Build your house on stone – how to avoid starting a bad business

A report by British commercial insurer RSA published in September last year found that more than half of new businesses don’t survive beyond the first five years (Telegraph, 21st October 2014). 

01/07/2015, blogs

The report cites the biggest growth barrier is the UK tax system, with 44% of SMEs citing it as their main concern. This was followed by a lack of bank lending at 38% and too much red tape at 36%, followed closely by costs and late payments or cashflow.

Whilst these issues can have an undeniable effect on some entrepreneurs and their aspirations for growth, I would argue that some businesses fail within five years because they have been launched badly and therefore are built on shaky foundations from the start.

So how do you avoid launching a ‘bad’ business?’ Many of the steps to avoid this problem are actually undertaken before launch. Outlined below are some basic questions to ask yourself before starting up, to help make sure you give your business the best chance in those first five years.

  • Are you 100% sure you have the willingness and drive to take this forward? Entrepreneurs and small business founders have to be tough and determined to get things off the ground – there will be many challenges ahead – ask yourself, do you really have the drive?
  • Do you have the time? Many entrepreneurs, especially sole traders, underestimate the amount of time they will actually spend at work. Dr Rachel Cohen, City University London, has worked with many sole traders in the course of her research and finds that, “The self-employed, especially those who are just starting up their businesses and do not employ others, find it very difficult to achieve a work-life balance. This is because before they are established the self-employed face high levels of uncertainty about whether they will have the customers necessary to keep their business going. As such, in the early days of a business many self-employed workers go to extraordinary lengths to retain any customers they do have, putting themselves out and working evenings or weekends where necessary.” (IB Times 13th August 2014)
  • Have you done all your research? Market research is a vital part of the pre-launch phase. Who are your competitors? What do your customers actually want? Where is the gap in the market? You will need time and resource to dedicate to finding out the answers to these questions in as much detail as possible to ascertain if your business is viable. Within this research you will need to research the most important thing to your business – pricing. How much are your overheads? Tax, fuel, expenses, insurance – all these need consideration in your pricing model and then you need to find out if your customer is willing to pay that price – without this knowledge you might be doomed to fail.
  • Are you looking to make a business out of your hobby? If yes, please consider all the points above very carefully. Commercialising your hobby will mean it is no longer a pastime and whilst it might be your passion, there are many other things to look after in making a business out of your hobby. This means you might not be spending as much time doing the thing you love as you’d like, so you need to ask yourself – have I really got the drive?

You might find yourself going through these questions many times whilst you decide if business ownership is for you, that is a good thing. If you are to launch a business, make sure you are on firm foundations to make sure you are in the 50% that succeed after the first five years.