23 Nov An entrepreneur’s first challenge: How to choose the right business ownership model
In the last few years, startup activity has risen, reversing a five-year downward trend, according to the 2015 Kauffman Index.
The rate of new entrepreneurs in the United States has increased about 10 percent, to the tune of nearly 6.3 million new business owners a year.
Going into business for yourself is life-changing, involving many choices along the way. Setting yourself up for success requires careful planning and research.
A hasty decision can result in serious negative consequences, including customer dissatisfaction, damaged reputation, lost income and revenue, or worse.
One of the first considerations facing potential business owners is the type of business ownership model to adopt. Typical options include starting a business from scratch, buying an existing business, or buying a franchise.
Starting from scratch
When you start a business from scratch you’re responsible for every aspect of the business including:
- Selecting the goods or services to be offered
- Finding the location
- Hiring, managing, and firing employees
- Building a customer base and reputation
Taking over an existing business
Buying an existing business is a less risky option, as some elements of the business will already be established. It offers:
- An established customer base
- A history of income and revenue
- Some degree of name recognition.
Potential problems with this model include determining how much to buy the business fo,r and, like buying a used car, you may be inheriting problems you’re unaware of.
Navigating the franchise model
With the franchise ownership model, a franchisor licenses the rights to a business name, operating procedure, designs, and business expertise to a franchisee.
Benefits include an established template for success, brand recognition, shared marketing, corporate training, and support. The two main types of franchise models include:
- With product or trade name franchising, the dealer (or franchisee) uses the trade name, trademark, and/or product from the supplier or manufacturer. Used extensively in the auto and truck, soft drink, and gasoline service station industries, this model consists primarily of the distribution by a single supplier of manufactured products to dealers who in turn resell to an end consumer.
- A second type of franchise model is business format franchising, in which the franchisee uses the franchisor’s products and services, trade name, trademark, and most importantly, the prescribed business format. This model provides the franchisee with extensive knowledge and support in a variety of business activities including marketing, promotion, management, operations, training, financing, accounting systems and legal support.
Converting your independent business to a franchise
I recently interviewed Jennifer Rosier, who had been running an independent business of her own, College Prep Solutions, which provided students with tutoring and prep for college entry exams such as ACT/SAT.
After nearly a decade of operating the business on her own, Rosier decided to switch her ownership model to a franchise brand, converting her business into a local Tutor Doctor, a fast growing at-home private tutoring franchise.
In addition to allowing her to expand her service offerings beyond test prep to a broader scope of educational tutoring, Rosier says a key factor driving her decision to convert to a franchise was the training and support offered by the franchisor.
According to Rosier, the franchise model allows entrepreneurial types who don’t necessarily have prior experience in operating a business to become trained and informed about running a business.
What to consider before converting
Rosier suggests entrepreneurs should consider the following when looking at a conversion to a franchise model:
- Training and support. Does the franchisor offer ongoing training? Are support staff available for troubleshooting? Is there individual assistance for franchisees? Rosier said Tutor Doctor provides her with backup and support that she didn’t have as an independent business owner.
- Demand. You’ll want to evaluate market demand for the franchise product or service, particularly in your own community. For example, is the business seasonal or evergreen? Does the business generate repeat business? Is it a fad?
- Costs. Start-up costs for franchises can range from a few thousand dollars for home-based businesses to a few million for retail or restaurants requiring real estate. A potential franchisee needs to consider what they will get for the initial investment. Ongoing costs should also be considered. Are they something you could manage in an economic downturn?
- Economic stability. Rosier said that before investing in Tutor Doctor, she carefully thought about recession durability. Before committing to a franchise agreement, potential franchisees for any brand should ask themselves if the services are luxury, or necessity? Does the franchise offer a product or service that people can’t do without? For Rosier, the idea that the franchise was based on values, education, children and career training made it a no-brainer.
Rosier pointed out that while the decision to convert to a franchise turned out to be the right move for her, it may not be the case for everyone. Deciding on the right business format is a personal decision, one that has to match the personal goals, values, and style of the individual business owner.