If you are looking to start a new business, there are three main ways you can do so.
You can start a new business, purchase an existing business, or invest in a franchise operation.
There are good reasons for each choice and each carries its own advantages and risks.
Option #1: Start a New Business
This option permits you the most freedom and the satisfaction of knowing you did it all yourself.
Some opportunities which might prompt this choice are: a new invention, a spin-off of an existing product or service, turning a hobby into a business, awareness of a customer ready to buy your product, unfulfilled market need, expansion of a part-time activity or simply chance.
Advantages of starting a new business:
- For true entrepreneurs, the real goal and major appeal is in the creation of something new, not necessarily in the management aspect, so starting a new business is appealing.
- The high investment costs associated with buying an existing business or obtaining a franchise can be avoided.
- You are in control. As the owner, you call the shots. You run the business you want to. No franchisors to listen to.
Disadvantages of starting a new business:
- You need a good idea, potential customers, and knowledge of marketing, finance and management to succeed.
- There is a high failure rate. (The Small Business Administration reports that 75% fail in a year and 25% of first-year survivors fail in the second year.)
- Most new businesses are privately financed with the owner’s money and often are undercapitalized.
- There is a lack of formalized structure, which is good for some and bad for others. You’ll have to learn to adjust to a need for greater personal drive and motivation to get going and stay active in business.
- It is not unusual for a new business owner to work at least 60 hours, and possibly as many as 80 hours in a week, seven days a week, for the first year or so, which can create stress for yourself and your family.
Option #2: Buy an Existing Business
By buying an existing business you can avoid lead-time required to launch the business, understand expected income and expenses, acquire an existing customer base, and take hold of an established image.
Most successful acquisitions are accomplished by knowledgeable, adequately financed business people. When acquiring a company, it’s important to understand the numerous tax and financial maneuverings available for acquiring and financially restructuring an existing company.
Evidence clearly shows that your chances of success are best when you buy an existing business or franchise resale. With any new business you have two challenges: developing the product or service, and then seeing what, if anything, people are willing to pay you for it.
In spite of a company’s past performance, an existing business or franchise will, at the very least, have a track record from which you will be able to make certain decisions.
Even if the company was not profitable in the past, your strengths may lend themselves perfectly to turning it into a viable venture. Additionally, you have the ability to evaluate what the company did in the past that resulted in the current status of the operation.
Advantages of buying an existing business:
- The business is “up and running” already.
- It is likely to have an existing customer, employee and supplier base.
- There is a tried and tested business formula to emulate, or some sort of a baseline to improve on.
- The previous owners are likely to lend support and goodwill.
- There is generally more chance of success than starting a similar business from scratch.
- Obtaining outside financing may be easier because of an existing track record.
Disadvantages of buying an existing business:
- A large investment is often required.
- The loss of an owner or manager may lead to disruption for the operation.
- Business transfer costs, i.e., solicitors, surveys, accountants etc.
- A large amount of time and travel required to research the opportunities available.
- You may inherit inept employees or employees who are loyal to the previous owner and not to you.
- The present location may be limiting. You may be locked into the existing policies and practices of the business, at least for the foreseeable future.
Option #3: Purchase a Franchise Business
This option allows you to “purchase” a known trademark for delivery of products or services under an established system. You will usually pay a franchise fee, ongoing royalties, and the costs of getting into the franchise.
While it can be comforting to have ongoing support services, collective buying and advertising power and market research, not every franchise is guaranteed to be successful. Many small, less-expensive franchises are under-funded, lack a good training program, and fail to provide the necessary support.
Many of the large, well-known franchises are too costly for many beginning entrepreneurs. This can be an attractive starting point but be sure to check out the franchise thoroughly.
Advantages of owning a franchise
- A ready business package that may include setup, training, operations, and marketing programs.
- Public recognition of franchise logo and product achieved through uniform standards in color, design, taste, clothing, etc. This includes quality control measures imposed and enforced by the parent company.
- Lower costs through collective purchasing powers for suppliers because of the economies of scale.
- Ongoing financial relationship that may include assistance and training in budgeting and financial management for your business.
- Finely tuned operating system where the bugs have been worked out at someone else’s expense.
- Training and guidance, often in the form of an ongoing program for employees and/or managers.
- Financial assistance, such as startup financing packages. Nearly one-third of parent companies offer startup financing to qualified potential franchisees.
Disadvantages of owning a franchise
- The high investment cost (franchise fee, royalties, advertising, etc.) may prevent you from looking at several franchise opportunities.
- Royalty fees appear to be never-ending, often as high as 4% to 6%, and tied to gross revenues (not profits). Royalty fees are a variable operating cost and often become a cash drain on small businesses.
- Lack of control: someone else tells you how to run your business.
- Borrowing money can be difficult (not all franchisors offer financing packages). Banks that have had bad experiences with franchises may be less willing to participate in a franchising arrangement.
- The franchisor’s ability to terminate the franchise agreement may be somewhat arbitrary.
- The franchisor often reserves the right to place new and more restrictive financial commitments on the franchisee at the franchisor’s discretion.
Being a successful entrepreneur, a successful business owner, takes more than a great idea. It takes personal desire, fortitude and stamina! Success also requires you to be thorough in your research, and honest in your decisions.
Knowing yourself, understanding where your talents are (and where they are not!), testing your ideas, and finally using available resources wisely are all key components of creating a successful business.
For more on this topic, please check out my book “Secrets of Small Business Success in the San Francisco Bay Area“.