Biz Talk: Structuring Your New Business (Part 1)

Part 1: The Idea and the Money

First in a four-part series on building a business that actually holds up

Whatever you are selling, whether it’s services, goods or your artwork, you need organisation. Wanting or buying ‘a business’ is VERY different to the reality of building one. It’s a mountain of work.

Start with a Who, What, Where, Why, When and How analysis:

• Who am I, who are my potential customers? (Do they match?)
• What am I selling? (Is it well defined?)
• Where? Fixed location, territory, online? Is that realistic?
• Why? Why will anyone buy it?
• When? Have you invented, developed, designed, ordered, taken delivery of your product?
• How? What is the mechanism, marketing, and logistics to sell?

Whatever your dream or motivation, I need you to consider some structural reality. Strap in for the ride, kid.

The Start

It’s the idea, desire or product and it needs to meet someone’s needs, so they buy it. As simple as that sounds, you don’t just ‘start a business’ without it. Beware of well-intentioned ‘groupthink’ where people close to you encourage you because they like you.

Much as I rate myself, I certainly have started some businesses that ended in tears and losses. Two that spring to mind were very successful failures: Australian Monitor built ‘the best power amplifiers in the world’ between 1986 and 1990, while Julius Events College churned out well-trained Diploma graduates between 2001 and 2010.

All the acclaim I gratefully received couldn’t make up for the issues: cost and volume with the amps, and the same for the college. There just wasn’t enough volume and the costs were too high.

The first one lost a cool million; the next one lost 1.5. Ouch. Then there was ENTECH USA, a partnership that cost each of us 250k. All those enterprises had customers, but not enough of them.

The overarching rule of business is never risk more money than you have and be prepared to lose your investment. Because life goes on, and you WILL be richer for the hard lessons and experience.

Most startups are an imitation of something that already exists or another version of an established good, like a pizza shop or a delivery service. Looking at the wider picture, it’s easy enough to try to figure out price and volume for that. If you really have invented something brand new for the world, then wow! Go you!

Capital

That’s money, honey. Starting with numbers on paper (or a beer coaster) rough up what you reckon you need. The cost components are:

• Structure (all the stuff you are reading about up front)
• Marketing (to create demand)
• Inventory (either tools, hire stock or sales stock)
• Working capital

That last one is the sum of available cash you need to get to profitability and to then trade properly once you do. It’s a hard sum to know, so you need to do projections first. Let’s break them down.

The cost of your product depends on volume (the number you can sell in a given timeframe), input cost (the buy price or execution cost per sale), amortisation (the payback of the cost of something you bought to deliver a service, like a piece of hire stock or tools), and running costs. Knowing running costs is essential. These are things like transport, rent, power, phone and insurance.

What you charge depends on volume. You divide the running cost by time, add on the input cost, allow for amortisation over a timeframe (because you’ll need to eventually replace your gear or tools), and arrive at a raw cost.

Onto the raw cost you’ll add margin, which is gross profit. If it’s a straight buy, make and sell item, that needs to be at least 50% on. And you also calculate the GST (tax), adding that 10% on top.

Assuming you got the costs right, that margin then accumulates and you pay yourself a wage. Happy days! Not really. You need to accumulate capital for expansion and rainy days and, eventually, tax on your earnings.

One of my most challenging businesses was the media company, because it was 90% funded from the sale of advertising. In a print magazine this has a paradox because you need enough content, words and pictures, to make the thing attractive to readers (the consumers) such that advertisers (buyers) come on board.

So you have a base cost (content), a production cost (printing), a distribution cost (shipping/ broadcasting) and, if you don’t sell enough adverts, you end up paying MORE for content to fill the space.

When we had a downturn like 9/11 or the Global Financial Crisis, advertisers cancelled, revenue tanked, and costs spiked as we bought more content!

COVID was a disaster by comparison, but sadly VCS Creative had just purchased the media co, which was lucky for us, since we didn’t have the problem that the magazine faced and overcame in time.

At the start of the media era I simply could not know the end costs, so I stuck a thumb in the air and started charging roughly whatever all the other trade magazines cost adverts at. There were literally thousands of trade magazines in print back then.

Nowadays, CX is one of the very few left worldwide, a credit to the current publisher!

Organisation Type

Now you have a product and a price structure, you need to work up the organisation type. Are you to be a sole trader (that is, you alone), a partnership (which requires an agreement), a business name (which is either owned by yourself, the partnership, or a company), or a Proprietary Limited (limited liability) company?

Understand the concept of ‘legal entity’: it sits either on the individual/s (sole trader or partners) or on the company itself as the ‘legal entity’.

If incorporating a company, will you be the sole director and shareholder? These can be different people. If there is a second shareholder, i.e. a partner, then you need a shareholder agreement that covers issues like who contributes what (upfront investment and labour inputs), how the profits are distributed, and what happens if one wants to sell out, or drops dead.

Partnership is a whole different subject: I’ve had some. One ended in court when they used ‘lawfare’ to liquidate the company and buy it back from Deloitte’s. All to avoid paying me out, a nasty end to eight years of trading success, made possible by free legals provided by a spouse. Lesson there: never partner with anyone married to a lawyer!

Back to the company, it has annual fees (about $240) payable to ASIC, so make sure you note your ‘Company Key’ number, and keep a written record of all your structure items.