The dream of business ownership draws many from the relative security of the ranks of the employed into the unknowns of owning and running their own business. In terms of job satisfaction and even potential income nothing compares to self-employment or owning your own – when things are going well. Unfortunately, the reality is that there are often problems and things do not go as planned. This makes the reach from dream to reality a risky prospect and one that should be thoroughly researched.
How to Get Started
The question that must be addressed immediately when considering business ownership is how do you intend to become the owner? There are actually two basic ways to become the owner of a small to medium sized business. The first thought that comes to mind is starting it yourself. Write a business plan, craft the ideas, do some research, do the legal paperwork to form a business and start it all yourself from scratch. The other method is to purchase an already established business and simply walk in as the new owner and begin running things. There are advantages and disadvantages to both methods.
Pros and Cons of Starting from Scratch
More people become business owners by starting it themselves and building their business from the ground up than buy becoming a first time business owner by purchasing an established business. Most of this is due to the entrepreneurial nature of the would be business owner. The draw is in having something you created for yourself and you made all the decisions on. The clear advantages are:
- Better understanding of the nature of the business – If you made it you clearly understand the business goals and the service you plan to offer.
- The business will highlight your strengths. By focusing on the strengths in your personal skillset you will be more capable of dealing with the day to day fundamentals.
- Satisfaction of creating something. This should not be overlooked since in the early months or years of most businesses there is typically not huge financial reward. This is made up for and made tolerable if you are getting a sense of accomplishment as well.
- Better position in the market area. If you are starting a business odds are you feel you have something to offer that is not currently offered or that you can do it better than those that are. This is a fundamental key to a successful business – fulfilling a need that exists in the market and by starting from scratch you can emphasize those areas.
The problems with starting a business from scratch are many and easy to identify. The biggest one is simply that while most entrepreneurs have a solid grasp of the area they intend to service, they often do not have much experience in business. The legal requirements, finding a location, negotiating leases, taxes, etc., all are new territory and the new business owner finds themselves spending all of their energy on these things as opposed to their strengths. Another item that is typically a problem is capitalization. Many people choose to start from scratch as a method to reduce the upfront costs of going into business themselves but often find by the time they have settled leases and purchased needed equipment and licenses they have not saved any money and the capital needed for day to day operations while growing a customer base is gone.
Buying an Established Business
There are many pros and cons of buying an established business as your first foray into business ownership. While it may not make such an inspiring story as starting from scratch, it certainly should not be ruled out without strong consideration. The list of reasons it makes sense may be simply summed up with-
- Better financing opportunities. While the initial price tag for a well-established business may be a put off, the biggest obstacle to business ownership is often capital and ability to obtain financing. An established business with independently audited financials is far easier to secure financing for and with last cash upfront from the want-to-be business owner than a business plan and no history.
- Established customer base for steadier income. If you purchase an existing business there is little guess work needed to know what the cash flow will be like in the first few months, unlike a new business where the cash flow is almost purely negative in the first months.
- No unforeseen legal issues with zoning or compliance. All infrastructure and compliance issues are already addressed so you can concentrate on running the business rather than purely administrative tasks in the first few months.
The biggest pitfalls in purchasing an established business are in attempting to get a fair price and the skill needed to place a fair value on the business. Unless you are very skilled as an accountant you will need to hire assistance to verify the books (this will be required if you are seeking financing) and should have an appraisal done on the business. Companies like Axis specialize in evaluating a business and establishing the market value. This can prevent exuberance at becoming a business owner from causing poor decisions that are not supported by the history. It will also prevent assumptions about the business. Often businesses established in an area for a long period of time are presumed to be profitable when a careful look shows otherwise. Remember, there is a reason they are selling. Use of experts will prevent you from falling victim to the often said used car adage about “buying someone else’s problems”.