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What type of start-up are you?

Tuesday, 14 June 2011 | By Marc Peskett
Marc PeskettAll start-ups can be broadly categorised in four ways, depending on their goals and the reason why they went into business. They can be a scalable business, saleable business, small business entrepreneur or a business where you’ve bought yourself a job.

Scalable businesses

 

Scalable businesses are ones that are set up from the outset to be capable of handling massive growth when the opportunity arises or demand is created. Owners of these businesses know that they want to build a large company and apply a business model that allows them to scale the business rapidly. They are businesses that don’t rely heavily on people to produce or deliver their product or service and have a low cost of goods sold.

 

To enable this rapid growth, scalable businesses typically need access to external funds often provided by venture capitalists, which bring with them accountability, management control and specific return multiple expectations. They employ professional management, implement a formal board structure and generally end up being listed, enabling the owners to cash out and exit.

 

Software companies are a common scalable business, as it’s relatively easy to sell large quantities once development has been completed. The internet has also created the ability to develop scalable businesses very easily, with Seek, Google and Facebook being well publicised examples.

 

Saleable businesses

 

These businessesare established by their owners with a view to selling the business in the short-term to a strategic buyer for a premium price. In order for a business to be saleable it needs to be set up to be attractive to strategic buyers and be able to operate without the current owner. Strategic buyers are generally large public companies or companies about to list who are looking to grow by acquisition. These buyers are also looking to buy “innovation” rather than innovate in-house.

 

Saleable businesses are generally set up by serial entrepreneurs who work on rather than in the business. They employ the right management staff and put strategies in place to make that happen. Saleable businesses generally need to meet at least some of the following conditions to be an attractive proposition for a potential buyer:

 

  • Have an in-demand product or service offering that a strategic buyer can rapidly ramp up by distributing to its customer base and distribution channels.
  • Not rely on the relationships, expertise or efforts of the owners.
  • Have existing sound financial and management processes in place that a new owner can rely on to run the business and monitor its performance.
  • Have operational processes and systems that can be followed by staff, managers and the new owner.
  • Have an ongoing retainable customer base and new customer market that can be sold to in order to grow the business.

 

Business owners with a saleable business have a sale price in mind and timeframe to achieve it, by implementing strategies to build the value of the business and reduce the risks to the business. They also establish it with a structure that allows them to achieve the return on investment they expect.

Small business entrepreneurs

 

This group makes up the majority of small business owners. They are businesses where the owner’s vision is simply to improve their current financial and lifestyle position and hopefully be able to fund a reasonable retirement. The business strategy is focused on developing steady growth that provides the owner with a wage plus a small profit. They employee staff, which may include their family members, but this may not stop them from working in the business as well as on it. They will exit the business one day, but haven’t given much thought to how they will make that happen or spent time sufficiently preparing the business for that. They pursue and take advantage of opportunities for developing the business along the way, but are often not nimble or proactive enough to maximise the results they achieve.

 

Buying yourself a job

 

If the business provides a return similar to what can be earned as an employee, then you’ve bought yourself a job with overheads. These businesses are typically reliant on the skill or knowledge of the owner who finds the customer, services the customer and takes care of the management of the business as well. They pretty much work entirely in the business and not on it.

 

Profits are small and enough to support the financial needs of its owner and their family, rather then funding a solid wealth creation strategy. They may have employees, but the business is unlikely to be capable of operating for any length of time without its owner. This creates a high risk to the continuity of the business. An exit is more likely to be a hand-over to someone with similar skills rather then a sale.

 

Each of these businesses will provide a particular financial outcome to their owner over different periods of time. The business models, strategies and resources are different as a result. The inherent risks associated with running these businesses, is different for each as well.

 

As a result business owners need to be clear about their goals and align the type of business they establish with them. This will give them the greatest chance of achieving their objectives and pursuing a journey of least resistance along the way.

 

Marc Peskett is a partner of MPR Group a Melbourne based firm that provides business advisory services as well as tax, outsourced accounting, grants support and financial services to fast growing small to medium enterprises.  You can follow Marc on Twitter @mpeskett

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