Starting A Business: How to Start A Business

If you’ve considered starting your own business, you will know that it is much more complicated than just selecting some products, pumping in some capital and waiting for the cash to roll in. This series of articles will provide you with a checklist of issues to consider before you commit yourself to starting your own business.

1. Determining how to start a business.
2. Creating a business plan.
3. Choosing a business structure.
4. Deciding whether and how to use advisors.
5. Determining capital needs and capital sources.
6. Using your home as your office.
7. Hiring employees.

Determining How To Start A Business

As an entrepreneur, you have four ways to own a business.

1. Start your own business.
2. Purchase an existing business.
3. Become an independent consultant.
4. Become a franchisee.

Each of these options has advantages and disadvantages.

1. Starting Your Own Business.

This is the most common way of starting a business. You build your business from scratch.

Advantages of starting your own business.

• Being your own boss.
• Taking ownership of your ideas. You are responsible for overseeing your ideas from inception to successful completion.
• You have extensive or total control of the process.
• You reap the fruits of your labor. You no longer work to make your bosses rich. Now you work for yourself and the harder you work, the more rewards you will enjoy.
• You can express your prior knowledge and expertise. Have you ever felt that you could have done things differently (and possibly better) than your boss?

Disadvantages of starting your own business.

• Working in relative isolation. Often times, you will have to start small, usually a one-man running the whole business.
• You carry the full burden of responsibility.
• You lack a built-in support system, such as the one available to franchisees.
• You learn mostly or entirely on the job. If you’re not streetwise and resourceful, then you might feel helpless if there’s no mentor to guide you.
• You are exposed to greater risk of cash flows fluctuations. Since your business is new, you could face difficulties in securing a customer base to ease your cash flows. Cash flows is usually tight in the beginning, making it impossible for you to draw a healthy salary from your business.
• You spend more time managing your business, which translates to reduced personal time for your family and leisure.

2. Purchase an Existing Business.

By buying an existing business, you not only circumvent the startup stage but you may also benefit from a history of profits, a network of relationships with suppliers and distributors and an established customer base.

Advantages of purchasing an existing business.

• Having an on going relationship with lenders and investors.
• Able to withdraw a salary through ongoing cash flows.
• Limiting the need for initial investment.
• Having the possibility of seller financing.
• Gaining support from the seller during the transition phase.
• Having a change to analyze real historical accounting numbers, rather than just projected numbers.

Disadvantages of purchasing an existing business.

• Time consuming to find the right company at the right price.
• You could overpay for the business.
• The company may have passed the “growth stage” and is entering “maturity stage”. This could lead you into overvaluing the business.
• Problems such as huge warranty claims, sales returns, or bad debt could arise later which may not be apparent during the negotiation process.

3. Become an Independent Consultant.

Given the trend of corporate downsizing and hiring contractors, it is likely that more and more people will position themselves as consultants.

Advantages of becoming and independent consultant.

• Eliminating the possibility of becoming involved in company politics and red tape.
• Low capital investment and overhead expenses.
• Flexibility in managing your time.
• The mandatory retirement age is not applicable to you.
• Having the potential for high annual income.

Disadvantages of becoming and independent consultant.

• Intense competition with the other consultants.
• You have no authority to make decisions for your client. Your client may or may not follow your recommendations or solutions.
• You lack a schedule or set routine. Your clients only require your input as and when the needs arise. Therefore, it is difficult to plan your schedule months ahead of time.
• You need to deal with irregular cash flows.

4. Become a Franchisee.

This is a legal arrangement in which you gain access to products, services, trademarks, and business concepts and possibly a customer base. Franchisors will provide guidance, support and training as to running the business. You will need to follow the guidelines given by the franchisor such as how you market your products.

Advantages of becoming a franchisee.

• Using a recognized name, trademark, and business appearance. The moment people see the yellow “M” with a red background, people will know you sell burgers.
• You gain the benefits of the franchisor’s reputation and previous track record.
• Products and services are standardized. Eliminates the need or skills for product sourcing.
• You don’t need to come up with your own business idea.
• You gain access to packaged financing.

Disadvantages of becoming a franchisee.

• You have limited flexibility in choosing products, suppliers, advertising budget and so on.
• Much of the direction of your business depends on the franchisor’s direction. You risk losing your business if your franchisor fails.
• You may need to pay a franchise fee. And the fees could be huge.

Summary

Some entrepreneurs already have a clear cut vision of how they want to start and accomplish their goals. If the situation isn’t so obvious, then it means that you need to sort through your options. One way is to review the advantages and disadvantages of the four options above. You could also talk to entrepreneurs who are involved in the different ways they start their businesses.

Next: Creating a Business Plan.