Originally Published in: Succeed in business
Most business owners have lost control long before the proverbial horseradish hits the fan. “It is all about proper planning,” says Bill Gibson, author and founding partner of Knowledge Brokers International. “Lack of foresight when starting out is the main reason why promising businesses fail further down the road.”
The key to ensuring a better chance of success is to plan your business properly while it is still in the concept stage. The better the foundation you lay when setting up, the more likely it will be that you can keep control when trouble hits.
Admittedly there are many variables to take into account, but Gibson says the following four points are vital and should not be overlooked.
1. Know with whom you are getting into business
Spend some time getting to know possible business partners before trusting them with privileged information or formalising business deals. Admittedly, it is difficult to make accurate judgements about people after just a couple of meetings, but it is sufficient to get an idea of their ethics.
“A person’s hierarchy of values is a powerful indicator of how they will react when the pressure is on. Unethical people will ruthlessly pursue their own interests and do whatever it takes to get what they want – even if it means screwing you over. These people also often make sure that they are well protected before agreeing to the terms of a deal.”
“Lack of foresight when starting out is the main reason why promising businesses fail later down the road” – Bill Gibson
2. Take care in drawing up the Articles of Incorporation
The Articles of Incorporation is the most critical document in planning a new company, because it details how the ownership and management of the business are organised.
“You need to be absolutely meticulous in drawing up the Articles of Incorporation, because you never know what is going to happen down the road,” says Gibson.
“Seek out all possible scenarios and try as far as possible to plan for any unforeseen circumstances that could arise. Think about how you would raise capital in a crisis situation or what would happen if a key partner had to leave. It makes people uncomfortable to think about partners walking before they have even opened their businesses, but the truth is all partnerships come to an end at some time.”
Gibson suggests forming a company or a close corporation right from the outset. This prevents crisis situations occurring if one of the partners leaves or switches allegiances should another company be brought on board as a shareholder.
The other thing to look out for at this stage is giving away too much of the business. This can really come back to bite you when your company enters a high-growth phase or if it lands in financial difficulties.
In both cases, you will need capital to either grow the business or keep it afloat. Very often, this means selling shares to raise funds. The problem is that if you have given too much away in the beginning, you could find yourself in a minor shareholder position and ultimately on the outside looking in.
“This does not mean, however, that you are safe as long as you are the major shareholder,” says Gibson. “The business could be set up in a way that a majority vote on the board in terms of numbers can rule even if you hold most of the shares. It really is all about the how things are stated in the Articles of Incorporation and it is vital that business owners do their homework in this regard.”
3. Be realistic when doing projections
Never over-project when selling your concept to potential investors, because this is what you will be held to once the business is up and running.
“If you fail to meet the conditions you agreed upon with investors, you could find that their expectations eventually wear you down. When you suffer emotionally you lose heart, which is extremely dangerous.”
In situations like this where your self-worth has taken a knock you end up agreeing to unhealthy terms out of guilt or because you feel that you do not have a choice. Ultimately, it could cost you your dream.
4. Ensure you have effective financial controls in place
Too often, small business owners wing it when it comes to instituting proper financial controls. This is mostly because these systems can be costly to implement and time consuming to set up. And because time and money are the two things in shortest supply when starting a new business, entrepreneurs do everything themselves and make it up as they go along.
Besides the obvious risks that come with not really knowing what you are doing, unwitting business owners could also fall victim to theft and fraud by employees or partners. Good financial systems also become more vital as the business grows.
“Increasing sales is good, but it is a cost leader because it requires administrative and financial support,” says Gibson
“You need to have implemented strict budgetary controls and debt collecting measures by the time you business enters its growth phase. Otherwise you will grow too fast for your own good and ultimately lose control due to financial mismanagement.”
Bill Gibson of Knowledge Brokers International can be reached on 011 784 1720 or 082 450 9877.
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