Start it up

Building wealth can be achieved in many ways, but usually the last one to be seriously discussed is starting your own business.

That may be because business start-ups in Australia have a high rate of closing down. Dun & Bradstreet, the business information firm that covers most of the developed world, says small businesses have a 37% chance of surviving four years, and a 9% chance of being around for a decade.

The better news is that only about 10% of these unlucky businesses actually fail; the rest ‘exit’ the market because the venture is not making the expected return on investment.

It means the people starting small enterprises have a clear idea of what sort of returns they’d like from their hard work. And so should you.

I’m approached often by people who want to open a business, or buy one that’s up for sale, and most of them talk about their skills, their contacts and their capital backing.

Those are all interesting topics, but the first question I ask these budding entrepreneurs is: “what do you want out it?”

For anyone starting a business, this should be your first mission statement. It doesn’t matter if you calculate it as a return on investment or the salary you pay yourself or even a fancy dividend arrangement through trusts. What matters is that you know what constitutes success, because this venture of yours has to make money. That’s what businesses do.

Having established what you want, you have to know how you’re going to create revenue. If you’re buying an established business, what skill, insight or technology will you bring to make it perform better than the previous owner?

If you’re starting a business from scratch, are you a me-too business? Are you a challenger with a better mousetrap, or are you highly skilled and well known in an established industry?

Most successful business people know where they fit in. It’s important because knowing what you have to offer determines how you approach the business. And one of the early questions for the business starter is one of growth: most of the small companies that get noticed in the media are of the fast-growing variety. But fast growth also means higher risk – the cash flow problems of a fast-growing business can be the same as an insolvent company.

So decide if you want to grow fast – which will mean taking debt or giving away equity – or whether you are happy with manageable size and predictable revenues.

There’s nothing wrong with a conservative strategy: think of all the lawyers, accountants, retailers and tradies who may only employ two or three people but they are successful because their skills, products or technology is such that they can create a premium.

So, having decided what the business owes you, and what kind of growth you will need to achieve it, you will need to do what the best business people do: plan. The cliché goes that businesspeople don’t plan to fail, they fail to plan. Harsh but true. Even a one-page business plan is better than winging it. Making a plan and committing it to paper forces you to focus not only on your strengths, but your weaknesses. In my experience, most business start-ups are spot-on with their expertise and their assessment of the market – they’re usually experts in one or both of these things.

But they fall down in the following three aspects: employees/advisers, financial management and marketing.

When you look at these three areas, you see that they are probably the core of a company’s survival.

So why do business owners get them wrong? They don’t admit they’re inexperienced in hiring or managing people, they don’t want to reveal their plan to an accountant who’s going to ask about financial management, or they don’t want to have a marketing plan drawn-up for how they’re going to sell this new business’s products.

They don’t plan.

In my business, we see customers every day who are sheepish about their business plans. They feel uneasy about admitting their weaknesses. But what they don’t realise is that like the doctor, we’ve seen it all. And by coming to a professional for an assessment, they are already making the first step towards their success.

At the end of the day, being embarrassed by how much you don’t know before you start trading is a much better thing than running into a trap a few months after you open.

But there’s another, more personality-centred aspect to building a business that perhaps the how-to manuals don’t dwell on. And that is the need to ask yourself: am I really cut out for this? Am I suited to carrying all of the burden and responsibility all of the time? Do I have the drive to leap out of bed every morning and get into it, even when things aren’t going well? Do I love a challenge? Do I know how to work effectively with fear and pressure? Is my spouse supportive? Can I afford to lose the money I put in? Am I better as an employer or an employee? Do I resent answering the phone after 6pm?

So the first question still stands: what do I want out of this business?

That’s the financial equation. But business is a way of life, so you have to ask the deeper question: do I have the personality to put into the business?

There are all sorts of personalities who do well in business. But you have to start with wanting to be there. Good luck.