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10 Step Venture eMentoring Program™

Session 2: Business Idea

Module 2e: Business Opportunity Alternatives

In addition to developing and pursuing your own business idea, you might also consider purchasing an existing business or a franchise license. Each of these choices has pros and cons to consider. The following outlines list some of these important considerations. There is not a worksheet in this section, but reading the material will provide valuable insights needed for the final worksheet in this session.

1. Starting Your Own Business

When people start thinking about going into business, they typically think about starting from scratch. For many, and for good reasons, this may be the best idea. There are though, some downsides to this process as well. Here are both sides of the issue:

Pros

  • Freedom to mold the operation the way you want - It is your own business, built the way you feel it should be
  • Ability to create your own distinctive competitive advantage - You define the market for the new business, the marketing outreach tools, the reasons why you believe your potential customers would want to buy from you rather than from where ever they presently do business
  • Pride in creating something that has not existed before - Starting your own business and making it succeed is a unique personal achievement, and one that gives many business owners great satisfaction
  • No carry-over baggage from some prior operations - You are not stuck with the accumulation of past operating decisions someone else has made and implemented, mistakes, employees, location, products, bad reputation or any other negative aspects
  • Cons

    • Risk of failure is high for an unproven start-up - No matter how good you may think the idea, and no matter how well you may plan, there are no guarantees of success
    • May be difficult to establish market, build a customer base - It is difficult at best to establish visibility for a new business; many operations compete for customer's attention and business
    • Difficulty of securing suppliers - Suppliers may be unsure about the viability of a new operation, and may not want to take the risk that working with them could represent
    • Must create facilities, equipment, operating systems from scratch - There is no proven business system; all of the parts must be understood, located, and assembled into an efficient effective operation

    2. Buying A Franchise

    If the thought of a pre-packaged business appeals to you, then you may want to consider buying a franchise. The US Small Business Administration defines franchising as "a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchisor or that meet the franchisor's quality standards."

    There are generally two types of franchise opportunities available. In product/trade name franchising, the franchise company owns the right to the name or trademark and sells that right to a franchisee. In business format franchising, the franchise company often provides an "out of the box business" with a full range of services, including site selection, training, product supply, marketing plans, and even financing assistance.

    For more information on franchising visit the SBA's Consumer Guide to Buying a Franchise at SBA Buying Franchise. For information on available franchising opportunities, please visit www.FranNet.com to connect with a professional counselor who will help you profile your desires and capabilities and then suggest opportunities that should be a valuable match.

    There are both pros and cons for buying a franchise:

    Pros

    • Proven business system - The franchisor has developed a methodology for running the business that can be followed, minimizing the need to develop such a system or learn by trial and error
    • Proven product / service - An opportunity to operate a business with wide market acceptance; you don't need to create this market reputation because it already exists
    • Marketing expertise - The franchisor has developed a proven marketing outreach program; you plug and play a system that will be successful in building your business
    • Financial assistance - Often the franchisor will help with arranging financing, both because they already have a reputation and because their franchisees often succeed
    • Professional guidance - The franchisor often has professional staff to provide guidance and share expertise that might otherwise simply not be available to a new business operation
    • Opportunity to learn - Even if you do not have experience in operating a particular type of business, you can learn what you need to know from the franchisor (MacDonald's operates Hamburger U)
    • Recognized standards - The franchisor typically provides quality standards to help assure that each operator will maintain the reputation for quality and service that makes the franchise valuable
    • Efficiency - Because the business systems (and even physical assets) are already available, the business can often be started with less capital than might otherwise be required

    Cons

    • Cost of purchasing franchise - The franchisor is providing something of value; typically the franchisee is initially glad to pay for this value, but may become discouraged as time goes on and must still pay a royalty fee to the franchisor with less tangible assistance being provided
    • Franchisor control - The same good news, a standard form of operation, can be the bad news as the franchisee must agree to follow the operational format and which typically will discourage adding other goods or services, promoting a different image, or changing other aspects of the operation
    • Over-dependence or unsatisfied expectations - The franchisor cannot always know what is best for each local situation and so the franchisee must be prepared to make a certain level of decisions
    • Risk of fraud or misunderstanding - There are unscrupulous franchisors that offer franchises that do not offer real value, or promises that are unrealistic
    • Problems of termination or transfer - Because of the franchise agreement, it may be difficult to terminate at your choice, or the franchisor may have reserved the right to terminate against your will; also, the franchise agreement may prohibit the transfer of ownership if you want to sell the franchise or even if you die and hope that your heirs can inherit the business
    • Poor performance of other franchisees - If other franchisees do not do a good job, the franchise can loose its reputation, and so could hurt your operation

    3. Buying An Existing Business

    If starting a business from the ground up is overwhelming or not appealing to you, consider buying a business that is already established. Business owners decide to sell their businesses for many reasons. Some owners are looking to retire while others wish to start new ventures. Whatever the reason, there are usually fully operational business available for sale and you may be able to purchase a business for less than it would cost to set up the business yourself, and save time and energy as well.

    There are many sources for learning about business opportunities. The most popular are:

    • Business opportunity brokers
    • Classified newspaper ads
    • Companies that supply or set up new locations
    • Business opportunity trade shows

    The US Small Business Administration refers to the following online resource guide from My Own Business for information on buying a business: http://www.myownbusiness.org/s10/index.html#1

    There are both pros and cons for buying an already existing business:

    Pros

    • Proven products, location, process, employees, market - The existing business is already in motion, and represents a proven viable operation
    • Planning can be based on historical data - Sales, costs, and growth trends are available through the past operating records of the business, and so do not represent speculation or guesswork
    • New owner benefits from experience of previous owner - The old owner may be willing to work with the new owner to pass along experience and help make a smooth transition for customers, employees, and suppliers
    • No start-up time required - The business is already in motion with an established market visibility and flow of sales revenues that help to reduce start-up costs
    • Employees and suppliers already in place - It is not necessary to recruit new employees and find out through trial and error whether they will work out; suppliers already have confidence in the existing operation and are likely to transfer that confidence to the new owner
    • Plant and equipment already established - Starting a new operation from scratch involves finding and assembling countless pieces; it is much easier and much less risky when they are already in place as a functioning system
    • May be available at a bargain price - There may be personal reasons why the old owner wants to sell; often because they want to retire or change their life style, or perhaps are even deceased. As well, they may have been such poor managers that the business is available through a bankruptcy sale
    • May facilitate securing financing - An existing operation is a proven operation through its history, or prior reputation for market and operations, and so may have greater credibility with a financing organization; the old owner may be willing to participate in the financing through holding a note for all or part of the selling price

    Cons

    • Its someone else's idea and operation and may not fit with new owner's style, goals - The existing business is established with a certain personality and operational style that may not fit with the new owner
    • Previous owner may have created ill will - There may be a bad reputation with customers, suppliers, financiers which can be very difficult to overcome, no matter how the new owners may try to represent "Under new Ownership"
    • Change and innovation may be difficult to implement - The old business may have such a momentum that it is difficult to bring about change in the way it operates or reaches its customers
    • Location may now be suboptimal - Changes in transportation patterns or decline or change in population or neighborhoods may mean that the old location is no longer the best location; it can be expensive to move
    • Inventory may be old, obsolete - Part of the sale price of the business may include inventory that is no longer really marketable either because it is shop-worn or obsolete
    • May have poor employees - Employees may have a bad attitude because of past management styles, or may be so attached to the old owner that they do not want to accept the authority of the new owner
    • Facilities and equipment may be old, obsolete - Outdated facilities and equipment can represent a higher operating cost and/or a major expense to up-grade to current standards or to include labor or cost saving technologies
    • Could have supplier problems - Suppliers may have had a disagreement with the old owner, or a personal relationship that is not transferable to the new owner, or may not trust the new owner to be as effective as the old owner
    • Financing, legal issues - There may be legal issues with the IRS, impending customer law suits, or other problems the new owner will need to resolve
    • Business may be overpriced - The existing owners may have an inflated idea of what they think the business is really worth, particularly compared with the cost of starting a similar operation from scratch

    Now - on to Step 2: Summary

    Click here to start



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