Start A Business, Buy A Business Or Buy A Franchise?
What is the best way for me to become a business owner?
Written by Rick Schell
Being a business owner requires the drive to get up in the morning and to do what needs to be done. It means that when all is said and done, the buck stops here. Being a business owner is not all fun and games, in fact, it can be downright tough, but if you have the drive, the discipline, and the determination to build and grow something for yourself, owning a business can be a very rewarding and lucrative venture.
If you are the entrepreneurial type, it boils down to one question: Are you willing to invest your time, money, talents, and resources to build something for yourself, or do you want to just keep working for someone else? If you are just looking for a paycheck, you probably want to be an employee and not "risk" becoming a business owner. If on the other hand, you are looking for more. If you want to be your own boss, if you want to build more than just a paycheck, if you understand that the way to financial independence is by building something of value for yourself, then maybe business ownership is right for you!
Start A Business vs. Buy A Business vs. Buy A Franchise
Start A Business
A lot of people start a business from scratch. Typically starting a business from scratch means starting out in your home or a small work space. You come up with an idea, and you develop your idea into into a product or service. From here you have to start going out to get customers and sell your product or services. Here are some interesting statistics.
The Age Range of people starting their own business today
50-59 years old: 35 percent;
40-49 years old: 25 percent;
60-69 years old: 18 percent;
30-39 years old: 14 percent;
18-29 years old: 4 percent; and.
70+ years old: 4 percent.
Out of one hundred people that start a business today, 80% of them will still be in business starting in year two. 70% make it to year three, 62% make it to year four, 56% make it to year five and 44% make it past five years.
If you start your own business, you will have to develop all of your own marketing, systems, processes, and methods. You will have to learn how to hire and train employees, develop your own business plan, create job descriptions, and you will most likely be responsible at least initially for all of your sales. If you are in a service-related business, you will most likely be the person providing the service. You can see that starting a business is no easy task.
Buy A Business
There are advantages and disadvantages to purchasing an existing business. Buying an existing business has some definite advantages, the first and obvious advantage is an existing customer base and existing revenue. A lot of people see this as a huge advantage and many entreprueners look to purchasing an existing business because they want that revenue coming in from day one. Many falsely believe that they can purchase an existing business and then just draw a paycheck and be what is referred to as an "absentee owner". Anyone experienced in purchasing businesses will tell you that finding a business that you can be an absentee owner from the very beginning is a fantasy.
Buying a business can be very challenging. The obvious initial hurdle is the upfront money to purchase a business. You have to look very carefully at any business you are considering. What does the business do? How profitable is the business? What are the condition of the books and records? What is the condition of the equipment? Is the business growing or is the business losing market share? what is the reputation of the business? Are there employee issues? Is there potential litigation pending? Is the business worth what the seller wants for the business?
As you can see there are a lot of things you must consider when you purchase a business. An existing business is typically an expensive investment. The reason why is the intangable called "Good Will". Good will is the value placed on the profitablility of the business. Terms for the bottom line net profit also referred to as "Earnings" of a business is called Cash Flow, SDE or Seller Descretionary Earnings, EBIT or Earnings Before Interest and Taxes, EBITDA or Earnings Before Interest Depreciation and Amortization. Each one of these net profit references means slightly different things and they all have their own multiple of earnings ratio.
On a national average, combining all industries together, the average value of a business is 2.5 - 3 times cash flow earnings. This is drastically over simplified and not all industries follow this model. CPA firms typically sell for 80-105% of annual earnings while other industries can actually sell for more than three times earnings. Other factors come into play such as inventory, long term contracts, special equipment, patents and more.
Unless you are experienced in purchasing businesses or you have vast knowledge in a specific industry and you have run other companies where you know exactly what you are doing, I do not suggest inexperienced buyers and entrepenuers try to purchase an existing business.
Buy A Franchise
Purchasing a franchise can give you the greatest chance for success if you want to own a business. There are many benefits to purchasing a franchise over starting your own from scratch or even purchasing an existing business. First, what is a franchise? A franchise is an existing business with a proven track record that has proven success and wants to expand and grow by using the franchise model to gain market share.
A franchise allows "equity partners" have exclusive territory to build and grow the proven franchise model while providing ongoing support. For providing the business model, systems, training, branding, purchasing power, and ongoing support, the franchisee will pay the franchisor an ongoing royalty. typically this is from 3-12% of the annual gross revenue.
One of the major benefits of purchasing a franchise is the upfront cost. A large part of the cost of buying an existing business is "Good Will". This is not the case with purchasing a franchise. excluding some of the franchises with high building cost such as restaurants, Most franchises have a much lower barrier to entry. A large percentage of franchises fall into what is known as the "sweet spot". This is the "all in" cost to purchasing a franchise and the cost to get it up running to include working capital. The sweet spot is typically between $80,000 and $150,000. There are plenty of franchises out there that are less than $80,000 and there are a lot that are more than $150,000, but this is a good average. This includes, franchise fee, training, initial inventory, equipment, store location and working capital. Some franchises can be operated right out of your home. Some can be started out in your home then moved to another location as you grow.
Because of the training and ongoing support, and the fact that there is already a proven product, proven system of doing business, and a set path to work on, in a large percentage of cases, franchising is in my opinion the best way to go for those who do not have business ownership or business purchasing experience.