Many people dream about “being their own boss” and, perhaps, you’re one of them.
Others find them forced into self employment and starting a business because they were made redundant from what they thought was a secure job and either, are struggling to get another job or don’t want to go through their recent traumas again.
I started my consultancy/training/coaching business in 1995 and I’ve never regretted it even though I had a few nights where I’d wake up in a cold sweat, wondering what I was doing.
The Different Ways You Can Become A Business Owner
There are many different routes into becoming a business owner:
- Starting a business from scratch on your own.
- Starting a business with a partner.
- Buying a business on your own.
- Buying a business with a partner.
- Buying into an existing business, perhaps because the existing business owner either needs more cash or wants to reduce his or her hours of work.
- Buying a franchise.
The Different Forms Of Business Ownership
The business can have different legal forms:
- You can be a sole trader where, the legal form is you trading as the business name. Here there is no separate legal identity for the business and you will be considered self employed by HM Revenue & Customs and you will be liable for the debts of the business.
- You can join a partnership, where the legal form is you and other people trading as a business name. Again, as far as HMRC are concerned, this is a form of self employment and you and your partners are jointly and severally liable for the debts of the business. This means that the creditor can choose which partner(s) to chase for money and seek to get the full debt from one. A specialised, rare form of partnership is the limited liability partnership.
- You can also form a limited liability company or buy a company already formed, off the shelf. Search for company formation agents on the Internet. Here, the owners are shareholders of the company and the senior management are the directors. This allows for ownership and management to be separated. This time the business has its own legal identity and is responsible for its own debts with limited liability for the owners unless they also provide personal guarantees to a bank and other creditors. The directors may become liable if the company continues to trade when it is insolvent and failure is inevitable. The directors earn a salary and pay tax as employees through the PAYE system and the company pays Corporation Tax on any remaining taxable profits it has.
If you intend for your business to stay small, you may be best as a self employed business provided there aren’t big risks associated with it. An accountant can advise you on the tax implications of one form or another as there are normally tax advantages in being self employed up to a certain level of profits and then tax advantages in working through a limited company above a certain profit. Unfortunately the cut-off profit can change from Budget to Budget depending on the whims of the Chancellor of the Exchequer.
Business Owners Don’t Get Even The Minimum Wage
You might be thinking about starting a business because you see it as a way to make a lot of money.
You’re right, it can be.
But you also might be wrong.
In a self employed business (sole trader and partnership), the business profits are automatically taxed as income for the business owners. In companies, you can decide how much salary to pay yourself (subject to tax and national insurance) but, if it might be more than the business can afford.
Profit is made if the business has a sales revenue that is greater than all its costs. If costs are higher than the sales revenue, the business makes a loss.
It can take some time for a business to start making a profit because of the time it takes to get enough regular customers and because of special start-up expenses.
Employees in the UK must be paid the minimum wage. Business owners can work many more hours than an employee would, and the business might still make a loss before taking any salary, meaning the business owner earns nothing from the business.
It may not sound fair but that’s life for the business owner.
Thoughts On The Type Of Business You Should Start
What will products and services will your business sell? What customer problems will it solve?
Before you leap into a business, this is a HUGE decision to make. Get it wrong and your business will be a long struggle.
As a general rule, the easier it is to start a particular type of business, the smaller will be the long term profits from that business.
Let me explain why.
One of the biggest factors in whether your business is a success or failure is the selling price you can achieve for a reasonable volume of sales.
If a business is easy for you to start, it will be easy for other people to start to and the more stories of good money to be made, the more people will follow you. More competitors alters the balance of supply and demand in the market.
Prices can be high when demand is high and supply is low.
Prices will be low when demand is low and supply is high. Each competitor will keep cutting price levels while there is an incentive to get extra business.
I received an email yesterday from a young man who wanted to start a taxi business. While licenses are required for taxis and private hire cars (they pick you up at a pre-arranged address and can’t be flagged down on the streets), there are many people who could offer a taxi service if they wanted to. Adding to the problem in recent years is Uber, the smartphone app that let’s you book a driver for a journey.
A similar situation applies to delivery drivers who work for Amazon. Many people can do it so prices and earnings are low.
The Three Big Risks Of Business
I’ve written about the three big risks of business before, but quickly, they are:
- Demand Risk – are there more than enough customers who will want to buy what you sell at the price you can be profitable?
- Competitive Risk – can you provide enough reasons for enough customers to buy from you rather than your competitors? Do you have an advantage or competitive edge?
- Capability Risk – can you consistently deliver on your marketing promises and do what you say you can do?
A few people have contacted me about selling luxury watches online, so I wrote an article about why it’s a hard thing to do. There is demand but it’s hard to beat the Competitive Risk. Imagine you wanted to join this market. Why should people buy from your ecommerce store (which they don’t know or trust) rather than from Amazon where the price is probably cheaper and they can get a free next day delivery, if they are Prime members? It’s hard to have a reason for existing in terms of what you can do for customers that no one else can.
How To Learn More About Starting A Business
First a KEY question.
Do you have experience in the trade or profession you want to join?
If not, I recommend that you work in it for some time to learn as much as you can. For example, it’s very easy to think “I’d love to own a restaurant” but you will gain so much from working in a restaurant – either in the kitchen or serving the guests. You will see the good things and the bad and your more experienced employees will probably share their stories with you.
If you have experience and you look at the business owner and think he or she has a good life, and you can do what he does, I’d like you to read a book.
It’s called The E-Myth Revisited. It calls this concept of thinking that you can do what your boss does, as the entrepreneurial seizure. It then goes on to explain the roles of the technicians (the people who do the work of the business), the managers (the people who control the technicians) and the entrepreneurs who build a business. You’ll see that you may be a great technician but you’ll struggle if you can’t also slip into the other two roles.
While it’s useful to read some general books, it can be even more helpful to read books about the particular trade you want to join.
It’s amazing how many specialist books exist provided you look for them. When they are written by people who have many years of experience in the trade, they can be very helpful. However, some authors repackage the same basic book under different titles to appeal to these niche markets and these rarely offer the insight you will need. To guard against books that look specialist but aren’t I recommend that you click on the authors name and you’ll see what else he or she has published.
Writing Your Business Plan
It’s much better to lose money on paper than in real life so I believe every new business should have a business plan that spells out key assumptions and actions.
This will need to be a detailed written plan with forecast numbers (a forecast Profit & Loss Account and Cash Flow Forecast) if you need to borrow money from a bank or other investor. If you’re using your own money, your plan can be shorter but I still urge you to put your thoughts down on paper.
That’s because it gives you something to look back on.
Low cost business planning software makes it much easier for you as the business owner to prepare the plan yourself. This can be a big learning experience and I don’t recommend that you ask anyone else to do it for you.
However if you’re using the plan to raise money from a bank or another investor, it’s a great idea to have a business expert review your plan and assumptions before you submit it. That’s because many business plans for start-up businesses are far too optimistic, both in terms of the sales revenue that can be achieved and the profit margins of those sales.
Getting Help From Business Advisors And Coaches
I would delay contacting advisors and business coaches until you are well advanced in your planning. You can normally get some time for free but you don’t want to waste these valuable opportunities on answering questions you can easily find the answers for, on your own.
As I say above, it can be very useful to have your business plan reviewed because it’s much better to fix obvious mistakes and to be properly prepared before you start rather than after you’ve lost quite a bit of money.
Sometimes, starting a particular trade has onerous regulations so specialist advisors can help you meet these requirements and fill in application forms.
More generally, it is on the marketing and sales that people need most help. You need:
- An irresistible promise to win against the Competitive Risk. You need to identify and create advantages that give customers reasons to buy from you rather than your competitors.
- To get your marketing messages in front of possible customers in ways that attracts their attention and creates enough interest for them to contact you. The more your target customers hear and see your marketing messages, the more likely they are to buy provided your offer is competitive.
- To find a low risk way for people to experience what you offer.
I offer a Business SOS which is a free 60 minutes consultation for UK based business owners and whilst the offer is mainly aimed at established business owners, I can be tempted to help the well prepared start-up.
>>> Business SOS