Every successful business begins with a simple thought, an inventive idea or identifying a niche in the market which grows into a viable and commercial operation. For those looking to start their own business, it can seem a daunting task with a seemingly endless web of information available. However, seeking appropriate professional advice and assistance early on will simplify the process and allow you to focus on turning your idea into a reality.
Two critical issues to consider during the early stages when launching your start-up business will be what entity or structure the business will operate, and how to fund the business through each stage of its lifecycle. These two considerations will form part of your business plan and the pitch to potential investors.
Why you need a business plan
A business plan allows you to, amongst many things, formalise your idea, identify the opportunities and challenges, and document key milestones. Once completed, the business plan will provide you and potential investors with a roadmap to success. Quality business plans are forward thinking and will allow the business to be agile and adapt to changing economic conditions.
Business plans can vary in detail based on your goal and the lifecycle of your business. For example, if you plan to develop a product and exit after the research and development phase, your business plan may be covering five to ten years as opposed to a service business which may have an indefinite timeline with detailed succession plans.
In the start-up space, there is a need to confidently pitch your vision to potential early-stage investors, and therefore a strong business plan integrated into this pitch can greatly assist in securing initial funding. At the very least, your business plan should include the following information:
- Business description
- Market analysis
- Information on managements experience
- Details on service or product lines
- Cash flow projections
- Expansion strategies
- Marketing concepts
- Funding models
What is the right structure for me?
After formulating a business plan, the next step will be to decide on the most appropriate entity or structure in which to operate your business depending on your situation and requirements.
Broadly, the key points to consider when establishing a structure for your business include:
- Understanding your structure
- How to inject funds into the entity
- The structure's compliance obligations
- Commercial effectiveness
- How to reward participants/access profit
- Eventual exit
The initial decision on your business structure is not a set and forget exercise. As your business evolves potential structing opportunities will arise, and as a result you should be constantly evaluating the effectiveness of the existing structure. Typically, the business structure you commence with is rarely the same when compared to the later part of its lifecycle.
In Australia, businesses are commonly conducted from one (or a combination) of the following entities:
- Sole Trader
In the start-up space where access to government funding and external investment is important, a company or corporate structure would generally be considered a sound choice.
Some of the start-up specific opportunities and challenges in a corporate environment can include:
As your business grows, a combination of legal entities can be utilised to access commercial advantages and gain optimum flexibility in the group structure, depending on the business profile. As a side note, there are several rollover and restructure concessions which may be available (subject to meeting relevant conditions), to defer the capital gains tax and transfer duty implications where a business is looking to restructure.
Funding your business
Access to funding in the early stages of running your business can limit future growth potential of the business, so it is an important consideration when drawing up the business plan.
Generally, there are multiple avenues to access funding for growth, including:
- Equity funding (issuing shares/units)
- Debt funding (bank financing)
- Crowd funding
- Access to government grants
Equity funding broadly involves issuing investors a share of your business. When investors have an ownership interest, they are focused on the success of the business as this will ultimately lead to returns in the form of dividend payments or capital growth (increased valuation of their share interest). The downside to issuing equity is that it can ultimately lead to losing effective control of the business you have built. A key consideration when opting to issue shares in order to raise funds, is that issuing shares is governed by the company's constitution and is supported by the requirements of the Corporations Act 2001.
Debt funding may include interest bearing loans from banks, or through private lenders (which may include interest bearing loans from banks, or through private lenders - which may be a shareholder/director). Debt funding has the advantage of not diluting ownership of the business, ensuring owners can maintain control and make business decisions without the influence of external investors. The downside of debt funding, is ensuring the business has the cash flow to support repayments of the loan with interest, and adhering to potential bank covenants. During the early stage, it may be difficult to obtain bank finance without a history of income to support the cash flow to repay the loan, or personal guarantees from directors/business owners.
Crowd funding is becoming an increasingly popular avenue to access funding other than through angel investor groups, venture capital firms, and private equity groups. An appealing aspect of crowd funding is the ease of access to one of the many online platforms for both the business seeking funds and its investors. Every offer is unique, depending on the offer, crowd funding allows companies the flexibility to access debt funding via a loan, equity funding via an ownership interest, or offer a product at a discount compared to its planned retail price through presales.
Grants and government assistance
Australia has numerous start-up specific grants available to the public. This demonstrates Australia's support of small and emerging businesses. Eligibility for these grants will need to be assessed on a case-by-case basis as each grant has its own specific requirements. Grant schemes issued by the Government are constantly changing, so business owners, together with their accountants and advisors, should always be on the lookout for new grant opportunities.
One such generous Government incentive is the R&D tax incentive. Only a company can access the R&D Tax Incentive, which provides eligible businesses the ability to convert authorised expenditure into an uplifted tax offset. Subject to conditions, businesses with an aggregate turnover of less than $20 million can receive a refundable tax offset on the eligible expenditure, which can be used for further product and business development.
As most start-ups will be seeking external funding, it is important to regularly assess the current and future health of the entity, with potential investors, lenders and government bodies in mind.
Maintaining a current business plan alongside accurate cashflow forecasts and management accounts, is essential when preparing to approach angel investors, private equity groups and crowd funding platforms.
In the current digital age, there are various opportunities to gain access to funding for start-up businesses with an online presence – your only concern is to stand out from the crowd!
Be sure to look out for our follow-up article where we explore crowd funding and the surrounding tax implications further.
How we can help?
This article aims to provide a quick snapshot of some key issues start-up businesses will need to consider. It is by no means a complete list. When embarking on your start-up venture, always seek professional advice specific to your circumstances.
Starting a business may seem overwhelming, however, the team at Moore Australia are well placed to put you on the best path to success.
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