"Entrepreneur” is a term we hear a lot when someone decides to go into business. But what is an entrepreneur? One tongue-in-cheek definition is "a person who will work 16 hours a day to keep from working eight hours for someone else."
"Tire kickers" who think they are interested in being in business for themselves are common, but for every 10 people who want to start a business, only one will usually do so.
There are three main ways to get into business: purchase a franchise, buy an existing business or start from scratch. Each has its pros and cons.
Franchising opportunities
When buying a franchise, what do you get from the franchiser? This is obvious with the well-known ones, such as the fast food chains. They usually offer extensive training, advertising and ongoing management assistance. The disadvantage is the cost of purchasing this type of franchise. But if you are not getting this type of extensive help, can you justify the fee for the lesser-known franchiser that provides little or no assistance? Is it really worth the price?
Adding tens of thousands of dollars expense and perhaps a percentage of ongoing sales may make the venture more difficult to finance and achieve a desirable cash flow.
Purchasing an existing business
Many times the asking price for a business is greater than the actual value of the assets being purchased. This makes financing more difficult because there are not enough tangible assets to secure the loan. Additional secured assets may be required if this is the case.
Another obstacle is when the income shown for the business from tax returns and/or financial statements is not large enough to show the ability to repay the loan.
A possible advantage of buying an existing business is the name recognition may contribute to the success of the business. Be sure the business has a good reputation. Always learn why the seller wants to sell the business, especially if the business has been successful. Also secure a non-compete agreement from the seller.
Another area to look closely at is the inventory of the business you are buying. Don't get stuck with obsolete or slow-moving inventory.
Starting from scratch
The advantage of starting a new business is that most of the time you do not have problems with reputation that the franchise business or existing business may have developed. The disadvantage may be the financing. Normally, lenders are unsure of a new business that has no track record.
This can be overcome with help from friends and family and using more of your personal assets to secure the loan. Business startups that are considered to be unusual are more difficult to finance than more established types of businesses.
You may have heard that grants and special financing are available for entrepreneurs—especially for minorities. You will be disappointed to learn that isn't necessarily so, except in rare cases.
If you want to go into business for yourself, be sure to look at the numbers first. Will sufficient cash flow be easily achieved or will it be difficult? Just as important, will the business provide the desired return on your investment?
Going into business for yourself is a gamble. But weigh what you have to gain against what you have to lose.
Authored by: Donald L Davis, manager of business applications for the Small Business & Technology Development Center at the University of Central Missouri. He can be reached at (660) 543-8777 or ddavis@ucmo.edu.
Date Reviewed: 4/2/08
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