Franchises
Franchising is big business. Mid-career changers are favorite targets for two reasons:
- The fact that they are considering making a change means they are willing to take a risk;
- They have money. It costs as much (and sometimes more) to buy some of the more successful franchises as it does to start a business from the ground up or to buy an existing successful business.
For example, a franchisor may say that none of their locations has ever failed. The franchisor can mask the number of business failures by assisting in selling a location that is in trouble. The new owner brings additional cash into the business, prolonging its life or even making it a success. By selling the business, often at a loss to the owner, the location does not go down as a failure.
Promises about training, support, and advertising are often much greater than what is delivered. For this reason, many franchisees soon begin to resent the 6 to 9 percent of gross sales they have to send the parent company every month.
If you are considering a franchise, investigate the organization carefully. Remember the franchisor has a vested interest in keeping each location open, not necessarily in making you a success. Each time the franchise location is sold, the franchisor usually gets a piece of the action. If you investigate carefully, you will see that some franchise companies make the majority of their money from opening new locations and selling existing stores, rather than from the revenue generated by product sales.
Successful franchises require a substantial investment and as much commitment as starting a business independently. A franchisee can expect advice and advertising campaigns from the franchisor, and also the help and support of other franchise owners.
If you are considering a particular franchise, be sure you check it out with the current owner. Have a lawyer look over the contract before you sign it; he is the only one who can spot language that may cause you problems later. If the franchisor cannot answer your attorney's questions satisfactorily, do not sign.
If the franchise deal looks too good to be true, it probably is.
Buying an Existing Business
As with a franchise, buying an existing business may eliminate many of the problems a new business will entail. Still, you must consider the following when evaluating the purchase of any business: debt service, cash flow, inventory, existing customer base, and potential growth/expansion. Know what you are getting before you write out a check. Talk to the owner and consult with his accountant. If you are uncomfortable after these discussions, engage a specialist. It will be worth the money.
With interest rates in the double digits, debt service is no small matter today for the average business. Debt service influences profit margins and also cash flow. Cash flow, however, is also affected by other business factors. What are the receivables like? How old are they? How many customers are there? How wide is the customer base? Are there lots of customers, or do one or two large ones generate most of the sales volume? If the latter, what is the credit risk with those few customers? What would happen to the business if those large customers were lost? What are vendor relations like? How much credit can you get from them? What will they do with a new owner? Will they raise the price on your supplies?
The existing steady customers are your bread and butter. Will they stay with you if you buy the business? It may be difficult to evaluate, but you must try to get a feel for it. What percentage are they of the receivables? If a change causes you to lose even 20 percent of your existing customer base, you may find yourself losing so much money that you cannot generate enough new sales before it is too late.
Finally, what is the realistic opportunity for growth? How many competitors are there and what are they doing to gain market share? Is the market large enough to let you grow? Is the market growing, too? Is the opportunity for growth that the seller presents valid when compared to his track record?
When you purchase a company, it cannot stay the same size. It is immediately supporting two families-the previous owner's (with your monthly payments) and yours. Give serious consideration to this fact before you buy.
Starting Your Own Business
It takes a lot of courage to give up a regular paycheck and go into business for yourself, and a franchise or existing business can lessen the risk. But you may have an original idea, or there may not be an existing business or franchise that interests you, so you start a business from the ground up.
The first thing you will need is money. Hat in hand, you pay a visit to your friendly banker. He will tell you that you may be brilliant in your career and have a great idea for a business, but without previous experience he cannot lend you any money. He can, however, lend you money by your mortgaging your house, cars, real estate, your first child, and your favorite pet. In other words, without prior business experience you cannot get a business loan. Instead, everything of value that you own will have to be used to raise the money. This is what gives you the incentive to make a success of the business!
Before you make the commitment, know the three circumstances you will face as a beginning entrepreneur.
First, you probably will not earn a profit from the business for the first two years. However, sometime within that period the business should generate enough revenue for you to begin drawing a salary that covers your living expenses. If the business actually earns a profit in those first two years, it is an exception.
Second, expect to invest twice as much as you figure in your original business plan. It's like moving into a new house: you never anticipate all of the cash drains that arise in a new business.
Third, your original marketing plan will probably be off the mark and you will find the market different from your expectations once you are actually working in it. Do not spend a lot of money on fancy brochures too early in your business development. You will have more urgent uses for that cash, and the brochures will be outdated and unusable within six months.
Develop something simple in the beginning and save your money until you know exactly what four-color pieces you will need.
These three considerations may sound crazy to you now, but ask ten entrepreneurs who have been in business for five years or less about each one, and you will find nine out of the ten will admit that they encountered all of those problems.
If you have enough money to live for two years without income from the business, and you have an exciting idea you would like to build into a business, go for it. It's harder than you ever dreamed, but worth it if you succeed.
Building a Company or Shaping a Practice
There is a difference between a business and a practice. As a mid-career changer, you probably have the means and the experience to go in either direction.
Fundamentally, a practice is based upon the reputation of an individual, such as a management consultant or a doctor. A business is based upon the reputation of a company name and location, such as Bloomingdale's. A practice is usually a personal service delivered by a professional. A business is usually a product or service delivered by a number of people. A practice usually involves promoting the reputation of the main practitioner. A business usually involves promoting the value of the product or service. A practice has to be passed on to another owner carefully, presenting constancy to its clients. A business can generally be sold without disturbing much of the customer base.
If you want to build a practice, you must look at how promotable you are as an individual. You must be, or become, an effective public speaker. You will need to gain visibility in your community. Making presentations about your specialty to groups of professionals and business people is the most effective tool you have to promote your practice.
In building a business, you will focus attention on your product or service. You want it to become your star attraction. Look for creative ways to get attention for the product.
If you want to build a practice, you can use your name in the company name. If you want to build a business that can be sold, give your company a name that represents the product or service the business delivers. It is much more difficult to sell a business that has the founder's name on it. A large part of a company's equity is in its name and reputation. With the founder's name as the name of the business, a portion of that equity could be lost in a sale that resulted in a name change.
Finally, a practice is often easier to build than to sell. What are your long-term goals? If you want to develop a business that you can still be working when you are eighty-five, consider a practice. If you want to sell out in five years for $5 million, you are going to have to build a business.
