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CHAPTER 4: ENTREPRENUERAL OPTIONS : START-UP, BUYOUT OR FRANCHISING

For a new entrepreneur, the decision to own and operate a business is the result of his serious
exploration of ideas and sensible evaluation of opportunities. A sensible entrepreneur would always
consider serious issues before going into business. Very often, the decision to engage is a particular
business would minimize the possible waste of time, energy and resources if it is made after carefully
addressing these issues.

A. Starting a New Business

This is a business from scratch as startup. The reasons for the popularity of a startup among
entrepreneurs are varied. They find it exciting and satisfying to be able to put to use the latest ideas,
process and facilities in running a business. The challenge that goes with doing something new puts the
entrepreneur passionately at work. Also, some entrepreneurs get a feeling of fulfilment in their
autonomy and freedom to run a business.

These are the other reasons that move an entrepreneur to pursue a business:

1. If the entrepreneur has a newly invented or newly developed products or service.

2. When the entrepreneur wants to take advantage of an ideal location, product or service, equipment,
employees, suppliers and financial backers.

3. If the entrepreneur wants to avoid problems and undesirable commitments in policies, contracts, and
procedures involving other firms.

Advantages:

1. Lower start-up costs - Depending on the type of business you start, costs may be lower than a
franchise where there is no up-front purchasing fee or supply costs

2. Independence - You make all decisions and create all business systems

3. Site selection - You choose where to locate your business and what marketing procedures to follow

4. No baggage - There is no history to overcome when you start a new venture

5. You’ll have the opportunity to orient the business toward your own personal goals.

6. You’ll have a complete flexibility in selecting your products, target market, service strategy,
competitive strategy, location and facilities.

7. Easier to innovate and make further improvements.

8. You can design your own policies and procedures and can train employees your own way.

9. You also avoid “goodwill” expense of buying an existing business along the possibility of unknown or
contingent liabilities.

10. You will not risk inheriting any pre existing ill will from previous customers, suppliers, creditors, or
employees.

Disadvantages:
1. There is a great uncertainty about the market demand for the new product or service.

2. It takes time and energy to create an image, build patronage, works out new system and procedures,
and reach a break even level of sales.

3. Added risks in an investment will not be recouped.

4. Unexpected competition may emerge and potential customers may be more difficult to attract.

5. High commitment - Starting your own business requires a higher commitment of time and energy

6. High risk - Success depends totally on you and your business talents

7. Delayed profitability - Where the market may not already be established, it may take longer to
become profitable.

8. Limited financing - Financing for a new business is more difficult to obtain

9. You will need to look in to every small detail that goes into running your business and that may mean
long working hours and fewer chances of vacation.

10. Running a full-fledged business is not easy. A lot of processes are involved which may make your
existing education inadequate. Thus you may need to learn a lot of new subjects like administration,
planning, promotion, human resource development, research and development etc.

11. Owning a business means exposure to direct legal problems, which you would not face as an
employee in a company.

12. If somehow you are not able to run your business yourself and your spouse or children take over,
then there is a huge risk that the customers may leave you owing to different methods of business
employed them.

B. Buying an Existing Business

For some entrepreneurs, buying an existing business represents less of a gamble than starting a new
business from scratch. While the opportunity may be less risky in some aspects, you must perform due
diligence to ensure that you’re fully aware of the terms of the purchase. Deciding on the right type of
business to buy Ideally any business you buy needs to fit your own skills, lifestyle and aspirations. Before
you start looking, think about what you can bring to a business and what you'd like to get back. List what
is important to you. Look at your motivations and what you ultimately want to achieve. It is useful to
consider:

 Your abilities - can you achieve what you want to achieve?


 Your capital - how much money do you have to invest?
 Your expectations in terms of earning - what level of profit do you need to be looking for to
accommodate your needs?
 Your commitment - are you prepared for all the hard work and money that you will need to put
into the business to get it to succeed?
 Your strengths - what kind of business opportunity will give you the chance to put your skills and
experience to good use?
 The business sector you're interested in - learn as much as you can about your chosen industry
so you can compare different businesses. It's important to take the time to talk to people
already in similar businesses. The internet and your local library will also be good sources of
information. Find out how to comply with all the regulations and licences that apply to Your
business sector.
 Location - don't restrict your search to your local area. Some businesses can be easily relocated.

Advantages to Choosing an Existing Business There are many favorable aspects to buying an existing
business:

 Drastic reduction in startup costs


 Facilities, technology already available
 Cash flow may be immediate because of existing inventory and receivables
 Existing goodwill and easier financing opportunities, assuming the business has a good
reputation
 They already have available personnel with know how.
 It may be easier to obtain finance as the business will have a proven track record.
 A market for the product or service will have already been demonstrated.
 There may be established customers, a reliable income, a reputation to capitalize and build on
and a useful network of contacts.
 A business plan and marketing method should already be in place.
 Existing employees should have experience you can draw on.
 Many of the problems will have been discovered and solved already.

Disadvantages to Choosing an Existing Business

The following are some downsides to buying an existing small business:

 Purchasing cost may be much higher than the cost of starting a new business because the initial
business concept, customer base, brand and other fundamental work has already been done
 Hidden problems associated with the business and receivables that are valued at the time of
purchase, but later turn out to be non-collectible
 Some of the groundwork to get the business up and running will have been done.
 It may be easier to obtain finance as the business will have a proven track record.
 A market for the product or service will have already been demonstrated.
 There may be established customers, a reliable income, a reputation to capitalize and build on
and a useful network of contacts.
 A business plan and marketing method should already be in place.
 Existing employees should have experience you can draw on.
 Many of the problems will have been discovered and solved already.

Franchising

Concepts of Franchising

Franchise – an agreement whereby an independent person is given exclusive rights to sell a specified
good or service.
Franchising – a marketing system based on a legal agreement wherein one party (franchisee or
franchiser) is given the right to handle a business as an independent owner but is required to abide by
the terms and conditions specified by the other party (franchisor).

Franchisor - The franchisor owns the overall rights and trademarks of the company and allows its
franchisees to use these rights and trademarks to do business. The franchisor usually charges the
franchisee an upfront franchise fee for the rights to do business under the franchise name. In addition,
the franchisor usually collects an ongoing franchise royalty fee from the franchisee.

Franchisee - A franchisee is an individual who purchases the rights to use a company’s trademarked
name and business model to do business. The franchisee purchases a franchise from the franchisor. The
franchisee must follow certain rules and guidelines already established by the franchisor, and in most
cases the franchisee must pay an ongoing franchise royalty fee to the franchisor.

Franchising Contract - The franchise agreement is a legally binding agreement which outlines the
franchisor's terms and conditions for the franchisee. The franchise agreement also clearly outlines the
obligations of the franchisor and the obligations of the franchisee. The franchise agreement is signed at
the time an individual has made the final decision to buy the franchise. It is strongly suggested that
anyone who is considering buying a franchise should consult with a professional franchise attorney.

Types of Franchising:

1. The Product Franchise.

With this the manufacturer uses the franchise agreement to determine how the product is distributed
by the person buying the franchise. A retail company can be provided with a franchise to distribute, for
example, a range of tyres. The franchisee can utilize the brand name and the trademark owned by the
manufacturer to distribute or sell the car tyres. The owner of the store will pay the manufacturer a
franchising fee or agree to purchase a minimum inventory to sell on to their customers. The
manufacturer gets the income from the purchase of the retailer, and/or the franchise fee, and the
retailer gets the benefit of the brand and experience of the franchisor.

2. The Manufacturing Franchise.

The franchisee is permitted to manufacture the products under license and sell them using the
originator's trademark and name. They also get the benefit of the national advertising of the product
they manufacture. The company owning the product gets the franchise fee and sometimes a fee for
every unit sold. Examples include the food and beverage industry.

3. The Business Franchise Venture.


The franchisee purchases and distributes the products for the franchise owner. A client base is provided
by the product owner for the franchisee to maintain. Vending machines are a classic example of this,
where the franchisee purchases the vending machines and distributes and services them, taking their
share of the takings of the machines.

4. A Business Format Franchise


This opportunity is very popular, and involves providing the franchisee a proven business model using a
recognized product and brand. Training is provided by the franchise owner and assistance in setting up
the business. Supplies are purchased from the franchisor and the franchisee pays a royalty fee.
Frequently the franchisor will sell the franchisee the products or raw materials to provide the same
quality of product. Most well-known fast food franchises are of this type, and also many jewelers and
other ubiquitous High Street names.

What Does Franchise Provide


Like other businesses, franchising also requires commitment, time, effort and the money that would
spend on franchising. The franchisor not only looks at the business location of the outlet but also the
financial and management capability.

1. Business name– The franchisee may have a different company name but it’s the product should have
the names that are patented by the franchisor. The name and the way it is written designed or printed
should be uniform with the other franchise outlets.

2. Market Research – The marketing research of the franchisor should benefit the franchisee. It will
serve as guide to help the franchisor in evaluating the proper location, promotions, personnel,
distribution and market segment.

3. System Ideas and the Operating Manual – the system ideals are written on the operating manual
which should be provided by the franchisor. It describes how things should be conducted in the
operating of the system. The operating manual communicates the complete operating procedures
necessary to maintain the standards of the franchise

4. Propriety Marks – Include logo, slogans, and other printed signs that show distinction of the franchise.
The franchisee is allowed to use the patented marks of the franchisor.

5. Experience – This is an important service that the franchisor provides to the franchisee. With the vast
experiences of the franchisor, the franchisee avoids mistakes committed by one by a new and growing
company. It will help reduce losses brought about by the miscalculation of risks.

6. Training- Franchisor provide training assistance to the franchisee. Not only the knowledge but the
conceptual framework of the business.

7. Location Assistance and Approval - Give ideas on where a franchise would likely to get more sales.

8. Store Layout and Construction Supervision – Franchisor give the franchisee the specification for the
construction of the store. These specifications are based on careful planning that would bring the
efficient operations. (color, decor, walls, pertinent materials)

9. Exclusive Area Coverage – Franchisors provide exclusive territories to franchise holders. Exclusive
territory means that no others franchise coming from the same organization may overlap territorial
limit.
10. Procurement Programs – Franchise organizations share the system of procurement with the
franchisee. It provides the list of authorized suppliers for the different needs of the franchise outlet.

11. Hiring Assistance – The franchisor usually gives the franchisee the guidance needed in hiring
personnel that would fit the nature of the organization.

12. Grand Opening Assistance – The opening is the highlight event of the franchise outlet.
The opening day is when all the training and plans will be operational zed. The franchise organization’s
management and staff lend a helping hand to make sure that everything goes smoothly starting at the
day one.

13. Marketing Strategies – The franchisor is generally familiar with tested and proven strategies to guide
the franchisee to remain competitive. It includes the aspects of advertising and different promotional
tactics design to ensure continued profit.

14. Research and Development – the franchisee must see to it that the business does not remain
stagnant. The franchisor spends time to ensure that improvement in the products, services, equipment,
operation processes. R&D is necessary to beat the competition.

Advantages of Franchising:

1) The business you are franchising is already successful and is a proven idea. Usually, before offering
the business for franchising, the original owners have already build it up and have already made it
successful. Franchising, for them, is a way to expand the business; it is not a way to build the business
from a small one to a big one.

2. The brand name is already recognized and name-recall is already very easy. Plus the franchisor or the
owner of the franchise will take it upon himself to promote the franchised name or product, which will
benefit the franchisee.

3) You may have exclusive rights to market the franchised products in your territory. One example is
Starbucks Philippines. This one is franchised, yes, but the franchise belongs to just a single entity in the
whole country.

4) A franchisee will enjoy the benefits of being supported by the franchisor. This is part of the franchise
agreement. In return for the franchise fee the franchisee pays the franchisor, the latter commits to
support, to train, to share ideas and even manpower to the franchisee.

5) Systems are already in place. From getting the supplies to cooking the food (if you’re franchising a fast
food or a food cart business) to selling the products or services to summarizing your numbers and
producing your financial reports, the systems are already there for you. You just need to follow them.

6) You will get to leverage on the good name and purchasing power of your franchisor when it comes to
sourcing your supplies from suppliers.

7) Lower Failure Rate - When you buy a franchise, you are buying an established concept that has been
successful. Statistics show that franchisees stand a much better chance of success than people who start
independent businesses; independent businesses stand a 70 to 80 percent chance of NOT surviving the
first few critical years while franchisees have an 80 percent chance of surviving

8) Buying Power - Your franchise will benefit from the collective buying power of the parent company as
the franchisor can afford to buy in bulk and pass the savings along to franchisees. Inventory and supplies
will cost less than if you were running an independent company.

4) Star Power – Many well-known franchises have national brand-name recognition. Buying a franchise
can be like buying a business with built-in customers.

5) Profits - A franchise business can be immensely profitable. (Think of Mcdonalds and Tim Hortons, for
instance.)

Disadvantages of Franchising:

1) Their Way or The Highway - The main disadvantage of buying a franchise is that you have to do it their
way - sometimes right down to the way the napkin holders are filled. As a franchisee, you are not the
one actually running the show, and some franchisors exert a degree of control that you may find
excruciating.

2) Ongoing Costs – Besides the original franchise fee, royalties, a percentage of your franchise’s business
revenue, will need to be paid to the franchisor each month. The franchisor may also charge additional
fees for services provided, such as the cost of advertising.

3) Ongoing Support? Not all franchisors offer the same degree of assistance in starting a business and
operating it successfully. Some are just startup operations – and everything after startup is up to you.
Others make promises of ongoing training and support that they don't follow up on.

4) Cost - Buying into well-known franchises is very expensive. If this is your choice, you will have to have
extremely deep pockets or the ability to arrange the necessary financing

5) Shark-Infested Waters - Buying a little-known, perhaps inexpensive franchise can be a real gamble.
Just because a business is offering franchises is no guarantee that the franchise you buy will be
successful. In some cases, franchising is the business; all the franchisor is interested in is selling more
franchises. Whether or not the individual franchises are successful is irrelevant to them. This is not to
say that no little known, inexpensive franchises are worthwhile, but just a reminder that any franchise
you're thinking of buying needs to be investigated carefully