This article on is on getting into business and ideas on whether it is better to start a business, buy a business, or acquire a franchise business opportunity. My article on finding profitable business opportunities goes into much more depth.
Start a business from the ground up.
It’s often thought the highest risk way to get your own business is to start a business from the ground up. This is because the business and ideas about starting from scratch have the highest failure rate. Much of this is due to poor planning, underfunding, and a lack of experience. There are many ways to deal with each of those issues though.
Given that you are reading these articles you seriously want to start a business right. You will be committed to proper planning and preparation which significantly improve your chances.
You can read my article on funding your business startup to get some creative ideas on how to pursue proper funding without becoming a debt slave. This will also increase your chances of success.
If you lack experience you should come to grips with that early. You can either take time to gain the proper experience, add the experience in partners or employees, or surround yourself with quality advisors or mentors. Some combination of those alternatives is usually best.
Starting a business and ideas you have for success put you on the offensive which is a great place to be. You will be able to shape and design the business from the very beginning. You won’t carry the large debt of a business purchase nor will you be subject to franchise fees or pricing restrictions.
Best of all you will have the full freedom to direct your business start up as you see fit to adjust to changing economies and markets. This has always been the strength of small business. When you are tied to large debt on a purchase, an existing culture of a business, or franchise restrictions you will have very limited options.
On the downside, I often see the new business and ideas for the start up not making provision for that inevitable one big mistake that happens during the first two years. To their credit and due to their experience, an existing business or franchise will have eliminated many of the big mistakes one can make. There is a real benefit to that experience.
The landscape of financing, the markets and the economy are putting even that edge in question now though. Many of the issues facing business today have not been faced in the past. To some extent these level the playing field. A good small business can take advantage of such opportunities.
Buy a business that already exists.
Many experts agree that the safest way to get into business for yourself is to buy rather than start a business from scratch. That’s both true and false.
It’s true in that a business start up tends to have a high failure rate. However, remember that most new businesses are poorly planned and prepared for. Make sure your business and ideas are well thought out.
You give yourself a better than average chance of success when you go through a proper planning process and surround yourself with capable advisors. You should do that whether you buy or start from scratch.
It’s false to the extent that you decide to start small, perhaps even part-time and work your way up. You need to start a business that lends itself to this model. If you do, then this can work well as you avoid paying the potentially large upfront purchase price.
Few can afford to pay cash for a business and thus take on debt to start. Debt is never a good thing. That bears repeating – debt is NEVER a good thing.
Debt means that even after covering all your costs of operations you still have to make payments on that debt before paying yourself. This increases your risk and the possibility that a downturn in your markets puts you out of business.
Always remember that debt cuts your options down significantly and will make you a slave to your lender. You wanted to leave the world of the wage slave … great idea … but don’t enter into the world of the debt slave. It’s not any better, it’s worse.
In the right situation, buying an existing owner’s business and ideas can make a lot of sense. A well established small business in a good market, purchased at a fair price, can be a good way to go. Don’t buy potential alone. The business must have proven results. To determine whether a business is a fair deal for you will require a review of its financial records.
I typically like to see five years tax returns and do an interview of the management team. Your best bet is to have a business valuation done by a qualified professional, a Certified Valuation Analyst (CVA).
Before incurring that cost you or you and your CPA could review the financial information to see if there is even a likelihood that it may work before engaging a valuation professional. Small businesses that have been around five or more years have a low failure rate. Economic conditions can throw a wrench into that though. Be sure to take into account how the business will do in any given economic situation or crisis.
Some last thoughts on buying a business. To buy another owner’s business and ideas puts you on the defensive, which isn’t always a great thing. You will find that you acquired your seller’s customers, employees, and culture. Why is that so bad?
You will have to rid yourself of the bad, nonprofitable, or late paying customers. You will have to rid yourself of bad, low character, and under performing employees. And you will need to change the culture of the business from the prior owner’s to one with your unique imprint. My experience is that this can take three or more years and it’s not a lot of fun.
The many times I’ve gone down this road I really questioned whether it would have been easier to start a business from scratch. When you evaluate the business try to evaluate how many bad customers and employees you see and what kind of culture exists. The financial numbers aren’t enough, you will be running this business and it will take your time to change it.
Selecting a franchise business opportunity.
A franchise business opportunity can be good alternative. They give you the benefit of a well thought out, tried and true business and ideas. They also have a great marketing plan and presence in place. So why doesn’t everyone go this route?
The first problem is that most franchises I see people get involved in are retail oriented. This means you are very married to your business. If you’re not there you don’t make any money. Retail businesses can be alright but there are often better alternatives for some. You can learn more about your alternatives in my article on finding a profitable business and ideas for success.
The second problem is that you must play by the franchiser’s rules as it’s not entirely your business and ideas at work. However, it is true that they help you to avoid the really big mistakes, but in a changing economy and in a changing market this limitation can make it difficult to adjust quickly. If you develop a better idea or new innovation you likely won’t be pursuing it.
It’s like you own your business and you don’t. Having owned a franchise in the past I found this limitation very difficult to live with and eventually sold to someone else.
The third problem, and the worst, is that you will need to normally pay an upfront fee to acquire the franchise and some sort of ongoing fees while you own the business. These are called royalties and they cut significantly into your bottom line.
It is best if the franchise you own limits those royalties to just a few years. Many require you to pay them for as long as you own the business. You should avoid that type of franchise, if possible.
Some of the reasons for avoiding the franchise fees relate to your ability to create wealth. Many small businesses make a net income of say 10%. If your franchise fees are 5% per year you have given up half of your profits to use their name and marketing. Is it worth it? Sometimes it can be, but be very careful in your analysis.
An issue often ignored by people going into a franchise is that this profit you give up each year impacts the value of your business.
Many businesses are sold and valued at a multiple of their net income. If you give away half of your net income in franchise fees you also give up half of any potential value you would have created. This substantially limits your ability to create wealth, one of the reasons you decided to start a business.
When you start a business consider all factors including potential future value by doing an in depth analysis. Your business and ideas about the wealth you will create should include more than just the annual cash flow. It has to also include the sale value of the business.
For in depth information and ideas:
For a more in depth look at these issues please read my article on finding profitable business opportunities.