Article by Jane Tweedy, Business Advisor, Western Sydney Business Centre
Bursting bubbles – the ugly side of being a business advisor
Some days I feel like I’m in the business of bursting business bubbles. I’ve had a few clients over the last few weeks, where I’ve looked at their business proposition at a high level and unfortunately it simply doesn’t stack up. I’m pretty much shooting down their business hopes, but I don’t say that in a bad way, it’s the truth. In the recent cases the numbers had been too roughly estimated, and when you work in real numbers, the businesses were not viable. Some clients are eternally grateful you moved them from that path quickly. Others it can upset them, and I find for them it can take quite some time (even years) before they finally come to the same realisation.
When looking at a new business opportunity, even to expand or diversify your business, you really need to consider the impact that it has – the risk and reward that opportunity will provide for you. This is not just in terms of money, but rather how it fits with your personal and family goals, and what other non-monetary benefits it provides. For instance, I was looking at a new business opportunity for a client who was looking at potentially buying a franchise. The franchise is quite niche (a clear point of difference in a crowded market, which can be a good thing).
Market research and demographics
One of her great questions was will this work in her area? Surveying people, asking questions of your potential target market can be helpful. We can look at things like the demographic shifts that are going on, using a tool like profile.id.com.au and this can give a good representation of the area in terms of ethnicity, income status and household structure. It’s a starting point, and could affect choice of location as she was also looking at a commercial lease.
Commercial lease
When starting a business with a commercial lease, you instantly add a level of cost to your business. Clearly this will be a lot more cost than if you work from home or occasionally rent space. Commercial leases also typically require full financials (like borrowing) and may require a director’s personal guarantee. This personally exposes you to losing your house even if you have a Pty Ltd company.
Where possible test your model before seeking a commercial lease, but in some cases that is not possible. For her, finding a suitable location is proving difficult as the zoning is quite restrictive. There are additional concerns about parking and be aware of any accessibility requirements that may preclude you renting older upstairs space.
Development Approvals (DA)
She had been confused about whether she needed a Development Approval (DA), as one agent said you would and others said no. Heads up, you mostly do need a DA if constructing anything within your premises, but also a usage DA. This is because in the Local Environment Plan (LEP) that each Council works under it will stipulate what is permitted within each zone. More often than not things are ‘Permitted with consent’ rather than ‘Permitted’, meaning an approval is required to get consent.
Insurance
Another reason you need a DA is because your insurance can be invalidated if your building or operation required a DA. A DA is always required if a zoning says your requirement is permitted with consent. Without consent you run an illegal activity and therefore run the risk that your insurance will refuse to pay out (a common policy exclusion).
Local Environment Plan (LEP)
Most of the LEPs have restrictions on what you can do in your area. A lot of this is derived from minimising the business making too disruptive an impact on your neighbours.
Pricing and Cashflow
The main issue in both recent cases was about the pricing. When looking at the planned cost per client, per service, neither business covered costs. You need to include the fixed ongoing overheads, the start-up costs (including things like equipment, franchise fee and premises fit out costs), and the variable costs plus labour.
Staffing and training
To put the nail in the coffin, the niche franchise business needs to train staff in the niche methodology. The cost and time to do this was quite high. Many people don’t have the time, the money or the willingness to pay themselves, and the franchisee wouldn’t know until they’d gone through the training program whether or not they would be suited for the role. To top it off, this industry has difficulty getting staff at the moment.
So all in all not looking too good after talking to me. It is hard sometimes to feel like you’re crushing someone’s dream, but better to crush an unrealistic dream, than have them lose their business and even their house. If you’d like an independent reality check please get a Business Connect advisor in to assess your business or business idea and see whether or not your idea is viable. We’d love to see you at the planning stage rather than ‘how can we get out of this contract’ or ‘how can we recover some of the money?’ stage.
Business Connect
Business Connect is here to help you assess and diagnose the state of your business. Arrange to see your local Business Connect Advisors by contacting Western Sydney Business Centre.
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