Getting into a Business

There are four basic methods of getting into business; start from scratch, purchase the assets of a business that has ceased operation, purchase an existing operation, or pay the fee for a franchise license. There are strengths and weaknesses for each method. 

Starting a business from scratch

Launching a business enterprise from your own creative idea or passion can be exciting and rewarding. The possibility of entrepreneurial success is a great motivator for creating your own unique product and service, sourcing all your suppliers and building your customer base. Starting a new business venture can also be time consuming, stress inducing and costly. Your new business has a greater chance of success when:

  • Any existing business in the industry is weakened due to poor management;
  • The market for your business is expanding; and/or
  • Strong customer loyalties do not already exist for a similar product or service.

The major advantage of starting from scratch is the independence and freedom to run the business according to your vision. Disadvantages include the need for extensive and careful pre-planning, the risk associated with an unproven product or service, and the potential difficulty of obtaining financing for your unproven product or idea.

Buying the assets of a business no longer operating

Even though cost savings associated with acquiring assets of a defunct business at a distressed price may be substantial, there are risks. Investigate the real reasons why the business is no longer in operation. Seek professional advice to discuss the tax implications associated with purchasing the assets. Consider the potential to rebuild a customer base. 

Buying an existing business

When you purchase an existing business you acquire an already established product or service, suppliers and, most importantly, a customer base. The risk includes the possibility of bad will, poor public image and a negative workplace culture. 

Investigate the real reasons why the business is for sale. While the stated reasons may be poor health or impending retirement, the actual reasons may be declining sales, changing marketplace or increased competition.

Keep in mind that you are not buying past performance; your only concern is what the future potential will be. Your financial and legal advisors should analyze the financial statements of the business. Consider investigating the following:

  • How do current customers feel about the business?
  • What is the attitude and personal integrity of the present owner?
  • What is the state of the local market?

Buying a franchise license

A franchise is a contractual agreement between an entrepreneur and a franchising company (franchisee). When you purchase a franchise, you purchase the right to open, operate and market a location, specified product or service (trademark or trade name) of that franchising company, in a specified but proven way, often with a defined territory, and for a fee.

In addition to a one-time purchase fee, you can expect to pay a percentage of sales revenue (royalty) for support services. Advantages to this type of business arrangement include instant brand recognition, tried and tested products, standard or uniform operations, delivery, design or décor; corporate-based manager and employee training and ongoing promotion and product upgrades.

Purchasing a franchise does not guarantee success. Like any other business opportunity, both good and bad franchises are available for purchase. Ultimately, success or failure lies with the individual franchisee. 

With a franchise you may acquire a successful concept, a proven financial control system and a designated protected territory. However, a strong franchise will exercise firm control over the company brand:  the product or service, the way it is merchandised, and the structured formula to maximize profits. Your acquisition may include a significant purchase price with royalties and the loss of total control over business policies.

 

 

Published date: 
May 9, 2016
Innovation PEI

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