Congratulations! You decided to leave the corporate rat race to start your own business. After a careful analysis of your skills and know-how, you are convinced that you want to be your own boss and have what it takes to succeed.
But do you know where and what to start? The first thing to remember is that there is no surefire formula for starting a business. What works well for some may not be the best choice for you. In the same token, the enterprise that you can turn into a financial success may not augur well for others.
Your road to business ownership can lead to three directions. You can opt to develop your own concept and start a business from scratch. However, if you find this approach too difficult or tedious, you can either buy a franchise or purchase an existing business. Why reinvent the wheel when you can buy your dream business? The choice is yours.
Here are the pros and cons of each road to business ownership.
1. Starting Your Own Business.
Starting an independent business of your own offers several advantages. You are free from contractual obligations required from franchisees, and from any precedents established by the previous business owner. You are able to start on a fresh, clean slate with total control on how the business is shaped and managed. You are free to offer a pioneering and proprietary product that could help you dominate your market. You can start with a bang, or at a slower pace, depending on your resources and entrepreneurial goals. There is no required upfront investment that you must raise; except for the level that you think your business requires to be successfully launched. You can choose the location you want, determine the products and service that you market, and decide whether you need employees or not.
The downside of starting a business from scratch could also be numerous. A new business entails greater risk than buying an established business or franchise. You need to determine whether a need exists for your products or service; and if it does, work to create awareness and branding. The start-up process also necessitates you to do the groundwork process by yourself – from business licenses and permits, establishing relations with suppliers, and establishing a customer base to support operations. Many new start-up businesses, particularly home businesses, find it hard to secure financing given the lack of operating histories and inexperience of the people involved.
A new business will require a longer period of time to show profits, if at all. Entrepreneurs who decide on venturing on their own must be willing to dedicate considerable time and energy to establishing and nurturing the business.
Franchising incorporates the features of both a start-up and an existing operation. The franchise is the right to sell a product or service. When you purchase a franchise you are basically paying for the right to market an already established product or service owned by somebody else (the franchisor). Under your franchise agreement, you (the franchisee) are expected to market the product/service successfully.
This alternative route to business ownership has some distinct advantages. Risk is minimized, since a well-established franchise has a proven business method with established products or services. Franchises like McDonald’s already has well-known name that could easily bring customers to the business and provide a competitive advantage for the franchisee.
Many franchise organizations also provide extensive assistance in terms of marketing, advertising, even managerial support. Oftentimes, management training and follow-up assistance are provided. In many instances, In addition, you can realize cost savings on inventory items, supplies and equipment due to bulk purchase orders made by the franchisor, which in turn is passed on to franchisees. Some franchisors also assist the franchisee in securing financing, while some provide the funding themselves. Franchisees find it easier to convince banks and other lenders to provide loans because franchises are less risky than start-up businesses. Support can also be given in finding the right location, while some provide the layout, display, facilities and business techniques that have already proven successful in previous operations.
Franchising could present problems to the business owner. At the onset, the high franchise fees required to be paid to the franchisor at the start of the franchise agreement may discourage any prospective business owners. Front fees can range from a few thousand dollars to hundreds of thousands of dollars, depending on the franchise. While some franchisors may require high initial fees, the trade-off may be poor support functions once the operations begin.
In addition to the upfront fees, royalty fees are also required on a monthly basis. The royalty fees are monthly payments based on a certain percentage of the franchisee’s income or sales, varying between 1 and 20 percent. Note that you still need to pay royalty fees even if the business is not profitable.
3. Buying An Existing Operation.
Buying an existing business offers several pluses worth noting. For one, it reduces the time and cost associated with establishing a new business. Someone else has gotten the company started, and much of the legwork associated with starting out is already completed. The customer base has already been established, and relationships with suppliers have been created. In some cases, you can even continue the status quo once you take over, particularly if the business is doing well. Some business buyers even employ the former owner either on a part-time or a full-time basis on a limited time to help ease the transition process. In addition to eliminating a competitor, the former business owner can even share with you tips and experiences he or she have had in running the business, thereby shortening your learning curve.
The biggest advantage to buying a firm is that the business already has a proven track record. As a result, you may have an easier time in securing financing. Plus, there is shorter waiting time for a business to become profitable because your existing inventory and receivables can already generate income for you from your first day. A business is also less likely to fail if it has been around for quite some time.
However, you should be aware of some of the common pitfalls in buying an existing operation. For one, the cost may be too high compared to starting a business from scratch as a result of inflated estimates of worth. The business may not be performing as well as expected and there may be inherent operational and logistical problems that may not be apparent until after the sale. Equipment and inventories may be obsolete. Receivables may be stale and uncollectable. Customer relations may not be all that well, and relationships with suppliers might be in bad shape. The distribution system may be falling apart and the physical location of the business may not be ideal. Also, be wary of potential personality conflicts with the employees and managers, who may or may not welcome you as the new owner.
Your road to business ownership can lead to three directions. You can opt to develop your own concept and start a business from scratch. However, if you find this approach too difficult or tedious, you can either buy a franchise or purchase an existing business.
by Steve Ma. Reyna