September 10, 2019

There are 3 Paths To Business Ownership

Scott Hill

Scott Hill
Consultant/William & Hill

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Over the last 25+ years, I been helping people buy, sell, start, and operate small businesses and franchises. Heck, I've actually done all of them personally! Today, I enjoy helping existing and aspiring business owners buy, sell, and start small businesses. There are 3 ways to become a small business owner. You can start a business from scratch. You can buy an existing business. You can buy into a franchise. Let's take a look at some of the advantages and disadvantages of all three:

START A BUSINESS FROM SCRATCH

This is probably the most risky way to be a small business owner. 50% of these businesses fail within several years and the overwhelming majority are gone by 7-10 years.

Advantages:

  • COST: Depending on the business, you might be able to start your business with a very small amount of money. We've all heard the success stories of people growing successful businesses with less than $1,000.
  • INDEPENDENCE: Ahhhh....for me, the greatest advantage of being a small business owner. I have a hard time working for someone else. It's great to be in control.

Disadvantages:

  • COST: It takes people more time and more money to start a business from scratch than they ever expect. Also, most people don't factor in the lost income or savings you blow through while waiting for the business to be able to pay you a living wage. 
  • PROCESS: Unless you're starting a business similar to one you've worked for in the past (or have a ton of experience in), there's probably little to no track to run on. You have to create everything yourself. 
  • BRAND: New business owners have no brand recognition. There is no existing marketing plan to lean on. Customers don't know you and it'll be your job to get them to know, like, and trust you/your business so they will buy from you.
  • PROOF: Whether you're selling products and/or services, until you have time to prove your business works, you'll struggle to build social proof and a reputation. It takes time.
  • CASH FLOW: There is no cash flow. None. Most experts say free cash flow (money to pay yourself) probably won't be available for 6-18 months. Prepare yourself.

FRANCHSIING

A very interesting way to "own a business." Problem is, you're technically not a business owner because you don't own the business. You don't own the brand. You have an agreement that allows you to use the brand, etc for a period of time. Most times, you can renew the agreement and go on for as long as you stick to their plan. For many, it's been a fantastic way to have much more control over your professional life.

Advantages:

  • PROCESS: If you're buying into a proven franchise system, there's a process. There's a track to run on. They've made most of the mistakes already and they've "proofed" the system so you don't have to. That's why you pay a franchise fee. That's why you pay royalties. It's because they should have ironed most everything out already. If not, you shouldn't buy into the franchise.
  • BRAND: This is a big one. If the brand is solid and enjoys a great reputation, you will too. Brand awareness is huge. Many people already know, like, and trust the franchise. You benefit from this brand recognition. 
  • HISTORY: Other franchisees should be able to provide a good indication of what your experience will be like. If franchisees are, on average, earning $100,000 then you should too. Historical financial performance and expectations are a big part of why people join a franchise. 

Disadvantages:

  • INDEPENDENCE: I personally don't think this is a clear disadvantage. For some, it's a disadvantage. If you're fiercely independent, it's a clear disadvantage. You will have to do it by the franchise book. You will not be able to make changes unless approved by the franchisor. This should be really clear for anyone buying into a franchise. The franchise has built its reputation by offering a predictable experience...no matter which location the customer visits. You are not at liberty to make changes to this experience and you won't want other franchisees making changes either. If, however, you generally like having control over how you spend your day, how you manage your employees, and how you manage your free cash flow, then it's really not a disadvantage. Plus, like mentioned above, you have a track to run on. You don't have to invent or reinvent the wheel. 
  • MONEY: It costs money to buy into a franchise. The better ones cost more. You'll probably have to take a loan which means you'll have to have enough financial clout to qualify for one. You'll probably have to cover living expenses for a period of time before your franchise location is earning enough to pay you a living wage. 
  • EXPERIENCE: Depending on the franchise, you may need experience. The better food franchises, for example, will not let you become a franchisee unless you have prior food experience. 

BUY AN EXISTING BUSINESS

Buying a business comes with several compelling advantages over both starting a business and buying into a franchise. 

Advantages:

  • SUCCESS: If you're going to buy an existing business, buy one that's profitable and has a track record of success through more than one economic cycle. These are businesses worth buying.
  • CASH FLOW: Existing cash flow is a very good thing. If you have enough financial clout to purchase the business, you may walk into a business that will pay you more than you're used to earning! Pretty cool huh?
  • TRACK RECORD/PROCESS: Unless the business is entirely dependent on the existing owner, you will be able to come in and take over a business that has a proven track record, reputation, and business process. While it'll take time to understand, having a successful track record will allow you to more easily continue the business into the future.

Disadvantages:

  • COST: It costs money to buy cash flow and track record. You'll have to have enough "buying power" to purchase the business. You'll probably have to qualify for a SBA loan. This is a process. Be patient. 
  • FEAR OF THE UNKNOWN: If you follow a proven process, this might not be such a big negative. If you don't follow a proven process and/or don't do your due diligence, you might buy a lemon of a business. If you've never gone through the process of buying a business, then fear will probably paralyze you from actually going through with it. 

Although I've lived all of the above and have watched others do it too, this is not an exhaustive list. There are other considerations. I wrote this article based on pure memory and experience. Make sure you do your homework and find the right type of business ownership for YOU.

Finally, after over 25 years of small business ownership/entrepreneurship, I've learned business ownership grass IS NOT greener. It's just a different shade of green. There are advantages and disadvantages to being your own boss. You'll have to do everything yourself. We haven't discussed the advantages and disadvantages of owning your own business versus working for someone else. Do this exercise before you decide you like our shade of green. Most importantly, get "buy-in" from loved ones.

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