If you think your business model is secure, reflect on this

If you think your business model is secure, reflect on this

They are usually young and keen with no financial experience save for a vision of quick and vast riches in their sights. And so it should be, because if there is nothing to power the passion that drives ambition there will be no business. Many of those budding entrepreneurs will succeed through a combination of sheer hard work and luck, but a large number will either reach a plateau of drop back down to earth over a period of months or years.

Several years ago I was approached by one of the aforementioned keen, young and hardworking wannabe businesspeople about an opportunity to purchase the firm she was working for as a sales rep. Her work ethos was beyond question but her understanding of the real business world was sorely lacking due to youth and lack of experience at the coal face.

Not every sales executive is cut out to run a business, nor is every businessman or woman good at selling. Some are simply good dealmakers.

My visitor presented me with the facts and together we examined all the angles including how she was going to fund it. The answer was through an interest- free loan fund I have that supports small businesses plus Daddy, who I believe was to be a shareholder. Daddy is a bit of a wheeler dealer but understood the business model and duly wrote out the cheque.

There were of course pros and cons, the greatest of which was an issue over security of supply for a main component which would be controlled by the seller of the business. Strange but true, as what essentially had been vertically integrated was now being split into retail and manufacturing but using the same name for both. On balance, I counselled that this was too good an opportunity to pass up, given the strong demand and growth potential and she should take the plunge but subject to the caveat over supply arrangements. She was most confident that it would not be a problem as she trusted the seller no to let her down.

The deal went ahead and she worked very hard and successfully ever since going ahead with the deal and last week I received a phone call that she needed to meet me urgently along with her husband. It’s not the first time they have consulted with me in the past five or six years but this meeting was something that took me by surprise. They were coming to ask me to act as their business broker to sell the business.

They had just been informed by their sole supplier of the critical component of their product that he was selling out to a new entrant into the marketplace and therefore their supply was in jeopardy as the new kid on the block had no intention of continuing with the product and would not supply their “new improved” product on the same terms, wiping out my acquaintance’s profit margin.

After clarifying the facts and making sure I understood their predicament fully I did some quick online research, which they had not, and broke the news to them that they were up against some really big boys and that the landscape was about to change dramatically. In fact, I had met one of the investors in the venture about 4 or 5 years ago and a throwaway comment he made back then now made sense.

She was so badly spooked by this that she wanted to put the business up for sale as she anyway had other long term plans. I ruined her day by informing her that it would not be so simple to sell in the knowledge of this fundamental problem that could potentially drive a coach and horses through the business model and perhaps pose an existential threat.

I counselled that as a matter of priority alternative supplies should be sourced and proven to work with existing clientele and subsequently she could commence marketing the business, but the fact still remained that there was a new kid on the block that would probably have an adverse impact on her broader marketing plans as well as the amount achievable in a sale.

Most businesses worry about being reliant on a single client, and in the good old days of St Michael of Marks and Spencer fame there were small firms who made a fortune over the years as a sole supplier, until the “impossible” happened. How many fret over their supply in the same way?

So, what lessons can be learned from this episode?

security of supply is paramount, either contractually and / or via alternative sources
you cannot shut the stable door after the horse has bolted
treat people with respect but be on your guard
don’t panic but take stock of the situation prior to responding
talk to experts or those in the know and get another perspective
always be paranoid and have a plan B at the ready
For the record, I reminded the young lady of my initial comment on having a single supplier and she looked at me sheepishly as she recalled my prescient initial observation.

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