Entrepreneurship

To start a new business,buy an existing business, or buy a Franchise

Start a new Business

• Define the nature of the business• Create preferred type of physical

facilities• Obtain fresh inventory• Make all initial personnel decisions• Latest technology & materials

available• Select a competitive environment

Not to start a new business• Problems finding the right business• Assembling the resources; Location,

building, equipment, materials, employees

• Lack of established product line• Production problems; start up • Lack of established market & distribution• Risk of failure higher then Buying existing

business or Franchise

Buy an existing business

• Personnel are already working• Facilities are already available • A product is already reaching a market• The location may be desirable• Relations with banks and trade creditors• Revenues and profits are being

generated• Goodwill already exists

Not to buy existing business• Physical facilities may be old or obsolete• Employees may have poor attitude• Accounts receivable may be

uncollectible• Location may be bad• May have poor financial standing• Inventory may be obsolete or in poor

quality

Questions to ask before Buying an existing business• Why is it for sale• Are facilities suitable

for future operations• Is the business

operating efficiently• Financial condition• Is the price fair• Do you have

necessary ability

Steps in Purchasing a Business• Write specific objectives about the

kind of business you want to buy.– Identify businesses for sale that meet

the objectives.

• Meet with business sellers or brokers to identify specific opportunities.

• Obtain accounting records for the prior three years.

• Get important information in writing. – reviewed by a lawyer– reviewed by an accountant

Visit during business hours to observe the business in action.

• Get expert help to determine the price to offer for the business.

Determine how you would finance the business.

Franchise Ownership

• franchise– a legal agreement that gives an individual

the right to market a company’s products or services in a particular area

• franchisee– the person who purchases a franchise

• franchisor– the company that offers the franchise for

purchase

Operating Costs of a Franchise• initial franchise fee

– the amount the local franchise owner pays in return for the right to run the franchise

• startup costs– the costs associated with running a

business

– weekly or monthly payments made by the local owner to the franchise company

• advertising fees– paid to the franchise company to

support television, magazine, or other advertising of the franchise as a whole

royalty fees

Investigate the Franchise Opportunity• The FTC requires franchise sellers

to provide detailed disclosure information at least 10 business days before finalizing a purchase.

• The disclosure document should include the following:– contact information for at least ten

previous purchaser who live nearest to you

– background and experience of the business’s key executives

– cost of starting and maintaining the business

– the responsibilities you and the seller will have once you have invested in the opportunity

the fully audited financial records of the seller

Evaluate a Franchise

• Study the disclosure document and proposed contract carefully.– All costs and royalty fees should be

provided.

• Interview current owners.– shills

• business references who are paid to give favorable reports

• Investigate claims about your potential earnings.– Does projected local demand match

potential earnings?

• Have the seller provide, in writing, the number and percentage of owners who have done as well as they claim you will.

Research the franchisor’s history and profitability.

– Do not sign up immediately.– Do not fall for a promise of easy money.

• Shop around.– Compare services offered by similar

franchisors.

Listen carefully to sales presentations.

• Determine what will happen if you want to cancel the franchise agreement.

• Ask for advice from professionals.

Get the seller’s promises in writing.

Advantages of Owning a Franchise• An entrepreneur is provided with

an established product or service.• Franchisors offer management,

technical, and other assistance.• Equipment and supplies can be

less expensive.• A guarantee of consistency

attracts customers.

Disadvantages of Owning a Franchise• Franchise fees can be costly and

cut down on profits.• Owners of franchises have less

freedom to make decisions than other entrepreneurs.

• The franchisor can terminate the franchise agreement.

Franchisees are dependent on the performance of other franchises in the chain.

The End