Early-stage businesses face a number of hurdles when trying to establish themselves. Our Corporate and Commercial team work across a range of sectors providing guidance to growing and well-established business clients. Below, we take a look at some of the most common challenges early-stage businesses have to overcome.
Choosing the Right Business Structure
Selecting the appropriate business structure is a pivotal decision. Depending on your business type and risk factors, you’ll typically consider forming a limited company or, less commonly, a Limited Liability Partnership (LLP).
- Limited Companies: These entities offer a significant advantage as they are separate legal entities, shielding owners from personal liability for debts and obligations.
- LLPs: Similarly, LLPs are separate legal entities, providing members with limited liability protection. They operate based on a partnership agreement, outlining ownership, decision-making, profit distribution, and member exit strategies. LLPs are better suited for service-oriented businesses where individuals are the primary assets, such as professional services.
Conversely, operating as a sole trader or in a partnership exposes personal assets to potential risks. Although limited companies and LLPs require some level of public disclosure through Companies House, the benefits typically outweigh this drawback.
Advice on Securing Financing as an early-stage business
Early-stage businesses seeking growth inevitably face the challenge of securing financing. Consider the following avenues:
- Regional Business Support: Explore opportunities available through regional business support programs, which can be complex but worthwhile.
- Debt Financing: This entails servicing costs and may be challenging for early-stage businesses lacking substantial assets.
- Equity Financing: Options include business angels, venture capital, or private equity, where investors assume more risk in exchange for less collateral. While this path may involve relinquishing some equity, it can be the route to rapid growth.
Regardless of your financing approach, focus on:
- Maintaining an up-to-date business plan.
- Producing regular management accounts.
- Maintaining a rolling cash flow forecast.
- Safeguarding key business assets, whether they are people, intellectual property, or customers.
Our advice is to implement these practices whether you are fundraising or planning organic growth.
Business Plans and Management Accounts
The age-old adage, “If you fail to plan, you are planning to fail,” rings true for any business. Successful businesses have a well-thought-out plan encompassing finance, marketing, and strategy, supported by management accounts and reports to monitor business health. This plan may require periodic revision, but the key is to maintain these essential disciplines. No business is too new or small to benefit from this approach. It not only aids fundraising but also helps manage cash flow effectively.
Early-stage businesses should also be advised about the risks of overtrading. Expanding sales often entail increased expenditures on materials, labour, stock, and energy. Without the ability to raise and collect debts promptly, you may encounter a cash flow crisis unexpectedly. Sometimes, slower, more consistent growth that can be meticulously planned is a safer option compared to explosive growth that leaves the business in a reactive position.
Trading, Contracts, and Customer Relations
When starting a business, owners often fall into the trap of relying on strong relationships, goodwill, and verbal agreements when arranging business deals. However, a lack of clear terms can lead to costly disputes with both customers and suppliers, ultimately harming the brand’s reputation. To avoid these pitfalls, it’s crucial to accurately document key contracts, specifying details such as delivery, pricing, service levels, and timescales within commercial agreements.
As a best practice, it’s advisable for all parties to sign terms and conditions (T&C’s) at the outset of any business arrangement. However, for some businesses, this may not be practical. In such cases, standard form T&C’s should be prominently displayed at the point of sale, or for e-commerce operations, they should be accepted by customers via a tick box. Regularly reviewing and updating T&C’s is essential to ensure their continued relevance.
For early-stage businesses that rely on key customers or suppliers, our advice is to proactively establish longer-term agreements to secure these relationships. Regardless of the type of contract, it’s important to include clear payment terms and exercise caution when extending credit terms. If customers are not paying promptly, there’s likely a reason, and it’s essential to address the issue without delay. Remember, your business is not intended to finance your customers.
Protecting Your Brand and Intellectual Property
Intangible assets and intellectual property (IP) often constitute significant business assets, making it essential to safeguard and enhance their value. IP can be protected through trademarks, patents, design rights, and copyrights, while trade secrets benefit from non-disclosure and confidentiality agreements. At a minimum, businesses should trademark their trading names to protect their goodwill. Protected IP rights not only add value but are also a critical consideration for potential buyers.
Understanding which aspects of your business should be protected and making strategic decisions to maximise their value is key. A well-managed IP portfolio strengthens a business’s competitive position and can be a valuable asset.
Retaining Key Employees
Employees are at the heart of any business, but retaining talented personnel can be challenging in today’s economy. The need to recruit new management can divert resources from business growth, costing both time and money.
Consider implementing tax-efficient, long-term incentive plans to attract, retain, and incentivise talent. Options such as share options, which provide employees with the opportunity to acquire equity in the business, have been proven to boost productivity by giving employees a financial stake in the company’s success.
By taking care of your employees, you foster a reciprocal commitment where they, in turn, take care of your business.
Contact The DTM Team for further advice on early-stage businesses
DTM Legal’s Corporate and Commercial team provide experience, legal expertise and commercial acumen to their client consultations. Contact Phil Whitehurst to discuss our practical approach to your business needs by calling 0151 230 1224 or email philip.whitehurst@dtmlegal.com.
