There are various options for entering a business of your own. The most common entry options are:
- Starting a New Business on Your Own
- Finding a Business For Sale
- Buying an existing business
- Purchasing a franchise business
- Joint ventures, distributorships or strategic alliances
Starting your own business can be a very exciting endeavor. It allows you great freedom and opportunity to explore and develop your own business idea. You must decide what kind of business you want to start. It is also important to examine yourself and decide what you want from the business. Keep in mind that starting a business requires careful thought and planning. Many aspects of the business must be considered including legal issues, financing, marketing concerns, employee relations, accounting procedures, equipment purchases, and location. Research, preparation, organization, and planning are critical in a start-up venture to minimize risk and enhance your chance for success.
You might ask, “How do I know what kind of business to start?” or “How are businesses formed?” Business ideas emerge in many ways. Examples are:
- Finding and meeting an unfulfilled market need
- Building a business on an existing customer relationship
- Spinning off a business based on your experience and knowledge
- Capitalizing on a new invention or technology
- Growing a part-time business or hobby into a full time opportunity
Consider the following approach:
· Research your business idea (doing a business plan is a good place to begin)
· Develop a strategy
· Determine your marketing approach
· Address key operational issues
· Make your own decisions, but get advise from appropriate professionals
Successfully starting your own business can provide a sense of accomplishment and satisfaction in knowing you did it yourself. However, if the business fails, you must assume all the liabilities and emotional strain that goes with it. There are many misconceptions surrounding owning one’s own business. Consider the following common misconceptions:
· I will be my own boss. Being your own boss does not mean you can play golf or go fishing anytime you want. Reality is, the business and your customers become your boss and can demand 50-65 hours per week.
· I can get rich overnight. Small business and free enterprise provides a great opportunity to build wealth; however, it will take time. Studies indicate that more than a third of small businesses that grow significantly, do so after ten or more years of existence.
· I can expect immediate income from my business. This is not likely. Generally, it takes 6-12 months before a new business can start to pay the owner a decent salary. You should have a cash reserve or savings to provide financial support for you and your family during the start-up phase.
· I can start my business with little or no money. Poor capitalization is one of the major causes of business failure. Lack of capital results in negative cash flow which can result in poor business decisions and serious credit problems.
· I will incorporate and use other people’s money. Many books and articles have been written about OPM (other people’s money). It is difficult to borrow your way to wealth as a new business. The corporate shield probably will not protect you in case of failure. Most banks today will require you to personally guarantee the corporate loans for start-up businesses. Consequently, all your assets may be at risk.
Finding a good business opportunity is not always easy. Sources to consider:
· Printed advertisements
· Trade sources and suppliers
· Friends and acquaintances
· Intermediaries such as business brokers or acquisition specialists
· Real estate brokers, if there is property for sale with the business
· Targeting a business and inquiring about its availability
EVALUATING THE BUSINESS
As a buyer, first evaluate a business by reviewing its history and the way it operates. Develop an understanding of the business method of acquiring and serving its customers, determine how it generates its sales, learn its marketing strategy, and develop an understanding of its finance and operations functions.
Checklist of material for the evaluation process*
To evaluate the business and make a reasoned buying decision, the following information (if applicable) will be needed from the existing business:
· 3-5 years financial statements
· 3-5 years tax returns
· Interim financial statements
· Debt schedule
· Accounts receivable and aging schedule
· Accounts payable and aging schedule
· Details of equipment leases and other contingent financial commitments
· Inventory list
· Supplier list (including contracts)
· Customer list (including contracts)
· Organizational charts and employee contracts
· Copies of all real estate, leases, or deeds
· Industry information to which the owners may have access
Purchasing an established business can lighten the burden of start-up costs, lag time without a salary, establishing markets, and other costs associated with the creation of a new business. Established businesses may have existing good will (intangible assets such as reputation or historic value). The decision to buy a business requires careful evaluation of many factors including pricing and financing your purchase. The potential buyer must understand their criteria for selecting, their motivation for wanting to purchase the business and the motivations of the business owners.
Consideration should be given to the following:
- What is your experience with the industry and/or management?
- Does the business match your strengths?
- Is the business what you enjoy doing?
- Is it in a desirable location?
- What are you willing to invest?
- Can you get financing?
- What size business do you desire in terms of sales, profit and employees?
If the business under consideration has a product or service outside your area of expertise, it is important to make certain that the key employees will stay after the sale or that you can hire someone with similar experience.
Franchising is a popular way to start a new business. In a franchise arrangement, the provider, or franchisor, contracts with you, the franchisee, to give you the right to sell or distribute a service or product in a particular area. A franchise offers advantages and has disadvantages.
ADVANTAGES OF A FRANCHISE
· Some require relatively small capital investment with franchise financing
· Initial corporate support for start-up
· Continuous management training and counseling
· Existing goodwill and brand name appeal (sometimes)
· Standardized quality of goods/services
· Proven products and business format
· Group purchasing power
· Some opportunities require no prior experience in that business field
· Buying power and programs
· Development of advertising and promotions programs (both local and national)
· Site analysis—help in deciding on a site based on past experience
DISADVANTAGES OF A FRANCHISE:
· Complicated legal negotiations
· Restrictions on purchasing
· Franchising fees
· Required to share portions of business profits with corporation (sales/royalties)
· Loss of control over some aspects of operation (e.g., use of name/logo for advertising, territory, uniforms, product purchasing requirements)
· Less freedom
· Potential problems if owner wants franchisor to buy franchise back
· Limited control over pricing, product lines, and suppliers
· Human resources policies may be instituted by corporation (potentially unsatisfactory training programs)
· Actions by the corporation may affect business of franchisee (especially new store locations close to yours)
Locate a list of lawyers specializing in franchise negotiations while in the research stage. Once a franchise opportunity has been selected, retain a lawyer for every step of the negotiations. The negotiations serve as the foundation of the franchise.
Working with the lawyer, set policies and agreements that will enable the franchise to thrive now and in the future. All obligations, rights, privileges, risks, opportunities, assets, and liabilities must be detailed and agreed upon by all parties before the contract is signed.
Starting a business by allying with a larger company can give a new business a significant head start. The alliance can be in the form a partnership of some sort or an independent contractor relationship, with or without the larger company investing in the smaller company.
Joint Ventures and Alliances
The term alliance has come to mean anything from a simple transactional relationship between companies to supply goods or services, to a licensing or outsourcing relationship with the smaller company. This is done for strategic reasons—both companies get what they want out of the relationship by being bound closely together without a merger.
Larger companies, for example, are supporting and even funding small company startup and growth for a variety of reasons:
- As a pipeline for the larger company to get new products and services to customers
- As a low risk way for larger companies to try out new ideas and be more nimble
- As a pipeline for smaller companies to provide research and development, innovative products/services, quick response time, short term labor, etc. to the larger company and its customers
Small firms must ensure that their larger partners have the same intent, expectations and vision for the alliance. If these are divergent in the beginning, or become divergent over time, the alliance is not likely to succeed. Commitments of time and resources, and leadership buy-in from the larger company are key to the smaller company’s success. Small companies, likewise, must be able to match the larger company’s technical and business competence to be and remain desirable fit for the larger company.
Many medium sized and some larger companies use small companies for distribution and/or sales of their products or services. This gives often a small company a number of distinct advantages over going it alone:
· Low startup cost
· Marketing materials, strategies, pricing and experience provided by the larger company
· Help in establishing and managing a territory
· Products/services that have a recognizable name
· Healthy commissions and other incentives
With either one of these approaches the same thinking, planning and execution is needed as is mentioned in the discussion of Starting a Business on Your Own. In addition, the small business owner must carefully evaluate the success, future, track record, players and commitment of the larger company. Get legal representation in negotiations and contracts.