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Start-up Guide

Turning to Investors for Funding

All businesses need capital to get started. Here is how to approach investors for funding.

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One of the hardest things you will do when starting a business is raising money. The cold hard truth is that it is almost impossible to get a business loan. Research shows that as few as 3% of applicants worldwide are successful at securing a business loan.

Small businesses, especially those in the early stages struggle to borrow money from banks or to find private investors. Funding institutions are inundated with applications, so a business has to really stand out from the thousands of other applicants, and the business owner needs a good credit record. Your business plan should also be well structured to appeal to investors. One common reason for rejections is when a business does not suit the funding institution’s mandate. Make sure the organisation you are applying to does fund businesses in your industry.

If you are determined to obtain external funding, there are a few avenues you can explore. Funding institutions include banks, government funds, venture capital companies and private equity investors. Entrepreneurs can also turn to angel investors for help, but most will rely on family and friends for help.

Raising finance is tough, but it is not impossible, provided you are willing to do the legwork.

Venture Capital

Venture capital (VC) companies usually favour early stage companies that show high growth potential. Venture capital is usually associated with a new business or venture, particularly with new technology projects. VC companies however, fund a minimal percentage of businesses who apply for financing.

When approaching a VC company, it is vital to learn as much as possible about the VC’s investment mandate to be sure that your company and business plan fits within its scope. Most VC companies shy away from start-ups in favour of companies that are able to demonstrate revenue for anything from six months to two years. There are very strict criteria that VC companies use, including a viable current business model, aggressive growth strategy, and international expansion opportunities amongst other things.

How they operate:

Venture capitalists raise funds from external institutions with a mandate to put those funds in relatively high-risk, high-return investments. The life of a venture capital fund is usually 10 years, meaning that they have 10 years to find investments, invest in a new venture, exit from the investment and return the capital and profits to the institutions that provided the initial capital for the fund.

Venture capital partnerships take a percentage of the profits and a management fee for their services. Because of the timeframes under which they operate and the returns they are seeking, venture capitalists typically look to invest in companies that have the potential to get really big, really fast.

What they look for:

1. Value creation

Above and beyond everything else, they want to know that the enterprise they are investing in has a realistic chance of being worth substantially more in five years time than when they invest in it. VCs and angels characteristically invest in technology related businesses which can generate the returns they seek.

They recognise that value within a technology business comes from one of three things:

  1. Strong cash flow,
  2. Patented technology
  3. The development of a very large user base.

A business that has more than one of these three elements will be worth even more. Therefore, if you are preparing a business plan to attract venture capital investment, you would be advised to focus on how you plan to create significant value through these three mechanisms: cash flow, patented technology and/or a large user base.

2. Exit options

Venture capitalists and angels need to know that there is some way they can liquidate their investment in approximately five years time. The two most valuable ways to exit an investment are a listing on the stock exchange or the sale of the company, usually to a larger corporation. If you want to make VCs and angels interested in a business, you need to allude to the likelihood of a valuable exit in approximately five years from the time they invest. You cannot be explicit about the exit in the business plan, but you do need to be aware of this and make passing reference to exit possibilities.

3. Technology versus people

The preference for all VCs is to invest in a business with world-class technology managed by world-class people. But if they can’t have both, different VC firms will have different preferences. Some prefer to invest in strong people, believing they will figure out a good product over time; others opt for investing in strong technology, believing they can hire good people to help manage the business.

It is important for an entrepreneur to find out the investment preferences of a VC and to emphasise the right things in the business plan. The way to find out what these are is to look at the VC firm’s portfolio of investments and how those were managed after they first invested in them. Were new people quickly brought on board or was the entrepreneurial team left alone to figure out a product over time?

Banks

Banks are unlikely to finance a start-up or very young firm without collateral due to the high risk involved. They normally prefer to provide expansion capital for a business that has a healthy track record. That being said, banks do provide credit cards, overdrafts and home loan advances which can give you access to finance. Before you apply for any type of funding from banks, make sure you have a good credit history and record. You will also need strong financials that are consistent with your credit history, a verifiable income and profit, and sufficient assets to use as collateral.

Some of the criteria banks use when evaluating a business plan include a comprehensive breakdown of what needs to be financed, the entrepreneur’s own contribution, evidence that the entrepreneur has done extensive research, the barriers to entry and the target market.

How they operate:

If a bank does get involved with a start-up business, they seek enterprises that adopt a tried and tested approach to doing business, such as a franchise. Banks may however be willing to fund certain assets for a start-up business, such as plant and machinery, and they will also be willing to provide capital to a small business that wants to grow.

When developing a business plan for a bank, the three most important things to focus on are:

1. Risk mitigation

Bankers granting a loan to any organisation want to know that they are minimising their risk. They are not looking for the hefty returns demanded by VCs, but they are looking for assurance that the loan they grant will be paid back with the requisite interest. They also seek to make loans where they will have an opportunity to recover the value of the loan with the sale of assets or surety if the company does fail.

2. Cash flow

For a loan to be repaid, a business needs to generate cash flow. Bankers will therefore pay a great deal of attention to the cash flow forecasts of a business. They will ask themselves these questions:

  • Are the assumptions underlying this forecast reasonable?
  • What is the probability of this forecast coming true?
  • What is the worst-case scenario?

3. Familiarity, understandability and verifiability

To feel comfortable providing a loan to a new business, a banker has to recognise and understand the proposed operation of the new business. The more radical or disruptive your ideas, the less likely they are to look favourably on the venture. In a business plan for loan funding use recognisable examples and familiar language to explain what you are doing.

Bankers also like things that can be verified, such as reference to a commitment for a long-term customer contract – if they can see a signed copy of the contract and corroborate it with the customer, all the better for the entrepreneur seeking the capital.

What they look for:

1. Character

Personal character is important. The bank’s experience with you is critical. The judgement of the character of an individual is based on past performance. Personal and business credit histories will be reviewed.

2. Capacity

This is figured on the amount of debt load your business can support. The debt-to-net-worth (debt/net worth) ratio is often used to justify a credit decision. A highly leveraged business with a high debt/net worth ratio is perceived as less creditworthy than a company with low leverage.

Your business plan can make a difference. Suppose it shows that the loan will increase earnings and lead to a swift reduction in the debt/net worth ratio. Your chances of a positive answer would increase. Keep in mind that a good banker is the ultimate realist. Don’t try to snow your banker with numbers.

3. Conditions

Economic conditions have a profound effect on credit decisions. If the bank is persuaded that a depression is coming, it won’t extend credit easily.

4. Collateral

Collateral is a secondary source of loan repayment. They want the loan repaid from operating profits and inventory so you become a bigger, better borrower and depositor. But just in case things go sour, a bit of collateral makes your banker sleep better at night.

5. Credibility

Do you know your business? Can you be counted on to be level-headed? How credible are your plans? A business plan helps you answer the banker’s questions without hesitation, sending your credibility rating soaring.

6. Contingency plan

A contingency plan is a useful financing tool. Bankers like to see that you look ahead. A contingency plan is a short worst-case business plan that examines the options that would be open to the business and how those options would be treated. Decisions made in panic are poor decisions.

Private Equity

Private equity is the umbrella term for a broad range of funds that pool investors’ money together to increase their buying power. Unlike most mutual funds, in which fund shares trade on active public securities exchanges, private equity funds attract investors who are willing to hold shares in privately held, non-traded funds (hence the term private equity).

If you choose to go the private equity route, you have to be prepared for the private investor to become a partner or direct owner of your business. Private equity capital is provided to companies for the development of new products or technologies, strengthening the capital base or for acquisitions.

How they operate:

Equity financing is a method of financing in which a company issues shares of its stock and receives money in return. Depending on how you raise equity capital, you may relinquish anywhere from 25 to 75% of the business.

What they look for:

The approval rate for start-ups is fairly low. Investors usually look for business plans that are well thought through and realistic, as well as the contribution an entrepreneur has made to the business from their own money. If a business cannot afford the repayments for the finance, their application will be rejected. Other reasons include a poor credit history, lack of experience in the specialised field and unrealistic financial projections.

What’s most important for business owners to know about private equity investors is that they are financial investors. Unlike corporations that might buy all or part of a business for strategic operating advantages, financial investors make their decisions based solely upon their projected return on invested money. They may be sensitive to a founder’s wishes, but not sentimental in negotiating final deal terms.

Angel Investors

Angel investors are wealthy individuals who invest their own money into start-ups. Angels come in two varieties, those you know and those you don’t know. Unlike venture capitalists and bankers, many angels are not motivated only by profit.

When seeking angel investors, look to your networks and the people you know. Your network includes professionals like doctors, dentists, lawyers and accountants; business associates who are people you come in contact with during the normal course of your business day.

How they operate:

Angels vary quite significantly, but they are usually willing to accept risk and demand little or no control in return for owning a piece of a business they consider to be valuable some day. There are two categories of angel investors: affiliated and non-affiliated. An affiliated angel is some who has some sort of connection to you or your business. It makes sense to start your investor search by seeking an affiliated angel since they will already be familiar with you or your business.

To look for non-affiliated angels, try these proven methods:

  • Advertising
  • Business brokers
  • Telemarketing
  • Networking
  • Intermediaries (Firms that find angels for entrepreneurial companies.)

Angels tend to find most of their investment opportunities through friends and business associates, so whatever method you use to search for angels, it’s also important to spread the word. Tell your advisors and people you meet at networking events, or anyone who could be a good source of referrals.

What they look for:

Here’s what you need to know to increase your chances of securing angel funding:

  • Not only tech companies get funding, and not all tech companies do either – most entrepreneurs tend to focus on technology, but in truth angels simply look for high-growth businesses in any industry.
  • Get your elevator pitch right – one way of gauging this is to try and fit it into a tweet (140 characters). Make it understandable (would anyone re-tweet it?); many angels do not know that much about the industry they invest in.
  • Avoid targeting advertising as your primary revenue model. At best, advertising must be an additional income.
  • Be selective about your management team – if you’re a technology company, you need technologists as founders. Having skills in-house is preferable to engaging external consultants at market-related rates.
  • Be flexible and approachable – many investors want to be hands-on. If this means relocating to Cape Town to invest in a better relationship, you may have to suck it up.
  • It’s not just about ‘idea meets money’ – you need to form a genuine relationship and regard the investor as a team member. Investors often place more faith in the individual than the idea (although the idea is crucially important); they may back someone through a few failures if they believe in them.
  • Don’t expect unrealistic amounts – look within the range of R1 million to R10 million. Anything less than that and investors will consider the barrier to entry too low. Anything higher and you may need a VC.
  • The business model must accommodate a viable revenue projection for the angel – angels target a return of roughly 10 times their investment within five years, because of the high likelihood of failure (perhaps one in 10 succeeds). It’s an aggressive investment path – ideas must be able to get to prototype quickly and have high growth potential.
  • Don’t hide your ideas until they’re perfect. Act quickly.
  • Don’t annoy investors with unnecessary non-disclosure agreements. Unless something is absolutely unique, like a formula or some other intellectual property, don’t bother. Most investors see many different start-ups in a day, and forcing them to do too much leaves a bad impression. Don’t leave out ideas that are crucial to the venture’s success either, for fear of it being copied. That is prohibitive to getting funding.

Family and Friends

Many businesses obtain funding from more than one source. The most popular source after self-financing is friends and family. The people you have relationships with know what your strengths are, so it is a little easier to ask for help than approaching a bank. However, one thing to keep in mind is when you bring money into a personal relationship, it can harm the relationship if not handled properly. Specifically if the business fails, the issue of paying the money back can be a problem.

The first step in getting financing from friends or family is finding the right person to borrow money from. Once you determine who this is, approach the person initially in an informal situation. Tell them a little about your business, and if they show interest requesting more information set up a more professional meeting with them. You need to present your business plan to them and get the other person as excited as you are about the possibilities of your business.

You must be prepared to accept rejection gracefully, don’t put emotional pressure on the person. If they agree to contribute to your business, you must state how much money you need, what you’ll use it for and how you’ll pay it back. Then you need to draw up the legal papers, which is an agreement stating that the person will put the money into the business. The agreement should also contain the terms of the loan – including what the role of the investor will be in your company.

How to approach friends and family:

Friends and family remain the best shot that many entrepreneurs have to raise outside money to launch a business, here are five tips for approaching friends and family properly.

1. Choose a strategy

Do you want to solicit large chunks of money from a few investors, or small amounts from many?

There’s less pressure associated with small sums.

You’re less likely to ruin a relationship over R100. Many fundraisers target a few dozen people for sums between R400 and R2000 apiece. But typically only 10% to 20% percent people asked will contribute. So if you want to raise, say, R20 000 at R400 per backer, you’ll need to woo 50 people. This means reaching out to 250 to 500 people. Contacting a smaller, more targeted group for larger sums may require more gumption and planning upfront, it could be easier for the time-strapped.

2. Choose an investment type

When you accept money from others, strings will be attached, no matter how you structure the transaction. Consider whether you want to accept and pay back loans, have your friends and family own an equity stake, or offer up a token of thanks e.g. some amount of free access to your product or service in exchange for a gift.

If you take on investors, you may have to give up a portion of your company, and perhaps make one or more board members. Even friends and family will want a return, which can mean eventually selling the company, buying back shares or paying dividends. Loans have to be paid back on schedule, which can have an impact on cash flow and profitability. If you go the micro-funding route, you could be juggling 50 of them.

Even gifts aren’t free of strings. If you do accept them, thank the giver profusely in writing and acknowledge that the money is a gift rather than an investment or promissory note.

3. Write down your pitch

Unless your friends and family are professional investors, they probably don’t want to read a 50-page business plan. More likely, they’ll prefer to sit down with you over coffee and hear you explain your idea. To avoid being too informal, draw up a five to ten page document that sums up what you want to do, how you’ll do it and what you’ll apply the money toward. Such a summary ensures you’ve made important disclosures, such as the key challenges, risks and competition the business faces, and that your backers understand what their money is going toward.

4. Keep your documents and communications business-like

When you’re dealing with people you know well, it’s easy to want to keep agreements informal out of concern that official documents might make things feel less friendly. But don’t be too casual.

5. Manage expectations

Another upside of bringing in friends and family is that they are typically more patient than professional investors. It’s a good idea to send a monthly email update to your backers, even if they’ve given money as a gift. Be honest about what’s going well and what could be better. You might want to raise more money later, and it can be easier if your backers have been able to watch your progress.

If things aren’t going well, friends who have a stake in your success are more likely than others to provide the advice, contacts or referrals you need to turn things around.

Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.

Start-up Guide

Understanding Your Responsibility As An Employer

Now that you have your own employees, here is what you should know about your new responsibilities.

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employee-responsibility

Hiring employees requires more work from you as the employer than simply placing a job ad, hiring the right person and training them on their role.

You need to be aware of the Labour Law requirements in terms of the various funds and other stipulated registrations.

Related: 5 Factors That Make a Great Boss

The law does not differentiate between different size organisations, and therefore it is imperative that SME’s fully understand the implications of all aspects of Labour legislation.

  1. Salary deductions
  2. What is UIF?
  3. What is COIDA?
  4. How Does Maternity Leave Work?
  5. Family Responsibility Leave
  6. Overtime
  7. Employee Pay Slips
  8. Public Holidays
  9. Employee Sick Leave
  10. Staff Working Hours
  11. Skills Development Levies
  12. What is PAYE?
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Start-up Guide

How To Write A Business Plan

A useful guide on how to write a business plan.

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An international study showed that only 42% of small-business owners actually took the time to write a formal business plan, but of those who did, more than 69% said it contributed greatly to their success.

It’s no surprise that most experts and financial institutions advise those thinking of starting their own business to put together a comprehensive business plan first.

Related: Business Plan Format Guide

But before you put pen to paper, there are a few vital exercises you need to go through to ensure your business idea is a viable one.

Step 1: Research

researching-a-businessThe business you plan to start might be in an industry you have some experience in or it might be totally new to you, either way you need to do in-depth research into the industry and market to make sure you fully understand how it operates.

Your research should include:

  • Understanding the dynamics and forces affecting the industry
  • The preferences and characteristics of your target market
  • Insight into how many competitors are already operating and the quality of their product or service
  • Finding out who you could partner with to start the business
  • How your product or service will be created and delivered
  • How it is different from those that already exist, and identifying a profit and operating model for the business.

Some of the sources you can turn to for this information include:

  • The Internet
  • Industry experts and associations
  • Suppliers who play a key role in the industry
  • Existing competitors in the industry
  • Interaction with member of your team.

Step 2: Stress-test your business concept

Many people are infatuated with their new business idea before they have properly evaluated whether it is worth the time and money they need to invest in it.

FREE Business Plan Template Download

An idea should be stress-tested before producing and selling it.

  • Technical feasibility: When considering the technical feasibility you need to know if the technology for your product or service is available or still in development, what possibilities are there that the end user might not want to use your technology and what other technologies could becoming competition in future.
  • Market feasibility: The market feasibility refers to the actual need for what you are selling, how large is the market and how fast it is growing. You need to know who your customer is, what their needs are and the advantages and disadvantages of your product or service over the competition.
  • Financial feasibility: You also need to determine the financial feasibility by determining what the sources of revenue for the business are, what the major costs are for the new business, is there a good profit margin, what capital is required to launch the business, how long the business will take to break-even and you should develop best-case and worst-case scenarios regarding your cash flow. If you are using your business plan to apply for funding, the funder will also want to see that your cash flow will adequately cover your running expenses and enable you to re-pay their loan.
  • Team feasibility: When looking at the team skills you will require to get your business off the ground, you should identify how many people it will take to make your business happen, what cost they will come at and develop a timeline for staffing if your budget does not enable you to hire staff immediately. If you intend to run the business by yourself then determine the skills and expertise you will require (marketing, sales, financial, etc). If you are not equipped with these skills, you should consider bringing a partner on board, outsourcing and/or up-skilling yourself.

Step 3: Refine your business concept

Based on the findings from your research and once you have stress-tested your idea, you may have identified weaknesses or opportunities.

The findings will allow you to refine the business idea so that it fills any gaps in the industry, meets market demands, is different from competitor offerings, leverages relationships with partners and suppliers and is financially sustainable.

Step 4: Writing the business plan

Writing-a-business-plan-in-south-africaWhile a business plan doesn’t automatically guarantee success, it does assist an entrepreneur to avoid many of the common causes of business failure, including undercapitalisation or an inadequate market-share.

Related: Sample Business Plans

While there is no universal business plan template, plans generally include the following sections:

1. Table of Contents

This features the main headings of the business plan and their page numbers for easy reference. Finalise this section last to ensure the numbers are all correct.

2. Executive Summary

The executive summary is a summary of your full business plan. It contains the summary highlights of each section of your.

It should also describe the company, provide details about management and their strengths, the business objectives and why it will be successful, and if the business needs external funding, how much is needed, and how it will be repaid.

The executive summary is written last and should not exceed two pages in length.

3. General Company Description

This is where you give an overview of the company and the business it engages in.

It should include the company’s name, mission statement, goals and objectives, and strengths.

If you have a register company name, trademarks, patents, BEE credentials and/or a VAT number include those details here.

4. The Opportunity Industry & Market

Based on the research you conducted prior to writing the business plan, you will discuss the opportunity you have identified, the ‘gap’ that exists in the market. You’ll need to detail why this gap exists, how you identified it and how you will fill it.

When writing about the industry you must answer questions about:

  • The ‘barriers to entry’ (how easy or difficult it is for future competitors to enter the same market and offer the same product or service as you do)
  • Who the customers are and the influence they have over prices
  • Who the suppliers are and their influence over the prices
  • Who the competitors are and how strong their products or services are and the major changes affecting the industry.

Regarding the market you need to state the total size of the market, what percentage of the market share you will have, and major trends.

5. Business Model

The business model you choose will be a strong determining point of the future the success of your business.

Your business model must include information on what your companies offers in terms of products or services; what makes your offering unique; who you sell them to; and how you make your money.

You need to take into consideration the source of revenue, the major costs incurred in generating revenue, the profitability of the business, the investment required to get the business up and running and the critical success factors for the model to work.

6. Strategy

Discuss how your business will compete in its specific market.

You need to explain the strategic choices you have made including the focus of the business, how you will create a unique and valuable proposition, what is unique about your business and what value there is for customers.

You must also include your plan for how you intend to enter the market and grow your market-share.

7. Team: Management & Organisation

You will provide a breakdown of the people in the business. It should include a list of founders including their qualifications and experience, a description of who will manage the business, and an organisational chart if you have over 10 employees.

8. Marketing Plan

This should provide details on your marketing strategy based on your market research.

The marketing plan should include important marketing decisions about the product or service and the value thereof, a detailed description of the target market, the product or service’s positioning, the pricing strategy, the sales and distribution channels and the promotion strategy.

9. Operational Plan

An explanation of the day-to-day operation of your business. It should include the business’s operating cycle, where the skills and materials will be sourced from, if anything is to be outsourced and how you will manage those relationships, and the cash payment cycle.

10. Financial Plan

The financial plan is an overview of your business’s financial future. You should back up the main features of the financial plan with accurate financial projections.

Related: Important Financial Planning for a Business Owner

The most important information to include in this section includes start-up expenses and capitalisation, a 12-month profit and loss projection, a 12-month cash-flow projection, a projected balance sheet at start-up and the end of years one and three and a break-even calculation.

11. Appendix

This section contains any supporting documentation you think the reader would want to refer to and could include:

  • Brochures and advertising
  • Industry studies
  • Blueprints and plans
  • Maps and photos of locations
  • Articles
  • Lists of equipment
  • Contracts
  • Letters of support from future customers
  • Market research studies
  • Detailed financial calculations and projections.

Related: (Video) Business Plans for Dummies. It’s Easier Than You Think. 

Take Note:

what-to-put-into-a-business-planWhile writing the business plan it helps to be cognisant of the following:

  • Business plans vary from one organisation to the next as well as the reason for the business plan. If you are writing the business plan to submit to a bank or other institution for funding you should contact the institution beforehand to find out what their specific requirements are for business plans. If you aren’t looking for funding your plan will look different and there should be a focus on cash flow.
  • If you are using your business plan as a tool to attract funders, partners or suppliers, the executive summary is the section that will be viewed first. The contents of the summary therefore must make a good impression and clearly demonstrate opportunity and viability.
  • Some entrepreneurs are concerned that those who read it could steal their ideas presented in the business plan. While some experts say this really isn’t something to worry about since it is the execution of an idea that is most important, if you believe your plan contains proprietary intellectual property, you should take steps to protect your ideas by registering trademarks and/or patents.
  • Using visuals like graphs, tables, diagrams and photos will capture readers’ attention. If you are communicating technical or complex ideas use a graph, table or diagram to increase the likelihood that the information will be read and understood.

Common Mistakes:

  • If you are presenting your business plan to third parties, ensure have corrected all spelling and grammatical errors. It is a good idea to give it to someone with strong language skills to edit it for you. Spelling mistakes make a bad impression.
  • There are many people who offer to write business plans on your behalf. This is not the best route to take as the process of putting the plan together will identify areas that need further research and help you determine the viability of the idea. It will help you know your business inside out, which is especially essential when presenting to potential investors.
  • If you don’t have a strong financial background, you can get assistance from someone who has, but be sure to let them explain the different aspects of your business’s financials. They will help you by pointing out key areas like payment terms and cycles, cash flow and any other discrepancies in your plan.
  • One of the most common mistakes people make is in creating unrealistic and over-optimistic projections. You must spend enough time collecting relevant and realistic figures for your financials. As a rule of thumb, experts recommend that start-ups halve their revenue projects and double their expenses.
  • Don’t make the business plan too long. In general it shouldn’t exceed 25 pages as this puts people off reading it. If you have more than 25 pages, cut out unnecessary information and include it in the appendix.

Related: Business Plan Examples to Get You Going

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Start-up Guide

Zoning and Permits

If you are thinking about setting up a business in a residential area you will need to know about zoning.

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Have you considered the legal ins and outs of starting a business in a residential area? You will need to know about zoning.

The Home Office

You want to open a simple consultancy, for example. You start out on your own, as so many entrepreneurs do, at home in your spare room. No inconvenient trading licences to worry about. As you take on some support staff, you hire your first few square meters of office space. Times are good and suddenly your new business is legit and firing on all cylinders.

Clients are happy, word of mouth has taken care of your marketing and you’ve had to take on more staff to cope with the increased workload.

All of a sudden you no longer fit into the modest office space you hired for your fledgling business and you have to think about expanding. But you’ve been paying rent for over two years and it seems such a waste. And now that you think of it, you were considering selling your substantial home and moving into a lock-up-and-go townhouse.

Related: Why You Shouldn’t Quit Your Job To Start A Business

It occurs to you that perhaps you should keep the house (it’s an asset after all) and convert it into business premises. That way you’ll save on rent.

On the surface it all seems to make perfectly good business sense. Except for one thing. Your house is in a residential area and therefore not zoned for business purposes. In order to trade as a business on those premises, you will have to apply for the property to be rezoned – and the time and energy needed to achieve that may make another year’s worth of paying rent not seem so onerous after all.

If you are operating a one-person business, don’t employ staff and don’t have clients calling regularly at your premises, you don’t have to apply for business rezoning. But if you need to put up signage, expect clients, suppliers and staff, and if the property is used solely for business purposes then, in all likelihood, you’re in for a rezoning application.


Choosing a Business Premises: Dealing with Landlords and Leases

If you are searching for a business premises, here is what you need to know about leases and landlords.


The Rezoning Battle

But here’s the catch – applying for a property to be rezoned as a business in no way means that it will automatically happen. As South African cities boom with business growth and congestion becomes an ever-increasing cause of frustration and wasted time, businesses are moving out of the CBD and into what were previously residential areas.

This is a natural phenomenon of urban geography and over time, as residents realise the potential value of selling up their homes to businesses that want to move in, areas are rezoned for business. However, if an area is not yet zoned for business, the residents usually have fairly strong objections to it becoming so.

Businesses generate traffic and parking problems. Local councils typically take the concerns of residents seriously and are reluctant to rezone an area for business on the strength of one application.

Add this to the fact that every local authority has a different set of parameters which guides rezoning decisions – and that each application is taken on its individual merits – and the process becomes extremely complicated.

Ultimately, if you want to avoid the daily horrors of traffic and purchase your own business premises in a residential neighbourhood, your best bet is to set up shop in an area in which other businesses are already established. After all, there is strength in numbers and this greatly improves your chances of getting the area rezoned.

Related: Register A Company In South Africa

To apply for rezoning in an area that is not zoned for business, you have to secure a zoning scheme departure or special consent from the City Council. Getting this can take a while – in some cases up to three months. You may need to advertise your business’s intention to conduct a particular business activity in the local newspapers.

Residents and other stakeholders will have the chance to respond with any complaints, which are heard by a board, before you will be granted or denied the departure. Being granted a departure usually paves the way for successful zoning approval but, once again, there are no guarantees. And all the while, you can’t operate legally as a business in that particular area.

When it comes to the legal side of setting up a business, it pays to do your homework and get professional assistance where appropriate. The cost of mistakes and bad judgement calls in this area can be severe.

Trading licences

Trading licences are governed by the Business Act of 1991, No. 71, which states that certain businesses require licences. These include:

  • Those that sell or supply meals or perishable foodstuffs
  • Those that provide certain types of health facilities or entertainment. These are defined as Turkish baths, saunas or other health baths; massage or infrared treatment; escort services (male and female); games halls that have coin- or token-operated mechanical or electrical devices or three or more snooker or billiard tables; night clubs and discothèques; cinemas and theatres, and “adult premises” as referred to in section 24 of the Films and Publications Act, 1996
  • Those that hawk meals or perishable foodstuffs

Before you open your doors, you had better check whether your business needs a special permit or licence. Certain types of businesses, namely those that sell, hawk or supply meals or perishable foodstuffs and those that provide certain types of health facilities or entertainment, require a licence to trade. In addition, purveyors of liquor need to apply for a liquor licence.

Related: Entrepreneurship Is All About Overcoming Obstacles

To obtain a trading licence for your business, you need to apply to the Licensing Department, which in turn requires reports from the health and fire department and town planning. The latter two departments will check that your business meets health and fire regulations and that your proposed premises are in an area zoned for business.

Useful resources


Related: Why Optimism Isn’t Enough – You Need To Also Accept The Brutal Facts

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