HOUSTON BUSINESS REVIEW

Tutorial On Selling Your Business: Going into Business for Yourself – Options
By Ralph Fain

Ralph Fain is a principal in the R/ Fain Group, a professional business brokerage firm which confidentially represents the interests of sellers/ buyers of “Mainstreet to Mid Market” companies (revenues from $1MM to $25MM). Mr. Fain has over 20 years of broad business experience with Fortune 500 companies as well as with small/medium sized companies and has served in various capacities including Controller, Vice President, and President/CEO. Each week he will provide comprehensive information on the many aspects of buying/selling businesses.

In our last article we presented an “overview” regarding the Buying of a Business.  We  touched upon the primary reasons why people want to be in business for themselves – master their own destiny, lack of enjoyment/personal fulfillment in their current job/occupation, uncertainty, and perhaps lack of functional employability (overly qualified for a position, etc).

            We also discussed the need to take a personal inventory and to answer some hard questions in order to determine if owning a business is right for you – what are your strengths/weaknesses [do you posses the requisite traits to be successful as a business owner – resourcefulness, self-discipline, enthusiasm/high energy, self-starter, perseverance, work ethic/sense of urgency, etc)], why do I want to go into business/what do I expect from the business, how much can I invest in a business, what type of business do I want to go into and what type of business am I best suited for,  do I have the necessary expertise and skills to run a business, etc.

            In today’s article we will discuss (in highly summarized form) the options one has vis a vis going into business for oneself.  Basically the options are three fold – you can either buy an existing business, start a business from scratch, or purchase a franchise.

            Building a business from the ground up is a very difficult undertaking but one which, if successful, can lead to substantial rewards, both monetarily and personally.  Generally, a typical start-up business requires a unique product or service or is a business which exploits a new industry.  Starting a business generally requires a much more diverse skill set (personal and business) than that required to purchase an existing business or franchise.

            The start-up entrepreneur will have to deal with much uncertainty and frustration and is assuming greater risk than the purchaser of an existing business.  This person/business either will have to be financially supported either by savings and/or by other family members or other persons until such time that the business generates sufficient income to support the owner – this could be a significant amount of time.  Start-up businesses have a high failure rate (~70-80%) but, if successful, can be exceptionally profitable.

            Another path available to an entrepreneur is to purchase an existing business.  Existing businesses may cost more to purchase (due to a variety of factors) but are less risky than starting a business from scratch.  Established businesses provide cash flow, business/financial history (which can be used to obtain purchase financing), demonstrable markets for the company’s products and services, trained personnel, operating systems and procedures, etc.  In general, you are purchasing an existing turn key package which will provide immediate cash flow/income to the purchaser.

            Purchasing a franchise, the third option, is somewhat a blend of the 1st two methods discussed above.  It is similar to starting a business from ground zero in that generally you have to select a location/site, hire/train personnel, find/develop customers, etc.  Unlike with the purchase of an established business, when a franchise is purchased, there is no established and immediate cash flow; the lack of immediate income makes this aspect of a franchise more similar to starting a business from scratch.   What is purchased is the name/brand, territorial rights, assistance from the franchisor (operationally and, often, financially), a proven product/service, supplier relationships, proven systems and procedures and a general expectation/estimate of earnings (not a guarantee however).  Franchises are less risky than starting from scratch and, generally, reduced risk translates to a lesser potential for significant profits.

            The above summarizes the three primary methods by which a person may go into business for himself/herself.  In upcoming articles we will explore two of these options in much more detail.
See you next time in this space when we discuss the pros and cons of franchises.  Should you have any questions or require additional information, please feel free to contact the R/ Fain Group @ 832-646-0832 or via our web site.