Q&A: Setting up and running a business

Roger Cowdrey and Stephen Pegge quizzed by Paddy and Adam

Your questions answered by business consultant Roger Cowdrey and Stephen Pegge from Lloyds TSB Business Banking.

First, Roger Cowdrey on turning your idea into a business.

What's the very first thing you should do when you think you've got a great idea for a business?

The first thing you should do is try and protect your idea by not telling everyone about it and if possible protecting it through legal means. You also need to ask yourself whether you are the right person to run a business.

Decide whether you are decisive, hardworking and prepared to take risks. Also make sure you want to run a business that includes marketing, selling, operations, finance, personnel etc.

If all this stacks up then you need to do plenty of research to check whether people want what you are about to offer at the price you intend to charge and that it will make money if they do. While you are researching, don't forget to check out the competition.

Once you've got your first major idea and you've set up should you branch out into other areas to build on the success?

Assuming that you have launched a successful product and you want to grow the business then there are two main ways to do this.

One way is to grow by selling the same product into new markets or to enhance the present product and the other is to find new areas to move into. If you are going to do the latter then it is a good idea to move into related areas where you utilise some of the experience you already have. This might be by using the same or similar processes or by delivering something else to your existing clients. The key to successful expansion is careful planning. Don't overstretch yourself either physically or financially.

At what point should you relinquish some control - I might have set the business up but it's grown very large and I can't do everything. Which bits should I keep an eye on?

People at the top of any business should not give up control of any area. However, there will come a time when you cannot physically do all roles properly.

Skills for all parts of the business can be bought in, whether it is finance support, marketing support, human resource support or even sales support. However, you will need to ensure that you bring in people with the right skills and define for them the information you need from them in order to control your business.

All aspects of the business are important, but sadly human resource support is often overlooked until the first industrial tribunal lands on the mat. How do you go about finding out how to set up a manufacturing business abroad?

The Business Link website gives a lot of information on the issues around bringing acquisitions in from Europe or importing from other countries. As far as setting up a business in another country goes, one will need to understand the regulations and laws that pertain to that country.

There is also a need to understand any cultural issues that may affect your ability to trade in another country. You will need to make sure that there are no problems with obtaining raw materials or labour.

Whilst one could start with discussions with embassies, there is no substitute for visiting the country. Whilst reduced labour costs and property costs may seem attractive, it may well prove to be a much more difficult operation to control effectively and remember that there will be additional costs such as shipping. What is more likely is that one may well want to contract manufacturing to a supplier in another country and the internet has made this much easier. However, where possible, a visit is recommended.

Marketing's not my strong point but I need some promotion should I keep it in house or go to an agency?

One of the most common mistakes that people make when running a business is to think that marketing can be turned off and on like a tap.

There are a wealth of agencies and freelance people out there who can give support in this area. If you wish to buy it in then you need to provide a clear brief to the person you are engaging and you should take time to get someone that understands your business, your aspirations and your market.

For a business to be successful it is likely that it has a marketing plan. It is certainly important that the business understands the importance of marketing and the portfolio of marketing materials.

Most marketing is common sense and it is worth getting a book or attending a course on the basics of marketing before purchasing from outside. What you may need is a graphic designer (or as in the old days, someone who can draw) rather than someone to run your marketing department. Whichever route you take keep the control in-house regardless.

At what point should I give up on my idea, I think it's great but I've seen five people so far who don't agree¿should I hang on until someone sees the potential?

The most important thing about any idea is belief in the idea by the person wanting to launch it. If the research done at the initial stage indicates a favourable marketplace and a favourable customer reaction then continue to go for it. No one has a magic formula for the success of any new business and there are countless cases of where people have carried on regardless of adverse comment from some people and have been successful. The time to stop is not when others don't believe in it but when you stop believing in it.

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Here are Stephen Pegge's answers to your queries about running a small firm.

Please can you advise me how to value my small business, Is there a standard formula? If you can't help can you advise me who can?

There is no standard formula, but there are two main approaches to valuing your business.

The first is the value of the physical assets including stock. If you're selling your shares in a limited company, buyers would normally be taking on the liabilities of the business as well, so the amount would be net of that. But if you're trading profitably you should be able to get more than the net book value and certainly more than that for a 'gone' concern, i.e. a virtual fire sale of assets should the business cease trading.

The second approach takes account of income. The key factor in a 'going concern' valuation will be the prospect of future earnings from the existing customer base - in financial terms that future is worth something, and is known as goodwill - the premium over assets, for example number of clients and fee income per client for a professional firm.

But the multiple of earnings (profit before interest and tax) someone will pay will depend on the nature of the business. Different industries and sectors have different growth prospects and different risks. Luxury goods have been booming lately but what would happen in a downturn?

A good starting point is to get advice from your accountant, who will be able to help analyse the financials and make recommendations, including tax advice on disposal.

Ultimately what you can get is driven by supply and demand. You should therefore also consult a 'business transfer agent' - effectively estate agents for the business world - who will be able to give you an insight into the demand for your type of business and so help you estimate what it is worth.

I graduated university last year and wanted to start up my own business. The only trouble was that as a 23 year old student who had only just graduated I have no assets and have run into trouble trying to fund my business. I have been turned down for business loans from the bank due to age, lack of assets etc and also the Princes Trust due to an education and not living in council property.

Do you know of any way that I can get approximately £5,000 so I can embark upon my project as I do not know of any alternative way to get funding.

More and more graduates are starting up and it's quite wrong for you to be turned down purely because of your age, though experience can sometimes be a consideration. The first question here is do you really need £5,000 to start up your business? If you've got no assets to fall back on, it's hard to cope with the uncertainties on the early days and most businesses start with a bit of free money either from savings, family or partners.

Or start slowly. If you're planning to use the money buy £5,000 worth of stock, would you be able to consider buying just a portion of that stock to begin with - bearing in mind you could then sell the first batch and buy more stock with the profit you make on that. Another option is for you to delay starting up the business by a few months and use this time to get a short term job to save up a sum of money that you can then use to kick start the company with its initial financial stake or even start part time.

Do ask the bank for the reasons they can't help. That could be good feedback and if you address the points you'll not only have a better business but may be able to persuade them to lend. A business person with a stake in his or her own company is a strong sign that he's committed to making the venture work.

Banks say yes to three quarters of start up borrowing requests but we also try to offer alternatives even if we can't help; like referring you to an enterprise agency or community development organisation. We may be able to lend jointly with them as a package in the knowledge that you're getting advice too. Try www.nfea.com and www.cdfa.org.uk.

My bank has refused us an account due to the fact we want to import electronics and computers. We are a just-formed company with good credit and no problems. Could you please explain to me why the banks refuse people just because they want to trade overseas (we want to trade with China etc)?

Seems strange that they wouldn't open an account if there's no adverse information - we love new customers and all the main banks have in-house specialists to help with international trade.

The problem could well be that your supplier is seeking some form of security to ensure they get paid once the goods are received.

In banking, this is often done through a system called documentary credits and they are very much the standard way of doing things in dealing with China. The bank basically guarantees payment to the suppliers as long as the shipping and other documents are in order. You know you've got what you've paid for and the supplier is assured of payment.

Effectively the risk to a bank providing a documentary credit is similar to that of making a loan or overdraft against the security of control of the goods. As the business hasn't yet started to trade, perhaps it's because it doesn't have a track record to justify that risk in isolation. So you might need some additional security to offer or the support of a trading partner.

Quite often, for new business, this is achieved by earmarking the cash required to pay for the computers as security.

The opinions expressed are those of Roger and Stephen and not the programme. The answers are not intended to be definitive and should be used for guidance only. Always seek professional advice for your own particular situation.