be for your business; who you have identified, or recruited so far; and last but certainly not least, how you will motivate them to remain with you and perform well for at least the first few all-important years.
Certainly investors will look for reassurance in this respect and will expect to see more reference to the steps you will take to encourage loyalty.
A good name can, in effect, become a one- or two-word summary of your business strategy. Jeff Bezos originally chose Cadabra as the name for his business – as in abracadabra – summing up the magic of being able to find any book online. After a few phone calls to canvas opinions, he ditched Cadabra as it was too easily confused with ‘Cadaver’! He settled on Amazon, figuring that most people thought it to be the largest river in the world, and he wanted to convey the image of having the ‘Earth’s Biggest Book Store’.
PayPal, Body Shop, Toys R Us and Kwik-Fit are other good examples of names that sum up the essence of their businesses. Google, though a colossally successful venture, struggled in arriving at a meaningful business name. They started with ‘BackRub’, as their algorithms checked backlinks to estimate the importance of a site, but moved on to use Google, a misspelling of the word ‘googol’ – the number one followed by one hundred zeros. This was chosen to convey the idea of large quantities of information being sifted for useful data. It’s unlikely that many people outside the Stanford University campus (where the founders developed their business idea) would have any idea what a googol was or why it would help describe the biggest search engine. But at the time, ‘geeks’ populated the internet, and the name caught on.
Your business name is almost always the first way people get to hear about your venture and it needs to convey the essence of the business quickly and clearly. Once you have to start explaining what you do, the job of communicating gets harder. As you are going to have to put some effort into creating this name and that of your web presence (domain name) if you plan to have one, it makes good sense to take some steps to protect your investment.
Your company name can be the starting and sustaining point in differentiating you from your competitors, and as such it should be carefully chosen, be protected by trademarks where possible and be written in a distinctive way. It follows therefore that the main consideration in choosing a business name is its commercial usefulness.
When you choose a business name, you are also choosing an identity so it should reflect:
Given all the marketing investment you will make in your company name, you should check with a trademark agent whether you can protect your chosen name (descriptive words, surnames and place names are not normally allowed except after long use).
First, anyone wanting to use a ‘controlled’ name will have to get permission. There are some 80 or 90 controlled names, which include words such as ‘International’, ‘Bank’ and ‘Royal’. This is simply to prevent a business implying that it is something that it is not.
Second, all businesses that intend to trade under names other than those of their owner(s) must state who does own the business and how the owner can be contacted. So if you are a sole trader or partnership and you only use surnames with or without forenames or initials, you are not affected. Companies are also not affected if they simply use their full corporate name.
If any name other than the ‘true’ name is to be used, then you must disclose the name of the owner(s) and an address in the United Kingdom to which business documents can be sent. This information has to be shown on all business letters, orders for goods and services, invoices and receipts, and statements and demands for business debts. Also, a copy has to be displayed prominently on all business premises. The purpose of the Companies Act requirements is simply to make it easier to ‘see’ who you are doing business with.
If you are setting up as a limited company you will have to submit your choice of name to the Companies Registration Office along with the other documents required for registration. It will be accepted unless there is another company with that name on the register or the Registrar considers the name to be obscene, offensive or illegal.
CASE STUDY Cobra Beer and dunnhumby
When Karan Bilimoria, now Lord Bilimoria, started Cobra Beer back in 1990 he operated out of his Fulham flat and with cases of beer in the back of a Citroen 2CV drove around selling beer door-to-door to London’s Indian restaurants. Although the beer was actually brewed in Bedford, the recipe and the image he wanted for his business were essentially Indian – hence the name Cobra. Determined to expand the business Bilimoria attended a Business Growth course in 1999. By 2011 Cobra Beer was sold in 12,000 restaurants and pubs, and exported to over 50 countries, with sales of over £100 million a year.
Edwina Dunn and Clive Humby chose to combine their surnames – Dunn and Humby – to create their company name, dunnhumby. They thought this through carefully. With around 10 years’ experience of customer data between them, they felt it important to make the most of their reputations in the industry, and they thought it would help attract clients to their fledgling business.
dunnhumby is the company behind Tesco’s Club Card, essentially a market intelligence gathering tool. So successful was their venture that Tesco bought them out in January 2011 for £80 million.
It’s not the end of the world if you decide after a year or so that your business name is not quite right, as the case study below shows. But you will have largely wasted any earlier marketing effort in building up awareness.
CASE STUDY Bridgewater
Emma Bridgewater set up her business 18 months after completing an English degree at Bedford College, London. At first she wasn’t sure what business to start but her boyfriend at the time, with whom she lived in Brixton, wanted to set up a craft studio to teach students how to slip-cast (an ancient method of making pottery with liquid clay poured into a mould). Emma visited factories in Stoke-on-Trent and discovered a number of people with this skill. ‘Their mug shapes were revolting, though. So I drew my own. I found, doing so, that all my frustration evaporated just like that. Suddenly I knew what I wanted to do.’
She equipped herself with sponges and colours so that she could apply her designs to her mugs in the factories. ‘At first the people in Stoke thought I was mad and were sceptical but helpful.’ However, within a few months she won her first order, worth £600, from the General Trading Company, and in April she joined a lot of ‘hysterical stall-holders with lavender bags’ at a trade fair in Kensington: Brixton Spongeware was launched.
She has since changed the name: ‘I was fed up with jokes about reggae music and sweet potatoes. The name “Bridgewater” is far more appropriate. It sounds like an old, established industry. People often imagine it’s a family business that has been going for years. That’s exactly the mood I want to create.’ Just over two years later she had a file full of orders from top department stores in London and New York. Cheap imitators quickly started copying her designs. Now Bridgewater has an established name and a turnover in the millions.
Before you start trading you will need to consider what legal form your business will take. There are four main forms that a business can take, and the one you choose will depend on a number of factors: commercial needs, financial risk and your tax position. Each of these forms is explained briefly below, together with the procedure to follow on setting them up.
There were approximately 5.5 million active businesses in the UK during 2016, up from 3.5 million in 2010. The figures from around the world are similarly impressive. There are over 175 million people running their own businesses in the developed world. That is double the number just two decades or so ago. GEM, through their Global Entrepreneurship Monitor research programme headed up by Babson College in the United States, collect statistics across 60 economies around the world on business starters and (equally importantly) would-be starters. Most new business start out as sole traders and if successful move on to limited liability to afford owners the protections described earlier in this chapter. In 2009 limited companies made up just short of 26 per cent of the business population, with partnerships accounting for 12 per cent and sole traders 62 per cent. By the end of 2016 those proportions were 30 per cent, 64 per cent and 6 per cent respectively.
The vast majority of new businesses set up each year in the United Kingdom choose to do so as sole traders. This has the merit of being relatively formality-free, and unless you intend to register for VAT, there are few rules about the records you have to keep. There is no requirement for your accounts to be audited, or for financial information on your business to be filed at Companies House.
As a sole trader there is no legal distinction between you and your business – your business is one of your assets, just as your house or car is. It follows from this that if your business should fail, your creditors have a right not only to the assets of the business, but also to your personal assets, subject only to the provisions of the Bankruptcy Acts (these allow you to keep only a few absolutely basic essentials for yourself and family).
It is possible to avoid the worst of these consequences by ensuring that your private assets are the legal property of your spouse, against whom your creditors have no claim. (You must be solvent when the transfer is made, and that transfer must have been made at least two years prior to your business running into trouble.) However, to be effective such a transfer must be absolute and you can have no say in how your spouse chooses to dispose of his or her new-found wealth!
The capital to get the business going must come from you – or from loans. There is no access to equity capital, which has the attraction of being risk-free. In return for these drawbacks you can have the pleasure of being your own boss immediately, subject only to declaring your profits on your tax return. (In practice you would be wise to take professional advice before doing so.)
Partnerships are effectively collections of sole traders, and as such, share the legal problems attached to personal liability. There are very few restrictions to setting up in business with another person (or persons) in partnership, and several definite advantages. By pooling resources you may have more capital; you should be bringing several sets of skills to the business; and if you are ill the business can still carry on.
There are two serious drawbacks that merit particular attention. First, if your partner makes a business mistake, perhaps by signing a disastrous contract, without your knowledge or consent, every member of the partnership must shoulder the consequences. Under these circumstances your personal assets could be taken to pay the creditors even though the mistake was no fault of your own.
Second, if your partner goes bankrupt in his or her personal capacity, for whatever reason, his or her share of the partnership can be seized by creditors. As a private individual you are not liable for your partner’s private debts, but having to buy him or her out of the partnership at short notice could put you and the business in financial jeopardy. Even death may not release you from partnership obligations, and in some circumstances your estate can remain liable. Unless you take ‘public’ leave of your partnership by notifying your business contacts and legally bringing your partnership to an end, you could remain liable.
The legal regulations governing this field are set out in the Partnership Act 1890, which in essence assumes that competent businesspeople should know what they are doing. The Act merely provides a framework of agreement that applies ‘in the absence of agreement to the contrary’. It follows from this that many partnerships are entered into without legal formalities – and sometimes without the parties themselves being aware that they have entered a partnership!
The main provisions of the Partnership Act state that:
It is unlikely that all these provisions will suit you, so you would be well advised to get a ‘partnership agreement’ drawn up in writing by a solicitor at the outset of your venture.
One possibility that can reduce the more painful consequences of entering a partnership as a ‘sleeping partner’ is to have your involvement registered as a limited partnership. It means you (or your partner) can play no active part in running the business, but your risks are limited to the capital that you put in.
Unless you are a member of certain professions (eg law, accountancy) you are restricted to a maximum of 20 partners in any partnership.
A cooperative is an enterprise owned and controlled by the people working in it. Once in danger of becoming extinct, the workers’ cooperative is enjoying something of a comeback, and there are over 5,450 operating in the United Kingdom, employing 237,800 people. They are growing at the rate of 20 per cent per annum.
Cooperatives are governed by the Industrial and Provident Societies Act 1965, whose main provisions state:
It is certainly not a legal structure designed to give entrepreneurs control of their own destiny and maximum profits. However, if this is to be your chosen legal form you can pay from £90 to register with the Chief Registrar of Friendly Societies, and must have at least seven members at the outset. They do not all have to be full-time workers at first. Like a limited company, a registered cooperative has limited liability (see under ‘Limited liability companies’) for its members and must file annual accounts, but there is no charge for this. Not all cooperatives bother to register, as it is not mandatory, in which case they are treated in law as a partnership with unlimited liability.
In the United Kingdom, before the 1895 Companies Act it was necessary to have an Act of Parliament or a Royal Charter in order to set up a company. Now, out of the 4.5 million businesses trading in the United Kingdom, over 1.4 million are limited companies. As the name suggests, in this form of business your liability is limited to the amount you state that you will contribute by way of share capital (although you may not actually have to put that money in!).
A limited company has a legal identity of its own, separate from the people who own or run it. This means that, in the event of failure, creditors’ claims are restricted to the assets of the company. The shareholders of the business are not liable as individuals for the business debts beyond the paid-up value of their shares. This applies even if the shareholders are working directors, unless of course the company has been trading fraudulently. (In practice, the ability to limit liability is severely restricted these days as most lenders, including the banks, often insist on personal guarantees from the directors – see Chapter 23 for more on this subject.) Other advantages include the freedom to raise capital by selling shares.
Disadvantages include the cost involved in setting up the company and the legal requirement in some cases for the company’s accounts to be audited by a chartered or certified accountant. Usually it is only businesses with assets approaching £3 million that have to be audited but if, for example, you have shareholders who own more than 10 per cent of your firm they can ask for the accounts to be audited. You can find out the latest information on auditing small firms either from your accountant or on the GOV.UK website at www.gov.uk/browse/business/limited-company.
A limited company can be formed by two shareholders, one of whom must be a director. A company secretary must also be appointed, who can be a shareholder, director, or an outside person such as an accountant or lawyer.
The company can be bought ‘off the shelf’ from a registration agent, then adapted to suit your own purposes. This will involve changing the name, shareholders and articles of association, and will cost about £250 and take a couple of weeks to arrange. Alternatively, you can form your own company, using your solicitor or accountant. This will cost around £500 and take six to eight weeks.
The behaviour of companies and their directors is governed by the various Companies Acts that have come into effect since 1844, the latest of which came into effect in November 2006.
If your business has already been trading for some time, your business plan should include a summary of past results and achievements. Annual reports, audited accounts, etc, if voluminous, can be included in an appendix, and referred to in this section of your business plan. Otherwise they can be shown in detail. You should emphasize what you have learnt so far that convinces you that your strategies are soundly based.
CASE STUDY Notonthehighstreet Enterprises Limited
When Holly Tucker and Sophie Cornish decided that a business selling well-designed, high-quality products that cannot easily be found on the high street was a good business idea, choosing a name for their venture was the easy bit. Notonthehighstreet (www.notonthehighstreet.com) was distinct and captured the essence of their proposition. The aim was to bring together businesses that lacked the resources to have an effective presence on the high street and put them all under one roof, spreading the cost base accordingly. The ‘one roof’ as physical concept was ditched in favour of the internet at the early planning stage.
Their first draft of the business plan called for a £40,000 investment, but within months of starting up that grew to £140,000. After scrabbling around family, loans and bank overdraft to fund the first year’s growth they pitched to Spark Ventures (www.sparkventures.com), an early stage venture capital company that includes Brent Hoberman, co-founder of Lastminute.com, in its portfolio.
Spark pumped in a sizeable six-figure sum, taking a minority stake in the business which allowed it to plan to more than double sales in its third year of operations (see Table 3.1).
Table 3.1 Sales history of Notonthehighstreet
|
Year |
Sales (£000) |
|
1 |
100 |
|
2 |
1,000 |
|
3 |
2,500 (forecast) |
For a joining fee of £450 suppliers can promote their products on Notonthehighstreet’s website for five years. Notonthehighstreet also takes a 20 per cent slice of any sales generated. It offers a tailored audience and a professional web presence that small firms would find hard if not impossible to emulate without spending tens of thousands of pounds. The site has been voted a top 50 website by the Independent magazine.
The pair knew from the outset that protecting their intellectual property was essential to both survival and prosperity. Not only have they protected all their IP, they assert those rights unambiguously on their website: ”We own, or are the licensee to, all right, title and interest in and to the Service, including all rights under patent, copyright, trade secret or trademark law, and any and all other proprietary rights, including all applications, renewals, extensions and restorations thereof. You will not modify, adapt, translate, prepare derivative works from, decompile, reverse-engineer, disassemble or otherwise attempt to derive source code from the App or any other part of the Service.”
It’s hardly surprising then that the business hit £6.4 million turnover in year two and in 2010 they reached £14 million. The business hired Jason Weston, formerly of Amazon, as COO and Mark Hodson from PayPal in 2011. The company’s latest accounts filed in March 2016 show turnover had reached £38,664,535.