Riding around on a “knackered old pushbike with a second-hand basket on the front” may not have been quite what Mark Salter expected when he founded his halal baby food business For Aisha in 2015. But he happily took to two wonky old wheels after he decided to sell his house, his car and not take a salary for three years to ensure that the business, which makes infant food pouches with natural ingredients, would succeed.
“We wanted to invest as much as we could back into the brand,” he explains. In addition to his personal sacrifices he gave up 49.9% of equity in the firm for a sizable investment soon after launch. But attracting the sort of money he needed meant demonstrating that his fledgling business was built on sound foundations and is clear example of why companies need the right business and legal structures in place from the very start.
“We had taken very early designs of our food pouches to supermarkets as well as research on the size of our potential market and told them ‘if you like it we will get everything done properly’,” Salter recalls. “One supermarket came back and said they wanted to stock us so we had to go away and look for investment. We needed around £150,000 for the food and packaging.“
Salter went to a host of investor meetings – “one a month for six months” – with some looking for equity stakes as high as 80%. But they also wanted reassurance about his business so he had the extra headache of shoring up the company’s foundations. It registered as a limited company, created shareholder agreements and legally binding non-disclosure agreements. It also organised its key financials.
“I had never done a business plan or a P&L in my life. I had no idea what to do but every investor wanted to see one for the first three years,” he says. “They also wanted a cashflow model for ideally two years and we had to look at everything such as sales/costs and expenditure from telephones to staff and marketing. This was also where my decision not to take a salary helped as you can really mess up a cashflow model if you put your own salary in it. We also set up business insurance for the brand and received wildly different quotes from £2,000 to £20,000.”
Getting the basics right allowed For Aisha to become the success it is today. Last year the company sold over a million meals through 2,000 stores, won numerous baby food awards and The Grocer best NPD award 2016. Its products are now available in 19 countries.
Salter’s experience of getting ready for due diligence at such an early stage of the firm’s life has lessons for other UK start-ups. Typically, in the first few days and weeks their immediate focus is on getting their idea from the drawing board to the shop, office or factory. Very few entrepreneurs think beyond the short term to what their company might need and indeed might look like in three or four years’ time.
They need to lay strong business foundations from day one to ensure that when the time comes to attract investors their due diligence reveals a company primed and ready for the next step.
“They need to have the building blocks in place to support and drive the value in the business,” says Lake Falconer, partner, corporate finance at PEM Accountants. These include, as Salter well knows, drafting shareholder agreements “no matter how small the business, such as two men working out of a garage”.
The agreement is between all or some of the shareholders of a company and helps establish how the company is going to be run. It sets out the ownership of shares, shareholders’ rights and obligations, regulates the sale of shares and defines how important decisions are going to be made.
“These agreements can be quite simple and send a positive message that your business is organised and you have structures in place,” says Falconer. “It is also important as it lays the foundations for tying up key people in your organisation by giving them shares and share options.”
One consideration could be to have the shareholding onshore or offshore. Onshore is cheaper regarding expenses and legal and accounting fees but offshore could be an option for online firms or those focused on overseas markets. And there may be some tax benefits and less complex financial reporting to enable you to focus on growth.
On the board
Start-ups should also look at the composition of their board and consider creating an external non-executive position, perhaps someone with experience of your sector and who has mentored or run a start-up before. Salter says he holds regular meetings with a business mentor and stresses that “they are out there if start-ups want to find them”.
Other fundamentals include devising a business plan setting out your strategy. It should cover the first one to three years, explain objectives and what you will do to achieve them. It could contain detailed financial forecasts, product descriptions, market research data and the CVs of key personnel. “Don’t look more than three years ahead,” advises Falconer. “If you go into endless detail for your fourth or fifth years it can undermine managerial credibility.”
A business plan can help a start-up gain banking facilities and loans as well as other early investment. Business and key person insurance should also be considered to enhance medium to long-term stability.
“You need to show an investor that you have a defensible business model so look at intellectual property protection for products,” suggests Falconer. “They are interested in backable teams, decent products and services and sales figures. They want to see that you have built value in the business.”
Salter agrees. “We put the foundations in place but being able to flash an email to an investor from a supermarket eager to stock our products also worked wonders. We have always had faith in what we are and we are growing.”
Perhaps it’s time to invest in a new bicycle basket now.
In 2016 over 650,000 new businesses were started in the UK, up from 608,110 in 2015. Source – Centre for Entrepreneurs.
£4.1billion was invested in UK start-ups in 2016. Source – Beauhurst.
The number of scale-ups – companies with an average growth in employees or turnover greater than 20% per year over three years – rose from 9,979 in 2013 to 11,575 in 2015. Source – Scaleup Institute.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.