Decide whether you'll buy an existing business, a business opportunity, a franchise, or go it alone.
By Lin Grensing-Pophal
The lure of private enterprise can be a strong one. Striking out on your own promises independence, the possibility of financial security--even wealth--and the ability to grow a business from the ground up.
But almost from the very first time the thought enters your mind, there are a million questions that need to be answered. One of those questions is: "Should I start a business from scratch, buy an existing business, or purchase a franchise or business opportunity?" That question is not an easy one, and its answer will depend on your individual goals and resources.
Each choice has its own unique advantages, according to Tom Gillis, who has spent 50 years as a business owner, entrepreneur, lawyer, CPA and management consultant in Houston. He's the author of Guts & Borrowed Money: Straight Talk for Starting and Growing Your Small Business (due in February 1997 from Bard Press, $19.95, 800-945-3132).
Starting a business from scratch can give you a sense of accomplishment and ownership that purchasing an existing business or franchise simply can't match. The downside is that you won't have instant name recognition or an established track record with customers or suppliers.
"Acquisition of an established company," Gillis says, "becomes attractive in three situations: when you haven't found `the idea' which really turns you on and you find it in an existing business; when you have more money than you have time to start a business from scratch; when you want to grow but lack a compatible product, service, location or particular advantage that is available from an owner who wants out."
The critical question, according to Gillis, is: What do I gain by acquiring this business that I wouldn't be able to achieve on my own?
In terms of franchising, the primary benefit is also the main drawback. As Gillis says, "You're not going to be in business alone." While this can be good news in terms of name recognition and "clout," it may be bad news in terms of your independence.
Somewhere between purchasing a franchise and purchasing an existing business is the "business opportunity," which capitalizes on the benefits of franchising (such as providing you with a packaged approach to running a particular business) without burdening you with some of the pitfalls of franchising (such as being restricted to certain advertising or marketing approaches, or having to pay franchisor fees). All franchises are business opportunities--but not all business opportunities are franchises.
For example, the owner of a successful housecleaning business might decide to package and sell the specific, unique process used, along with his or her proven marketing strategy. Purchasers would then be free to market and operate their resulting businesses in any manner they choose. A business opportunity is often one of the easiest and least expensive ways to start a business.
Kay Bauer is a Eau Claire, Wisconsin, entrepreneur who has successfully owned and operated three businesses: Impact Advertising (an existing business which she purchased), which sells promotional products like mugs, pens and other trinkets that companies use to promote their business names; The Balloon Connection (a business which she started on her own and later sold), which offers an alternative to flowers by using balloons to create bouquets and other decorative items; and Trophies+ (a company which she also began on her own and continues to operate), which sells plaques and awards.
One bit of advice that Bauer would offer to would-be entrepreneurs who must choose between starting from scratch, buying an existing business, or purchasing a franchise or business opportunity: "Do your homework."
Bauer didn't attempt to make a purchasing decision on her own. She talked to friends who were operating businesses. She hired financial advisors to help her make an informed choice. And she did a lot of legwork.
"I had to get all kinds of figures together on what it would cost if I started my own business: the fees that were necessary; how much it would cost to obtain new clients, compared to the value of existing customers; how much time it would take for me to develop a reputation, to develop contacts; etc." Because Bauer knew exactly what she was purchasing, and was able to compare the cost of this purchase to the cost of going it alone, she was able to make an informed decision.
The same considerations you would make in purchasing an existing business are applicable when considering a franchise. With a franchise, though, it pays to be extra cautious and to be certain that you understand the different provisions in the franchise contract. What does your money cover? What is not included?
One of the primary reasons that Bauer shied away from franchising was the issue of control. "I just felt that I had far more control over what I did," she says. "I was lucky that I had enough financial resources that I could do it without backing from someone else."
Bauer offers three additional tips to those who are considering which of the options is best for them:
1) Don't skimp on research. "I see a lot of people who start a business because they think it's `neat.' You have to research your business. If there are 100 companies in the same town that do what you do, chances are you're not going to be extremely successful. You have to find out how unique your company is. Check out your competition."
2) Invest in expert advice. "I've used the same consultants each time I've started a business. As much as it cost me, it's paid off every time; I got more information from them than I could have from anybody else."
3) If you're buying an existing business, a business opportunity or a franchise, give specific consideration to the established reputation of the business. "Buying a bad reputation is not a smart way to do business--it takes hunting to find out about a business reputation." There are a number of ways to do this. First, ask around; chances are you'll be able to unearth information simply through word of mouth. You may also wish to obtain a list of the company's suppliers and gather information from them. You should also contact the Better Business Bureau and your local chamber of commerce.
Regardless of the route you take, Bauer emphasizes that "any business is your reputation." Take the decision seriously and rely on the many resources available to help you make an informed choice.
How to Buy a Business: Entrepreneurship Through Acquisition, by Richard A. Joseph, Anna M. Nekoranec, and Carl H. Steffens (Dearborn Publishing, $19.95, 800-235-8866).
Start Up & Stay Up (audio cassette set), by Shari Posey. Successful entrepreneurs share their secrets. $52.95, postage paid. Order through the Small Business Resource Center at http://www.webcom.com/seaquest/sbrc/reports.html, or fax requests to (818) 359-0103.
The Small Business Start-Up Guide, by Robert Sullivan (Information International, $14.95, 800-536-6162).