So you have decided you want to be a business owner.  Weather you franchise, acquire a business or start your own there are benefits and drawbacks to each.  Let’s take a look at these three very different paths to business ownership.

Franchising

Opening a franchise requires the owners to pay a franchise fee ranging from several thousand dollars to tens of thousands of dollars.  When you pay your franchise fee you are buying several things with your cash outlay, not the least of which is a proven system.  Successful franchises have hundreds of locations with an established track record of success. 

Along with the proven system comes name recognition or what is referred to as brand awareness.  Franchises are successful because they offer consistency.  You get the same hamburger at a McDonalds located in New York City than one ordered in Pierre, South Dakota.  It may not be the best hamburger but when you know what you are getting every time you order. 

A good franchisor also serves as a resource to your company providing a network of support.   All of this added together amounts to less risk and the potential for a higher return.  Finally, once you have paid the franchise fee 90% of the market research, business planning and financial modeling have been completed by the franchisor

Franchises are not all good news though.  Franchises require a higher cash investment because banks typically will not lend you the money to pay for intangible assets.  In fact, cash spent on a franchise fee does not lessen your equity requirement when getting a loan for the remaining start-up expenses.  Also, franchise fees are almost never refundable once paid. 

The initial franchise fee is not the end of the story.  Royalties on every dollar of revenue the company takes typically range from 4-8 percent or more.  Add to that marketing fees of 3-5 percent of sales for professionally produced marketing campaigns placed by the franchisor and you have lopped 10 percent or more off your bottom line. 

Finally, because franchises work under rigid models there is a decided lack of creative control for the franchisee.  Flexibility amounts to deciding the size of the restaurant and a choice between two or three pre-selected locations for your store.  If you are looking for a place where you can test new product lines or create your own corporate culture, a franchise is not for you.  (Make sure you check www.franchiseregistry.com to determine if your choice of franchise qualifies for SBA financing.)

Buying a Business

The key benefit to purchasing a business is a built-in customer base.  There is no start-up sales curve in a turn key operation which means less working capital is needed.  Successful businesses with a good reputation can provide immediate profitability and more importantly cash flow. 

There is a significant likelihood that the operations have some undiscovered opportunity or mismanagement within the business that you can take advantage of to increase your bottom line.  Like a franchise there is generally less risk involved in buying a business.   Finally, while a mom and pop shop may not have a business plan in place they will have an operations model that will make planning easier.

Like franchises business acquisitions have their drawbacks.  Acquisitions are difficult to finance because successful are significantly more than the underlying assets on the balance sheet.  The difference between the price of a company and the value of the assets being purchased is called Goodwill or Blue Sky. 

As you may have guessed, blue sky is very difficult to finance at a commercial bank and therefore many times sellers have to provide financing to bridge the gap.  Unsuccessful businesses shouldn’t have a lot of blue sky but typically won’t cash flow the debt service required for the purchase.  Both these situations require large cash investment from the buyer of the company if seller financing is not an option. 

Undiscovered opportunities may be a hard sell to lenders because they do not have a history to help determine their profitability.  If too much of the business model will change under the new ownership the lender may treat the business as a start-up, requiring additional market research to justify the opportunity’s financial potential.  Finally, the reputation of a business is not always a good thing as customer stigma can follow a business through many different owners/name changes. 

If you are looking to buy a business there are many different resources online including the Go Big Startup Business Network and industry specific brokering services such as RestaurantBizOps.com. 

Starting from Scratch

There are two main benefits to starting from scratch:  A) It is almost always less expensive because there are no franchise fees and no blue sky to pay for and B) You have more creative control build your own brand image, business reputation or niche in the marketplace. 

Entrepreneurs are full of good ideas and are rarely unsuccessful because they are offering a product that nobody wants (although it does happen).  Typically, start-up fail because they underestimated their funding need or they overestimated their potential market or both (attributed to a failure to plan).  While there is certainly more risk in developing a new venture there is also more potential for reward…both financially and emotionally.

The drawbacks to starting from scratch include developing an unproven system, additional risk, and additional preparation work for market research, business planning, & developing financial projections.

The path you choose depends on the quality of your business opportunity, resources available including time to complete research and business planning, cash available to invest and financing resources willing to fund your project.  Once you have weighed these options you can determine if the benefits of each option outweigh the drawbacks.