Starting a New Business, General Start-up and Entrepreneurs Advice

Starting a New Business

Starting a new business takes guts, and up to 80% of entrepreneurs fail in their business. I sure did. In fact, I've had a number of failures, but did not allow any of them to take me down with them. Bouncing right back, and learning from failure is important. Having solid guidance can massively boost your chances for success.

I've personally built 3 multi-million rand businesses from scratch, here are some of my tips.

Becoming rich through business, means understanding business and its realities, such as

• What is value, and how does one create it (See: Money)
• How does one write a business plan, and do you actually have faith in your business plan that it is not just something you "cooked up" to satisfy other people -but actually something that gives you insight into what you are about to embark on.
• Do you have experience and specialised knowledge of the field that you want to start your business in ?
• Do you have adequate capital, and margin of safety ? Can you afford to wait two years for profits ?
• Will you be able to persist in it for at least 5 years ? Will you be clever enough to fold it within 2 years if you realise that it can never be succesful and that your original business plan was flawed ? And will you be able to bounce back from such a devastating loss, both emotionally and financially ?
• Are you someone that will learn from every mistake, expect mistakes, and be willing to correct course along the way ?
  • Usually even your most fundamental business assumptions will be proved wrong, but by adapting to the realities that you face, you can still come out on top.

Starting a Business is Harsh - So educate yourself

I'm not saying you need to go and do an entrepreneurship MBA.

But read up as much as possible, on the web, books, and speak to experienced business people.

Some good resources

Business Start-up Checklist

• Marketing & Sales method for aquiring customers, preferably have some anchor clients to launch with.
• Trading Structure and Bank account, Understand VAT and its catches. Other taxes and compliance issues. (Income tax, employees,PAYE, optimum personal tax structuring)
• Accounting and Invoicing
• Marketing Materials, Website, Business Cards
• Proposal Template/Legal Docs, Quote Acceptance Form
• Financial Parachute: Cash in bank to sustain for a few months
• Product/Service to sell (Distribution agreements, register with suppliers, no credit usually at first).
• Premises / Secure Lease. (Do you really need an office - I built a multi-million rand business from a flat)

Usually the first R 10m is the hardest, thereafter it becomes easy, Why ?

• Making money is a skill, and there are many lessons that people have to learn on the way before they have the "success recipe" all figured out
• By the time you have R10m you have significant capital and resource base to leverage
• You have credibility, and lots of people will give you additional money for new ideas, and other succesful people will take you seriously. (Trust me, if you have never been up there yourself, you will not be able to "fake it" with truly successful people)

A few words on Business Partners

One of the most common problems businesses face sooner or later, is a battle between business partners. Having no partners avoids these problems later on, but having partners often boosts one's chances of success. If you have one or more partners, it is critical to have an indepth understanding of power dynamics, and of legal protection mechanisms that you have to put in place, and to understand basic company law governing the roles and behaviour of shareholders and directors.

For a service business

• If you have a business where you need to invoice other businesses (provide services to them), you need to have really aggressive CASH MANAGEMENT policies that ensure that you actually receive your cash.
  • The best possible advice that I can give you, is to take upfront deposits.
  • Try to deliver recurring services, and if billed monthly, bill on the first day of the month, 1 month in advance for that month.
• Get service contracts for secured revenue
• Have a clause in contract to allow you to stop providing the service in case the client is behind on payment
• Keep your book keeping up to date at least once a month
• Not all customers are economical to serve - many people want your services but don't want to pay what you need to earn - accept it and ignore them.
• Sometimes you need to fire a bad customer or those that waste your time. 80/20.... 20% of your customers give 80% of grief. Similarly 20% of your customers creates 80% of your profits.
• Understand the key benefits that your service has to your customer, and especially if you have an advantage or benifit that 99% of your competitors don't have - emphesize this point to your customers, but be sure your customers will actually care about this "benefit". This is useful when marketing to new prospects.
• Niche servives then broaden. The more concentrated your service offering (and as a consequence your marketing message), the more memorable your business will be in the mind of prospects. Later you will discover the reality that as you start to service your clients they have expectations that you broaden your services slightly to them. Use this as an opportunity to extract additional revenue, but be careful to broaden your marketing message.
• Not having an office can be an advantage - clients find it convenient if you go to them. You'll save a lot of money with a home office.
• Try to create a high switching cost for clients - lock them in. If you become such an integral part of your client that it becomes difficult for them to stop using your services, or to replace you with another service provider, then good for you!!!

For a store based business, consider

• Number of feet
• Store location
• rent single biggest determinant of your risk & profitability because you lock it in and pay it regardless of your turn over.
• Your rent and its escalation, appropriate store size for your business type
• Add a clause to have the option to renew for another 5 years at expiry of current lease - for security to recover your investment.
  • Imagine you built up customer base but at the end of 5 years you are at the mercy of the landlord who could opt not to renew your lease! You don't want that.
• Try to recoup your upfront investment within the lease period.
• Liability for lease if business doesn't work out - usually you can hand over your lease.
  • Try never to sign liability or surety in your personal name.
  • Don't allow an automatic debit order to take your rent - insist to pay it manually by invoice.
  • Never withold rent from landlord - he'll lock your doors. Even if he doesn't do things he is supposed to do - don't withold rent. You will be the only loser in this game.
• ONE TIP FOR NEGOTIATING:
  The last moment just before signing the lease agreement you have maximum negotioation power.
  • The landlord has invested energy and time and efforts on screening you, and by this time you are his best offer.
  • Usually negotiations are handles via an agent who forwards the contract to you for signing.
  • Now is the time to cross out clouses such as you paying for the air condition. Now you fight for the concessions you want like the annual escalation - shave a few percentage points off...
  • try to pass stamp duty, municipal charges back to landlord
  • So cross out and modify critical points with your black pen, sign the contract and forward it back via the rental agent to the land lord. The land lord knows now that if he accepts the new agreement he is guaranteed with a concluded deal. Will he now take the effort and risk to try and fight and try to change clauses back ? Maybe, but you will for the first time be in the drivers seat. At worst case you will reach a middle ground which will still leave you in a better position than if you didn't follow this tip.
• Land lords don't like independant tennants due to high failure rate - you'll get the finger many times - don't let this make you grab the first lease that finally gets offered to you.
• Don't spend a sent on equipment,stock until you've secured a lease - it can take a long time to secure a lease (months)
• Show well designed logos, business plan to land lord, renderings of what store will look like (get it from your shop fitter - may cost R 5000 - 7000 to get it - but usually gets taken off your final bill)
• Many landlords will allow you up to a 5 month initial free rent - installation allowance, if you sign a 5 year lease. Negotiate for this!
• Negotiate penalty clause with shop fitter for each month time overrun equavalent to the rent (but don't use the word penalty clause when speaking to him!!!). Casually ask for a deadline, then add in, if you run over that, you need to pay the rent, OK ?
• Distance to Closest competitors
• Distance to complementary businesses (hair salon & nail salon next to each other. ATM next to a strip club...)
• Quality of the product and its appeal
• Realising that it can take 1-2 years to start getting traction in many locations
• Reasonably broad appeal. Niche interests can either fly or fail miserably, and may take longer to build traction.
• Understand who your target market is, and tailor your presentation to them. (Men/Women/Students/lower income/middle income/upper middle income/traditional black market/upcoming black "diamonds"/staunch white afrikaans omies)
• Store design, budgeting correctly for it, but be prepared for cost and time overruns! Remember you keep paying rent while you wait for store remodeling to be completed. Also if you shut down or move location, you lose a lot of money as many things are customised to a specific store and cannot be re-used or sold easily. If you move, also your customers WON'T follow you.
• Buying a franchise makes it easy, but requires the ability to loan money. Plus most franchises are more like jobs that you buy, than real businesses (remember a real business is something that you can duplicate, and in the long term make it reasonably independant from your own full time effort). A KFC would be a good franchise. How often do you see an owner manager in it? There are several investment holding companies that does nothing other than owning 10-30 KFC franchises.

My friend Graeme, who runs a successful Coffee shop (soon to be a coffee chain), had this to say:

1) Always talk to the other tenants in the building. Ask what's happening. If there are any vacant spaces, ask if they know what went wrong. Also bear in mind who the tenant you're talking to is - if you're opening a coffee shop, another coffee shop owner will probably not give you an honest answer. I considered a space that I thought was good, but the other tenants told me they remember the shop was very hot inside. Only then did I realize that it wasn't connected to the center's air-con.

2) Ask for exclusivity in your domain for the whole property (say I want to be the only coffee shop) - this can be slipped in last minute. If they deny you this, ask that they don't put a similar place next door to you.

3) Even if you think you won't get an answer to a difficult question, ask the landlord/agent directly. This works especially well with agents, they typically aren't that smart :-) I asked before "You mentioned before that Seattle Coffee pulled out of negotiations for this spot - why?". I didn't expect an answer, but she told me "They were worried about another shopping center being built near by". I didn't even know about the other shopping center ''

Success secrets for an internet business

• Virtual (not physical) products and services works very well over the internet such as
  • Financial Services
  • E-books (Yes there are millionaires that make money from people that pay to download a book in electronic format)
  • Music downloads
  • Internet dating - how many similar kinds of business ideas can you come up with ?
  • Information and subscription services. (If I wanted to be clever I could transform my newsletter into paid for service to which people have to subscribe at a monthly fee)
  • Convert a traditional physical service to an internet service (Think Pay fines online, internet banking, hmmm Why has no-one provided a service that allows you to renew your car license online.... )
  • Find international websites that do well, and then build a local SA version of it. (Like Khalahari did compared to Amazon)
• For physical products
  • Ensure that the product is suitable for easy shipment and delivery - reasonably compact and light
  • Can attract profit margins high enough to ensure you overcome all the costs related to physical prodcuts
  • Delivery costs can seriously eat into profits - try to pass it on to the buyer - add it to his shopping cart at the last minute
  • Try not to go into a business where you need to keep a great variety of different items in stock
• If you plan to build a strong consumer brand and become a famous internet site
  • Specialise in a tight niche concept, but one that still has fairly universal appeal
  • Select a good memorable name (Alliteration, unusual, unique, short, easy to pronounce - it must sound good not look good when you write it down)
  • Your concept must be so useful and cool that people get excited about it.
  • There must be no well known competitor in this space
• Keep in mind that the South African internet market is a 1000 times smaller than say the US + UK + Europe markets.
• Building a website is not as easy as it sounds - try to get a third party "shopping basket" component such as the ones provided by mweb that handles all the details including payment, and simply spits out a list of orders that you need to ship.
• If you build your own you need to learn about things like Payment gateways (iVeri, vcs.co.za can be recommended in South Africa). Probably a good idea to partner with someone that is good at programming and web design.
• There are many unexpected ways to make money on the internet without ever selling anything
  • Create an information site and stick google banner ads on it.
  • Become an affiliate for someone else that has products to sell
• You need to learn about Internet Marketing (The most important is google adwords... google it :-) and SEO (Search Engine Optimization). There are a few companies and independant consultants that can do SEO for you. If you build a website traffic don't just automatically go to it.

Other success secrets for business in general

• Understand how you are going to find customers
• Use a spreadsheet "Model" to calculate the profit drivers in your business. (If you don't know, ask me and I'll point you in the right direction) This helps you to determine if your margin is high enough; what would happen in both worst case and best case scenerious; What is more important - getting more customers, or charging more per customer... and many other profit sensitivities BEFORE you actually do it.
• Use common sense at every turn, and don't take advice from unsuccessful people and every day people who've never done it themselves.
• Learn the basics about how to invoice, how VAT works, the various taxes, what items you are allowed to expense and what not.
• Keep good records. Keep all possible slips. Even if you are out on a Thursday night with friends at a restaurant - be sure to take the slip home with you: see below
• Understand the difference between paying for something in your personal capacity vs letting the business pay for it. This is like getting 40% more umph out of your money.
• Its all about TAX. Read Rich Dad Poor Dad and ask an accountant to explain... a good person to consult is Kristof Zielinski (my personal advisor) kristof@kzee.co.za
• Have a plan to scale the business up, duplicate the business across regions, or to be able to stash it into a portfolio of one of many businesses that you are still to create.

The realities of marketing

• The most difficult thing in any business is to find customers
• Different forms (mediums) of advertising or sales approach works for different kinds of business - and it is hard to predict which will work best.
• There is a massive science to marketing... the exact words that you use can make a big difference
• Most forms of marketing simply does not work, and will simply steal your money
  • Cold Calling
  • Handing out flyers
  • Most newspaper ads (Rather try classifieds)
  • Email marketing (often has 1/10,000 or less success rates)
• Most forms of marketing has an approach to sales success rate of 1-3/500.
• Some forms of marketing has a 1/3 to 1-7 success rate - try to discover them.
• Referals are your cheapest form of marketing, but you only start getting large numbers normally after you've already been two years into business
• For some businesses it might be appropriate to build your own customer database over time and this can become a major asset. (My insurance business database has more than 35,000 South Africans listed with full contact details, what cars they drive, what area they live in.... I'm not going to share how I will turn this into money without spamming or annoying them since its a trade secret that I wish to protect... but I'm sure you can concoct similar ideas for your own database if your business involves large numbers of customers)
• When taking marketing advice from anyone, ask them how much sales in rands were directly attributed to their marketing campaigns. If there are no concrete answer, only talk about how his ads are shown on TV, skip it.
  • Marketing that works for big companies are not appropriate for start-ups unless you have a venture capitalist funding you with R 20m - and even then you will likely fail with this approach.
  • The best approach for the small business is RESULTS BASED MARKETING. For every R1 that you spend on marketing, you must get back R 2 in additional profits. If your marketing rands don't come back with friends, stop sending them out there....

BRILLIANT!!!! Thanks please add me to your mailing list at any time! I just started my own short term Brokerage AFT
Insurance Brokers and this info has been so helpful. thanks again. shawn@aftib.co.za
	

Thanks for the compliment! Wishing you maximum success with your new venture.
	

Thanks for the brilliant insights. i am planning to start a business but i have little capital, your info has given me
some clues. thanks!