Read Start Your Own Business Online
Authors: Inc The Staff of Entrepreneur Media
Start Your Own Business (10 page)
On the downside, an asset acquisition can be very expensive. The asset-by-asset purchasing process is complicated and also opens the possibility that the seller may raise the price of desirable assets to offset losses from undesirable ones.
The other option is stock acquisition, in which you purchase stock. Among other things, this means you must be willing to purchase all the business’s assets—and assume all its liabilities.
The final purchase contract should be structured with the help of your acquisition team to reflect very precisely your understanding and intentions regarding the purchase from a financial, tax and legal stand-point. The contract must be all-inclusive and should allow you to rescind the deal if you find at any time that the owner intentionally misrepresented the company or failed to report essential information. It’s also a good idea to include a noncompete clause in the contract to ensure the seller doesn’t open a competing operation down the street.
“You don’t have to be a
genius or a visionary or
even a college graduate
to be successful. You
just need a framework
and a dream.”—MICHAEL DELL, FOUNDER
OF DELL COMPUTER
Remember, you have the option to walk away from a negotiation at any point in the process if you don’t like the way things are going. If you don’t like the deal, don’t buy. Just because you spent a month looking at something doesn’t mean you have to buy it. You have no obligation.
Transition TimeThe transition to new ownership is a big change for employees of a small business. To ensure a smooth transition, start the process before the deal is done. Make sure the owner feels good about what is going to happen to the business after he or she leaves. Spend some time talking to the key employees, customers and suppliers before you take over; tell them about your plans and ideas for the business’s future. Getting these key players involved and on your side makes running the business a lot easier.
Most sellers will help you in a transition period during which they train you in operating the business. This period can range from a few weeks to six months or longer. After the one-on-one training period, many sellers will agree to be available for phone consultation for another period of time. Make sure you and the seller agree on how this training will be handled, and write it into your contract.
If you buy the business lock, stock and barrel, simply putting your name on the door and running it as before, your transition is likely to be fairly smooth. On the other hand, if you buy only part of the business’s assets, such as its client list or employees, and then make a lot of changes in how things are done, you’ll probably face a more difficult transition period.
Many new business owners have unrealistically high expectations that they can immediately make a business more profitable. Of course, you need a positive attitude to run a successful business, but if your attitude is “I’m better than you,” you’ll soon face resentment from the employees you’ve acquired.
Instead, look at the employees as valuable assets. Initially, they’ll know far more about the business than you will; use that knowledge to get yourself up to speed, and treat them with respect and appreciation. Employees inevitably feel worried about job security when a new owner takes over. That uncertainty is multiplied if you don’t tell them what your plans are. Many new bosses are so eager to start running the show, they slash staff, change prices or make other radical changes without giving employees any warning. Involve the staff in your planning, and keep communication open so they know what is happening at all times. Taking on an existing business isn’t easy, but with a little patience, honesty and hard work, you’ll soon be running things like a pro.
TIPFor more information when investigating a franchise or business opportunity, check out this helpful resource: The FTC provides a free package of information about the FTC Franchise and Business Opportunity Rule. Write to: Federal Trade Commission, 600 Pennsylvania Ave., Washington, DC 20580, or visit
ftc.gov
.
If buying an existing business doesn’t sound right for you but starting from scratch sounds a bit intimidating, you could be suited for franchise ownership. What is a franchise—and how do you know if you’re right for one? Essentially, a franchisee pays an initial fee and ongoing royalties to a franchisor. In return, the franchisee gains the use of a trademark, ongoing support from the franchisor, and the right to use the franchisor’s system of doing business and sell its products or services.
McDonald’s, perhaps the most well-known franchise company in the world, illustrates the benefits of franchising: Customers know they will get the same type of food, prepared the same way, whether they visit a McDonald’s in Moscow or Minneapolis. Customers feel confident in McDonald’s, and as a result, a new McDonald’s location has a head start on success compared to an independent hamburger stand.
WARNINGIs a franchise or business opportunity seller doing the hustle? Watch out for a salesperson who says things like “Territories are going fast,” “Act now or you’ll be shut out,” or “I’m leaving town on Monday, so make your decision now.” Legitimate sellers will not pressure you to rush into such a big decision. If someone gives you the hustle, give that opportunity the thumbs-down.
In addition to a well-known brand name, buying a franchise offers many other advantages that are not available to the entrepreneur starting a business from scratch. Perhaps the most significant is that you get a proven system of operation and training in how to use it. New franchisees can avoid a lot of the mistakes startup entrepreneurs typically make because the franchisor has already perfected daily routine operations through trial and error.
Reputable franchisors conduct market research before selling a new outlet, so you can feel greater confidence that there is a demand for the product or service. Failing to do adequate market research is one of the biggest mistakes independent entrepreneurs make; as a franchisee, it’s done for you. The franchisor also provides you with a clear picture of the competition and how to differentiate yourself from them.
Finally, franchisees enjoy the benefit of strength in numbers. You gain from economies of scale in buying materials, supplies and services, such as advertising, as well as in negotiating for locations and lease terms. By comparison, independent operators have to negotiate on their own, usually getting less favorable terms. Some suppliers won’t deal with new businesses or will reject your business because your account isn’t big enough.
Is Franchising Right for You?An oft-quoted saying about franchising is that it puts you in business “for yourself, but not by yourself.” While that support can be helpful, for some entrepreneurs, it can be too restricting. Most franchisors impose strict rules on franchisees, specifying everything from how you should greet customers to how to prepare the product or service.
That’s not to say you will be a mindless drone—many franchisors welcome franchisees’ ideas and suggestions on how to improve the way business is done—but, for the most part, you will need to adhere to the basic systems and rules set by the franchisor. If you are fiercely independent, hate interference and want to design every aspect of your new business, you may be better off starting your own company or buying a business opportunity (see the “Buying a Business Opportunity” section starting on page 65 for more details).
TIPCall the appropriate agencies to see how franchising is regulated in your state. Then keep the addresses and phone numbers for key state officials on file so you can contact them later if you have specific questions.
More and more former executives are buying franchises these days. For many of them, a franchise is an excellent way to make the transition to business ownership. As an executive, you were probably used to delegating tasks like ordering supplies, answering phones and handling word processing tasks. The transition to being an entrepreneur and doing everything for yourself can be jarring. Buying a franchise could offer the support you need in making the switch to entrepreneurship.
Do Your HomeworkOnce you’ve decided a franchise is the right route for you, how do you choose the right one? With so many franchise systems to choose from, the options can be dizzying. Start by investigating various industries that interest you to find those with growth potential. Narrow the choices down to a few industries you are most interested in; then analyze your geographic area to see if there is a market for that type of business. If so, contact all the franchise companies in those fields and ask them for information. Any reputable company will be happy to send you information at no cost.
Of course, don’t rely solely on these promotional materials to make your decision. You also need to do your own detective work. Start by going online to look up all the magazine and newspaper articles you can find about the companies you are considering as well as checking out
Entrepreneur
magazine’s FranchiseZone (entrepreneur .com/franchise). Is the company depicted favorably? Does it seem to be well-managed and growing?
Entrepreneur
magazine’s FranchiseZone (entrepreneur .com/franchise). Is the company depicted favorably? Does it seem to be well-managed and growing?
Check with the consumer or franchise regulators in your state to see if there are any serious problems with the company you are considering. If the company or its principals have been involved in lawsuits or bankruptcies, try to determine the nature of the lawsuits: Did they involve fraud or violations of FTC regulatory laws? To find out, call the court that handled the case and request a copy of the petition or judgment.
If you live in one of the 15 states that regulate the sale of franchises (California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington and Wisconsin), contact the state franchise authority, which can tell you if the company has complied with state registration requirements. If the company is registered with D&B, request a
D&B Report
, which will give you details on the company’s financial standing, payment promptness and other information. And, of course, it never hurts to check with your local office of the Better Business Bureau for complaints against the company.
D&B Report
, which will give you details on the company’s financial standing, payment promptness and other information. And, of course, it never hurts to check with your local office of the Better Business Bureau for complaints against the company.
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