Starting a business in direct competition with employer

[Tom Keown]

Hi all,

New to the forums so thanks for looking at my post.

I'm currently contemplating starting a business in the exact same market as my current employer.

Obviously I understand it has some morality issues however the business I am currently in is owned by 3 very wealthy directors who have no interest in driving the business forward and are missing out on opportunities and it's frustrating me to sit back and watch.

It is essentially a building material brokering company and i've been in discussions with a major player in the game who own huge market share who have agreed to back me and offer me the cheapest possible prices in order to get me started.

My concerns are i've never run a business before, and although i'm excited, i'm also leaving behind a fairly high paid job, company car etc. I am also concerned regarding cash flow, as the industry runs on circa 20% gross profit margins and after costs i suspect my net margin will be circa 9%, does this seem feasable?

I'm looking to hopefully speak with people who have set up their own business and can advise me the early stages.

I would love the stability of being able to stay in my job and work on this on the side and move on when it grows however it is very very risky, and I suspect would not take long to get back to my current employer so it's either 100% committed or 0%.

I have experience growing businesses as an employee (current business grew from £0 turnover to £1.6m annually in just 2 years) however none as a business owner.

I am trying to convince a fellow employee to come alongside and start this venture with me however he is very risk averse and is worried about the idea of having no income and a family, albeit he would add great value to the business.

This post is certainly not in any chronological order but I would love to hear from those who have maybe been in my shoes or those who can offer words of encouragement or advise, whether it be negative or positive I welcome it all.

Many thanks!

 

[Stedurham]

Hi
Check your contract first I would have a non compete Clause in it stating you can’t deal in same industry and deal with any customers or suppliers you’ve met through or via current employment! Would this stand up in court possibly not but I could tie you up for months making sure you don’t start and cost you big fees with solicitors and lawyers.
Then if you do open and take customers and suppliers that you were dealing with I would take you to court and probably win and shut you down before you start
Be careful check contract

 

[Stedurham]

Cash flow if the suppliers are genuinely going to support you tell them you need 60/90 day account and put customers on 30 days that should give you a good start with cash flow depending on set up costs of your business like office unit storage etc vans

 

[Stedurham]

Why not tell them about your concerns do a business plan and ask for a percentage of business if you hit the increased turnover and profit you think you can achieve, that’s a win win situation

 

[Tom Keown]

Hi
Check your contract first I would have a non compete Clause in it stating you can’t deal in same industry and deal with any customers or suppliers you’ve met through or via current employment! Would this stand up in court possibly not but I could tie you up for months making sure you don’t start and cost you big fees with solicitors and lawyers.
Then if you do open and take customers and suppliers that you were dealing with I would take you to court and probably win and shut you down before you start
Be careful check contract

Great point, and it is one I have looked into however.

My contract states that i cannot do anything within 6 months of termination of my employment. However, I have a very good relationship with my directors and would not be taking any of their current customers, I am after a slightly different customer base than themselves. I do believe if I am honest with my employer we would potentially trade together. If this is not the case, there has to be a way around it, ie not being a director for 6 months and working under the radar?

Cash flow if the suppliers are genuinely going to support you tell them you need 60/90 day account and put customers on 30 days that should give you a good start with cash flow depending on set up costs of your business like office unit storage etc vans

Hi Sted, Thanks for the reply.

My supplier has agreed to offer help and has offered me a credit account on 30 days which is typical of the industry and unlikely to get any more than that. However they can only offer me £5,000 limit until I have a few months trading history. At a 20% margin I need to be moving circa £15-20,000 worth of product a month to cover overheads and a small salary to cover my personal bills. That may sound like a lot of sales, but each sale is circa £500 and it's not uncommon for one order to be £25-30,000 depending on the size of the site.

My concern is taking on a large order and not being able to pay for the goods, thus not being able to supply my customer. I have about £10,000 savings I will be putting into the business but that still leaves me short. My customers are highly likely to be on 30 day credit terms themselves, meaning I can only afford to pay for 1 months worth of goods, without any cash left for month 2.

I have considered funding, a loan etc and it is likely that this is what I will do

 

[Tom Keown]

Why not tell them about your concerns do a business plan and ask for a percentage of business if you hit the increased turnover and profit you think you can achieve, that’s a win win situation

My issue with my current management is they take months to make decisions as their eyes are on other business ventures and not this one. It's the way the business is run that I cannot deal with, the employees are great and the directors are nice guys, just not the best people to work with

 

[Stedurham]

Be suprised if only 6 months I’ve done one year and 2 in past. It would be hard to go under radar and it’s the solicitors letters etc that cost you the money I do know how to get round it I helped write some depends what contract says etc
You need a loan depends on your credit rating I guess for that as it will be personal doubt you would get a business loan
Good luck where are you based?

 

[Stedurham]

Tell them you want to make them
More money that’s what they will want to hear. Ask if you can make decisions for a bit running them by them and once they see turnover and profit increase sure they will listen
Make sure you set targets and if you hit them ask for percentage of business at agreed rate before

 

[Stedurham]

Best bet is do you have excel? There’s profit and loss templates on there. Put your figures in rent rates your wage elec gas etc make sure you include vat as it makes big difference
Then do cash flow one but guessing 10k won’t be anywhere near I’d think you would spend that on unit/office. Then you would realistically need another 50k mon new suppliers tend to take time to set up accounts in their system get approved etc so Ul be nearer 60 days to start with

 

[Tom Keown]

Be suprised if only 6 months I’ve done one year and 2 in past. It would be hard to go under radar and it’s the solicitors letters etc that cost you the money I do know how to get round it I helped write some depends what contract says etc
You need a loan depends on your credit rating I guess for that as it will be personal doubt you would get a business loan
Good luck where are you based?

I'd be keen to PM you and see if you could take a look at the clause in the contract word for word?
Yep, a personal loan is what I had in mind, i've never borrowed money before and my credit rating should be high as i've never missed a payment on anything, so I think £20,000 loan shouldnt be an issue (according to websites i've looked on)

I'm based just outside of London, however I would be focusing on the london market.

Tell them you want to make them
More money that’s what they will want to hear. Ask if you can make decisions for a bit running them by them and once they see turnover and profit increase sure they will listen
Make sure you set targets and if you hit them ask for percentage of business at agreed rate before

It's not the money I want, it's to run a business properly. We have many opportunities that get missed because their eyes aren't on the ball and the business seems to be in a little turmoil with the directors at each others throats.

I'm more about my own future security, building a good team and business and doing the job properly. Money comes last.

 

[Tom Keown]

Best bet is do you have excel? There’s profit and loss templates on there. Put your figures in rent rates your wage elec gas etc make sure you include vat as it makes big difference
Then do cash flow one but guessing 10k won’t be anywhere near I’d think you would spend that on unit/office. Then you would realistically need another 50k mon new suppliers tend to take time to set up accounts in their system get approved etc so Ul be nearer 60 days to start with

I have done all my financials on excel already, it'll originally be operated from home by just me until I hit a certain turnover. So it will be a grueling few months.

I've worked out that I need to be having sales circa £35k per month, which is around 75 sales per month, in order to be in a better position than i am currently and to be able to employ a member of staff to assist. This sounds like a lot but I currently have sales in excess of £120k a month at my current employer. That's my target for year one. My plan is to take out a loan, make sure my suppliers are paid on time to heighten my chances of getting a larger credit account sooner, so i can then operate on credit accounts with cash in the bank for a rainy day fund.

 

[Stedurham]

Firstly. Heck you credit score then if you haven’t had debt normally not a good thing as you haven’t provrd you can repay money if you know what I mean, try clearscore it’s free and will give you an indication. What will the set up costs be ur office computers storage signage racking etc not sure what your business is but guessing you will need it
Also please please do a profit and loss before you go any further you will hit vat threshold quickly. 20 percent profit is this including vat bill? Get a fixed costs monthly worked out first rent rates salary etc

 

[Stedurham]

Seems like you know where your going but check start up costs you will need solicitor for unit 1000 agent fees 1000 rent up front and deposit ? You can quickly go through 10k without getting open. I know your going to start from home but these costs will come and people will want to come and see you I’m guessing
What’s competition like, can’t see them
Just letting you take 35k a month without a fight
Might even be worth getting someone to check it make sure you have calculated vat correctly
Etc

 

[Tom Keown]

Firstly. Heck you credit score then if you haven’t had debt normally not a good thing as you haven’t provrd you can repay money if you know what I mean, try clearscore it’s free and will give you an indication. What will the set up costs be ur office computers storage signage racking etc not sure what your business is but guessing you will need it
Also please please do a profit and loss before you go any further you will hit vat threshold quickly. 20 percent profit is this including vat bill? Get a fixed costs monthly worked out first rent rates salary etc

I've got a mortgage so assume that would be a fair indication regarding lending?

I've done all my setup costs, most of my setup costs are personal items I will take with me, Laptop, car, phone, printer and then additional things i'll need like credit check software, accounting software, web design, logo design, domain hosting, virtual office, SEO, business cards, brochures etc

I plan on registering for VAT on incorporation and I have got my profit/loss done already, worked out my break even point etc.

 

[Tom Keown]

Seems like you know where your going but check start up costs you will need solicitor for unit 1000 agent fees 1000 rent up front and deposit ? You can quickly go through 10k without getting open. I know your going to start from home but these costs will come and people will want to come and see you I’m guessing
What’s competition like, can’t see them
Just letting you take 35k a month without a fight
Might even be worth getting someone to check it make sure you have calculated vat correctly
Etc

My costs have been kept at a minimum and the business can genuinely be run from a mobile phone, laptop and printer as a few startups have done in the past in the industry in different geographical areas. In regards to seeing clients/suppliers i've calculated a virtual office in my costs with a nationwide company and apart of that package allows me to use their facilities all over the country which is where I intend to have meetings etc.

With my VAT i've spoken with a trainee accountant who's advised me regarding input tax and output tax and given me a 5 minute fag packet briefing on it over a coffee but before going live I will go into this in a lot more detail

 

[Stedurham]

Mortage not really brothers got Mortgage but never had any debt could get finance on a car last month although he could pay for it, worth checking into. Good luck I know how competitive the building industry is worth getting these best prices from supplier and trying competitors so how good they really are, I would guess that the big boy that spend millions Will be on a better rate and I e noticed now that I’ve howdens b and w etc all price match to get the work

 

[Stedurham]

Sounds like you’ve got all the boxes ticked and checked sounds like good business especially if it’s what you know. What is is your supplying if you don’t mind me asking

 

[Stedurham]

I’ve got houses that I do up and I try and get best prices from everywhere and go to howdens and b and q give them the quotes and they beat them easy for me all from one pls e and best price with 30 days to pay apart from bathrooms tho

 

[Tom Keown]

Mortage not really brothers got Mortgage but never had any debt could get finance on a car last month although he could pay for it, worth checking into. Good luck I know how competitive the building industry is worth getting these best prices from supplier and trying competitors so how good they really are, I would guess that the big boy that spend millions Will be on a better rate and I e noticed now that I’ve howdens b and w etc all price match to get the work

Noted, will get that on the list of things to be done regarding the finance.

In regards to your competition comment above, there are a lot of competition in the industry however most of the competition chase the larger sites with ongoing work to allow for forward planning and longevity but at much, much smaller margins. However i've found an area where i can make the largest returns, albeit the customer base will need more of my time.

I have relationships with suppliers all over the country, however due to me still being employed i've kept my ideas quiet except for one supplier I trust whole heartedly. Once i'm out of my contract i will be approaching the suppliers I know for price comparisons etc.

I've worked for 2 companies in the industry, one with a turnover of 200 million, one with a turnover of 15 million. The prices they pay different are minimal but the 200 million company i worked for only has a profit margin of 2% because, as i mentioned above, they chase the larger jobs as it gives them a larger profile

 

[Tom Keown]

Sounds like you’ve got all the boxes ticked and checked sounds like good business especially if it’s what you know. What is is your supplying if you don’t mind me asking

I'm very wary of my situation regarding employment so i'll mention it's quarried construction goods but i cannot go further i'm afraid.

I’ve got houses that I do up and I try and get best prices from everywhere and go to howdens and b and q give them the quotes and they beat them easy for me all from one pls e and best price with 30 days to pay apart from bathrooms tho

I did toy with a procurement company as I have supplied builders merchants for 7 years and have very good relationships with all types of merchants and manufacturers etc however it's a flooded market but you would of been the customer base I was looking at.

My end goal is to end in property, however I don;t have the capital to do this now being within commuting distance of london i need a hefty deposit.

 

[Stedurham]

Seems like you have it all sorted know that builders merchants margins horrendous for the big boys.
Go for it can you survive for 6 month without any income tho worst case? Then by time you get set up and first orders invoices delivered any paid your looking nearer 9 month is guess. Please get help from accountant tho I do it all time just gives you that bit confidence that you need if never ran own business get it wrong and your in trouble. I’m looking at buying a fish and chip shop he’s 125k into it and just starting to turn it round and he’s lost well going to lose house. Literally ran out of credit and money it’s now closed

 

[Stedurham]

I would even contemplate property in London or near it you could make 200k or lose everything on one property lol I buy houses up here for what garages or sheds are down there hahs

 

[Stedurham]

Wouldn’t haha

 

[Stedurham]

No probs was just interested, hint I’d make make up just incase you never who’s in here haha

 

[Tom Keown]

Seems like you have it all sorted know that builders merchants margins horrendous for the big boys.
Go for it can you survive for 6 month without any income tho worst case? Then by time you get set up and first orders invoices delivered any paid your looking nearer 9 month is guess. Please get help from accountant tho I do it all time just gives you that bit confidence that you need if never ran own business get it wrong and your in trouble. I’m looking at buying a fish and chip shop he’s 125k into it and just starting to turn it round and he’s lost well going to lose house. Literally ran out of credit and money it’s now closed

I've done my costs two ways, one whilst building the business under employment using just savings, it'll take 6 months with a 20% month on month growth to be in a position to leave and do full time.

And i've also done it as a leave my job, go full blast at it with a 20-30k loan with intent to take wages after 3 months.

I will be using accounting software for now but once i begin to increase turnover i'll bring in an accountant to do my books to ensure everything is compliant.

Sorry to hear about the fish shop lad, great idea just sounds a bit fishy! Excuse the poor pun.

I would even contemplate property in London or near it you could make 200k or lose everything on one property lol I buy houses up here for what garages or sheds are down there hahs

Yep I wouldn't try. I couldn't afford to if i wanted to.

Where abouts are you based? I have contemplated taking out a personal loan and purchasing a property up north to do up but never really gone past the idea stage

 

[Stedurham]

I’m guessing I may be wrong but it’s full time or nothing, you are getting into massive legal issues doing both. As you said they are rich your taking the piss they will tie you up in paperwork for a year and probably win in that case
Not sure 20/30 will be enough itl be from day one I’m guessing 60/90 before you get paid unless you offer incentive to pay invoices early or factor your sales to start to help with cash flow with them margins tho this would be very tight
Going to make it pizza shop like pizzas better always fancied one, wait and see what deal he can do it’s massive shame food was amazing and he was probs a month 6 weeks from turning it round but borrowed all he could even from relatives, wouldn’t like to be his mmm at a family gathering
As for accountant was just to check your figures, softwares only as good as user and doesn’t take much to get it slightly wrong with low margins, send me them if you want il have a quick look take company and details off just figured

 

[Tom Keown]

I’m guessing I may be wrong but it’s full time or nothing, you are getting into massive legal issues doing both. As you said they are rich your taking the piss they will tie you up in paperwork for a year and probably win in that case
Not sure 20/30 will be enough itl be from day one I’m guessing 60/90 before you get paid unless you offer incentive to pay invoices early or factor your sales to start to help with cash flow with them margins tho this would be very tight
Going to make it pizza shop like pizzas better always fancied one, wait and see what deal he can do it’s massive shame food was amazing and he was probs a month 6 weeks from turning it round but borrowed all he could even from relatives, wouldn’t like to be his mmm at a family gathering
As for accountant was just to check your figures, softwares only as good as user and doesn’t take much to get it slightly wrong with low margins, send me them if you want il have a quick look take company and details off just figured

Yep I think you're right regarding the all or nothing but if I can do it alongside my role for 2 months just as a safety net under the radar then I think i'd take the risk.

None of my customers will be on any more than 30 day payment terms and i'd offer a discount on goods paid up front to help with cash flow in the early stages, 2.5% should be enough.

Food outlets are the way forward, best of luck with it!

One of my best mates is a trainee accountant with Nationwide so he's always there for advise should I need it and can normally get my questions answered even if he doesn't know himself, but once we generate a good enough profit i'll happily spend the money in the right places, ie accountant.

 

[Tom Keown]

Year one i'm hoping for a turnover of £298,000, gross profit of £49,000 and net profit of £17,000.
Year two turnover of £429,000, gross profit £72,000 and net profit of £39,000.

My costs are significantly higher in year one when factoring in startup costs etc, both include a full years salary despite not intending on taking a salary for the first 3 months.

It sounds like a lot but based on my growth for other companies, my relationships within the market, my knowledge of the market and my drive I don't think they're unachievable.

 

[Ian J]

My supplier has agreed to offer help and has offered me a credit account on 30 days which is typical of the industry and unlikely to get any more than that. However they can only offer me £5,000 limit until I have a few months trading history. At a 20% margin I need to be moving circa £15-20,000 worth of product a month to cover overheads and a small salary to cover my personal bills. That may sound like a lot of sales, but each sale is circa £500 and it's not uncommon for one order to be £25-30,000 depending on the size of the site.

My concern is taking on a large order and not being able to pay for the goods, thus not being able to supply my customer. I have about £10,000 savings I will be putting into the business but that still leaves me short. My customers are highly likely to be on 30 day credit terms themselves, meaning I can only afford to pay for 1 months worth of goods, without any cash left for month 2.

I have considered funding, a loan etc and it is likely that this is what I will do

There is another possible alternative and that is invoice factoring whereby you receive the bulk of the value of your sales invoices straight away from the factoring company with the balance less their charges coming when your customer has paid. This will enable you to turn your cash around far quicker.

If you haven't come across factoring before have a look at my web page on what is factoring which gives you more details.

 

[Stedurham]

Only issue I can think of is if you want to get into company x for instance have s chat take a day off to go and do meeting, thrn they follow up with calls asking things and your st work might prove akward and you could undue all the good you've done. If your company find out what you are doing your in breach of contract will sack you spread the word what you are doing. Most companies will side with them its wrong, thrn where do you stand? Plus put aside a big chunk in solicitors lawyers possibly even qc fees. It’s risky unless you can get a few customers you trust 100 percent only issue then is the other stay at these business you do t know

 

[Stedurham]

You sound like you can do it and figures you quote no problem, maybe don’t make an arse of it from the start tho and leave and do it 100 percent. Know industry’s I am involved in if you did what you are doing I’d stop you buying product or make it very difficult to get it, also making sure your terms and credit would be really low

 

[Mark T Jones]

I haven't read the whole thread, so apologies if I'm repeating or have misunderstood

Firstly, lockouts - if if there is a lockout it will be in your contract - I've yet to see one of more than 6 months and would say the chances of a longer one being enforced are virtually nil. What often happens after a bit of willy-waving is that the 2 parties sit down and agree a compromise - they will often to go to collaborate.

The fact that you are discussing this will others in or around the business creates a big risk that your employers will find out and make the decision for you, in which case there can be no lock out.

However, they will want to preserve their market share and might well resort to tactics like price-cutting or leaning on suppliers to stop them dealing with you.

Are you involved in storing or delivering goods, or is yours just an administrative function?

In any case if your are invoicing the client you are technically the supplier - I would invest in good contracts. and choose carefully who you work with.

And the biggie - credit control. The sector you are dealing with is notorious for slow/non payment, sharp tricks and litigation. I would invest a lot of time and possibly money into understanding and enforcing this - or sub-contract to a strong professional (professionally strong, not a gangster!) - one who makes things happen rather than some half-baked letter sending exercise

In you position now I would sit down and work on a detailed cashflow, focusing on best and worst case scenarios - this process will certainly highlight some key areas to consider and hopefully address before you launch. Profit is important, cashflow is critical.

Factoring & trade finance can help, albeit at a cost but from experience most factoring companies are pretty poor when it comes to collections @Ian J might know some who aren't.

 

[Paul Norman]

The two big issues here are already identified.

1. The lockout clause in your current contract. That is relevant, and clearly, if you start immediately , you are going to be in breach of it. Potentially your current employers might not be too concerned. I would get that established up front.

2. Cash flow. If you have a £5k credit line, and only 30 days credit, that is going to severely restrict your pace of growth. Imagine, in month one, you take a £5k order, and the customer takes 60 days to pay. This is a very normal scenario. Already, you cannot trade in month 2 because you cannot obtain any stock.

Getting funding for stock for resale is not as easy as people think. You might get a bank overdraft - expensive, but a very normal option. Invoice factoring might help, but could also be a means of delaying the shock a few months, as invoice factors do not bear the risk if a customer never pays.

The best way of understanding the above is to get a proper cash flow forecast drawn up.

I am not in the construction business. But I do, in two of my businesses, buy and sell stuff. And, even though the businesses are well established and profitable, cash flow is still something I have to focus on.

 

[Newchodge]

Be suprised if only 6 months I’ve done one year and 2 in past. It would be hard to go under radar and it’s the solicitors letters etc that cost you the money I do know how to get round it I helped write some depends what contract says etc

Knowing how to get round a restrictive covenant is interesting, even though you don't seem to be aware that a 2 year covenant would be unenforceable as it is far too long, and a 1 year one would probably be too long, depending on the terms.

 

[Stedurham]

Yeah its more of a scare thing to tell the truth, but tied new company up in paperwork etc while we had the dame template letter from solicitor so cost us effectively nothing. You can however enforce the contact with customers and that correct me if I'm wrong but isn't as easy to get around. I know this years ago when I was a gardener for 6 months lol

 

[Ian J]

Invoice factoring might help, but could also be a means of delaying the shock a few months, as invoice factors do not bear the risk if a customer never pays.

Credit insurance is available from most factoring companies

 

[Mr D]

Have you worked out what happens if your customers pay late, get into financial difficulties, become insolvent?
You will be giving credit to people that you may think are able to pay it right up until they send you a letter / email saying the business is insolvent - and then you may, months later, get a little money on what is owed. Or no money even.
Carillion went under, a lot of companies appear to not have insurance covering the risk and they took a hit themselves.

Perhaps to build up some funds and learn how to run a business start a different business first? Not saying you cannot do as you want.

Jumping straight in is scary. At times its necessary but its the business equivilant of learning to swim by having a mate push you into a flooded river.

 

[Ian J]

Have you worked out what happens if your customers pay late, get into financial difficulties, become insolvent?
You will be giving credit to people that you may think are able to pay it right up until they send you a letter / email saying the business is insolvent - and then you may, months later, get a little money on what is owed. Or no money even.
Carillion went under, a lot of companies appear to not have insurance covering the risk and they took a hit themselves.

Perhaps to build up some funds and learn how to run a business start a different business first? Not saying you cannot do as you want.

That's a bit scaremongery. If anyone is concerned about their customers becoming insolvent then they should consider credit insurance - problem solved.

 

[Mr D]

That's a bit scaremongery. If anyone is concerned about their customers becoming insolvent then they should consider credit insurance - problem solved.

Yes hence I mentioned those not having insurance.