A couple of weeks ago I wrote about how there will be a lot of opportunities to buy a business in the next few years. That can be a great option for some people. For others, it makes more sense to start something from scratch. Others may be best served by becoming a franchisee. How do you decide what’s best for you?
Starting a business from scratch offers a number of advantages. It allows the owner 100% control of the the business – the idea, the company’s image and how the business will be run on a day to day basis. For service based businesses, it can also be the cheapest way to start – no upfront costs or big loans just to pay for someone else’s experience. The downside? More unknowns which translates into more risk. How do you know the idea will work? Are there enough customers? How much revenue can you generate? Some of these can be answered by writing a solid business plan and doing thorough research up front , but the reality is you never know many of the answers until you try.
Buying a business can reduce some of that risk. You often get a name that (hopefully) already has a good image in the community. You have existing supplier relationships, (hopefully) loyal employees and (hopefully) steady customers. If the deal is structured right, you can also call on the previous owners when you have questions. What’s the downside? The word “hopefully”. Yes, you get the “good will” of the business and the reputation it has built up over the years. But you also get potential skeletons in the closet. While you should conduct due diligence to try and uncover anything negative during the buying process, all it takes is one or two bad situations from the past to come back to haunt you. There are no guarantees that employees will stick around. Odds are they won’t. There’s nothing that rocks an employee’s world more than a new boss. Many will bolt without even giving you a chance. (Tip: Provide some incentives for the good ones to stick around.) What about customers? Assuming you don’t change the business too much, they’ll likely keep coming back, but again, there are no guarantees. If those customers were loyal to the previous owner because they really liked him or her, how do you know they’ll be loyal to you?
What about buying a franchise? Sometimes called “a business in a box”, a franchise can often offer the lowest risk approach to owning your own business. Franchises are available for a wide variety of types of business, from restaurants to retail stores to business services. In most cases, the franchisor has already figured everything out for you: the products and services you can sell, pricing, supplier relationships, operating procedures, marketing plans, potentially almost every detail down to the layout of your store. Sounds great? Yes, it can be, particularly if you are entering an industry that you don’t know much about. So what’s the catch? In many cases, you give up creative freedom, something that a lot of entrepreneurs really value. If you are a franchisee, you must play by the franchisor’s rules. After all, they’ve already figured everything out, right? The other catch is the cost. In addition to upfront franchise fees to secure the rights to operate within a certain geographic territory, you’ll typically pay a percentage of revenues forever, regardless of whether or not you’re profitable. While a 5-7% royalty may not sound much, if the business on average yields a 10% profit, that means more than half of your potential free cash flow may go to someone else. You may be ok with that in the first few years when you need lots of help from the franchisor, but after you become more knowledgeable , those payments will become more painful to make. The secrets to success in franchising? 1) Pick a good franchisor that is always coming up with more ways to help you make money. 2) Don’t stop with just one location. Successful franchisees usually have multiple units.
Are there any other options other than starting your own business, buying a business or going with a franchise? Clearly going out on your own entails a lot of risk. While buying a business or a franchise reduces that risk somewhat, as we’ve seen, that path can be very expensive. Instead, consider starting your own business but proactively seek help from similar business owners who have been successful in another market. If they like you, they might help you for free. Or, you can hire them as consultants. Either way, if you develop good, long-term relationships with smart mentors, you can get some of the benefits of being a franchisee without the costs.
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