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Loading ...Going into business for yourself is a major decision so you should have a decent framework in place to evaluate your options. The depth of your framework may vary but key items to address in your framework should include an analysis of your personal desires, products or services you plan to sell and business model you plan to utilized. In addition, you should have a view on whether you plan to start a business from scratch or buy an existing business.
Framework
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Personal Desires - You should always consider your own personal desires for starting, acquiring or running a business. People start businesses for a variety of reasons. You might see an opportunity to develop a new product or service. Or, perhaps you see a way to enhance an existing product or service. In either case, you have identified an opportunity and want to “cash-in”.
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Lifestyle - You may just be tired of the strict 9am - 5pm schedule and just want a job where you have more flexibility because, well, you are the boss. You just want to earn some decent money but have the flexibility of being your own boss. However, when you first start your business, you probably will be putting in longer hours. This seems obvious because your business is just getting started but family might be surprised when this becomes reality. You may also want to make your business into a family business for future generations.
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What are products or services - It’s a good idea to map out the products or services you want sell as this will help you to stay focused. If you try to sell too broad a range of products and services, you will overextend yourself and potentially confuse your target customers.
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How will your products or services be sold - There are many ways to sell products and services. How you sell will depend on who you are selling to. If you are selling direct to consumers, e-commerce or retail stores are options. However, if you are selling to other businesses, e-commerce and/or sales staff, are options.
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Differentiating your products or services - You should think about how you are going to distinguish your products or services from competitors. This differentiation likely will drive how you market and sell your products or services.
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What is your business model - In other words, how do you plan to make money? For example, if you are starting an online business - do you plan to make money through subscriptions, one-time purchases, online advertisements, etc. It is always important to think about your potential sources of revenue and target customers when deciding on a business model.
Entrepreneurs have several options to consider when thinking of going into business for themselves. They could
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start their own businesses,
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purchase existing businesses, or
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purchase franchises. We see franchises has being different from starting a new business or purchasing an existing business.
Start a New Business
According to the US Small Business Administration (SBA), small business firms are those firms with less than 500 employees. Small businesses are vital to the US economy because they:
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employ 50% of all private sector employees,
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pay more than 45% of total U.S. private payroll, and
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generated 60% to 80% of net new jobs over the past decade.
You take a lot of risk in trying to start your own business. Most people probably think that only a small percentage of small businesses actually survive more than to two years, let alone four years. But, the odds are not completely against you. Recent findings in a SBA survey showed that small businesses do have decent survival rates:
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66% of new businesses last at least two years and
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almost 50% of new businesses last at least four years.
Sources: U.S. Bureau of the Census; Advocacy-funded research by Joel Popkin and Company (Research Summary #211); Federal Procurement Data System; Advocacy-funded research by CHI Research, Inc. (Research Summary #225); Bureau of Labor Statistics, Current Population Survey; U.S. Department of Commerce, International Trade Administration.
Some advantages of starting your own business include molding the company has you see fit and flexibility (both for yourself and the company). However, your flexibility may decrease if you accept outside money from investment firms (venture capital, private equity, etc.).
Purchase an Existing Business
You may find that you prefer to buy an established business versus starting a company from scratch. Buying a business takes away some of the unknowns associated with starting a company from scratch:
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You know the historical revenue and expenses of the business. Looking at the historical financials of the business, you should be able to get comfortable (or uncomfortable as the case might be) that it is representative of the earnings capability of the business.
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You should find it easier to obtain financing. Since the business is already established and has historical financials, there is a track record for financing sources (e.g., commercial banks, private equity firms) to examine. However, you still will have to invest some of your own cash in the transaction. You will often hear people refer to this as wanting you to have “skin in the game”. Basically, if others are going to be providing financing to you, they want to know that you are also investing and aligned with them.
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You have key relationships (both supplier and customer) already established. If it’s an existing business, you should have the chance to talk with key customers once it looks like the transaction will go through. Talking to the customers provides you the chance to confirm that they are happy with the company and not going anywhere.
Some other reasons to purchase a company:
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You see a lot of opportunities for operational improvements and / or efficiencies. Some businesses are simply not run as efficiently as they could be. The current owners might be satisfied with the amount of cash flow being generated and aren’t looking to change things.
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You have new products or services to sell to the same customer base served by the company you purchase. If your company has had trouble penetrating potential clients, it might be easier to just buy a company already serving these same potential clients. Be careful though - companies may then realize that they are a bigger percentage of your revenue and may try to receive better pricing.
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You feel market / company is poised for growth and feel it is more attractive to start with an established company. If you think a market or company is really posed to grow, be sure that you believe it is posed to grow profitably.
Now, while you are more likely to get financing, you may still have to put up a personal guarantee (home, etc.) to get the financing to help fund your purchase. It all depends on the assets of the company you are purchasing and the size of the loan. You also could seek money from investment firms to help pay part of the purchase price. There are some investment firms that will not require control to make an investment.
We have an overview of various financing sources to either start or purchase a business.
Purchase a Franchise
In the end, you want to buy a Franchise because of the operational assistance provided as well as the amount of information you receive. It is important to note that every franchise offers varying degrees of support and brand value. The costs of franchises vary but the following provides some guidelines when considering if a franchise is right for you:
There are several other factors to consider in our Franchising Overview.
