Finding the right small business to meet your individual strengths, needs, and goals has two components.
- What kind of business should you start? Many people who want to start a small business have a pretty good idea of what type of business they want to own. But some only have a general idea, while others don’t have any idea at all.
Cost of the books you can read on the subject of finding a small business will tell you that the best place to start is with a matching of your skills and experiences to some business that requires those skills. For example, if you love to cook, they’ll suggest you open a catering business or a restaurant.
If you have a strong interest in something, think about the needs of other people who share your interests. Is there something you can provide? It may help to think in terms of goods and services. Most businesses involve a mixture of both, but this dichotomy can help narrow the focus.
Ultimately, considering doing something you love is a start, but it has to be further analyzed by examining the market potential, competition, resources required to enter the market, consumer/buyer demand, and uniqueness of the idea.
Of course, you don’t necessarily have to sell a new or different product or service in order to succeed; you can succeed if you can improve what is already being sold. In the above example, you should open a catering business if you can provide a better service than other catering businesses, such as a wider menu or lower prices. But that’s still a function of what consumers want. Your research would have told you that there is a demand for a new catering business if prices were lower or if the menu were more varied.
Now that you have an idea of what you need, here’s how to get it:
- A comprehensive study and analysis of all your potential markets is something most small business owners either don’t know how to do themselves because they lack the training or can’t afford to pay someone else to do because it’s so expensive. But there are a few less expensive (and, admittedly, less scientifically exact) techniques that you can use to find out what consumers want.
- Once you have some idea of what the market wants, now is the time to begin looking at your skills and experiences. You’ll need to match your skills with what the market wants. Once you match your skills to what’s available, you should be well on your way to picking the small business that’s right for you.
- As we all know, a lot of new small businesses fail each year. In most of those cases, the small business owners were probably convinced that their idea for a business was a perfect match for their skills. They were wrong. But you can learn from their errors by avoiding the mistakes they made. In fact, there are some common mistakes that many failed small businesses make.
- Should you buy an existing business rather than build from the ground up? A business or franchise that’s already operating can save time and, sometimes, money.
If you think that starting a business from scratch is too difficult but still want to have your own small business, you have choices. You should consider either:
- Buying a business – there are a lot of successful business owners out there who want to retire, particularly as the baby boomer generation gets closer to retirement age. In some areas you may be able to purchase a going concern for less than it would cost to set up the business yourself.
If you don’t want to start from scratch, buying an existing business may be an excellent alternative. Let’s take a look at some of the advantages and disadvantages of buying an existing business.
Advantages of buying an existing business:
- Immediate operation. Operations can start immediately.
- Quick cash flow. Existing inventory and receivables can produce quick cash flow.
- Existing customers. Customers and suppliers have already been located, and relationships with them have been established.
- Existing goodwill. Goodwill toward products or services has (presumably) been created.
- Easier financing. Financing is easier to obtain because the business has a track record.
- Eliminate competition. Buying a business may eliminate a competitor that you would have had had you started from scratch.
Disadvantages of buying an existing business:
- Cost. Buying a business is sometimes, but not always, more costly than starting one from scratch.
- Problems. There may be inherent problems in the business, some of which may not be apparent until after the sale.
- Obsolete goods. Inventories and equipment may be obsolete.
- Personality conflicts. Your personality may clash with existing managers and employees.
- Uncollectable receivables. Bills owed to the business by its customers may be old, stale, and ultimately worthless.
The steps involved in purchasing a business are similar to those you need to take whenever you make any major purchase. You need to:
- locate a good business to buy
- research the business thoroughly
- decide whether to buy
Caution should be exercised throughout the whole process, not only because it will help you find the business that is right for you, but it will also help you to avoid being taken advantage of by unscrupulous sellers. Your attorney or your accountant should be actively involved in your search. You may also want to consider our detailed description of selling a business from the seller’s point of view.
- Buying a franchise – you can take advantage of a successful business concept and still exercise your entrepreneurial urge by purchasing a franchise.
First of all, let’s define what we mean by the term: franchising refers to an arrangement in which a party, the franchisee, buys the right to sell a product or service from a seller, the franchisor. The right to sell a product or service is the franchise.
There are basically two types of franchises: (1) product and trade-name franchises and (2) business-format franchises. A product and trade-name franchise generally involves the distribution of a product through dealers. For example, auto dealerships are product and trade-name franchises that sell products produced by the franchisor.
Business format franchises generally include everything necessary to start and operate a business in one complete package. Business format franchises provide the product, trade names, operating procedures, quality assurance standards, management consulting support, and facility design. Many familiar convenience stores and fast-food outlets, for example, are franchised in this manner.
People are attracted to franchises because the best ones have proven to be extremely successful over the years, and they combine many of the benefits of business ownership with the brand name, experience, and economies of scale provided by the established corporate franchisor. In fact, good franchises generally have a higher success rate than other types of businesses. Let’s take a look at the advantages and disadvantages of franchising:
Advantages of Franchising:
- Risk minimized. A reputable franchise is a proven business method.
- Name recognition. A well-known name can bring customers into the business and provide a competitive advantage for the franchisee.
- Training. A franchisor can provide a regimented training program to teach the franchisee about the business operation and industry even if the franchisee has no prior experience.
- Support. A franchisor can provide managerial support and problem-solving capabilities for its franchisees.
- Economies of scale. Cost savings on inventory items can be passed on to the franchisee from bulk purchase orders made by the franchisor.
- Advertising. Cooperative advertising programs can provide national exposure at an affordable price.
- Financing. A franchisor will generally assist the franchisee in obtaining financing for the franchise. In many instances, the franchisor will be the source of financing. Lenders are more inclined to provide financing to franchises because they are less risky than businesses started from scratch.
- Site selection. Most franchises will assist the franchisee in selecting a site for the new franchise location.
Disadvantages of Franchising
- Franchise fees. Franchise fees are required to be paid to the franchisor at the inception of the franchise agreement. These fees can range from a few thousand dollars to hundreds of thousands of dollars depending on the franchise.
- Royalties. The cost of many franchises includes a monthly royalty (fee) based on a percentage of the franchisee’s income or sales, and you pay even if the business is not profitable.
- Loss of control. Franchise agreements usually dictate how the franchise operates. The franchisee must adhere to the standards in the franchise agreement, which thereby leaves the franchisee with little control over the operation.
- Required purchases. The franchise may require the franchisee to purchase certain materials for the purpose of producing uniform franchise products.
- Termination clause. The franchisor may require that it retain the right to terminate the franchise agreement if certain conditions are not met. The franchisor may then terminate the agreement and offer the franchise location to another.