Entrepreneurs and their small businesses are the engine room driving Britain’s economic recovery, but out of the thousands of firms opening, few survive to grow into thriving companies.
The rate of attrition is high – according to the Federation of Small Businesses (FSB), 20% close within the first year and 50% have disappeared by the end of year three.
For every 10 businesses opening today, only three will be trading in 36 months.
If you are looking to invest in one of these firms through the Seed Enterprise Investment Scheme (SEIS) or crowdfunding, spotting a business doomed to fail should be high on the due diligence list.
To help identify flops, the FSB has come up with five crucial indicators:
Lack of a sound business plan
Business plans should be thought through, considered and based on logical and quantifiable assumptions. Warning bells should ring if the numbers seem hazy as working to a plan is so import ant in the early stages of a business.
Inexperienced management
Entrepreneurs are often big on ideas but light on business experience. To succeed, a new company needs clear leadership and multi-skilled managers who are prepared to make the difficult decisions. Seeking board representation to have a heads up on internal thinking and business decisions is always a good idea.
Trading below the horizon
Whatever sector the new business is in, trading depends on visibility. If customers do not know the business is there, then they will not come through the door or click to buy online. Social media provides a large audience that is cheap and easy to reach with the right messages. A strong marketing plan running alongside the business plan is a must.
Ignoring your enemies
Every sector will have businesses at different stages of the life-cycle. A new business needs to find out who the movers and shakers in the sector are and keep an eye on what they are doing.
Failing to control the money
Sales are the life blood of a new business, and any cash coming in needs to be spent wisely to generate more sales. Good businesses have sound credit controls and accounting processes so they know exactly how the ‘actuals’ match the projections in the business plan.
In the end, investors cannot expect a magic formula for success, but that does not mean cutting back on due diligence before parting with that hard-won investment cash.
