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Business Startup the Easy Way? Franchises, MLM, and Existing Businesses

Potential entrepreneurs who aren’t sure what kind of business to start, but know they want to be on their own are often drawn to the idea of buying a ready-made business. Whether purchasing an existing business or buying into a franchise or multi-level marketing (MLM) program, the idea of having the operations portion of a business already laid out can be very attractive. Before you spend your startup cash on these options, there are a few things to consider about each.

Buying an Existing Business

The advantages of buying an existing business are obvious — cash flows should be immediately positive, receivables and inventory assets are already built-in, you start out with a developed customer base, and the brand should already be established in the industry and market. In addition, the actual operations of the business are likely set and you will usually gain a staff of knowledgeable employees who are able to handle the basics of the business. At least, if the business has been well-run, these advantages should come with the purchase price!

The primary disadvantage of purchasing an existing business is the upfront cost. Though you will save some startup costs in terms of time, cash, and energy over starting a business from scratch, purchasing a good existing business is likely to be expensive. In addition, there is a good chance that the business will have hidden issues that come to light after you close the deal, such as uncollectable receivables, worthless inventory, or well-disguised cash flow problems. It is critical that you thoroughly inspect every aspect of an existing business’s financials, and understand what you are looking for, before you commit to a purchase.

You are also inheriting any and all less obvious problems when you purchase an established business. Image and culture issues are often very difficult to overcome. If the business has a reputation for providing less-than-ideal customer service, simply throwing an “Under New Management” banner up may not entice customers to try the establishment again. Any internal issues with employees may be even more pronounced with the introduction of a new boss, and any changes you intend to make may well be met with severe resistance, especially if the staff members have been with the business for a long time.

Buying Into a Franchise

Franchise opportunities are available in just about every industry imaginable, from food service to mobile auto detailers, from specialty retail to hotels. In fact, over the past three years, the number of different franchise concepts has grown from 300 to over 2,500, including businesses in 75 different industries. A new franchise is opened in the U.S. every 8 minutes, and the average investment is around $250,000.

The advantages to buying a franchise are widely touted — you are buying into a proven business model. The corporation has established an overall business concept that has found success in other locations and usually provides franchise owners with the necessary (and required) supplies at a better discount than an independent dealer could get on their own. In addition, the corporation provides you detailed operations procedures, the name is regionally or nationally known, and some or all of the marketing collateral is provided. Sounds pretty good, but there are some important disadvantages to consider as well.

The initial franchise fees vary widely, from as little as a few thousand dollars for smaller, less profitable business opportunities to tens of thousands for well-known and established brands. This initial cost is not the end of your startup expenses, however, as you are generally responsible for purchasing all equipment, securing the location, and providing all the working capital (for supplies, employees, and other bills) yourself.

In addition, buying into a franchise typically includes committing a portion of your ongoing profits to the franchisor as well. The franchisor reserves the right to evaluate and recalculate your books at will to determine whether you are paying the right amount, an option that some of the bigger franchisors seem to be exploiting. Regardless, a significant portion of your profits are paid to the franchisor, a check that can get harder and harder to send off once you have run the business for a while.

When you commit to a franchise, you are bound to whatever requirements are included in your contract. Typically, these requirements include purchasing only from the approved vendors, even if you can find better prices or terms with others, using the standard operating procedures the franchisor provides, even if you see a better way to do things, and offering any franchise-wide promotions, such as premiums, discounts, or coupons that the franchisor selects. You have very little control over the day-to-day operations of a franchise, down to the uniforms your employees wear. While this can seem like a great advantage now, when you are unfamiliar with the operations of the business you are considering, in time you will know your industry inside and out, whether you go with a franchise or start from scratch. At some point many franchisees feel too constrained by the restrictions of the franchise setup.

The brand recognition and marketing assistance that come with a franchise agreement do not always live up to the hype, either. Obviously, some major franchises such as Subway, Hilton Hotels, and Stanley Steemer provide excellent national marketing campaigns through both television and print ads. But of the estimated 15,000 franchises currently available in the US, a very small percentage provide that kind of market reach. More typically, you are provided with an array of marketing collateral that includes print ad layouts and the like that you can use in your own marketing efforts.

Buying into a franchise can be a good choice if you have quite a bit of capital available and are looking for an opportunity that you can turn over to a hired manager for the day-to-day operations. The established processes and procedures reduce the ability of your employees to run amok, changing the operations as they see fit. The right franchise can provide excellent returns on your investment and can be the best choice if you are not looking to remain hands-on with your business.

Buying into MLMs

Multi-level marketing programs are not a new business model, though the monstrous growth of the internet has unleashed a horde of questionable opportunities. Most old-school MLMs, many of which are still available, are founded on the sales of actual physical product, such as Amway, Avon, or Pampered Chef. In these programs, you buy into the program through another representative and are supplied with a sample kit of available products. You host parties or otherwise set up your own customer base and keep a percentage of the sales. In most MLMs, the representatives above you in the levels are entitled to some lesser portion of your sales, all the way up to the actual owners of the MLM. Some programs limit the income for those above you to the initial buy-in, but either way, the one making the most money is the person at the top.

The advantages of MLM programs are the ease and lower cost of starting your own business, the flexibility of the work hours, and the marketing tools usually included with your buy-in. The more recent MLMs often provide an online “informational” product of questionable value, and those who buy in are expected to sell more of the MLM businesses, not the product itself. The product is there merely to make the business concept legal by offering a “legitimate” product. These get-rich-quick concepts usually include “your own website” already designed for which you pay a monthly maintenance fee. The idea is that you need only sell one or two of the business concept you bought to turn a profit. Often, these programs also provide marketing collateral in addition to the website, for a fee, such as colorful postcard-sized advertisements or lists of places to purchase classified ads.

The reality of either type of MLM program, legitimate or otherwise, is that the disadvantages and limited likelihood of success far outweigh the advantages. In both cases, your business’s growth and income potential are pretty limited. Most of the legitimate product-based companies now sell direct to consumers online at the corporate level. In some instances, a representative from the purchaser’s area gets a smaller percentage of those sales, but usually the representatives only earn on the products they sell themselves. Therefore, the online stores cut directly in to the independent reps market.

The popularity of ecommerce has also reduced the MLM market in general because people can simply search the internet to find what they are looking for rather than waiting for a representative to stop by or host an event. Of course, if what you are looking for is a simple, few hours per week method to earn extra cash, and one of the established MLM programs includes products you are interested in selling, this can be an excellent small business option. Just be sure to do your homework before committing your seed money!

The more recent and more questionable MLM opportunities often walk a thin line between legal and not — the US Federal Trade Commission oversees these programs and frequently passes judgment on whether new programs are legitimate or not. The factors that make a business opportunity illegal are charging large upfront fees, requiring large inventory purchases or high minimum orders, and directly paying “business owners” just for recruiting new members. For this reason, many of the internet-based MLM programs available offer those “information service” products that are not intended to be sold as actual products, but must be included to make the program pass the federal laugh test.

The reality of MLM programs is that most people who buy in never earn their investment back. The pitch always makes it sound easy to draw customers, as though simply posting a web page will provide endless sales leads. Actually, posting a web page without marketing it is like writing your ad copy on the back of your hand, then wearing a glove. If nobody sees it, it might as well not exist. Remember, too, that those “free websites” are provided to all the other purchasers hoping to get rich quick — exactly the same webpage is provided to everyone, with limited options for customizing it (such as adding your photo and contact info). If you are looking at these opportunities, search for the key words of the program you are considering, and check the first few hundred results. If the name is distinguishable, you will probably find dozens of sites selling that same program.

The best place to be in an MLM program is at the top. If you have a good idea for a product that could be distributed and marketed through an MLM, consider putting in the time and effort to start your own. If you choose to buy in to an existing MLM program, be prepared to sharpen your marketing skills across the board. Succeeding in an MLM is all about the marketing and networking, both of which require significant commitment on your part.

Conclusion

For those entrepreneurs who are thinking that purchasing an existing business or buying in to a franchise or MLM is the best route to independence, be sure you consider all your options before you commit. If you are looking at a particular industry or type of business, do your homework to determine whether starting the same type of business from scratch is feasible and whether you would be better off long-term doing it yourself. Also, ask a lot of questions about what you get for your money — if they tell you it comes with marketing find out exactly what that means. Talk to others who have bought into the same program and search the web for forums and blogs related to the opportunity you are considering.

One common aspect of each of these options — starting your own business or buying into a ready-made concept is that you, as the business owner, must still figure out and manage the business side of the equation yourself. That is, none of these options includes planning, financial management, or significant marketing training. These three areas are the keys to success for any and all businesses. It is up to you to learn and apply all you can about the business side of your venture, whether you develop the operations side on your own or pay someone else to provide it for you.

Business Plans – Stop Wasting Your Time!

“Failing to plan is planning to fail!” was a phrase commonly heard as far back as high school when speaking with my career counselor.  As cliche? is the statement is, most business leaders will suggest that there is a great deal of merit to it, to the extent that most business leaders either a) have started thinking about writing a business plan, b) have started writing one or c) have one tucked away on a shelf that they haven’t looked at, ever.

Business plans take too long to write, they are more of an academic process, they are impractical, they are only used to raise money when starting a business and most good business leaders don’t need one, anyway, right?  While there have been many the albatross thrown around the neck of the business plan, we hope to give you new perspective on creating a business plan and hope that you will engage in one for your business.

In this issue of “Had an Aepiphanni, Lately?” we are going to discuss the justification of the business plan, or why the heck we need one, anyway, and how you might implement one into your daily business without it becoming a burdensome exercise.  Topics we will cover include:

The Business Plan: Why?
The Business Plan: Types
The Business Plan: How?
The Business Plan: When?
The Business Plan: Why?

Your business plan is a way to get the idea or vision for your business down on paper in order to determine:

if it makes sense, as in, does it fill a specific want or need and can that need be met, if it is feasible, as in, are there people or businesses who would be interested in buying your product or service at a price that works for you and them explore potential risk, how to avoid some and how to manage others,  costs of starting it and keeping it going and financial outlook.  

Additionally, simply going through the process of building the plan will provide you with a great deal of information you will need while running your business.  Additionally, as the business grows, you will want to use the business plan to help guide you in your future planning and decision-making processes.  Finally, if you expect to raise money using investors – whether friends and family or through venture capitalists, you will need a good, strong business plan.

The Business Plan: Types

The first thing you’ll want to do for your business plan is to determine what it is going to be used for.  Basically, there are four types of business plans:

Startup plans – sometimes this will be more of an overview of the business with expected sales and expenses, discussion about the product or services, the market and marketing.  These plans can be very short (10 pages) and effective for the startup phase of the business.

Operational plans – that focus on how the business will operate, heavily focused on processes, systems and people.  Ideally, cost analysis of the various processes and systems should be included, but often, current financial information and projections are used in the plan.  These can be equated with business architecture and strategic planning.

Presentation plans – these plans are used to attract partners, donors, executive teams and investors.  The key, here, is that this plan is used to attract them. Rarely will they be the final piece of information required.  In this type of plan, we focus on outcomes: the product and why there is a great need for it in the marketplace, what an investment will do to bring the product or service to market and what type of return one might expect as a result of investing or partnering with the company.  It will normally include a lot of visuals and is, essentially, a marketing piece.

Investor Grade Plans – these are the all inclusive business plans that combine all three of the other plans, with the addition of exploring risk.  This is the epitome of a marketing and investing tool that potential investors will try to tear holes in (versus trying to justify) to determine whether or not they will invest.  The executive summary, alone, needs to be powerful enough to engage potential investors to read further.  Financial plans need to extend three to five years.  This type of plan requires the greatest investment in research and financial planning of the four plans.  It will be the authority on operating the business.

The Business Plan: How?

Many people begin their business plans with a simple template.  Templates can be found all over the internet, in books, through SCORE (Service Core of Retired Executives) the SBA (Small Business Administration) and the SBDC (Small Business Development Centers).  You can take courses on how to develop the plan, or you can work with a consultant or business plan expert (Note: I emphasize with. For your business plan to be practical, you need to fully understand what is going into the plan, why it’s there and what to do with it!).  

The most important aspect of the plan, however, is that it needs to work for you and your business.  If you are a visual person, you might create a plan that is pictorially based.  If you are a task-oriented person, you might use bullet points to describe many areas of the business.  If you are a story teller, create a story, first, before even looking at a template.  Templates can be intimidating given all that is required.  Take it one step at a time.

The Business Plan: When?

When?  Your business plan should be your road map.  How often do you look at your road map when you are going somewhere you’ve never been?  Hopefully, you will look before you begin to veer off course.  Does this mean that you need to look at the whole thing, from beginning to end each and every day?  Not practical.  So when do you look at it?

The easy answer is: depends on your industry.

The better answer is – it’s too big to eat all at once.  Just like eating an elephant, you need to break it down into manageable pieces.  That means that you will want to put the marketing plan in one folder, put the SWOT analysis into another folder, your financial information in another, your processes in another, etc.  Your business plan does not necessarily need to be a single three inch thick document.  

With the plan separated, it becomes much more practical to use and update.  You might do marketing every day, but do your SWOT only once a month or once a quarter.  Ideally, you’ll manage your finances regularly and can look, at any time, to see where the business is financially.  As you update any area, stick it in the appropriate area.  Once a year, you may wish to pull out a whole section, or the whole plan section by section to review and make plans for the following year.

In Conclusion:

Your business plan should be a living set of documents that can be practically applied to your business’s every day operations.  Just the fact that you’ve invested so much time and money into the development of it should encourage you to squeeze every bit of that money right back out of it, even beyond the investment stage.  Keep in mind that creating the right type of plan and creating it in a way that makes sense for you and your business is a major determinant in the success of your plan, and that implementation of the plan is not a once and done deal.

Small Business Finance the Smart Way

Are you a small business owner? If you are, you’ll know that running a small business is one of the most difficult things you’ll ever do in your life. You’re the company’s spokesperson, owner, founder, advertiser and investor. You are its inspiration. It is your livelihood and your passion. And like all passions it is all consuming.

It has you crunching numbers when you should be sleeping. It has you sketching out ideas on napkins in restaurants when you should be eating. But like any love affair the irritations are worth it. You know that almost nothing in your life can match the highs that your business gives you. So stick with it! Give your business all your heart and soul. But be sensible when it comes to your cash.

Business Finance.

Starting your business can be incredibly costly. Buying the machinery, renting the premises, purchasing the advertising space… well you get the picture, you’ve been there. You are also probably aware that the cost of kicking your business into life is so high it can affect your businesses ability to grow later on down the line.

You’ve established yourself as a great business; you know you have the ability to expand and to grow. But you just don’t have the cash to do it. But what is the best way to get that much needed cash injection? You don’t want to be taken for a ride. This is why you need to know about business finance.

Small Business Cost.

The first thing to do when you start investigating small business finance is to look carefully at what you want to achieve. Having clear goals is one of the basic rules of success in business. If you are going to borrow money to support your business you must have a clear aim in mind. That way you can easily track the success of any investment and see how much, making your small business grow will cost. So, determine what you want. Are you purchasing assets, such as land or machinery, or stock? Or are you looking to improve your market position through advertising, or expand into new markets? Whatever you’re doing be clear about your goals.

Small Business Finance.

There are two types of small business finance available to you. The first is the more traditional and common form, known as ‘debt finance’. This involves your company lending money from a financial institution, usually your bank. There are up sides to this deal, you get your cash and you keep all your business. You do have to pay more back than you borrowed in the first place, with the onus on you to repay as soon as possible.

However, if you have clearly identified a use for your money this should present no problem to you and allow you to expand quickly. This is why it is the route taken by the majority of small businesses. If you fail to pay back the money you have borrowed however the consequences are severe, as part of the agreement will involve collateral. Often, this could be your house.

A less common option is that of ‘equity finance’. Ever seen the TV show Dragon’s Den? Then you’ll know what I’m talking about. Equity finance is when an investor gives you the cash you need and in return you give him a share, or a stake of your business. As the investor has no assurances, unlike the bank, he or she requires a much greater pay off if things go well. They want some of those profits! However if things don’t work out, you won’t be sleeping in the streets!

Your Future.

So there are plenty of ways you can offset your small business cost. Small business finance is easy to get if you pitch correctly and your business is heading in the right direction. Whichever mode of business finance you choose make sure you keep following the dream and your passion might end up making you millions.