There are three primary ways to start or begin a business. You can start fresh, purchase an existing business or invest in a franchise. Once you know the field of competition and your target customers, it is time to figure out which entry strategy is best for you. This may be the time to talk with your advisors.
Starting a business from scratch gives you great satisfaction that you did it yourself. Many opportunities and ideas will prompt this entry strategy. Perhaps you have a new invention, a spin-off from an existing service or product, a hobby that becomes commercial, customers ready to buy, unfulfilled needs in the market or part-time work that is starting to become full-time.
The glory of starting a business is in the creation not necessarily the management of the details. Start-up costs are generally lower than buying a business or franchising one. As the creator you are in control. The disadvantages of starting a business include needing to have an understanding of customers, marketing, sales, finance, operations and management to achieve success; not having sufficient funds to keep the business running; possible long hours; high start-up failure rates and a lack of structure (a benefit for some.)
A few years ago, my boys started a fire starter business. They started from scratch and learned or were forced to learn lessons on marketing and sales, finance and accounting and dealing with partners. They didn’t enjoy necessary aspects of business but they each take pride of ownership in the business they started.
Buying an existing business generally gives you a better chance of success as the business has already made it through the startup years – they have already developed the product or service and found people willing to pay for it. After due diligence, you should understand the track record of the business and the opportunities and issues you are buying. This allows you to make decisions that can improve the business and learn from things they have done in the past.
The glory of buying an existing business is having an existing track record to grow from and being up and running when you sign the papers. Previous owners may lend support and advice. Financing may be available tied to the business’ profitability. It probably already has customers and suppliers. The disadvantages of buying a business include generally needing a large investment, change in ownership can cause disruption, costs to facilitate the transfer, you didn’t get to hire your employees, location issues, and inheriting a culture that will require pain to alter.
Some of my clients have purchased their businesses from others who started the business. They worked there as an employee and learned the ropes. When the business was offered for sale, they bought it and are grateful to have had the base of business to grow it from.
Investing in a franchise allows you to purchase the use of trademarks and systems for delivery of products and services. You are required to follow the system and in return you get the franchisor’s help and support which often includes training, marketing and greater purchasing power. You will usually pay an upfront cost or franchise fee and ongoing royalties (a piece of the sales – not your profits). You generally get a proven system to operate the business and do well, but not all franchises are equal and there are no guarantees of success.
The glory of becoming a franchise owner includes a business in a box (setup, training, operations, software, etc.), possible immediate public recognition of the brand, better purchasing prices, financial relationships, systems that are proven, management and employee training and possible start-up financing. The disadvantages of owning a franchise include possible high investment costs, never-ending royalty fees based on your sales (they make money before you do) not your profits, someone is telling you how to run your business, and agreements are often more favorable to the franchisor than the franchisee.
Another client of mine is working on opening their second franchise location. They love the franchise, support, culture and way of doing business the franchise provides.
After thinking it through, there is probably one of the three entry strategies that make the most sense to you. It is now time to talk with your advisors about your thoughts and they can lend their opinions to yours to make an informed decision. They can also help advise you on the next step of selecting a business model or selecting an entity.
This blog allows you to experience the raw, gut wrenching drama of human conflict through accounting in each of its three stages: preparing to do battle, the thrill of victory and the agony of defeat.