Who are you?

How frequently do you overhear, or partake in, conversations that run along the following lines: ‘In a couple of years I would like to start off on my own if I can’, ‘I would love to have my own business but my financial commitments mean that I can’t take the risk’, or some other variant? Quite a number of people dream of running their own show, but not all take the plunge.

In some ways, it is hardly surprising that entrepreneurial dreamers are slow to take concrete steps towards making their business a reality. Lying ahead of them, maybe for a number of years, is the unknown: financial insecurity, long working hours, long-term financial obligations and, at the end of it all, possible failure. What is different about those who jump and those who only talk?

The conventional image of an entrepreneur is of a strong-minded, positive risk-taker with a sense of destiny, seizing the ever-present opportunities. Well, this may be a reasonably close approximation of some successful entrepreneurs and you may be that sort of person, but this still does not explain why you are starting your own business and why now. There are many people like this who stay employees for the rest of their lives; and many more who start a business ‘accidentally’ but make a great success of it.

One plausible explanation for why some start a business and others do not is that those who go solo have received a rude shock to their lives. Their previously cosy existence has been disrupted. In 2010, a survey for the firm Opal found that only 12 per cent of new entrepreneurs had planned to go into business. Thirty-six per cent had started up because of redundancy, a fifth due to a cut in hours and 15 per cent because of a pay cut. There are plenty of other reasons that may sway you towards starting a business, for example: being sacked, not being promoted as expected, having your ideas at work rejected, feeling undermined, having a new boss foisted on you, being transferred to a different job or location, retiring but finding you need extra money, reaching a milestone age and feeling you have yet to achieve anything worthwhile, or realising that corporate life does not provide the security or sense of worth that perhaps it did 30 or so years ago. Another catalyst could be seeing a friend or colleague in similar circumstances to you successfully making the break into self-employment.

If you have experienced one of these shocks, the comfortable niche in life that you have created for yourself may suddenly feel restrictive and unsatisfactory. Your response may be to try to seize control of your own life by creating your own job.

Obviously, this shock theory does not explain everyone’s decision. There are those for whom starting on their own is a positive, not a negative, move. Some have mapped out their lives to include starting their own business. There are others for whom being an entrepreneur seems commonplace, because most of their family are either self-employed or have started a business. But there is no doubt that the proverbial kick up the backside is the starting point for many a new venture.

Government statistics show that there were 4.8 million private sector businesses in the UK at the start of 2012, of which 96 per cent had fewer than 10 employees. It’s easy to see why running your own business is popular: the threat to job security following the ‘credit crunch’ and fragile economy; the need for many older people to supplement their pensions; the opportunities created by the Internet for online businesses; the attractions of working from home or flexible (even if long) hours as a way of achieving work–life balance; enterprise education in schools; and the popularity of business-reality TV shows. Starting your own business may become normal, not abnormal.

But, for now, the conclusions are that:

• not everyone has the necessary ingredients for success.
• there may be many people who live out their working lives as employees who possess the vital skills and characteristics in full, but fail to take advantage of them.

What do you want?

An important part of your self-analysis should include what it is you hope to achieve by starting a business. Motives may range from achieving monetary gain to enhancing status, to establishing a comfortable working environment, to combining work and home responsibilities. You could have a combination of business and personal objectives. It may be a helpful exercise to note what your objectives are under the following headings, which are not exhaustive:

• money: how much? when? in what form? as much as possible? enough to live on?
• working hours: number of hours? amount of holiday? flexibility?
• risks: like a gamble? only low risk acceptable? prefer calculated risks?
• stress: looking for lower levels of stress? can cope with stress?
• type of work: want to be able to do the work you like? want to choose which work to do and which work to leave for others? want to concentrate on what you are good at? feel your skills are being wasted? want to achieve your full potential?
• independence: fed up with being told what to do? no longer wish to explain your actions to your superiors? think you can do better?
• achievement: want to have the feeling of satisfaction that building your own business can bring? like to set yourself standards to achieve? to see if you can do it where others fail?
• power: looking for the sense of power that being the boss can give? want to enhance your reputation or status? want to do better than someone else?
• personal relations: want to get away from the problems of having to coexist amicably with others? prefer the feeling of isolation? happier on your own, away from irritating workmates?
• any other objectives?

Once you have drawn up a list of objectives that you hope to achieve from being your own boss, you need to assess how realistic these are. A number you will find fit ideally with the notion of being self-employed; others will be quite contradictory. Part of your self-analysis should be to see how good or how bad a match your objectives are to the reality.

What will it be like?

Most probably the answer is much worse than you can imagine. There are a few people who start out and find the whole operation flows smoothly from the beginning; there are others who pretend everything is going well, while the reality is quite different; and there are others who openly admit how hard it is. One of the more dispiriting aspects is that while you may expect hard work for one or two years, it could continue for several.

The government publishes survival rates for new businesses in the UK. The data show that, after two years, around one in five new businesses has failed. After three years, three out of ten have ceased trading and fewer than half are still in business after five years. Taking advice, such as counselling or training, is likely to improve your chance of success – research suggests you are 20 per cent more likely to still be in business after 2½ years if you have taken advice at the outset.

If you manage to survive, life will not always be easy. Your business life may follow this pattern:

• money: your income can prove to be a problem. At the outset, if not later on, you may find you cannot draw as much income from your business as you would like. Initially, you will need extra funds to fall back on; it can be very helpful if you have a spouse or partner who is earning.
• working hours: surveys show that nearly two-thirds of self-employed entrepreneurs and bosses running their own companies regularly use weekends to catch up on the paperwork and admin tasks that inevitably go with running a business. On average they work 55 hours a week, and three-quarters say they have to work even when ill. Dealing with ‘red tape’ averages about five hours a week. While, in theory, you can choose your working hours and be flexible, in practice you may find that you work all the hours possible. If your business is not going well, you will need dedication, drive and energy to overcome problems; even if the business starts off well, you may still find you cannot turn your back on it, because you want to make as much money as possible in case things start going wrong! You cannot win: until your business is well established you need to work long hours.
• risks: a gamble is an unlikely basis for a successful business; but if you only want to pursue low-risk ventures, you may be short of ideas to follow up. You stand the best chance if you are prepared to take calculated risks that allow you to make a sound estimate of the chances of success.
• stress: come what may, running your own business is a very stressful experience. You need to be able to cope with it or to seek advice on ways of overcoming it. Stress is not only caused by business problems; it may also occur in your domestic life as a result of allowing the business to overwhelm you. Your spouse/partner and close members of your family need to be very supportive and be prepared for what is to come.
• type of work: you need to be a jack of all trades. Unless you are forming a partnership or hope to raise sufficient funds to allow you to employ someone who can complement your own skills, you will find you act as salesperson, technical expert, accountant, administrator or whatever. The wider the range of skills you possess, the greater your chance of success. Be honest about what you can do well and what you do badly. If there are gaps, consider being trained in the area of inadequacy (see Chapter 3, ‘A spot of coaching’) or try to make sure you can afford expert assistance.
• independence: you remain totally independent in your business decisions only if you never borrow or raise money. Once you have done that, you may find that you have to explain your actions, although not usually on a day-to-day basis.
• achievement: founding and controlling a successful business can yield a tremendous sense of achievement, but what happens if there are failures? What would be your reaction? To be a successful business manager, you need to be able to deal with failure. You must be able to accept failure without finding the effect devastating and yet to draw all the lessons possible from it, so that in future you will not make a similar mistake and your performance will be improved.
• power: power can be a destructive influence in a business. There is no problem if you are a sole trader, but once you begin employing staff, you are trying to operate your business through others. Should the desire for power lead you to try to control employees in a way that is counterproductive for their work performance, your power will be a negative influence on the success of your business. Managing people properly is more important.
• personal relations: one of the advantages of running your own show is that you select the people who work for you, and (provided you do not discriminate unlawfully – see Chapter 21, ‘Your rights and duties as an employer’) if you do not like them you do not need to employ them. But if you find it difficult to associate in a friendly manner with most people, you are unlikely to be a successful owner-manager. You need to be able to establish good relations with suppliers and customers, as well as with those you employ.

Why will you succeed?

The conventional view is that your business is more likely to be successful if it fulfils three criteria:

1. The people involved realistically assess their strengths and weaknesses and try to overcome shortcomings. This could apply to you alone if your business is as a sole trader. Or, if it is on a larger scale, it means you as the leading figure plus the rest of your management team should be balanced and with no obvious lack of skills. The quality of the management (you and others) is the most important criterion.
2. The idea and the market for it has the necessary growth potential and you have experience in that market.
3. Financing is sufficient to cover the shortfall of working capital (p. 339), especially in the early days.

If you cannot fulfil these criteria at the moment, do not accept defeat; you may be able to do so in the future. Most of the processes can be learned and acquired if your personality allows for realistic self-assessment. At this stage in the chapter, you should already have some self-knowledge about your strengths and weaknesses as an owner-manager. In Chapter 5, ‘Are you sure?’, the information is drawn together in a checklist (p. 57), which you can use as a quick test of where you stand.

Why will you fail?

You will fail if your operation does not match up well to the three criteria mentioned above. But some more specific problems are:

• overestimating sales and underestimating how long to achieve them.
• underestimating costs.
• failing to control costs ruthlessly.
• losing control over cash, that is, carrying too much stock, allowing customers too long to pay, paying suppliers too promptly.
• failing to identify your market because of inadequate market research.
• failing to adapt your product to meet customer needs and wants and failing to retain customers.
• lacking sufficient skills in one of the following areas: selling and marketing, financial, production, technical.
• failing to build a team that is compatible and complementary, if your business is on a larger scale.
• taking unnecessary risks.
• underpricing.

Many of these causes of failure are a result of lack of skills. Running your own business does not mean you have to be an expert at everything, but you do have to appreciate the importance of all these aspects so that you can control your business properly. Try to acquire an appreciation of the crucial factors to watch out for by seeking training or advice from others in those areas in which you are weak. Use this book as a starting point. If more help is needed, there are training courses and advice agencies (pp. 28, 31).

How big a business?

One factor to consider at an early stage is which track you are in – the fast-growth, medium-growth or slow-growth lane. You may know, from the assessment of your skills and character, that the most you aspire to is being a one-person business, pottering along steadily, making a good income for yourself. Or your analysis may convince you that, with the right funds and the right management team, you have the potential to look for swift growth. Your plans about raising money are determined by this consideration.

What are your skills?

The logical business idea for most people is to choose an area in which they already have considerable expertise. Many self-employed people are simply practising their own acquired knowledge, such as engineers, solicitors, design consultants. Your expertise may be acquired as a result of your education or training on the job. If you have been employed as a manager of a supermarket, one obvious idea is to do the same but on your own. Or you may have worked in the computer industry and so possess considerable knowledge about products, the market and distribution.

Many people also opt to begin a business using a skill that they have acquired in their spare time as a hobby. Obvious examples are the craft-type businesses, such as jewellery making and pottery. The disadvantage with these is that you have not acquired any of the business knowledge needed to turn hobbies into a living. You will not know the suppliers or the distribution network, for example. However, given determination, this disadvantage should not be insuperable. A more serious problem may emerge later: you may have decided to base your business on a pastime because you found it enjoyable, but a few months of struggling to keep your head above water can soon turn a pleasure into a chore.

Which is the best market?

An alternative to choosing an idea based on your existing skills and knowledge would be to research some markets in which you believe there are profitable opportunities. The ideal market to base your business in is one that:

• is growing or is large.
• is supplied by businesses that are not efficient or are outdated.
• has a niche or sector (p. 14) that you can exploit.
• is not heavily dependent on price to help consumers select one product rather than another.
• is not already supplied by products that are heavily branded; that is, there is not considerable customer loyalty to products from one or more businesses.
• is not dominated by two or three very large suppliers but instead has a number of smaller would-be competitors.

In practice, there is only a remote chance of finding such a market; and, if you did, so would many other businesses, which would make it very competitive. But it would be unwise to base your business in a market that does not come up with some of these positive indicators. The moral is, do not be afraid of competitors; they prove that there is business there to get.

A tough economic climate might seem the worst time to start a business but, even when the economy as a whole is under pressure, there are still individual markets that present opportunities. For example, if households’ disposable income is falling: people still eat but may turn to ‘value’ food products; they may cut back on big-ticket items but still buy smaller, affordable luxuries, such as chocolate and mini-break holidays; and they may go out less so that home and garden become more important spending areas. Firms may cut back on expensive permanent staff but this may increase demand for freelancers and consultants; for some industries, such as debt collection, economic problems represent a boom time. Similarly, when the pound is low against other currencies, this can give a big boost to businesses with a high proportion of overseas customers.

It is difficult to enter a market if you have none of the technical skills or industry knowledge necessary. In particular, if you need to raise money, the decision-makers will want to see some, if not considerable, knowledge and experience in that market. If you do not have it, you have to concentrate instead on demonstrating your all-round business skills and experience, the strength offered by your character and abilities, and the research you have undertaken into your chosen market.

No ideas at all?

If you cannot come up with an idea on your own, do not despair. Try organising what is called a brainstorming session. Ask two or three colleagues, friends or relations to join a discussion. Hold it as a proper meeting in peace and quiet, with paper and pencil in front of you. Spend a couple of minutes outlining the sort of idea you are after and what you have already considered but dismissed and why. Ask for their reactions and cross your fingers that some ideas will emerge. A brainstorming session need not last a long time. Probably a quarter or half an hour will be sufficient.

Defining your ideas

At this stage, you may not have focused on just one idea but still be considering two or more. Whether it is only one or several, your next step is to draw up a pen portrait of each idea. Clearly, some of the aspects will be nothing more than wild guesses; you will need to carry out research before encapsulating your final choice in a detailed business plan with realistic forecasts. The brief sketch should define the following points:

• a description of the product or service.
• an indication of why it will sell.
• a description of the intended market: UK, Europe or global.
• your estimate of the approximate price.
• how you think it will be sold.
• a first stab at the amount of sales you can make.
• how it will be made, if it is a product.
• its approximate cost.
• whether revenues are likely to be more than costs.

Having drawn up these broad-brush definitions of a couple of the most promising ideas, you will find that during the detailed estimation and calculation stage, one idea will emerge as the favourite. You can concentrate on developing this one into your business plan.

Other chapters to read

2 Who will buy? (p. 13); 5 Are you sure? (p. 57); 7 Timing the jump (p. 73).