We compare the advantages and disadvantages of the ways you can own a small business:
1 Start a business from scratch.
2 Own a franchise.
3 Buy a business that’s trading already.
We also look at how they fit with your personality, mindset and experience.
The advantages of starting from scratch.
A startup, with you as the founder, is any business you start from scratch. Starting from nothing may provide you with an enormous sense of satisfaction. Creating your own source of income from zero can be a real buzz.
You get to design everything in the business from scratch. Your products, services, branding, systems and culture. Everything!
If your enterprise grows and employs people, you may derive satisfaction from this achievement too.
You can startup while employed to test your idea and you decide the speed and risk you take on.
Turning a hobby into a business is an attractive for many startup entrepreneurs.
The advantages a franchise offers.
Owning a franchise is a common way of getting into business.
In essence, a franchisor leases you the right to trade under their brand. They provide you with know-how, a business model, systems, and intellectual property.
Buying into a franchise is an attractive option for many people who pay significant fees in return for a “ready to go” business.
Instead of developing everything yourself, which could take years, you pay someone else so that you can generate sales quickly.
Being part of a franchise means that you should have like-minded people in your business community.
Trading under an established brand should give you an advantage with better recognition compared to a new brand.
A franchise should provide access to marketing, group purchasing, training and management support.
These are some reasons why owning a franchise has been so popular.
The advantages of buying an existing business.
Buying an existing business can have many advantages over a startup. One of the most significant is cash flow which is the bain of most startup owners lives.
Listen to our episodes about the basics of buying a business.
Reasons to buy a business and forget starting one.
Where to begin.
How to find and choose the right one.
Business valuation and choosing the best deal structure.
Buying an existing business with established customers and a sound financial history can be a huge advantage. Hopefully, you acquire a business with a history of success and the previous owners have done a lot of hard work that you can build on.
An established business will most likely have employees, systems and products already in place. These assets can take years to develop and add value to the company. Some businesses also have valuable intellectual property or a degree of uniqueness which offer a competitive advantage.
You focus on improving and growing your business, not establishing one.
Choosing the right company and negotiating the price is paramount.
There are many good quality businesses for sale thanks to Baby Boomers who were a successful generation in growing businesses. Many Baby Boomers are now preparing for retirement which creates a tremendous opportunity for those looking to buy a great business.
The disadvantages of a startup from scratch.
A startup is hard work, and many will fail.
Your choice of business concept is crucial and avoiding your first business mistake starts here.
It can be tough to grow a new businesses as the world is “noisy” with lots of competitors.
For a business to succeed many things have to happen in harmony which is tricky if you are inexperienced at running a business.
Funding a startup requires cash, so expect to put cash in rather than take it out!
Growing a business may require additional cash as often cashflow does not come through increased sales and needs an external source. This is a common misunderstanding by new business owners.
Startups demand a lot of time and cash before they become self-sustaining.
The disadvantages of owning a franchise.
When franchising is done well, it can benefit both franchisor and franchisee. However, it has frequently been done poorly.
One major disadvantage can be the extent of the franchisors’ influence over your business as a result of the Franchise Agreement.
A recent Parliamentary Enquiry into Franchising in Australia highlighted many issues and unethical practices.
The report is damming. It quotes “the significant, and often life-changing, detriment that many franchisees endured as a direct result of being exploited by franchisors“.
If you are thinking about buying a franchise, it is imperative to understand your legal liability.
You may have significant financial liabilities even if your franchise does not do well.
You need to mindful of the term and territory included in your Franchise Agreement and be aware that additional fees may be required to renew your agreement.
Our article explains some issues with franchising-Why buying a franchise?
Some people buy franchises as they believe them to be a lower risk way to own a business – this is not true!
The disadvantages of buying a business.
Deciding which industry sectors will continue to thrive is critical as is choosing the best opportunities.
Successfully acquiring a good business requires meticulous investigation. You must ensure you know exactly what you are buying and that the agreed price is fair.
Getting professional help is recommended at every stage.
Skimping on professional fees may cost you dearly if you get things wrong.
Due diligence is the process applied to check that your assumptions about a business and the sale contract align properly.
A thorough due diligence process will cover all the key things, such as:
- intellectual property.
- supplier agreements.
- customer agreements.
- Financial performance.
Which personality and mindset suit the three options?
Having read the pros and cons of each option, you probably have a preference.
Some individuals are startup people, whereas some are more comfortable managing a business.
If you have management experience, you might be more comfortable running an existing business as it is closer to your skillset.
For those who love the idea of founding a business, then a startup will be attractive. One important consideration is that you will be front and centre in marketing and selling. If this is outside your comfort zone, be careful, as, without sales, your business is dead. Do not underestimate this, as comfort zones cause business failure.
Franchising suits followers and not maverick entrepreneurs. Franchise chains like people who follow their system, pay their royalties and honour the Franchise Agreement without any fuss.
Paying monthly royalties can cause some franchisees to feel resentment, and this is an important mindset to deal with if you buy a franchise.
If you start or buy an existing business, you will own the brand name, systems and tacit knowledge you generate, which could be a significant value. This is not the case with a franchise as you lease them.
Are you an entrepreneur?
The definition of an entrepreneur is “a person who sets up a business or businesses, taking on financial risks in the hope of profit”. So, whichever method you choose, you will be an entrepreneur!
The “Should I Own a Business?” Podcast
The podcast is for ordinary people who like the idea of being their own boss. Throughout the episodes we expose some hidden causes of business failure and how you can to prepare yourself for owning a successful business.
The reality of business ownership is often very different from the dream, and we explain common issues so you can decide if it’s for you.
Here are some other resources that might help you.