Rules for a successful business

[Kay]

This kind of stuff usually bores me senseless, but I really liked this one. There's a lot of sense in it.

So please have a look at Theo Paphitis's rules and come back and discuss them.

http://www.theopaphitis.com/theo-tips.html

I found myself nodding in agreement with all he said. What do you think?

[Clinton]

Fantastic tips, but I was even more impressed with how he's built brand Theo. From the appearances in DD, he's not got this whole new "guru" potential for generating revenue... and even a "teamtheo@ryman" answering his email. @ rymans!

Starting with Rule 1:

One of the reasons I’ve often bought businesses out of receivership is because you can automatically dispense with a lot of overheads. If you buy a business before it goes into receivership, you have to take on all its assets, all its liabilities, all its loss-making and then it’s very difficult to turn it around. You’ve got a lot more room to manoeuvre when you’re buying a company from receivership because all you buy are the assets, the goodwill and the equipment to carry on the business; you don’t take on the liabilities.

That's one activity I've been spectacularly unsuccessful at and it's not for want of trying. In fact, receivers don't even return my phone calls or reply to my emails. I've given up on the grounds that most of those are pre-packs (i.e. fiddles). Some people believe that nobody ever makes money online. I've come to believe that nobody ever buys a business out of receivership

[Kay]

Receivership is an odd business to be in. When I was a trainee chartered accountant (ha ha) I worked on some of these. Obviously I can't say too much but there wasn't much effort put into trying to get the business back on track. Asset stripping is more profitable. I don't have evidence for saying that, but just think about it, especially in the way that Theo mentioned. You don't take on the liabilities.

[Eternal]

Thanks for the link. It seems like a good general list, nothing to specific, but good none the less. Like the man says, common sense isn't always that common, so it's good to see them down in black and white.

Re: Receivership, my sister worked in the audit department at one of the big boys in the uk when she was doing her chartered training, and she says pretty much as you say, the general feeling was that if they were there for receivership it was too late, lets extract as much money as we can from whatever is left.

[Denny]

His common sense rule #6 is the most important rule of all in my opinion. If fact, I've come to believe that common sense is an oxymoron ! I can't tell you how many businesses I've shaken my head at over the years because it was obvious that the owner had no common sense at all ! Years ago, I just assumed that everyone had common sense. Wow, was I wrong ! The problem though is; the person doesn't realize that he/she is lacking common sense with regards to his/her business. I don't think you can teach common sense. So the bottom line is; if you have no common sense, then I think your chances of being successful are very slim. Perhaps there needs to be a "common sense" IQ test.

[Kay]

The rule I identified with most was the one about cash flow. I've seen so many businesses go bust because the owner simply could not get that concept into their thick head. I tried to explain cash flow and got a heap of crap back about how much they'd invested, how profitable it could be, how their turnover was increasing... Aargh! But can you pay your bills? Will you still have an office tomorrow if you get evicted? Will you even have electricity if they cut you off for not paying?

I despair of it. And yet so many people don't understand this very simple concept. You need enough ins to match your outs.

I should have invested in buying shares in a soap box business as I've worn out so many of them over the years trying to explain this very simple thing to people. Why can they not understand it?

[Eternal]

Agreed Kay. The worst sector i had seen for this was the building trade, when companies are doing large contracts with stage payments over a long period, using a lot of agency labour costing a fortune, and the stage payments just don't cover the ongoing expenses. It doesn't matter how profitable it could be in the future if you don't get there.

[golles]

That's one activity I've been spectacularly unsuccessful at and it's not for want of trying. In fact, receivers don't even return my phone calls or reply to my emails. I've given up on the grounds that most of those are pre-packs (i.e. fiddles). Some people believe that nobody ever makes money online. I've come to believe that nobody ever buys a business out of receivership

That's interesting. I thought that receivers/administrators (whatever the correct term is) had a legal obligation to confer with interested parties - I am not sure why I thought this or where I picked it up from, but I was clearly wrong.

I have a friend who once wrote to every insolvency company in the country - listed the criteria of the businesses he was looking to buy and asked them to contact him should relevant companies crop up. He bought two businesses utilising this method. i think it did take him two years though.

[Chabrenas]

But can you pay your bills? Will you still have an office tomorrow if you get evicted? Will you even have electricity if they cut you off for not paying?

Cash flow problems (undercapitalisation) are by far the commonest cause of failure in small businesses. Owners don't do their sums properly. If they factored in the monthly cost of borrowing the amount they need to balance the cash flows, they often would not see any future in the business. And they must use the results of a real attempt to borrow what they need, not an unsubstantiated estimate. At best, they'll probably have to pay a comparatively high rate - but if they cannot find anyone willing to lend, then the effective rate is infinite.

[KenW3]

I see the name Theo Paphitis, and am automatically biased in favor of any wisdom he sees fit to impart to the masses. His business abilities are not in question, as he has a £150 million net worth with a string of successful businesses. I respect his accomplishments and his displays of astute business analysis on Dragons' Den. Why am I starting with all of these compliments, you may ask? To be candid, I didn't post in this thread because I wasn't as impressed with his rules as I expected to be. Do you think my expectations may have been too high, due to prior exposure to this businessman on the television?

Am I the only one here that found these rules just a bit too generic? Are they just a bit too obvious? Is it virtually impossible to apply these from any other perspective than that of a hugely successful entrepreneur such as himself? I want to praise these rules. I do.

Rule 1, Reduce The Risk. Great advice for business. No doubt this is a valid rule. How many readers can apply it? If risk-reward parameters could be accurately assessed all of the time, there would be no risk. If everyone had all the information, and knew the risks and rewards, risk could be discounted and reward could be assured.

Seriously, if I am buying 20 websites and I have assessed risk and reward, then risk is mitigated. For example, let's say I have the experience to know that 10% of every 20 sites purchased will have DD problems I didn't catch and be worthless. Historically, if I know my analysis typically results in revenue that is 10% lower than expected (from those sites that have value), then between site failures and DD problems, I have to cover debt service for all 20 purchases from 18 sites doing 90% of their initial expectations (assuming all have similar metrics). Having this known risk-reward, I can then adjust out any risk, which then permits me to do really fun things, like adjust rates of return on investments and use OPM (other people's money) safely for purchases. Theo Paphitis can accomplish this because of his experience. I know of members here that can do the same, but doesn't this seem just a bit too obvious?

Rule 2, Don't Fool Yourself. Of course self-delusion can exist due to lack of experience with market research. I cannot tell you how many times in my life I've been told I won't succeed or that an idea is silly. Honest opinions. Doesn't it seem as though he is expecting others giving their opinions to feed vanity and always counsel friends that they are great? Maybe Theo doesn't hear this from others? He probably needs to join EP if he wants some decent feedback.

I promise not to disassemble these rules one at a time, so will stop here. To be perfectly honest, I liked them. They are accurate due to lack of specificity. As business people, we apply these rules to the best of each of our abilities. Am I the only one who found these too generic?

Serious question: If we dispensed this type of advice on EP, how many new business-people would be able to apply these? Do these help much beyond being motivational for the possibilities presented?