Thinking about starting a business? You have a number of choices. You can start your own business. You can acquire an existing business. You can also become a franchisee of an established brand. What is the best approach?
There is no right or wrong answer. Much depends on your personality — your need for control, your comfort with risk, etc. Here is a brief overview of each approach to having your own business and some of the pros and cons of each.
Why are you in business?
But first, let’s revisit this question, because it’s really at the heart of starting up or buying something existing or becoming a franchisee. Why are you getting into business in the first place?
Let’s take something common and commercial, like a coffee shop. You may look at an area and say, Hey, I want to own a coffee shop. There are some great independent coffee shops out there, some wonderful places that are doing really well…even if there’s a Starbucks nearby.
So, with the “coffee shop” scenario, there are some questions you should ask yourself:
- Do you want to be in the coffee-shop business, or do you have a deeply-personal one-of-a-kind vision for a unique coffee shop?
- Do you see a need for a particular product or service that isn’t available nearby?
- Do you appreciate the way a certain business is run and you want to keep it going?
- Do you see a business that’s providing a particular product or service that’s valuable but could use some improvement, especially on the operations side?
You could be the next Steve Jobs! Depending upon the type of business you want to start, there could be a modest investment in start-up costs as opposed to an acquisition. You gain a lot of independence from the start, and the decisions are all yours. This is probably the most risky of business ventures, however. You will have to make a major investment of time, energy and expertise, because you will be wearing all the hats.
It is often cheaper to start your own business, depending on the business you’re going into. Of course, if you’re starting up in an industry that requires specialized facilities or equipment, it can be pretty costly.
So how is this cheaper? Because if you buy an existing business, the seller is going to build into the sale price what we call goodwill. They have a customer base already, they have a history of revenues and cash flows, and those things have value that you will have to pay to obtain.
Getting financing for a start-up may be more challenging. You may have a really great business idea, but before the bank (or an investor) provides any money, you're going to have to project cash flows into the future. You have to show the bank a business plan, and be ready to back up every number on your projections: Show us how you're going to get the customers, how you can make this profit, and more.
Starting a business from scratch isn’t just having a unique product — it also involves Intangibles, like mission, identity and culture. You will need to integrate into your operations some of the insights from your “why am I in business?” analysis, and you will need to seriously think about what kind of experience you want for both customers and employees. If you’re launching a start-up, you have to build all of this from the ground up — this is a huge part of developing your own brand.
Buy Out or Acquisition
Here you avoid the start-up challenges — the business is already up and running! Customers, goodwill, equipment, etc. are there! There’s cash flow! Yet, you may still need to make a sizable investment up front, especially if it is underperforming. There may be other factors such as a declining market for those particular goods and services, so there is still a sizable risk factor.
As noted earlier, initial costs for an acquisition may actually be higher, because of the existing “goodwill” and existing customer base that you’re buying. But getting financing will likely be considerably easier, because an existing business has existing cash flows, which will help convince the bank or your investors that you’ll have money to pay them back. There are also brokers who specialize in connecting business sellers and business buyers. Like having a good real estate agent, having a good broker is invaluable.
Buy-outs often fall into one of two types: the business is doing well but the owner is retiring or has other issues, or else the business is in distress. The distressed business will likely cost you much less, but has a higher risk of failure. But if you’re a fearless, creative, curious problem-solver, this could be your niche.
If you’re buying a business that’s doing at least moderately well, you’re probably going to want to buy into at least some of their existing mission and identity — after all, that likely affects why they’ve been successful. And adopting some of their existing philosophy and culture might be a good fit if you’re an “if it ain’t broke, don’t fix it” person.
A franchise is very different from ownership. You immediately associate yourself with an established national or regional product, brand and service. The operating structure is in place, as are the products and services. There are lots of resources available such as training, marketing analysis, sales data and advertising. It is usually the least-risky of these options.
However, with reduced risk comes reduced control. “Corporate” makes most if not all of the decisions, not you. If you are a creative, innovative type, this may grate on you. You as the franchisee will have to pay a fee upfront and a monthly cut of your net sales to the franchisor. If the franchisor suffers a brand setback or marketing mishap — self-inflicted or unavoidable — you share their pain. There are territory restrictions — you may want to sponsor an event at your child’s school but not be able to because there is another franchise that’s geographically closer. Selling the franchise later will be more complicated and micro-managed by the franchisor.
I firmly believe that the backbone of the American economy is new business ownership. There is always risk in starting your own business, but I would argue that it is no greater than the risk of working for someone else who may lay you off at any time. And we as believers should be the most fearless in all things, for as Paul says in 2 Corinthians, “We are hard pressed on every side, but not crushed; perplexed, but not in despair; persecuted, but not abandoned; struck down, but not destroyed.”
Every semester I do an informal survey of my MBA students, and every time, a large percentage of them are in the program because they want to learn how to start their own business. They understand that — whether start-up, buy-out or franchise — it requires hard work and creativity. But it also requires a skill set, and a Crowell School of Business degree — specifically, an MBA — is a great way to acquire that skill set.
Dr. Randy Markley teaches finance and accounting at the Crowell School of Business. In part one of this post, Dr. Markley discussed the principles and decisions involved in deciding to go into business for yourself.