Blog posts in Business planning

13 Things you need to know about being a sole trader

1. Becoming a sole trader is the most popular option

According to the government, three-quarters of all British businesses are sole traders, which amounts to about 3.6m businesses out of some 4.8m firms. Sole traders (aka the “self-employed”) drive the UK economy.

2. Registering as a sole trader is dead easy

All you need do is call the HMRC ‘Helpline for the Newly Self-Employed’ on 0845 915 4515. You’ll be asked for your name, date of birth, address, telephone number, National Insurance number, business start date, name and type of business and whether you’re a sole trader or working with a partner. You can register even online or download and complete the HMRC form ‘Becoming self-employed and registering for National Insurance contributions and/or tax’.

3. If you don’t register as self-employed soon enough you risk a fine

You must register as self-employed with the HMRC within three months of starting your business or you risk a £100 fine. Best advice? Do it straight away, there’s no point in delaying.

4. Being a sole trader involves some personal financial risk

As a sole trader, you are the business. It’s not a separate legal entity, as it would be if you formed a limited company. Therefore, you’re liable for your business’s debts. If you’re starting a business that won’t build up big debts, becoming a sole trader isn’t too risky. If you are likely to build up significant debts, you should consider setting up a limited company.

5. Being a sole trader is cheaper than being a limited company

You have to pay to set up a limited company and running it requires slightly more administrative effort when it comes to tax. Registering as a sole-trader costs nothing, while accounting costs and tax liabilities are likely to be cheaper than if you started a limited company.

6. Sole traders can still employ people

But if you do employ people, you must collect income tax and National Insurance contributions (NICs) from them and pay these to HMRC. You’ll need to operate a PAYE (Pay As You Earn) payroll scheme for this purpose.

7. Sole traders must pay tax (of course)

You pay income tax based on your business profits. You (or your accountant) must fill in a self-assessment tax return each year, detailing your income and expenses. You’ll also have to make flat-rate Class 2 NICs throughout the year (£2.50 a week payable every six months). If your annual profits are more than £7,225, you’ll also have to pay Class 4 NICs (9 per cent on profits up to £42,475; 11 per cent on annual profits above this figure). You pay this with your income tax and the figure is calculated from your self-assessment tax return.

8. Sole traders must also keep detailed financial records

That includes details of all your sales. You must also keep proof of any expenses (eg receipts, invoices, utility bills, etc). Anyway, they’ll help when you’re filling in your tax returns. Keeping basic financial records (aka Bookkeeping) doesn’t have to be as arduous as it might sound.

9. Some sole traders must be VAT-registered

If your turnover exceeds the VAT threshold (currently £73,000 a year), you will need to register for VAT. When you’re VAT registered, you charge your customers VAT on VAT-able goods and pay it to HMRC. In turn, you can reclaim the VAT you pay on goods and services you buy.

10. Sole traders can become limited companies

The size and nature of your business can change quickly and for a range of reasons (including increased exposure to risk) you might want to set up your own limited company (“incorporate”) at a later stage. Providing someone else hasn’t already registered the name, you should be able to use your sole trader name (with Ltd added, of course).

11. 31 January and 31 July are key dates for sole traders

Self-employed people pay tax on the 31 January following the end of their tax year. Crucially, HMRC will request payments on account for the following year’s estimated tax – on 31 January and 31 July each year. That means, after your first year in business, your tax bill could be 150 per cent of what you were expecting to pay, with another 50 per cent payable in July. If your business income is very low, you may not have to pay Class 2 National Insurance contributions.

12. You should put money into a tax fund bank account each month

When it comes time to pay HMRC, you’ll be glad you put a few quid away each month. Being faced with a large tax bill you haven’t saved for is a nightmare. Try to put 25 per cent of your grow earnings into a separate bank account (and don’t dip into it). Failing to pay your tax bill on time will result in penalty charges.

13. Sole traders have to ‘wear many hats’

Crucially, you’ve got be good at sales and marketing. If you don’t make enough sales, your business will fail – simple. There will be admin tasks to take care of, too, including simple accounting/bookkeeping. Paying an accountant to do your tax return can save you time, but you’ll still have to maintain simple financial records. Having to manage employees for the first time could prove a big challenge, too.

• You can read more information about registering as sole trader on the Start Up Donut. You should also look at Q&A – Tax for the self-employed and our concise guides – Choose the right form of business and Forming a business.

Mark Williams is a freelance journalist and editor of Start Up Donut.

• Top of page

How to survive in a downturn

Figures show that more start-ups succeed when they start in tough times than those that don’t. This may be something to do with starting prudently and keeping things that way, rather than starting with a more relaxed or even cavalier attitude. There are certain approaches that start-ups can take to stand a better than average chance of success. Most of it is to do with attitude. It may be tough medicine, but it works. Here are six suggestions.

1. Don’t ‘do gloomy’

No one wants to listen to someone moaning. The circumstances might be difficult, but you don’t have to be miserable. If you are, you will probably lose customers fast.

2. Don’t invoke a higher power

Bad performers often use the context of a recession to claim their company’s poor performance is nothing to do with them – it’s the economy, apparently. This isn’t always true.

3. You only need one girlfriend

Complaining there is no work is like a man saying there are no women in his town. You only need one girlfriend or piece of work, so go and find it.

4. Good companies do the right things all the time

There is no difference between the things your business should do in a recession versus what you should be doing in any other circumstances. If you have to ask what to do differently in a recession, it may actually be too late.

5. Sometimes things go up, and sometimes they go down

Economies go up and down. You still need to earn a living, so you need to believe that your success is entirely in your own hands, and go for it.

6. Nip into the gap

You need to be dexterous enough to nip into the gaps that other businesses might have missed by being too cautious. Be flexible and keep coming up with new ideas.

This extract is taken from Kevin’s recently published book – What You Need to Know About Starting a Business

Kevin Duncan – business adviser, marketing expert and author

• Top of page

10 important lessons our Q&As can teach you

1 Buying a business

“Buying an existing business can be less risky than creating one from scratch. If the business has customers, it has income. Risk is also easier to assess because you can calculate costs, turnover and profit – and thereby predict cashflow”

Emilie Corbille of www.daltonsbusiness.com

2 Setting up a limited company

“If you want to form a new company, you must send Companies House your registration fee plus a memorandum of association, articles of association and a completed IN01 form, which details the company’s registered office and the names and addresses of its directors (and company secretary, if applicable)” 

Andrew Millet of Wisteria Formations

3 Tax for the self-employed

“By putting away some money from your earnings each month – say, 25 per cent of your gross earnings – you should have more than enough money in the bank to take care of your tax bills”

James R McBrearty of www.taxhelp.uk.com

4 Market research for start-ups

“Even if you believe you have an excellent idea for a business, you mustn’t allow yourself to get fooled into a false sense of optimism. Test it thoroughly by doing some basic market research. Only then can you move forward on any sound basis”

Start-up author Kevin Duncan

5 Calculating start-up costs

“You should minimise your start-up costs because then you’ll stand a better chance of surviving that crucial first year. Also, it’s a good discipline to get into from day one. In business, you must keep your costs as low as possible ­– and avoid buying things you don’t need”

Martin Dunne of Sayers Butterworth chartered accountants

6 Effective cashflow management

“The old saying ‘turnover is vanity, profit sanity and cash reality’ remains true. Businesses go bust in the long term through lack of profit, but in the short term, they fail because they don’t have enough cash to pay their bills on demand. Cashflow is the lifeblood of any business”

Chartered Accountant Howard S Hackney

7 Supplier contracts

“Having a written contract clearly sets out the roles and responsibilities of both parties, which is helpful when it comes to monitoring the relationship’s success. It can also act as proof if a supplier’s performance falls short”

Marie Kell of Andrew Jackson solicitors

8 Complying with environmental legislation

“The onus is on the business to ensure staff comply with legislation. An act of omission by an employee is likely to have consequences for the business. In some circumstances, directors may even be personally liable. The consequences can be drastic”

Kevin Turnbull of Muckle LLP Solicitors

9 PR for start-ups

“Editorial is regarded as more believable than an advert. I’ve read that it’s 50 per cent easier to sell to someone who has read positive things about your business, products or services. And such publicity is usually no cost or low cost. Even if you have to pay someone to do your PR, gaining one piece of coverage per month can be much cheaper than advertising”

Jane Lee of IT PR specialist Dexterity

10 Setting up a home-based business

“It’s low cost and therefore less risky, because there aren’t any expensive premises overheads. You can also claim for a percentage of your domestic bills, for lighting, heating, telephone calls, etc. A home office means no commute, so you save money and time, too”

Emma Jones of Enterprise Nation

• Top of page

It’s free business advice – but is it reliable?

While running a small business is highly rewarding, it’s not easy. Yet more of us are being enticed into starting a business, encouraged by an increasingly supportive government that promotes entrepreneurship at every opportunity. This is good news. As entrepreneurs innovate, we as consumers benefit as they produce products and services that better meet our needs. Governments benefit through a greater tax take and lower social welfare costs. Everyone’s a winner.

Key challenge

However, a key challenge for most entrepreneurs is dealing with the numerous issues they must address – when all most want to do is sell. Their knowledge base must not only span their sector, it must also cover a wealth of functional issues ranging from marketing and HR to cashflow management and taxation, etc.

While bigger companies will typically have access to this knowledge in-house, smaller businesses don’t. Instead, for help they turn to their network as well as search engines, blogs, websites and business forums. 

Social media

One of the benefits of the growth of social media is information about pretty much any subject is available for free on the internet, making it much easier to access than previously. The quality of information is significant and search costs are low, resulting in unfettered access to solutions to your every business problem.

But all is not as straightforward as it might seem. Information gleaned from these sources is not without its drawbacks, not least, for the most part – you don’t know who you are getting the knowledge from.

Some of the following issues also apply:

• How can you assess the veracity of the information?
• How do you ensure the impartiality of the content?
• How do you take general advice and apply it to your own circumstances?
• What if you rely on information and then act on it to your detriment?

Factual accuracy and substantiation

Firstly, taking information at ‘face value’ is rarely a good thing. Consider each bit of advice as a mere data point as you seek to gather information to make a decision. You should also seek out articles supported by facts with clear attribution to source data where you can substantiate claims.

Secondly, it is important to assess the nature of your inquiry, relative to the risks associated with the decision to be made. Information gleaned from a search engine or website is no substitute for paid-for advice when dealing with legal or taxation matters, for instance. While we have all become accustomed to using search engines for information searches, we must not lose sight of the fact that nurturing a wide network of contacts from which you can request advice is a better use of your time than surfing the net for solutions to more complex issues.

It is also worth considering the context of the information. Is it on a commercial site where the author has a commercial agenda or is it on an informational site such as Wikipedia, where the content is curated by a number of contributors? Articles written on branded websites, with full author accreditation (and clear domain expertise), trump anonymous postings on poor-quality websites every time. However, you must remember that, unlike professional advice, there is generally no come back if you suffer damages as a result of acting on erroneous information.

Incomplete information

As an entrepreneur you also must constantly weigh up the costs of a decision and need to become comfortable dealing with incomplete information. As venture capitalist Mark Suster eloquently puts it:

“You are constantly faced with decisions and there is always incomplete information. This paralyzes most people. Not you. Entrepreneurs make fast decisions and move forward knowing that at best 70% of their decisions are going to be right. They move the ball forward every day. They are quick to spot their mistakes and correct. Good entrepreneurs can admit when their course of action was wrong and learn from it. Good entrepreneurs are wrong often. If you’re not, then you’re not trying hard enough. Good entrepreneurs have a penchant for doing vs. over-analyzing. (Obviously don’t read this as zero analysis).”

Finally, it is worth remembering that general information is subject to cognitive biases, and accredited sources used in support of the arguments may be from wildly different contexts from the one in which you are attempting to apply your learnings.

Alan Gleeson is general manager of Palo Alto Software Ltd, creators of Business Plan Pro®. He holds an MBA from Oxford University and an MSc from University College, Cork, Ireland. 

• Top of page

20 important lessons you can learn from the real experts...

There’s no doubt that the best way to learn about business is from the real experts – people who actually run their own successful small firms. Here is a selection of insightful quotes cut from just some of the businesses featured in our case studies…   

1 “Carrying out pre-launch market research is essential. Look for firm evidence of demand for what your new business is offering. Crucially, find out whether people will pay your asking prices” Henry Virgin of Green Boar Organic Tea 

2 “Get a non-disclosure agreement signed before you reveal your invention to a potential manufacturing partner. Don’t register your design until your patent is close to being granted” Cara Sayer of SnoozeShade

3 “Retail buyers are notoriously difficult to reach. I had to email, call and send them samples relentlessly. You must keep going until people just can’t ignore you any longer”                  Matt Horan of Rollasole

4 “Being in full-time employment while setting up or running your business is very challenging. For more than two years, I sacrificed my evenings and weekends to developing my business” Janan Leo of CocoRose

5 “When it comes to borrowing money, I’d advise caution. I’ve made a conscious decision to put profits back into my business, enabling me to grow it organically, without having to seek a loan or investment elsewhere” Claire Willis of SnugBaby

6 “Don’t overstretch yourself – an easy mistake when trying to get a business off the ground. Make lists. I know it sounds stupid but I find I get so much more done if I’ve made a list"    April Browne of Crystal Jewels

7 “Don’t let age put you off starting your own business. It’s never too late. You probably have a lot of knowledge, experience and skills you can bring to a new venture”                                      Suzy Kilgour of Walking Workouts

8 “Nurture strong relationships with good suppliers and pay your bills on time. With new suppliers, it’s a case of working slowly to build up relationships and trust with them”                  Jane Robson of The Fine Cotton Company

9 “If your personal financial liability is small, becoming a sole trader is easier and cheaper than setting up a limited company. Put money away as you go along, then you won’t have to panic when you get your tax bill” Andy Oakley of AO Pro Finish Plastering

10 “When trying to think of a name for your new business, come up with a few choices and ask as many people as you can which they prefer. Find out why they like and don’t the names you’ve shortlisted” Jennie Avramovic of Clevercow

11 “When using Twitter for business, be careful about what you say in your Tweets and what information you link to. Don’t lie, bash the competition or say anything that will reflect badly upon your brand – but that doesn’t mean be boring” Sean Price of iBox-Security

12 “If we hadn’t taken steps to differentiate ourselves, we’d be ‘just another sandwich shop’, which makes marketing even harder. Being different – if you get it right – has appeal”        Griff Holland of Friska

13 “When publicising your business, focus your time and money where it’s most likely to have the greatest impact. Use knowledge of your target customers to decide which marketing methods to use” Claudia Kapp of Deadly is the Female

14 “Before they’ll buy from you, a supermarket must feel confident that your business is run properly and has the necessary infrastructure and support. If it were just me making bread from my kitchen table, no supermarket would ever have been interested in my products” Lucinda Bruce-Gardyne of Genius

15 “Provide your customers with a friendly and professional service. Listen to them and aim to continually meet their needs” Ross Campbell of the Exercise Club

16 “We’ve never had any problems with health and safety, because we talked to the relevant organisations before we started the business. We listened to their advice and continue to ensure we fully live up to our legal responsibilities” Natalie Richmond of The Kitchen

17 “You must be tough but fair when negotiating with suppliers. Often you must ask for a better price. Usually, they’ll ask you to buy more, but successful negotiation isn’t just about gaining ground – sometimes you have to concede it” Adam Ewart of Karacha.com

18 “Start your business with as little money as possible. Only buy things you need. If you can’t borrow, buy second-hand or trade-off with other businesses. Be cheeky, too. If you don’t ask, you won’t get” Kerry Hale of FUSE Bristol

19 “Look at your supplier chain. Does it have too many links? Ask manufacturers if they will sell direct to you rather than via a distributor. We doubled our margins on some products by doing this” Will Starrit and Andrew Taylor of Urban Rider

20 “Take your time when looking for staff. Having good people in all areas of is a must. They are the face of your business” Oliver Trezise of The Yurt restaurant

• You can read more Start Up Donut case studies here.

• Top of page

The Apprentice entrepreneurs

You may have noticed that the positioning for the new series of The Apprentice has been subtly shifted from business in general to entrepreneurship in particular. This is evidenced by the prize, which is no longer an opportunity to work for Sir Alan Sugar, but £250,000 for the winner to start their own business.

This makes sense, given the nature of the candidates. If not before, they will certainly be unemployable in the traditional sense after the series. They may be bright, hardworking people, but the nature of reality television is to entice the unwary in to saying or doing something stupid, and then broadcasting the output to many millions of people.

Having “failed Apprentice contestant” must be the last thing that the human resources director is looking for on a CV. It implies not only that your sense of judgement about your own strengths and weaknesses is suspect, but also that you are not a team player.

The premise of the programme is how quickly you can screw some revenue out of unsuspecting consumers while simultaneously stabbing your teammates in the back, so as to win the competition. Looking at this year’s candidate auditions, most seem to fit the stereotype required by this kind of programme.

There are the morally challenged (“there is no time for Mr Nice Guy”), the over-confident (“can only see success on the horizon”), the morally confused (“a nice person, who isn’t afraid to show her dark side if crossed”), the arrogant (“already knows it all; loud and aggressive, wants respect”), the two-faced (“intends to make friends with his fellow contestants, but also has no problem dropping them like a stone should he need to”), the unrealistic (“always gets everything she wants”) and the deluded (“Lord Sugar will find me too good to be true”).

All of these are also characteristics you find in many aspiring entrepreneurs. Mentors will tell you that the prime attribute required of the entrepreneur is an unshakable confidence in his or her own ability. They also need to be creative, charismatic, hard working, optimistic and ambitious.

All of these are excellent qualities, but to succeed as an entrepreneur is to understand that you also possess the opposite qualities in equal measure, being at times arrogant, poor at completing tasks, manipulative, prone to overwork, sarcastic and ruthless.

While these are great qualities if your only ambition is to eventually host The Apprentice yourself or be a panellist on Dragon’s Den, this will not help you with your first task, which is forming a complementary team to turn your good idea into a great business.

To do this, you have to show the opposite qualities to those currently attributed to The Apprentice contestants; to have a clear moral purpose, to be pragmatic in the short term, to be nice to people at all times, to be humble and listen where necessary, to be loyal to others, to set realistic goals and finally to understand fully your own strengths and weaknesses.

All of The Apprentice candidates will leave the programme with some fame or notoriety and ideally will have learnt something from the experience. If they find the right mentors and are honest about their own shortcomings, then they have every chance of becoming a successful entrepreneur.

An interesting question for the candidates would be how they would actually spend the £250,000 if they won. Based on the candidate interviews, I suspect that many will spend some of this money on a fabulous website about themselves, with the rest used to hire a PR company expert in personal brand damage limitation.

Originally published in The Financial Times. Copyright ©Mike Southon 2011. All Rights Reserved. Not to be reproduced without permission in writing. Mike Southon is the co-author of The Beermat Entrepreneur and a business speaker.

Read the latest blog on The Apprentice here.

• Top of page

Six key trends to bear in mind when planning your business

We've just launched our business planning software – Sage Planning for Business – and what I wanted to do was give you an insight into how we see the business world changing and how you can plan to thrive in it. Here are six key trends I believe anyone starting a business should consider in their planning.

1 The tyranny of speed

Potential customers won’t wait around for you to 'get back to them'; they're off, looking for someone else who can help them ‘now’. And they’ll find someone, because the internet has changed the game, putting speed at the top of the agenda.

If you can't respond quickly, you need to consider whether your unique selling points are worth waiting for – or if the customer is going to go somewhere else.

2 The impossibility of controlling the market

The creation and marketing of a business, product or service used to be expensive. It required investment and only the wealthy could afford to do it. They could push products onto their audience because there was little competition, and they controlled the production and distribution networks.

Now you can set up in business for next to nothing, so competitors can and will pop up overnight. Plus, potential customers can visit price comparison websites and go to the lowest seller. And they can read hundreds of reviews online and communicate with other users of your product or service before they buy.

Face facts – you can't control the audience anymore. But, you can be more agile. Try to build flexibility into your offerings, service and marketing to help you adapt more quickly to circumstances.

3 Be authentic in whatever you're planning

Gone are the days when customers didn't talk to each other. Today, they're always talking to each other online. And as the marketing author Seth Godin and many others have said: "the internet does not forget".

Whatever you're planning, don't try to spin one 'truth' to one audience, and the same 'truth' another way to a different audience. They'll find out you've been playing both sides against the middle and your reputation will take a real battering as a result. This can be serious and follow you around like a bad smell for years. Stories spread like wildfire online.

The best way to avoid this is to be authentic in everything you do. Speak with passion, speak with conviction, but more than both of these – speak with integrity.

4 Add more choice

If you are planning to sell online, the more choice you offer, the better you’ll do. This takes advantage of a phenomenon called “The Long Tail”. 

Put simply, the internet has enabled customers to find what they want to find, no matter how small a niche you operate in. And because there is no physical stock to store, there are no additional costs to offer that niche product or service. All those niche sales add up, so take advantage of this in your planning.

5 Can you outsource any skills or processes?

The world has changed. It's easy to outsource these days. There are thousands of web and social media sites that enable you to hire skilled people to work remotely and cost-effectively. Ask yourself if this might be a viable solution to work into your plan.

6 The definition of scarcity has changed

Colour TVs used to be scarce, as did bananas, cars, mobile phones, PCs and many other goods. Not any more.

Now, time is scarce, therefore quality time spent with a customer or potential customer is more appreciated and can have a higher value placed on it, but you need to balance this against your return on investment. How much service and support are you willing to provide, and can you charge more for it?

Jason Sullock is a marketing manager for Sage UK and author of "555 Quick and Dirty Marketing Tips". You can follow him on Twitter at @UK_Marketer 

Read more:

• How to use customer feedback to improve your business
• Get a 5 per cent discount on Sage software
• Outsource IT support

• Top of page

Six ways to avoid being branded a “business bandit”

A while ago, a complaint appeared on the Actinic customer forum about a third party who was spamming our customers using somewhat dubious methods. We got in touch with the offending party and they were totally dismissive: “All’s fair in love and war” seemed to be their attitude.

A few days later, the tone had totally changed. When anyone searched for their company name on Google, the first result returned was the thread on our customer forum. And it wasn’t good for them that every mention was a howling complaint. Swallowing larger chunks of humble pie than I had ever seen before, they promised to reform their ways and begged us to remove the comments about them. It was hard not to feel smug.

But the point of this is not the humbling of one company, it’s that things have changed. It is now much harder to be a bad boy (or girl) and get away with it. In fact, with Twitter, Facebook, review sites and online forums, you can guarantee that your dirty washing will be aired within minutes. Taking an ethical approach to all aspects of business has never made more sense.

So here are my six top tips of some of the things to do and not to do to if you want to avoid being branded a “business bandit”.

1. Don’t lie when selling. It will come back to bite you. People expect a sales pitch to push hard, but they hate it when they are told something that isn’t true. In the worst case, they will take legal action.
2. Act on all feedback and fix problems. It’s cheaper not to have problems in the first place, but when they occur, the quicker you fix them the less they will damage your reputation. Fixing things quickly will enhance your standing, because we all understand that things go wrong sometimes.
3. Be easy to do business with. It’s worth looking at every touch-point with your customers to see if you can make their lives simpler. It’s not just for their benefit, because this tactic should also increase sales and grow brand loyalty. Just look at Apple. In general, treat your customers how you want to be treated.
4. Treat your suppliers with respect. This is one that’s easily missed, yet there are a number of reasons for taking this line. Firstly, don’t we all want business to be more pleasurable? Why should we expect our customers to treat us well if we don’t do the same for our suppliers.

   Secondly, companies get a reputation within an industry and once you’ve got a bad name it’s hard to shake it off. Then you may need a favour from your suppliers one day. If you’ve always behaved badly, they will be strangely unavailable when needed, or particularly hard to negotiate with on contract renewal. What goes around comes around.

5. Communicate responsibly. When you send customers emails or other communications, or participate in forums or social networks, be rational, avoid ranting and behave with integrity and honesty. I have caught out competitors several times over the years masquerading as independent commentators. It’s humiliating for them when it comes to light, and their dishonesty is then on record. It’s not the way to build a business.
6. Accept cancellations gracefully. Sometimes your customers don’t want your service any more or wish to return your goods. You won’t retrieve many sales if you are aggressive, but you will ensure that they never return and also tell their acquaintances not to do business with you. If you accept the situation with grace, you can earn a friend.

In the early days of my company when we were desperate for sales, one of our few customers returned his purchase. We handled the situation courteously and quickly. The customer turned out to be a journalist, and they sang our praises in print for years afterwards.

My final thought is this. Most of us want to do a good job for our customers. If we stick to these points, we will not only run a more successful business, but we’ll also feel better about it.

Chris Barling is CEO of ecommerce software supplier Actinic

• Top of page

Why you need to think about the end at the beginning

When you’re starting a business, it’s easy to get bogged down in the priorities of winning business, product development, marketing, admin and so on. Your ultimate exit from the business can seem like an eternity away, hardly worthy of your precious time. However, the day will come when you finally leave the business and the value you extract from it can be maximised by decisions you make early on.

The most common exit for a small business owner is via a trade sale, where the whole company or just its assets are sold to a third party (often another company in the same sector). Having been involved in selling two businesses I started, I've learned the hard way that value is not just decided by turnover and profit. Here are some key factors to consider at an early stage.

1 Ownership

It’s important to retain the copyright for your designs; to register trademarks and product patents where possible; and make sure you own the source code for your software. It may sound obvious, but many outsource contracts allow the contractor to retain intellectual property (IP) for their work and it’s crucial to stipulate that all IP reverts to you.

2 Control

In a service business, it’s tempting to outsource as much of your service as possible to third party providers. This often makes sense during normal business operations because it keeps costs more predictable. However, going towards a sale, if your offering relies upon another company for delivery, it will be perceived as an extra risk by a buyer.

3 Billing methods and cashflow

This is something that makes sense for the general well being of your business – with or without a sale in mind. Recurring income streams are extremely valuable. If your business model allows, invoice your clients on a regular monthly, quarterly or annual plan, ideally using a passive billing method such as credit card or direct debit. That way, the buyer of your business knows that they will walk into a cash-generating machine from day one.

Monthly or quarterly billing cycles are best. Annual billing cycles are great for cashflow, but be prepared for your buyer to query the unused portion of any pre-payment as a liability. Get advice from a good accountant on how to counter this.

4 Less is more

To fund business development, you might need investors. Avoid building up a large number of small shareholders, because the chances are that one of them will at some point become a problem. Ideally you want to keep 100 per cent of the business for yourself.

If you need to give away equity, only do so when all other options have been exhausted. Pay for a lawyer to create a watertight shareholders’ agreement that ensures you maintain overall control of the company, and can drag along all other shareholders should you wish to sell.

So it may sound counter intuitive to think about the end at the beginning, but it will help shape your long-term plans and ensure you develop an asset worth selling.

Jonathan Rodger is managing director of email marketing service Message Horizon.

• Top of page

Seek to grow your business on profit – not loans

The last two years have been tough. My business, Karacha.com is based in Bangor in Northern Ireland. It sells musical instruments, online and through my shop. Up until a few years ago, sales peaked around customers pay days. Now, people are much more cautious with their money.

Many of my customers now prefer to rent instruments rather than buy them. Our rental business has tripled, because parents are not racing out to buy ‘wee Johnny’ a saxophone until they know it’s more than a fad. Increased caution is to be expected, but it does not necessarily need to result in businesses closing.

In fact, despite the recession, many small businesses we supply have grown. And we’ve had more applications for trade accounts over the past two years than we did before the crunch.

The reason why many independent smaller shops have weathered the storm, I believe, is they are inherently run completely differently than large business. In a well-run small business, the owner has a good knowledge of all areas of the business. The larger a business becomes, the more cracks can appear in the foundations, cracks that can go unattended until it’s too late.

Certainly, in my sector, many businesses that failed were asking for it. Too many people believe the way to grow a business is to add as many locations as quickly as possible. Personally, my aim has always been to secure the biggest net profit on the lowest possible turnover. In other words – maximise my margins, not my turnover.

But in my sector (and in others, I’m sure) the focus hasn’t been on margin, more the drive to grow at all costs, with the misconception that with scale will naturally come profitability. This is why as soon as the recession hit, the smallest dip in turnover was enough to bring down some of the biggest chains.

I saw it firsthand several weeks ago. A company that held stock belonging to Karacha.com went into administration, entirely out of the blue. They had just moved into bigger and better premises and hired new staff to grow the business. All well and good, but they were balanced on such a knife-edge that the loss of the smallest amount of business resulted in them going bust.

In August I was being regaled with their success story. In October I found myself at their warehouse at 5am on a Saturday morning overseeing a considerable amount of our stock being moved by lorry before the administrators turned up.

If your business is worth a £100,000 loan, you or your business should probably be investing the same amount yourself. In the years leading up to the crunch, businesses were opening new premises and expanding too quickly without having a sound bottom line. Consequently, when the banks would no longer play the game, many businesses failed.

The general lesson from what I’ve seen over the last year is that small businesses should aim high, but don’t overstretch yourself or try to run before you can walk. You should seek to grow your business on profit – not on loans.

Adam Ewart, Karacha

• Top of page

How to get off to a flying start

Essentially, there two types of start-ups: the ‘pioneers’ that create a service, product or process that is unique and where there is no known competition; and the ‘settlers’, the more common type of start-up where the business enters a market where there are already many competitors.

The more mature a sector becomes, the greater the likelihood a significant number of businesses will be competing in that market, with a few, increasingly dominant businesses (sometimes called ‘Gorillas’) leading the pack.

What is key is the number and strength of competitors in relation to the overall size of the market you decide to target, along with your market’s rate of growth. If it is growing at twice the rate at which new competitors are appearing, your chances of success are high. However, pitch your startup against a growing number of strong competitors in a market that is stagnating or shrinking and your task of winning market share is much harder. And while it’s not impossible to do well, it means your offer has to be extremely compelling.

Market size is not something that increases or decreases in isolation. It is also influenced by the businesses that operate within it. For example, Europe’s air travel market was considered mature, with many established airlines operating within it. Then came along the low-cost carriers such as Ryanair and Easyjet, which not only took market share off the established players, but actually grew the market they served by encouraging people to take trips they might otherwise not have done if it had not been for the cheap fares on offer. In this way you can change the dynamics of the market you enter if your offer is significantly different.

My own business, Message Horizon, has entered a market that has many established competitors, but the market is still growing, albeit at a slower pace than previously. Here’s what I’ve learnt:

• Study your competitors. Decide which parts of their offer you want to emulate. What are the things your customers will expect you to offer, too?
• Then differentiate your product from theirs. This can be achieved through a combination of product innovation, market innovation (eg finding new types of customer not served by your competitors) and economic innovation (eg pricing plans).
• Think differently from your competitors. If you can’t think of any obvious weaknesses in your competitors, search online for postings made by their disgruntled customers voicing complaints, criticisms and suggestions for improvements. You might be amazed to find that what you considered to be a mighty competitor actually has a significant number of unhappy customers, perhaps because of its service, technical problems or other ways it is failing to live up to its customers’ expectations. If you can nip in and cover the gaps left by your competitors, you will start to pick up the business they neglect.

Jonathan Rodger is managing director of email marketing service Message Horizon.

• Top of page

Nothing personal, it’s business

Many times I’ve heard people say, “I only do business with people I like” – but is this a sensible approach?

Most small businesses operate in markets of limited size. They have a finite amount of potential customers, with a range of competitors doing more or less the same thing.

So, for example, if a rude and unpleasant customer walks into your business, do you do business with them, even if you don’t like them? Would you rather say no and not be too miffed if they head off in the direction of one of your competitors?

You might not mind too much. You might say: “I wanted to set up my own business partly so I could choose who I work with”. The truth is, only doing business with people you like will limit your ability to grow.

Don’t get me wrong, if you can have a good, personal relationship with a customer, that’s the icing on the proverbial cake. To strive for that with every customer will limit the scalability of your business and your revenue opportunities.

Having good business relationships with customers, based on mutual trust, respect and understanding is certainly a goal to strive for. But that doesn’t necessarily mean you’ll become best buddies and regularly chat on the phone every day.

In the summer I started working on a project with a guy I got on very well with. Nights out together, drinking beer, good laugh, but the perfect person to do business with? No. When working with him I found him to be unreliable. He talked a good game, but failed on three important deadlines, which ended up costing me time and money.

Would I ever go for a beer with him again? Sure. Would I ever do business with him again? No chance.

Liking me as a person is not the same as liking the way I do business. Only doing business with people you like is restrictive. The best way to know how you’ll do business together is by doing business together. To build a business of scale, it’s impossible anyway to know all your clients personally. Getting on with each and every one of your customers doesn’t guarantee success.

Darren Leighfield, Director at EtcEtc Ltd

• Top of page