What do you need to do when you’re trying to build a new business? From an experienced, specialised business advisory team, here are 5 things you might not have thought of. Ignore them and you could run into trouble.
1. For the avoidance of doubt
You’ve started a new business. The founders all get on well and you’re all focused on building your new project up to a point of success, so who wants to slow things down by getting lawyers involved to draw up a shareholder agreement? But there’s a very good reason to – to sort out and protect your Intellectual Property.
The key thing is to draw up a document which sets out clearly what you have agreed with each other. A one-pager, signed by each of the founders, is a nil-cost, must-have document. Companies so often break up because of arguments between shareholders and that often happens because of simple misunderstandings: “You said you would do this…”, “I thought that…” Write down what you have agreed now, before the business is worth millions, and reason will prevail.
2. Don’t do it on your own
“It will only cost £30k to build the website, and then we’ll be up and running”. If this sounds like your attempt at a first year cash-flow forecast, then you’re already in trouble. Don’t underestimate the cost of getting to a point where you break even. Do the proper research.
All the answers are out there – you just have to ask; don’t guess. Discuss your ideas openly. The chances are that someone has already thought of your idea anyway but will do nothing with it. Talk to everyone, and get their opinions. Will your potential customers buy at the price you anticipate? If you need to change the business model then do it. You can’t plan a business in isolation.
Running out of cash will stop you dead, but being diluted by a last-minute, second-round investment which makes you compromise the business model because you can’t afford to build it properly will create terrible damage and loss of value. And all before you’ve even got off the ground.
3. Agree on your respective contributions
Agree as early as you can between yourselves on what each of you is to contribute to the project. It may be cash, expertise or just a number of hours of hard work. You will have agreed how to share the ownership of the business (ie how many shares you each hold), but it will almost certainly turn out that one of you will have to contribute more than anticipated. It is vital that you all agree beforehand how that extra contribution will be rewarded, or else mistrust and arguments will ruin the business – and your friendships.
4. Define your attitude to risk
Decide what risks you are prepared to take. Are you prepared to borrow? Will you sign away your house? Know now, before the pressure is on, what you are prepared to do. People often end up doing so in the heat of a crisis, without proper foresight. If you share your life with someone, be brave and talk to them now about commitments you might have to make which will affect them – or your home may not be the only thing you lose if the business goes down.
5. Define the buy-back price
This could be the most valuable piece of advice you will ever get. If you raise investment from friends and family or a private investor, agree a price then and there at which you can buy back their shares. Offer them a 300% return and the right to buy them back at any time in the first 3 or 4 years and write this into a formal agreement. Most investors would be delighted to make 3 times their money and you will be surprised how much more than 3 times their original cost those shares will be worth if your business really does take off. It will be the best deal you have ever done.
Christopher Jenkins is Senior Partner of Ecovis Wingrave Yeats, Business Advisers and Chartered Accountants. They were voted Best Medium Sized Firm of the Year and he was voted Best Business Adviser of the Year by the CBI. Contact him at email@example.com or go to www.wingrave.co.uk