Peter Gummer, a companion of the British Institute of Management and chairman of Shandwick UK, plots a path for would-be service entrepreneurs.
Just 23 years ago I started running my first service company - a consultancy subsidiary of a financial institution. In that way I could make all my mistakes with somebody else's money. Six years later I put that experience to work with my own business and made lots of new mistakes I never knew existed. If only somebody had given me some rules for establishing and building a service business. So, for the aspirant entrepreneur who wants to run a service company, here are my 10 commandments.
First, start your own business in a recession. Things can only get better. Money will be cheaper, optimism will grow, customers will be more willing to spend and opportunities will open up. If you start when the economy is booming, then the aspirations of employees, clients and suppliers will be ahead of the trading of the business. Inevitably when the downturn comes you will have a nasty shock.
Second, on that first day of work establish a clear mission, an objective by which all that you do is to be measured. My own company's mission statement included thoughts on quality of service, size of the business and geographical reach.
Third, stick to what you know. Do not be lulled into thinking that because you are good at one aspect of commercial life, you can manage another equally well. I am probably over-sensitive to this rule. I remember, as a young man, working at ICFC (now 3i). I saw many entrepreneurs make their fortunes in a company which they understood, only to lose much of what they made by diversifying.
Fourth, service companies depend for their success on the health of their clients and if those clients are being driven to overseas markets you must consider how to service them and their aspirations or lose them to a larger, international competitor. Decide whether you want to be a niche or international player.
Fifth, if you decide to grow your service company by acquisition, use earn-outs to keep your new staff loyal and motivated. Ensure that they are cash positive, plan succession for the vendor the first day you buy the company and never try to merge service companies. It is highly unlikely that their individual cultures will be able to stand it.
All earn-out payments should be satisfied either in cash or shares at the acquirer's option - not the vendor's. Similarly, caps should be set for each annual payment as well as the final one. If you purchase a company by earn-out, do not forget that you have bought it. It is yours to manage and if you do not make that part of the management agreement it will fail.
Sixth, bear in mind that professionals cannot manage. Engineers, advertising executives, PR men, accountants - if they are good at these jobs - it is unlikely that they will be able to manage anything beyond a small business where they personally control clients and staff alike. If you want to get big, get professional help.