There are several forms of business ownership, each with its own advantages and disadvantages. Depending on your reasons for starting a business, your personal needs, personality, or concern about risk, you may choose to:
- Start a business from scratch
- Buy a business that is already established
- Buy a franchise
- Build a network sales business
STARTING A BUSINESS FROM SCRATCH
You have a great idea for a business and you want to begin. Where do you start? We’ve about to discuses the advantages and disadvantages of starting a business from scratch. Be aware that a large percentage of new businesses fail. You need to be honest with yourself in evaluating whether you have the right personality for taking on a project of this sort.
The most important thing you can do to prepare for your business is develop a thorough business plan. With this plan, you will be able to see the strengths and weaknesses of your business and make decisions accordingly. It is helpful at this point to get some professional assistance, someone who can look at your business plan objectively and provide ideas and insights. Organizations that provide free or low-cost assistance are available in most areas.
After investigating the needs of your business, it is necessary to take care of the groundwork, which includes the legal structure, business name, location, licenses, permits, financing, and other requirements. Go through the checklist to make sure you’ve considered all the main tasks in starting your business.
Starting your own business from scratch can be very fulfilling. You have the freedom to be creative and innovative; you make all your own decisions. This can be your dream come true.
There is a great deal of risk involved in starting a new business. Many new businesses do not succeed. You have to do everything yourself, from creating a business name to promotion, and you must make all your own decisions. The buck stops here!
BUYING AN ESTABLISHED BUSINESS
Buying a business that is already operating is an excellent way to get started and has many advantages. But, as with any business decision, your purchase takes careful thought and research.
The first step is to determine what type of business to buy. This could depend on your personal interests, previous work experience, lifestyle, or a number of other criteria. Make sure that your prospective business fits your needs.
After deciding on the business type, you need to locate a business for sale. You can contact businesses yourself, look in newspaper advertisements, ask friends or acquaintances for suggestions, or get professional help from a real-estate broker or consultant.
When you find a business you are interested in, plan to do some serious research and analysis. You need to study the records, ask questions of customers and neighbors, do market research, and learn all that you can about the business. Professionals will be very helpful at this time, especially accountants and lawyers.
Some of the areas to evaluate include
- Physical assets, such as equipment, fixtures, inventory
- Client base and customer loyalty
- Financial condition
- Products or services offered
- Warranty liabilities
- Business relationships with suppliers, distributors, etc.
How much is the business worth? There is really no simple answer to this question. The fair market value comes down to what the buyer is willing to pay and the seller is willing to accept. A dollar value for a business can be derived in several ways. One is to look at replacement cost: what it would cost to start the business from scratch. Some parts of a business are easy to calculate: inventory, equipment, fixtures, etc. But others are more difficult to put a dollar value on, such as customer base, name recognition, and goodwill.
Another approach looks at the return on investment. For example, if you expect a 25 percent annual return from your business, you can look at the net cash flow of the prospective business and calculate what it is worth. Many business brokers use an income multiplier, that is, an accepted industry factor that is multiplied by the annual gross income of the business. Another easy approach is to compare the business with other similar businesses on the market. Professional appraisers may be able to provide a dollar value for businesses.
Now it’s time to prepare a purchase offer. This is an opportunity to work with the seller to negotiate the best solutions for both of you. Some common types of business transactions are
- Outright purchase. The disadvantage of this is that it leaves the seller with little incentive to be concerned with your success as a new owner. If you find a problem, you may have difficulty recovering any money.
- Phased-in purchase. The buyer acquires the business over a period of time, usually three to five years.
- Lease management. The business is leased from the owner for a period of time with the option to purchase at a later date for a specified price and terms.
- Marketing agreement. This is a long-term contract that gives you exclusive rights to market a product within a particular area without buying the entire company.
- Licensing contract. An alternative to purchase in which your product is manufactured and distributed by an existing company.
- Management contract. You manage the business for a fee with the option to buy if the business meets your expectations. As with all business transactions, the terms need to be carefully spelled out.
- There are many ways to finance a business purchase. Each has its own benefits and risks. Creativity can be exercised to come up with the best solution for both buyer and seller.
- Preparing the purchase offer and closing the sale should be handled with the assistance of your lawyer. Be familiar with the terms of the agreements and the legal documents involved.
When you buy an existing business, the infrastructure is in place, a client base is established, and there is already name recognition. Past records let you know what you are getting and make it easier to finance. This option can be less risky than starting a new business.
An existing business may be covering hidden problems (e.g., financial difficulties, bad reputation). Your business reputation is tied to that of the previous management, and it may be difficult to establish a new identity. Occasionally, the previous owner may impact your business by starting a competitive operation.
BUYING A FRANCHISE
A franchise is one way to avoid many of the risks and headaches associated with starting a new business. When you buy a franchise, you are buying the right to use the franchise’s name, product, and management approach. A franchise already has its infrastructure in place as well as a promotional strategy. Name recognition may be well-established and you have a good idea of what you are getting.
Before you buy a franchise, proceed cautiously and do your homework. You might want to take a test to see if you will make a good franchise owner. Make sure the company you are considering fits your personal interests and needs. Ask a lot of questions. Visit a franchise unit and spend some time there. Talk to the owner and customers. Imagine working there for years.
When you find a franchise you like, contact the franchiser to request information. Generally, you will be asked to provide some basic information, including personal financial data. If this initial paperwork is satisfactory, you should be invited to visit the home office where you will usually receive a tour, sales presentation, and a Uniform Offering Circular (UFOC) with information about the company. This information should help in your decision to negotiate a franchise purchase.
Study the UFOC carefully. It is good to have professional help in analyzing the financial statements, litigation history, and other background information. Examine the franchise agreement carefully with your lawyer. Talk to as many franchisees and visit as many units as possible. Proceed with the deal only when you are fully satisfied that this is the business for you.
Buying a franchise is a way to reduce risk and receive support from a large network. You know what you’re getting. The preliminary work has been done with an infrastructure well established, a product line in place, and the marketing strategy developed. The customer base may be set, sometimes with good name recognition. The franchisor usually provides management assistance and training and may offer financial support. The pooled resources of many franchisees allow strong promotional opportunities and group buying power.
A franchise offers less freedom than an independent business. There are lots of rules and procedures in place. The owner cannot change products and services. Initial franchise fees may be expensive. You need to take into consideration start-up and operational costs, as well as ongoing royalty and other payments to the franchiser The reputation of one franchisee is affected by that of others. Transfer of ownership may require approval of the franchiser.
BUILDING A NETWORK SALES BUSINESS
Multilevel marketing, also known as network sales or MLM, is a method of selling that depends on networking between people. The salespeople not only sell their product, but also recruit other salespeople who in turn sell the product and recruit other salespeople. The resulting hierarchy produces levels of distributors all working to promote and sell the product and sharing in the profits of the levels below them. It effectively bypasses the traditional forms of promotion and distribution in favor of a large network of independent distributors.
Companies that employ this strategy provide a number of different compensation plans that can enable members to earn money from several sources. These include
- Commissions on personal sales: the money made on the goods you actually sell;
- Group bonus: the percentage of the sales generated by the members of your network;
- Leadership bonus: the reward for helping someone you sponsored move up to a higher level in the organization;
- Residual income: the commission received for a customer repurchase; and
- Usage bonus: the money paid to distributors as a percentage of their groups’ total usage levels.
As in any business venture, choosing which multilevel marketing company to join depends on your personal interests and needs. Research the companies whose products and/or services you believe in and from which customers will buy on a repeated basis. You want a company with a sound track record.
Do your homework. Check financial statements, years in business, management team, marketing plan, and industry standing. Look at the position of the product industry as a whole. The amount of support in marketing and training provided by the company is another indicator of the strength of the company. You can do research in a variety of ways.
- Sales presentations. Attend sales presentations (opportunity meetings) and meet other network members.
- Distributors. Talk to people in the company and ask about their experiences.
- Customers. Talk to people who buy and use the product.
- Promotional materials. Examine the promotional material for quality and truthfulness.
- Training materials. Learn about the materials provided by the company to get you started.
- Annual reports. Examine the annual reports over the past years to determine assets and liabilities, revenues, expenses, investments, management, and other information.
- Trade associations. Ask for information about the company’s performance record and reputation.
- Government agencies. Check with the state attorney general’s office and Federal Trade Commission or Better Business Bureau to obtain information.
- Media reports. Do some research to see what kind of coverage the company has had.
- Competitors. Talk to the competition to help in evaluating your company.
- Product line. Become familiar with the company’s products.
Many people are concerned about getting involved in a pyramid scheme. Note that although it shares the same organizational structure, multilevel marketing is not the same as a pyramid. Pyramid schemes, which are illegal, recruit people who pay money to those already in the network. The only way to get money in turn is to bring in more people. The pyramid inevitably collapses when there are no more people to bring in.
Multilevel marketing, on the other hand, offers a legitimate product, costs little to become a distributor, and emphasizes selling to customers. While some pyramid schemes may also offer a product for sale, instead of selling to customers, the product is sold from one level to the next until those on the bottom are left with overpriced goods that can’t be sold. Avoid unscrupulous pyramid schemes by avoiding any company that:
- Promises extremely high earnings
- Downplays the importance of hard work in achieving success
- Is more interested in recruiting new members than in selling to consumers
- Pays headhunting fees for new recruits
- Charges a high entry fee to become a distributor
- Has a product that people may buy once but not on a regular basis
- Is structured so that only the distributors at the bottom actually sell to consumers
- Requires new distributors to purchase large amounts of inventory
- Has an inadequate “buy back” policy for unsold inventory
Once you are in a multilevel marketing company, the work in setting up the business is similar to that of other new businesses. You need to get all applicable business licenses and permits, set up your office (often in your home), plan your marketing strategy, and keep all necessary records. Your company should be able to help with promotional material and sales training.
Your success in a multilevel marketing business depends on a number of factors, one of the most important being your willingness to work hard and stay motivated. Learning to promote your business, sell your product, and satisfy your customers is the key to a rewarding business venture.
There is the potential for high earning with a low initial investment. A network sales business allows you the freedom to be your own boss and have a home-based business. There is the opportunity to interact often with other people.
This type of business may require extending the work week into evenings and weekends. You must stay motivated and actively involved. The product may be difficult to sell without the benefit of a storefront, and there may be expenses involved with selling. It is necessary to follow guidelines established by the company. The reputation of one business is affected by others in the organization.
BUSINESS ON THE INTERNET
Welcome to the world of electronic/Internet commerce, or e-commerce. This rapidly growing virtual world is filled with incredible opportunities and just as many challenges and difficulties. You may choose to build an entire business online or supplement a physical business with an online component—anything from a promotional website to a full-fledged store. As people (potential customers) become increasingly comfortable with online searching and purchasing, it becomes important to consider this option for your business.
Where to start? Start with an e-commerce business plan, of course. This is the place to address all the potential issues and concerns of your new venture and determine its feasibility. What do you want the business to accomplish? Who are your target customers and how do you reach them? What special technological equipment and expertise do you need? Who will create your Internet site and who will maintain it? How much will it cost?
There is a lot to learn before starting any e-commerce venture. Even if you have professional help, it behooves you to do your research—the more you understand, the more you can be involved in the decision-making to ensure the business develops as you wish. Learn also about the limitations of e-commerce. Remember that the Internet is still in its infancy. You may be a visionary but must be realistic in terms of what is technologically possible for your customers.
An e-commerce business involves all the considerations found in other businesses, plus many unique to the Internet. As with any business, you need a business name and location, but the business name is constrained by the rules of the Web and the location is your Web address. The look of your “storefront” is determined by the Web design. That design is important since it projects the image of your business and also gives your customers the information they need to move around the site and find what they want. In addition, there are lots of technical issues to be resolved—the nuts and bolts of selling online, secure transactions, taxes, shipping, returns, etc.
Even after your site is up and running, the work continues. You need to promote the site, monitor your traffic, and continue to upgrade and change your business in response to marketing results and changing Internet styles and technology.