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Getting Started

November 23, 2009

How do I get started? Where can I find an owner who is interested in selling an established business? How do I arrange the financing necessary to acquire an on going business? Where can I get some help? These are a few of the commonly asked questions of entrepreneurs as they get ready to take that first step towards business ownership.

There are three basic ways to become a business owner. You can start your own business, acquire an existing business or you can purchase a franchise. Each of these three pipelines have distinct characteristics regarding skills, investment, risk and time. It is important to assess which of the alternatives is most suitable in light of your goals, background and resources.

The successful start-up is generally dependent on special and marketable operational skills. The time involved with a start up, from conception to self sufficiency, is usually longer than with the other alternatives. The larger the proposed venture, the longer the time involved. The capital required by the start up is often the lowest initially, but often requires the largest investment overall. The successful start up will often show the greatest return on investment, but the risks of failure are greatest.

Ownership by acquisition can take place by means of an out right purchase or several other alternatives such as a buy out over time or inheritance. Acquisition by purchase generally results in the largest initial investment. However, a well planned successful acquisition should result in an orderly and profitable business from the start.

The franchising alternative offers a middle ground. Less initial investment than an acquisition and less initial risk than a start-up. Key to establishing a successful independent business as a franchisee is dependent on the careful choice of the franchiser and the territory.

Successful start-up opportunities are found where there are unsatisfied needs in the marketplace. When there is a customer willing to pay for a product or service that they cannot currently purchase, a business lays waiting to be born. Start-ups can also be found when there is a product or service that has such appeal and value, even if no one is currently aware of it, that when presented to the consumer, it will create a demand for itself.

If you are looking for acquisition by gift or inheritance, you should know where to begin. For those of us not so fortunate, there are a number or reliable sources for locating an established business for sale. First, you must remember that the purchase of a business is not an impulse buy. Be prepared to conduct a patient and thorough search. Depending on the size business that you are interested in acquiring, classified ads, business brokers and merger and acquisition consultants are fertile sources. Don’t overlook the power of networking. Make your intentions known to friends as well as to legal and accounting firms that are in your area.

The acquisition of an established business by means of a buy out over several years can be desirable for both the buyer and seller. In these types of situations you normally develop an agreement and begin working for a business whose owners are agreeable to selling it to you over a one to five year period. You use “sweat equity”, contributions that you make to the business, to generate funds that are used to pay the owners for their equity. It would not be uncommon for you to continue making deferred payments to the previous owners for several years after they have ceased active involvement in the business.

The buy out with “sweat equity” works best with owner operated businesses where the owners are looking to gradually retire, have a profitable business and there is a limited market for the business. It will be an appropriate alternative for you if you have limited financial resources, have the skills and determination to make a contribution to the business and the patience to work hard to realize your objectives.

Franchising has become quite popular in recent times. Because franchisers actively promote their businesses and there are a finite number of franchising situations available, you can conduct a reasonably systematic and thorough search of the opportunities available to you. Once the right opportunity has been identified, it is important to thoroughly investigate the franchiser. Unlike the start-up and acquisition, the owner of a franchise is dependent on others.

Frugality is a great quality for the new owner of a business to possess. However, being “penny wise, pound foolish” can be costly when negotiating the purchase of a business. By this I mean that although negotiating the lowest price for a business is important, it is more important to focus on a price and terms of payment that the business can support. For example, a higher price payed over a longer period of time can be desirable.

Your success in running your new business will depend on your operating and management skills. Those skills are different than those required to structure your new business. Getting started is usually a once in a life time event. Get the help of professionals who are experienced with these types of transactions.

Because you want it to be your business, be patient but get started and take that first step.

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