Rising Stars

Our Rising stars - What makes them shine?

It is often said that one of the key ingredients of a successful business is a talented, cohesive team. In sport, a team is usually led by a “captain” or “manager” and in the business world this is usually the owner and entrepreneur.

At the start of a business cycle, the entrepreneur is often the owner, manager and team. It’s how they move from this to running a profitable business, with a number of employees, overcoming the significant challenges in a short space of time, which sets them apart.

It is clear that the most successful businesses are run by people passionate about what they do. They know their market, quickly get their finances in order, are prepared to make big sacrifices and find good people.

A “rising star” may be a second-generation business owner or someone who has acquired or started up their own business. Wherever they are in the business cycle, they will have faced the following key challenges:-

Use the right business structure – Most businesses come in the shape of a limited company. This allows the owner to ring fence risks and bring in friends, family, employees and external funders as shareholders. Alternatively, a Limited Liability Partnership (“LLP”) may suit better.

One key difference between the two is that the division of annual profit is often easier with an LLP as companies have more rigid share classes and share rights. Another is the ability to “roll-up” annual profit within a company and pay income tax only when profits are withdrawn from the business.

Access to finance – at various stages of growth, business owners will think long and hard about whether to take additional share capital and face ownership dilution or take loans. A mixture of the two is often the best. If the business and investor qualifies, tax breaks for the investor under the EIS can give the business significantly more access to funders, including Crowd Funders. The entrepreneur will often be happy with a “smaller slice of a bigger pie”.

Use a mentor – Whatever our stage in life and business, the ability to consult is key. Your mentor maybe someone external, another business owner or your accountant! He/she may have already solved the very problem you are facing.

Recruit, reward and retain talent - In many respects, this is the most difficult aspect. Nowadays, potential employees are not always interested in just high salaries. Work-life balance, benefits and a “4 day week” are just as important . Finding good people is not easy. The business owner will want to have key people around him “the management team” as well as a workforce. He/she will often have a tax-efficient share incentive plan in place for key management as well as a cash bonus plan for the workforce as a whole. In that way, everyone shares in the success. It is important however, for the owner to communicate regularly with his team to get the most out of these plans.

It's never too early to plan for an exit – Our rising star is unlikely to run a “lifestyle” business. Rather, he/she is growing a business, constantly challenging themselves and overcoming many bumps in the road, with a view to a future sale. In an ideal world, you would sell on the way up, with significant growth prospects but optimum timing is not always possible. At the very least, the owner will have a track record of growth (at least 2 years), all their books and contracts in order and the ability to withstand due diligence at any time.

Invest in tax planning – We are in an uncertain phase with a looming October Budget under a new Government. Tax rises or reductions in tax reliefs have been mooted. It may be a good time to look at how the business owner remunerates themselves, to consider the structure of the business and perhaps to accelerate exit plans. That said, a knee jerk reaction is often not the best approach. The focus on profit and value has to be the main priority. As someone said to me, “tax is a penalty for doing well”!