You’ve decided that you want to own your own business. Congratulations! You are on the way to capturing your piece of the American dream.
Deciding to own your own business is the first step to get you where you want to be, but the real payoff to you and your family is owning and growing your family business. You can add great value to your family’s wealth by growing the value of your business. By far and away, the best route to personal and business wealth in America is through owning your own business. Day trading and flipping houses pale in comparison to the wealth that can be built in a successful family business.
So let’s say that your first big decision has been made – you want to own your own business. The second big decision is (1) Do you want to start up a business, (2) Do you want to buy an existing business, or (3) Do you want to buy a franchise business? Each has some advantages and some disadvantages. Let’s look at them individually.
Buying a Start-Up
Buying a start-up may seem the least expensive initially, but U.S. Department of Commerce statistics show that 65–90 percent of start-up businesses are not still in business after five years. There are many reasons for those numbers. One of the main ones being that no matter what type of business you start, you have to get people (customers) to stop going wherever they have been going to get that product and/or service, and instead buy that product and/or service from you. And, you normally start with the normal costs and expenses (rent, inventory, furniture, fixtures, equipment, leasehold improvements, employees, training, advertising, insurance, etc.), and at first you have no customers and no sales (no income).
Obviously, start-ups sometimes work very well, especially, if you have a product and/or service that is new and different and the marketplace accepts your new business. In most cases, however, I do not recommend starting up a business.
Buying an Existing Business
The same statistics that apply to the failure rate of small businesses show that if you buy an existing successful business (it already has trained employees, an existing customer base – existing sales, and an established cash flow – sufficient to pay the business’ expenses and provide the owner with a living), there is a 90–95 percent chance that the business will still be in business after five years (provided, of course, that you buy it right).
Buying a Successful Franchise
The 90 percent-plus success rate applies to buying a successful franchise also, provided that the franchise has already proven the market’s acceptance of that franchise concept. This may be true even though the franchise that you buy may be a start-up in that location. For example, you are starting up a donut shop, and the franchise company has 2,800 other stores that have proved successful in making and selling donuts. There is a pretty good chance that your franchise start-up will be successful.
Each of these business opportunities have some advantages and some disadvantages that we will discuss in the following chapters. As we look at your options, keep in mind that business brokers sell business opportunities, they do not sell business guarantees. In fact, if someone were to guarantee you success in a business venture, I would be very skeptical of that person and that business venture.
At Business Buyers University we are big proponents of buying an existing successful business and working hard to first maintain that success and then to grow the business through the improvements that you make to management and to the business. It is the same rationale that big businesses use in merger and acquisition (M and A). They merge and acquire another business that has a product and/or service that has proven itself in the marketplace rather than starting a business from scratch. Almost every big business has grown through buying another existing business that already had market share, customers, trained employees, cash flow, etc.
In our next blog post, we will take a look at navigating and making sense of small business financials.