Business Start-Up Packet
Step 3: Three Ways to Start a Business
There are three ways to go into business. You can start from scratch, you can buy or inherit an existing business, or you can buy a franchise.
Start from Scratch
Starting a business is often least expensive. You also get the most freedom because you are not restricted by history. The name, location, equipment and employees are yours to choose. If you sell products, you start with a new inventory, unaffected by previous purchasing decisions. You are not affected by prior commitments to employees, leases and other obligations.
On the other hand it is hard to raise money for a new business, and the risk is high. Because you probably do not have an established clientele, expect advertising expenses to be higher than those of an established business. You may have to go through a long period of trial and error as you develop a marketing strategy. Initially, there may also be insufficient cash flow, and without a history of operations to draw on, your projections may be too optimistic.
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Acquiring a Business
For some people, acquiring a business through purchase or trade may be an excellent alternative to starting a new business from scratch.
As with any business entity, good judgment and competent advice are essential. Just as the term “business” has many meanings, exactly what is being acquired in a business may be understood differently by different people. Caution, prudence and diligence must be practiced in acquiring an existing business or in starting a new one.
Where To Find Businesses To Buy
- Personal friends, acquaintances and contact with other business activities
- Business opportunity advertisements and general business newspapers
- Acquisition wanted advertisements
- Trade associations
- Chambers of Commerce directories
- Government agency publications, directories and yellow pages
- Business brokers and consultants
- Commercial real estate brokers
- Bank trust officers
- Commercial loan officers with banks, savings and loans, and thrifts
- Securities brokers
- Public accounting firms
- Law firms
- Venture capital firms
- Insurance brokers and agents
What Is Being Acquired?
- Seek competent financial and legal advice. This does not need to be expensive if information is gathered and questions for advisors are prepared in advance.
- What special assets are included in the acquisition?
- How much "good will" is part of the price?
- If the seller leaves, does the good will evaporate?
- Is there special technical expertise that will go when the seller goes?
- What liabilities will be assumed?
- Can a similar business be started for less?
A deal should be made only after careful review. Determine whether a seller is:
- Serious
- Willing to discuss the pricing and terms of the sale
- Willing to have all terms reviewed by your advisor
Signed agreements, properly reviewed, are essential. A competent business consultant can help arrive at proper values.
Caution: When purchasing a business, the purchaser may be liable for debts of the seller or the acquired business. Always seek professional legal advice from an attorney to help avoid serious legal liabilities.
Consult the Better Business Bureau in your area, which can help you avoid swindlers. Have the business you are buying investigated by both a lawyer and an accountant.
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Franchising
When you purchase a franchise, you run your business under the name and systems of operation of a master company. Franchises that are available can vary from tax-preparation services to soft-drink distributorships to fast-food restaurants to hotel chains. Sizes vary from simple one-person operations to businesses employing hundreds of people.
What you get as a franchisee depends on your contract. Frequently, you will get training and a precise formula covering every detail of an operation, based on the experience of the franchiser.
For further information write to or check out the International Franchise Association
International Franchise Association
1350 New York Avenue, Suite 900
Washington, D.C. 20005
Telephone: (202) 628-8000
www.franchise.org
The Franchise Opportunities Handbook is available for purchase from the U.S. Government Printing Office
Government Printing Office
Washington, D.C. 20402
1-888-293-6498
www.access.gpo.gov
This publication offers descriptions of hundreds of different franchises listed by category, and provides a checklist for evaluating a franchise.
Precautions:
Here are some basic precautions to take before investing in a franchise.
- Study the required disclosure statement and proposed contracts carefully.
- Consult with an attorney and other professional advisors before making a binding commitment.
- Be sure that all promises made by the seller are clearly written into the contract.
- Investigate all earnings claims carefully.
- Resist pressure to close the deal before you have examined all facts and have considered reasonable alternatives.
- Be sure you buy exclusive rights, and that the product or service involved sells elsewhere under similar circumstances.
How to investigate earnings claims:
First, analyze the earnings claims. Be sure to get them in writing. The basis and assumptions for the claim must be described. Look for a statement of the number and percentage of other franchises whose actual experience equals or exceeds the claims. Make sure there is an offer to show substantiating material for the claims. Check carefully for cautionary language regarding exceptions. Second, talk with others who invested in this type of franchise. Seek those recommended by the company and others who might offer a different view. Third, comparison-shop for other franchises in the field, and for similar opportunities not franchised.
For more information:
The Federal Trade Commission publishes A Consumer Guide to Buying a Franchise. For more information, write to or check out the Federal Trade Commission Regional Office.
Federal Trade Commission Regional Office
150 William Street, Suite 1300
New York, NY 10038
Telephone: (212) 264-1207
www.ftc.gov
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