Consider these 5 Ways to Become an Entrepreneur when considering self-employment
- Starting from scratch
- Multi-Level Marketing
- Buying a franchise
- Buying an existing business
- Conversion Franchising – a Hybrid Strategy
It is important to identify your ideal business model by considering the following:
- What drives your passion? To be self-employed, you really have to be passionate about the roles that drive your business, or you risk losing interest in it after a period of time.
- Your skills and abilities. Know what you are good at so you can leverage those positive aspects of your personality and background.
- Your likes and dislikes. Not all tasks when running a business are pleasurable. But make your choice of self-employment based on a business or franchise opportunity that allows you to do more tasks that you enjoy doing and less of the ones you don’t like to do.
For instance, if you are good at sales and marketing and enjoy it, choose a self-employment option that lets you do more of it. If sitting at a desk and generating reports isn’t for you, look for a business or franchise opportunity that has less of these tasks involved. Of course, hiring help or outsourcing is always an option, but not always the most cost-effective one, especially when you are just starting business. Overall, it makes sense to focus on roles that drive the business, not on products or services.
For more information and guidance on how to be self-employed and find the right franchise opportunity, call Gary Prenevostat (905) 405-6300
1. Starting Up Your Own Business From Scratch
This is arguably the most common way that Canadians go into business for themselves, because many people see this as the fastest, least expensive way to get a business started. There are certain advantages to starting a business from “scratch”:
- Lower start-up costs
- Ability to leverage past experience
- Perception of getting paid what you’re really worth
- Pride of ownership & accomplishment
- No-one to report to or tell you what to do – 100% control
Sure, starting a business from scratch can be argued as being far less expensive… but is it really? The new entrepreneur has to figure out what mix of products and services to offer, how to offer them, who the customers are & where they’re going to come from, how to position against customers, where to locate & why… the list goes on. While the new owner is not paying out money to start the business, they could be paying a lot over time – for the wrong things. Some disadvantages of starting a business from scratch include:
- Limited to no support – you have to figure everything out yourself
- Business generation – prospecting, selling are ongoing commitments
- Tremendous competition – how to differentiate yourself?
- Cash flow may be unpredictable
- Risks associated with you being principle asset of company – difficult to build equity
- Cash flow interruptions during injury or vacations
- Less customer loyalty in marketplace
There’s also the cost of time – time to figure out so many important factors about what it takes to achieve and maintain success in business. Another way to look at this cost is as a “lost opportunity cost” – in other words, the would-be owner needs to factor in how much business they’ll miss because they don’t initially have the right product/service mix, the right value proposition, the right marketing and sales material, the right staff and resources to deliver the product/service, etc., The only way to figure out all of these and many more important factors is by trial and error – over time. The trouble is that each trial, each error consumes invaluable time, effort, focus and money; all of which are usually in limited supply!
When you consider that in Canada close to 50% of start-up businesses fail within 5 years, in many cases consuming most, if not all of the entrepreneur’s life savings in the process, it’s painfully obvious that almost everyone starting on the “start from scratch” didn’t figure things out soon enough. While no one knows for sure, it’s this author’s opinion that most of these entrepreneurs didn’t look a t things strategically enough when they started their business – in other words, they only focused on the up side possibilities, instead of taking sufficient time to consider the numerous down-side risks and come up with ways to mitigate those risks.
So, when you look at the cost of time from this more complete perspective, the cost of time can be measured in tens of thousands to hundreds of thousands of dollars of physical money spent by the owner, not to mention a significantly higher amount that were not realized due to missing real opportunities!
2. Multi-Level Marketing
Becoming a distributor or licensee of an MLM company is often a very inexpensive way to get into business, and most people in this type of business do it on a part-time basis. Most MLM businesses offer a niche set of products or services, but instead of using traditional retail or B2B go-to-market strategies, they have a much more “grass-roots” approach.
The principal strategy that drives this business is recruiting – where you recruit people to also become distributors (some of your revenue comes from their purchase of the start-up kit). Each person you recruit becomes a member of your down-line channel, and you make an override on anything that they buy, plus you make an override on anything that they sell. When they recruit someone, that person becomes part of their down-line, but also becomes part of your down-line so you get an override on those purchases and sales as well, and so on…
Different concepts have different limits regarding how deep your down-line can be, but almost everyone who’s achieved any degree of success in MLM businesses has done it by recruiting lots of people, and NOT by selling lots of product directly. They often use seminars to recruit people and are responsible to train the people they recruit. Because you get an override on the production of your down-line, the more people you recruit, the more money you make.
Unfortunately there have been so many MLM companies over the years that have failed to fulfill their promised of high value and rapid wealth creation that most of us are conditioned to avoid “the pitch” – you know – when one of your friends or family members want to introduce you to a “unique opportunity”, but they can’t give you any details until they meet you in person…
When it comes to these types of businesses, we recommend high levels of caution because it is very difficult to substantiate any earnings claims that many of these businesses make.
3. Buying a Franchised Business
When done right, franchising is about working with proven systems, consolidated thought leadership, outperforming non-franchised competitors and capturing disproportionate market share! Many people hold franchising as the ideal way for a first-time entrepreneur to launch into business; in many cases it is. Franchising in Canada boasts a success rate in the 85% range – more than 5 times more successful than starting from scratch! (based on the number of businesses still open after 5 years).
When you look at the combined Retail and Service Industry sectors (which encompasses most independent businesses and franchise systems), you’ll want to consider that close to only 12% of all businesses in these two entire sectors are franchised – the other 88% consists of sole proprietors, private corporations, public companies, not-for-profit, etc. Now here’s the kicker! These 12% of businesses that are franchise systems capture roughly 47% of ALL business in that sector! (This is almost exactly the same statistic for both the Canadian and the US marketplace).
Do you think there is a correlation between this statistic and the number of independent business failures compared to so few franchise failures? We do! When you look at success rates of franchises versus independent businesses, the ability of franchise systems to be able to capture so much market share should NOT be overlooked. Many business experts, as well as many banks consider franchising as the safest, most effective way to go into business for yourself, especially if it’s your first time in business.
A well-established franchise opportunity offers you this and much more:
- A proven system and business model
- Training and support networks
- Control over career and business growth
- Greater freedom and flexibility once your business is established
- Work-life balance once your business is established
- Ability to leverage an established brand
4. Buying an Existing Business
Buying an existing business is often considered less risky than starting from scratch; we agree, provided that you follow the proper search methodology and first identify what types of businesses you should be looking at. Finding a good existing business is often far more difficult than people initially expect – it could be that the owner wants a much higher price than seems fair and reasonable, or once you start your due diligence you find that the business isn’t as easy to run as you initially thought, or a myriad of other reasons too!
In most cases, the primary reason why people end up buying an existing business is that they’re buying a predictable cash flow, and they’re willing to pay a fair premium for this cash flow instead of starting from scratch.
Advantages and Disadvantages of buying an existing business:
- the business should have a stable and established customer base
- the business has an established brand and reputation in the immediate marketplace
- you can look at actual performance history and quickly assess to what degree that business is generating cash flow and profits, and how the business has been trending
- the business should have employees who are familiar with all aspects of the business, and who should be willing to stay on through the transition
- the business has established systems and procedures so you don’t have to reinvent the wheel – in other words, some level of formula for success for running the business has already been implemented
- somewhat easier to obtain financing, provided the business has a good performance track record
- buying a business is often more costly than starting from scratch because you’re paying a premium for the existing cashflow; independent businesses often sell for 1 to 2 times EBITDA (earnings before interest, taxes, depreciation, and amortization), while franchised businesses often sell for 2.5 to 3.5 times EBITDA
- You can only assess the business in terms of its own performance versus a franchise system where you can assess multiple locations and in multiple markets
- There’s no way of knowing how many customers and/or employees will leave when the ownership changes, therefore ALWAYS assume some attrition (we recommend at least 20%)
- The new owner may be stuck in unfavourable contracts with suppliers, or may have to renegotiate attractive contracts due to ownership change, thus losing some advantages the existing owner enjoys
- It’s very difficult to identify potential weaknesses of the existing business systems and processes
- It’s very difficult to identify potential market threats (some of which the owner is aware of and thus is motivated to sell)
- You rarely know the REAL reason why the owner is selling, so there’s always a niggling question as to what’s really going on behinds the scenes.
Buying an existing business can be very lucrative, but there are a lot of things to consider in your research. In addition to thorough a due diligence investigation into the performance of the business, you still have to ascertain to what degree you “fit” the roles that drive success for that business; you also have to make sure you can effectively manage the business’s existing systems without changing too much when you take over.
5. Conversion Franchising – a hybrid strategy
One way to mitigate much of the risk of buying an existing business is to work with a proven and established franchise system in your target industry to find a successful independent operator, then buy that business and convert it to a franchised business with that franchisor. This enables you to buy a business with a good track record, while also taking advantage of the proven systems, support and marketing strategies of a proven franchise system.
This strategy is known as “Conversion Franchising”, and it is often the best way to enter a well-established marketplace. There are a few franchisors who take a proactive role to scout the independent business market and target the top 25% performers of these independent businesses to see if they are ready to sell their business. The new franchisee (you) would buy that business AS PART of your franchise purchase, thus enabling you to realize all of the advantages of buying an existing business, while removing many of the disadvantages – because a sophisticated franchisor will do a far more detailed assessment of the business than you could on your own.