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In the third part of our series, Fort William businessman Angus MacDonald offers advice on starting your own company, and why it is quite possible to build a valuable business in the West Highlands.
What makes a valuable company
There are three sorts of businesses: a lifestyle business that will hopefully allow you to bring your family up, go on holiday and have a comfortable life, perhaps owning a pub or shop, or working as a plumber or joiner; traders who exist by buying something cheaply and selling it at a high price, living on the profit of their last deal; and the third, which is what I want to focus on in this column, is the dream company. It grows steadily over several years, employs many people on good salaries and spreads wealth throughout an area. This high-quality business benefits almost everyone who has any contact with it.
The viability of the Scottish economy depends on these dream companies. They are the engine of our tax base. Ideally they are locally owned, too, so that the profits don’t disappear abroad but are reinvested here, with the company a keen supporter of local causes — the highland games, shinty team, etc.
In my view the dream company has a steadily increasing revenue line over many years, with rising profits and good cash generation. Of course it is not easy to achieve this, but there are a number of business principles that can help you get there.
Build a brand. This involves an unwavering focus on quality: if you build houses that are shoddy then the word gets out, your houses sell for low prices and your income falls. Quality and brand go hand in hand. If you buy an Audi, JCB or Oban whisky, you are getting quality and paying up for it. The owner of a respected brand makes more money, for example, Heinz charges a 50 per cent premium to the supermarket’s brand of baked beans.
Repeat revenue. You need your customers to keep coming back, it is much more profitable to sell to existing happy customers than to attract new ones. If your £500,000 a year turnover company keeps its existing customers and adds 30 per cent more annual revenue from extra services or new clients each year for a decade, then your revenue would be £7 million. A maintenance contract, paid by direct debit each month, ideally in advance of the service being provided, would be the dream.
Build a moat. You need to stop other companies from wanting to invade your territory.
You can stop them competing with you by being the lowest cost possible, protecting your product with a patent, or by being the provider of such fantastic service why would customers possibly go elsewhere. Sage accounting software is a classic example of a company that seems to have an impregnable moat.
Spread your risk. Every company has a few invaluable employees, treasure them, take out keyman insurance – you can’t afford to lose them. Also don’t have all your eggs in one basket: try not to have more than 10 per cent of your revenue from any one customer. They may switch to a competitor or change focus and not need your product anymore. Ensure you have back up for your supply chain. During this virus period many companies have struggled to get key components while in lockdown.
Lastly, ensure your business is really well run, has a tight grip on finances, a good board of directors, a clear mission and an ethical business ethos.
Let us imagine a fictional company, Wheelchair Maintenance Ltd, started by Ewan and Maggie Cameron, both mountain biking fanatics from Kinlochleven. They fix a wheelchair for a family friend, then for other people in their garage. Within six months they have rented cheap space in the former smelter building and are doing weekly runs to care homes to pick up, repair and service wheelchair and powerchairs.Three years later they have won the contract for the NHS work in Argyll, and have service engineers that travel to hospitals and care homes. After 10 years they have outstations across Scotland to look after the NHS and private care sector nationally. They have started making new wheelchairs, much better than those currently available. This sounds like a dream business.
There would be corporations from all over the world wanting to buy Wheelchair Maintenance Ltd. It would sell for more than 10 times profit, whereas a trading company or lifestyle business would be difficult to sell at all.
Next week: Sales and selling.