5.06 – Founding a Larger Company
When starting a business that requires substantial initial investment and involves managing significant risks, such as customers owing money, it’s crucial to consider the appropriate legal structure. This lesson explores the advantages and disadvantages of forming a limited company or buying an existing business.
Opting For A Limited Company
A limited company offers a distinct legal identity, separate from its owners, with liability limited to the amount of share capital contributed.
Key Features
- Formation Requirements: Two shareholders, one of whom must be a director, can form a limited company. A company secretary is also required, who can be a shareholder, director, or an external professional such as an accountant or lawyer.
- Buying a Company: You can purchase a company “off the shelf” from a registration agent and then adapt it to suit your needs by changing the name, shareholders, and articles of association. Alternatively, you can form a new company.
- Limited Liability: Shareholders are not personally liable for the company’s debts beyond the value of their shares, unless the company has been trading fraudulently.
- Raising Capital: The ability to raise capital by selling shares is a significant advantage.
- Legal Requirements: Limited companies must file audited accounts for public inspection if they meet certain criteria, such as turnover greater than £10.1 million, assets over £5.1 million, or more than 50 employees.
For detailed information on company registration and filing, visit the UK Government’s Companies House website.
Buying an Existing Business
Buying an existing business is ideal for those with general management experience but lacking specific technical or product knowledge. It offers several benefits:
- Experience and Expertise: Acquire valuable experience and expertise without making the same mistakes yourself.
- Customer Base and Credibility: Gain access to established customers and the credibility of a trading history, saving time and effort in building relationships.
- Immediate Income: If the business is already profitable, you can draw a salary from the outset.
However, there are drawbacks:
- Existing Problems: You might inherit unresolved issues and mistakes from the previous owner.
- Time-Consuming Process: Identifying the right business and negotiating a purchase can be lengthy and uncertain.
- Professional Fees: The associated professional fees can be significant, especially for smaller businesses, where they might constitute a large percentage of the total investment cost.
Websites like Businesses For Sale, Christie & Co, and Daltons provide extensive listings of businesses available for purchase.
Valuing a business to buy
To value a business, consider the performance of similar businesses. The price/earnings (P/E) ratio of publicly traded companies, found in their accounts or financial sections of newspapers, can serve as a benchmark.
Example: If a business earns £100,000 profit and has 1,000 shares, the earnings per share (EPS) is £100. If the share price is £10, the P/E ratio is 10 (100 ÷ 10). For small private firms, discount the P/E ratio by a third to account for their smaller size and lower liquidity.
Considering a social enterprise
Not all entrepreneurs prioritize profit. Social enterprises focus on achieving sustainable social change or trading with a social or environmental purpose. Approximately 471,000 social entrepreneurs in the UK run businesses aiming to make a positive impact. Resources like Social Enterprise UK and the School for Social Entrepreneurs provide support and guidance for starting a social enterprise.
Example: Cemal Ezel founded Old Spike Roastery and Change Please to employ and train homeless people as baristas, providing jobs, housing assistance, and emotional support. His ventures have garnered numerous awards and recognition for their social impact.
Encouraging Intrapreneurship
Intrapreneurship involves fostering entrepreneurial thinking within a larger company. Employees are encouraged to innovate and develop new business ideas, benefiting both the individual and the company.
Example: The development of Post-it Notes at 3M originated from an accidental invention by scientists who thought like intrapreneurs. Similarly, Intel’s New Business Initiatives Group saw over 400 new business ideas pitched by employees, with several receiving funding.
Companies can encourage intrapreneurship through programs like Kickbox, which guides employees through validating, market-testing, and implementing their business ideas.
Additional Considerations
- Due Diligence: Thoroughly research potential businesses, including financial records and market conditions.
- Legal and Financial Advice: Consult professionals to understand the implications of your business decisions.
- Support and Training: Ensure access to adequate support and training, especially when forming a limited company or buying an existing business.
- Flexibility and Commitment: Be prepared for the level of commitment required and ensure the chosen structure offers the necessary flexibility.
