A recession is a great time to start a new business. Assets are cheap, labour is available, and if you can make it in a recession, your chances of survival are much higher than average. Having a great idea or spotting an acquisition bargain is a long way from getting a business out of the zero zone and into profits though. Some folk get so fired up about their new idea that they forget to check the limiting factors. This post looks at some of the classic mistakes that start-up enthusiasts are making at the moment.
Going for a song
Ireland is awash with cheap business properties as liquidators are prepared to realise negative equity losses in order to wind up liquidations. A hotel in Donegal was recently purchased from the liquidator for €650,000 by the hotel’s former manager. This hotel was formerly on the market at €4.5 million.
The challenge for the new owner is how to make the hotel profitable this time around. What will he do differently now? Although he will be starting with a different cost base, because of the cheap acquisition cost, he will need to be on his toes to survive. His previous experience, twenty years as manager of that same hotel, will be both a benefit and a disadvantage in that regard.
Have You Got a Business?
“Good design can’t fix broken business models.”
Jeffrey Veen, Designing the Friendly Skies, 2006.
Would-be entrepreneurs need to find a way to generate sufficient income to make a profit. Great ideas, even innovative ones, aren’t enough. Currently with fire-sales on assets being a weekly occurrence, as a business consultant and mentor, I am turning down more requests for proposals than I am writing. People are requesting business plans and feasibility studies at an unprecedented rate. I could spend, (or waste?), most of the week writing proposals if I wasn’t careful. I check out the limiting factors with would-be clients before I even write a proposal.
I don’t want to charge an entrepreneur a fee for entering a game that they cannot possibly win. Some of the questions that I ask would-be entrepreneurs are outlined below. They might sound very basic, but many of the people that I meet cannot answer these questions, even though they have a menu, a colour scheme and a marketing idea for that fantastic restaurant they are going to buy.
- How much money do you need to finance your acquisition or start-up costs?
- How much money have you got?
- What is your credit record like?
- Do you need bank finance? If so, how much money do you need to borrow?
- What are the annual municipal taxes, (rates in Ireland)?
I constantly find folk who “think” it might cost so much, but have no real idea. If a property is involved, particularly one that has lain idle for some time, you will need a surveyors report. There are several types of costs involved in starting a business, refurbishment, legal, and the cost of buying stock for the first time to name a few.
Many of the annual operating costs such as insurance will have to be paid up front as well. These days, in addition to a great business plan, you need to have an impeccable business history, a squeaky clean credit record and sizeable collateral to obtain bank finance.
Skills and Experience
- What is your background and do you have the skills required to operate this business?
You can put together a team of course, but if you have no industry experience, how will you know what that team looks like? You’re going to run a bar? Well, what are the attributes that you will seek in a bar manager? If you have no bar experience, it’s harder to pick a winning team than it seems, because you don’t know how a good bar manager operates.
There is a first time for everything of course, but, running a hospitality business for example, is not the same as running a home. You can’t learn everything at once; it’s simply naive to think that you can. These skills are needed to operate every aspect of the business, and investors and bankers are investing in the team more than the business. Skills are the most important limiting factor.
- Do you need a licence to operate?
- Are there regulatory requirements that you need to fulfil?
Some businesses need a licence to operate, for example a liquor licence is required to operate a bar. Licences are generally not freely available and are expensive to require. Sometimes, you need to meet certain regulatory requirements such as a fire certificate or planning permission, in order to operate or as a pre-condition of finance. Make sure you know what these requirements are or it can cost you dearly when you can’t fulfil them.
- Is there a funding deadline?
- Is there an auction date?
Some deadlines are immovable, and if you require a business plan to obtain finance make sure you do so in good time if a property is up for auction. You need to have your finance in place before bidding at auction, or you risk losing your deposit. These days even a good proposition can take three to four months to obtain bank approval, so if you seek to have a business plan written just one week before auction, you cannot possibly meet the auction deadline.
Sequence of events
If you start a business, you will find that there is a logical sequence for getting all business operational. For example, in Ireland you will find that you can’t get a VAT, (sales tax), number if you don’t have a bank account. And you can’t get a bank account unless your company is registered. It can take several weeks to take each step in the set-up process, so you do need to plan your project from the outset or you may end up expending money for a business that you literally can’t start within the time available.
How was it for you?
If you are starting out in business, don’t just dream of marketing strategies, press releases and product packaging. Do your homework and make sure that you know what the limiting factors are. Have you experienced any limiting factors in your business?
Image: “Many american traffic signs mixed together/Shutterstock“