start-a-biz-part-5

start-a-biz-part-5

In the initial post of this series, I suggested a step-by-step process for launching a business. This post will be a continuation of Step 4 – Launch, where we explore the benefits and challenges of various methods of achieving a startup launch. (See Part 2Part 3, and Part 4 for other posts on the process).

Launching the Best Opportunity

As mentioned in our previous installment, this is the phase in which you are prepared to launch the best opportunity that was fully vetted in the earlier steps of DefineGenerate, and Evaluate. In the last article, we discussed the four core requirements for a launch and in this article we will cover the various methods of actually getting the business started.

Various Methods of Launch

At this point in the launch process, you’ve spent time fleshing out your offering platform, your go-to-market strategy, your business model, and your team. It is now time to decide the method of launch, which includes starting up from scratch, buying into a franchise, or buying a business (which may not be as far out of reach as some assume). A blank-slate startup is what most people think about when building a business – and while many entrepreneurs take this course of action – it is wise to carefully consider all three prior to choosing one over the other. These various methods are all viable, with their own advantages and disadvantages.

  • Starting up from scratch – Putting together a business from the ground up means you have maximum control and can have it your way: e.g., the name, culture, and location. But, building a company in this manner will take much more time and effort than the other two methods.
    • Advantages:
      • Build it the way you want – You will be able design, gestate, and give birth to your own business as opposed to adopting someone else’s business
      • More room for creativity – You will be able to create an offering, a brand, and a work environment that has your fingerprints all over it
      • No bad habits – You can hire who you want and when you want, rather than acquiring an existing culture with existing employees
      • Less up-front capital – You generally experience your expenses on a monthly basis over time until you breakeven rather than paying an upfront franchise fee or purchase price
      • Play offense, rather than defense – Most of your time is spent creating your offering, acquiring customers, and putting operations into place
    • Disadvantages:
      • No company infrastructure – You have to put everything in place, from logos to letterhead and from payroll to policies
      • No employees – You have to personally hire and train all initial employees who will lack knowledge on how to deliver your offering
      • No existing product or service – You have to develop everything from scratch
      • No market recognition – You need to deal with objections about being new and untested
      • No established customer base – You will have to compete in the marketplace each and every day to win every single customer one-by-one
      • No revenue – It might take surprisingly longer than you expect to build up sufficient revenue to cover your expenses and pay yourself a salary
    • Getting creative: Entrepreneurs can generally speed up their launch and mitigate downsides by outsourcing tasks to experts (especially “one-time” tasks to avoid learning how to do something only once) and by partnering with larger firms to help take your offering to market through their existing relationships
    • Bottom line: A startup is best suited for a highly-experienced entrepreneur launching an offering into an existing marketplace where the entrepreneur has significant relationships
  • Buying into a franchise – Overall, buying into a franchise will provide a proven business model and a body of knowledge to get launched much faster than a rank startup. But you will also lack independence and may be frustrated with the rules and boundaries of a franchise.
    • Advantages:
      • Packaged business – The detailed operating guidelines lead you through how to run the operation
      • Leverage lessons learned and best practices – Most franchises do a good job of sharing best practices and a clearly defined path to success to make their franchisees more successful based upon the collective wisdom of other franchisees
      • Leverage sales and marketing investment – Franchises usually invest broadly in their brand to drive customer traffic to their franchisee locations
    • Disadvantages:
      • You are married to your business – Entrepreneurs may feel trapped after paying what can be a hefty upfront franchise fee and committing to an ongoing royalty
      • You are typically stuck in retail – Most franchises are retail business models that require bricks and mortar and mean you unlock the doors every day to wait for customers to show up
      • You have to play by their rules – Maverick entrepreneurs will no doubt feel hemmed in by the rules of the franchise agreement
      • Limited territory – Franchisees have strict limitations on how and where they operate so as not to infringe on the territory of other franchisees
      • You give up significant value – Paying a 5% revenue royalty is equivalent to giving up half of the ownership value of your business since most businesses have a Net Income of roughly 10% of revenue (resulting in only 5% Net Income if your income was 10% prior to paying the franchise fee)
    • Getting creative: Entrepreneurs can potentially create franchise-like value by licensing intellectual property or creating a larger marketing network with other entrepreneurs to extend their market reach and brand
    • Bottom line: A franchise is best for those that lack a unique idea and/or entrepreneurial experience
  • Buying a business – Overall, buying a business means most of the hard work has been done, but since you are buying something someone else has built, you may not like what you get. In fact, you may not really know what you get until after you purchase the company.
    • Advantages:
      • Existing company infrastructure – a going concern usually has all operational functions already in place
      • Existing employees – you gain a team that knows how to deliver the offering
      • Existing product or service – you acquire a viable offering that customers value
      • Existing customer base, revenue, and earnings – you reduce risk and save many, many months of hard work by acquiring existing revenue and earnings
    • Disadvantages:
      • Requires more up-front capital – most small business acquisitions require up to 50% or more of the purchase price at closing with the balance in a seller note
      • Requires deal experience – buying a business is complex; entrepreneurs will need good advisors unless they have M&A experience
      • May need to tear down and rebuild – there may be processes, people, and technology that need to be upgraded post-acquisition
      • Playing defense, rather than offense – buyers typically pay a multiple of earnings for the business and are forced to play defense to try to maintain the customers, employees, and value for which they’ve already paid
    • Getting creative: Entrepreneurs can negotiate many creative types of deal structures to minimize the capital and risk required to buy a company
    • Bottom line: Buying a business is ideal for an entrepreneur that has access to sufficient capital and likes to focus on growth and improvement of an existing operation

Join us in Part 6 (coming soon) of our continuing series as we explore the best method to predictable, profitable, and sustainable growth.

Recommended Resources

Training:

wade-myers-pic

About Wade Myers

Wade has founded or co-founded, invested in, and been a director of over 25 companies and has completed 55 financing and M&A transactions. His previous work experience includes the Boston Consulting Group and Mobil Corporation. Wade also served as an Airborne Ranger in the US Army where he was a decorated veteran of the Gulf War. He is a Baker Scholar graduate of Harvard’s MBA program and is married with five children.

View Full Profile