Which Way To Go?
Decide whether you'll buy an existing business, abusiness opportunity, a franchise, or go it alone.
By Lin Grensing-Pophal
The lure of private enterprise can be a strong one. Striking outon your own promises independence, the possibility of financialsecurity--even wealth--and the ability to grow a business from theground up.
But almost from the very first time the thought enters yourmind, there are a million questions that need to be answered. Oneof those questions is: "Should I start a business fromscratch, buy an existing business, or purchase a franchise orbusiness opportunity?" That question is not an easy one, andits answer will depend on your individual goals and resources.
Each choice has its own unique advantages, according to TomGillis, who has spent 50 years as a business owner, entrepreneur,lawyer, CPA and management consultant in Houston. He's theauthor of Guts & Borrowed Money: Straight Talk for Startingand Growing Your Small Business (due in February 1997 from BardPress, $19.95, 800-945-3132).
Starting a business from scratch can give you a sense ofaccomplishment and ownership that purchasing an existing businessor franchise simply can't match. The downside is that youwon't have instant name recognition or an established trackrecord with customers or suppliers.
"Acquisition of an established company," Gillis says,"becomes attractive in three situations: when you haven'tfound `the idea' which really turns you on and you find it inan existing business; when you have more money than you have timeto start a business from scratch; when you want to grow but lack acompatible product, service, location or particular advantage thatis available from an owner who wants out."
The critical question, according to Gillis, is: What do I gainby acquiring this business that I wouldn't be able to achieveon my own?
In terms of franchising, the primary benefit is also the maindrawback. As Gillis says, "You're not going to be inbusiness alone." While this can be good news in terms of namerecognition and "clout," it may be bad news in terms ofyour independence.
Somewhere between purchasing a franchise and purchasing anexisting business is the "business opportunity," whichcapitalizes on the benefits of franchising (such as providing youwith a packaged approach to running a particular business) withoutburdening you with some of the pitfalls of franchising (such asbeing restricted to certain advertising or marketing approaches, orhaving to pay franchisor fees). All franchises are businessopportunities--but not all business opportunities arefranchises.
For example, the owner of a successful housecleaning businessmight decide to package and sell the specific, unique process used,along with his or her proven marketing strategy. Purchasers wouldthen be free to market and operate their resulting businesses inany manner they choose. A business opportunity is often one of theeasiest and least expensive ways to start a business.
Kay Bauer is a Eau Claire, Wisconsin, entrepreneur who hassuccessfully owned and operated three businesses: ImpactAdvertising (an existing business which she purchased), which sellspromotional products like mugs, pens and other trinkets thatcompanies use to promote their business names; The BalloonConnection (a business which she started on her own and latersold), which offers an alternative to flowers by using balloons tocreate bouquets and other decorative items; and Trophies+ (acompany 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-beentrepreneurs who must choose between starting from scratch, buyingan existing business, or purchasing a franchise or businessopportunity: "Do your homework."
Bauer didn't attempt to make a purchasing decision on herown. She talked to friends who were operating businesses. She hiredfinancial advisors to help her make an informed choice. And she dida lot of legwork.
"I had to get all kinds of figures together on what itwould cost if I started my own business: the fees that werenecessary; how much it would cost to obtain new clients, comparedto the value of existing customers; how much time it would take forme to develop a reputation, to develop contacts; etc." BecauseBauer knew exactly what she was purchasing, and was able to comparethe cost of this purchase to the cost of going it alone, she wasable to make an informed decision.
The same considerations you would make in purchasing an existingbusiness are applicable when considering a franchise. With afranchise, though, it pays to be extra cautious and to be certainthat you understand the different provisions in the franchisecontract. What does your money cover? What is not included?
One of the primary reasons that Bauer shied away fromfranchising was the issue of control. "I just felt that I hadfar more control over what I did," she says. "I was luckythat I had enough financial resources that I could do it withoutbacking from someone else."
Bauer offers three additional tips to those who are consideringwhich of the options is best for them:
1) Don't skimp on research. "I see a lot ofpeople who start a business because they think it's `neat.'You have to research your business. If there are 100 companies inthe same town that do what you do, chances are you're not goingto be extremely successful. You have to find out how unique yourcompany is. Check out your competition."
2) Invest in expert advice. "I've used the sameconsultants each time I've started a business. As much as itcost me, it's paid off every time; I got more information fromthem than I could have from anybody else."
3) If you're buying an existing business, a businessopportunity or a franchise, give specific consideration to theestablished reputation of the business. "Buying a badreputation is not a smart way to do business--it takes hunting tofind out about a business reputation." There are a number ofways to do this. First, ask around; chances are you'll be ableto unearth information simply through word of mouth. You may alsowish to obtain a list of the company's suppliers and gatherinformation from them. You should also contact the Better BusinessBureau and your local chamber of commerce.
Regardless of the route you take, Bauer emphasizes that"any business is your reputation." Take thedecision seriously and rely on the many resources available to helpyou make an informed choice.
How to Buy a Business: Entrepreneurship ThroughAcquisition, by Richard A. Joseph, Anna M. Nekoranec, and CarlH. Steffens (Dearborn Publishing, $19.95, 800-235-8866).
Start Up & Stay Up (audio cassette set), by ShariPosey. Successful entrepreneurs share their secrets. $52.95,postage paid. Order through the Small Business Resource Center athttp://www.webcom.com/seaquest/sbrc/reports.html, or fax requeststo (818) 359-0103.
The Small Business Start-Up Guide, by Robert Sullivan(Information International, $14.95, 800-536-6162).