Sunday Business Post
8 November 2009
Sound advices and wise counsel is vital to ensuring any venture succeeds.
The best business plan answers many questions, what do you want to achieve? What is your unique selling point? Why would customers buy from you? How do you intend to achieve your goals? What are the key milestones.
What are the critical success factors/barriers to achieving your goal? What are you going to do about them? What funding is required to achieve your goal? Which milestones will the first fund-raising achieve.
A Roy Keane famously said “if you fail to plan, you plan to fail”. Business planning is fundamental to success in business. It is the key to getting things done and making things happen. The finished business plan becomes an operating tool that will help you manage your business and work towards success.
It is the first marketing aid that you will use to convince interested third parties – including investors, banks and state agencies – of the potential viability of the business.
Many companies get an adviser to assist with their business plan. It is important the plan doesn’t take on a life of its own and suddenly develop into something that is not truly yours.
Similarly to hw you seek advices from your doctor without letting them decide how you fee, you need to listen to your adviser while retaining ownership and responsibility for the inputs and outputs in your business plan. This point cannot be over-emphasised.
By preparing the business plan you will identify potential problems. This will allow focused consideration of solutions. A business plan is necessary as it supports the following;
- it gives business owners an assessment of the business as well as a roadmap for the future
- it helps a business grow, both organically and through outside funding.
- it provides up-to-date business information to secure financing ranging from an overdraft facility or bank loan to venture capital funding.
The main elements of a business plan are:
- executive summary – an overall view of your business and its potential
- background and description of the business – the rationale behind the business
- management and organisational structure – how your company will be organised and managed
- market research and he marketing plan – a comprehensive analysis of market potential and dynamics
- pricing strategy – the price point chosen will affect the image of the product or service you are offering and what gross profit per product and in total is expected
- channels of distribution – the geographic area and whether it is better to sell directly, through retail outlets or wholesalers
- product/services promotion – advertising person selling and sales promotion
- sales management – out line details of sales team and track record; what selling methods will be employed; what are the sales volume and activity targets; how long is the sales process; what procedures are in place for handling customer complaints
- sales forecasts – a sales forecast on which monthly cashflows and budgets can be based should be prepared
- the operation’s plan – this section should describe the type function of the equipments you are buying so that the reader will have a clear image of you operational environment
- forecast profit and loss accounts and cashflow – projected results for the business demonstrating initial capital required break-even point, potential return on investment and over what period.
Critically, you need to clearly demonstrate the financial viability of the business. If you have incorporated the above elements into your business plan, you have the basis of a good, workable plan which can be reviewed and modified as your business progresses.
This is also an excelled document with which to proceed to the relevant government agencies and funding organisations. Key milestones should be identified setting out what you intend to achieve up to six months, six to 12 months and after 12 months.
Getting the structure right
In the business start-up environment, it is easier and relatively inexpensive to get the corporate and tax structure right at the start. The alternative is to reverse out of an existing structure at a later date, which causes expense and disruption to the business.
It is also generally a wasteful use of an enterprise’s resources and time when both of these are in short supply.
In essence, the most successful businesses are those that are built to grow or sell from the start. An industry of change managers has evolved to alter corporate practices and culture to enable businesses to improve. We recommend focusing on the start, eg the possible exits, expansion opportunities and tax optimisation strategy in order to avoid expense at a later stage.
We believe the three key areas fro start ups are:
- decision to incorporate and procedure for incorporation
- optimising the tax opportunities form intellectual property and patents
- shareholder agreements and protection
Decision to incorporate and procedure for incorporation
A significant feature of an incorporated body is that it has a legal status separate from its owners and is capable of suing and being sued in its own name. An unincorporated body may be a sole proprietorship or a partnership. Incorporated bodies include private limited companies, public limited companies and unlimited companies.
A first step is to conduct a name search with the Companies Registration Office to ensure that the intended name of the company is not already being used or is not too similar to the name of an existing company.
At least one of the directors is required to be resident in a EEA (European Economic Area) which is all of the EU plus Iceland, Norway and Liechtenstein.
Alternatively, the company may hold a bond to the value of €25,394. The bond provides that , in the event of failure by the company to pay a fine imposed in respect of an offence under the Companies Acts or the Taxes Acts, an amount of money up to the values of the bond will be paid by the surety.
When you start up your own business, you are obliged to notify the Revenue commissioners through your local tax office of the establishment of your business and the provision of information required to register your business for the relevant taxes.
When registering for tax, a company must complete a form TR2 to register for all applicable taxes. The tax heads that will normally apply for most companies include corporation tax, Vat, PAYE/PRSI and dividend withholding tax. Corporation tax is charged on the profits of a company, which for these purposes consist of income and capital gains. Capital gains arise on the disposal of capital assets.
The standard rate of corporation tax in Ireland is 12.5 per cent on trading income, 25 per cent on non-trading income, certain trades and capital gains.
Tax exemption for start-up companies
Companies that qualify will be fully exempt form corporation tax on trading profits and chargeable gains on the disposal of assets used for the new trade where the total amount of corporation tax does not exceed €40,000, ie at 12.5 per cent this equates to €320,000 of profits per year.
Where the corporation tax for the period is between €40,000 and €60,000 marginal relief will apply. No relief is available where the corporation tax liability for the period exceeds €60,000.
This relief will apply for three years from the commencement of the new trade.
The following conditions must also be met to qualify for the relief:
- the company must be incorporated on or after October 14, 2008 and have commenced trading in 2009
- the trade must be new and cannot have been carried on previously
- tax relief will apply for three years from the commencement of the new trade
- relief will not be granted to professional services companies.
This relief is awaiting a ministerial commencement order before it is given full legislative effect. New business owners also need to acquaint themselves with the tax rules relating to patents and to research and development.
Vat rates
Vat rates range from zero to 21.5 per cent, depending on the product or services with most being charged at 21.5 per cent. Certain activities involving immovable good (land and buildings together with all fixtures attached) are liable to Vat at 13.5 per cent.
Shareholders’ agreements and protection
A shareholders’ agreement is a simple way of avoiding costly and damaging disagreements when a business has succeeded and value has been created.
Like all good marriages, business partners can have ups and downs. A shareholders agreement clarifies at the start of the relationship the rights and entitlements of each party.
In our experience a relatively small amount of time and expense at the start of the relationship agreeing common practices for the business venture has the potential to save an exponential amount of time further into the business cycle.
In fact, the best shareholder agreements are those that are agreed at the start of a venture with a good healthy debate are signed and are then put in a drawer never to be used, as there is clarity around a number of key aspects of the business and its relationship with the shareholder.
The typical elements of a shareholders’ agreement are:
- salary and remuneration entitlements of key directors/employees and shareholders
- shareholder rights to dividends/return on capital
- dispute resolution procedure
- mechanism for transferring/selling shareholdings
- an outline of decisions that can be taken by the board of directors and those that are reserved for approval by the shareholders.
An outside provider of capital to the business, such as Enterprise Ireland or a venture capitalist, will always require their form of shareholder agreement to be signed. However, once a business plan has been agreed and it is believed the venture is viable it is appropriate for all businesses that have the potential to create value for the shareholders to have a shareholder agreement.
Patrick Burke is a partner with Grant Thornton.
Please click here to dowload our Helping start-ups start up guide