CHAPTER 4: ENTREPRENUERAL OPTIONS : START-UP, BUYOUT OR

FRANCHISING

For a new entrepreneur, the decision to own and operate a business is the result of his serious
exploration of ideas and sensible evaluation of opportunities. A sensible entrepreneur would always
consider serious issues before going into business. Very often, the decision to engage is a particular
business would minimize the possible waste of time, energy and resources if it is made after carefully
addressing these issues.

A. Starting a New Business

This is a business from scratch as start up. The reasons for the popularity of a start up among
entrepreneurs are varied. They find it exciting and satisfying to be able to put to use the latest
ideas, process and facilities in running a business. The challenge that goes with doing something
new puts the entrepreneur passionately at work. Also, some entrepreneurs get a feeling of
fulfilment in their autonomy and freedom to run a business.

These are the other reasons that move an entrepreneur to pursue a business:
1. If the entrepreneur has a newly invented or newly developed products or
service.
2. When the entrepreneur wants to take advantage of an ideal location, product or
service, equipment, employees, suppliers and financial backers.
3. If the entrepreneur wants to avoid problems and undesirable commitments in
policies, contracts, and procedures involving other firms.

Advantages:

1. Lower start-up costs - Depending on the type of business you start, costs may be lower than a
franchise where there is no up-front purchasing fee or supply costs
2. Independence - You make all decisions and create all business systems
3. Site selection - You choose where to locate your business and what marketing procedures to
follow
4. No baggage - There is no history to overcome when you start a new venture
5. You’ll have the opportunity to orient the business toward your own personal goals.
6. You’ll have a complete flexibility in selecting your products, target market, service strategy,
competitive strategy, location and facilities.
7. Easier to innovate and make further improvements.
8. You can design your own policies and procedures and can train employees your own way.
9. You also avoid “goodwill” expense of buying an existing business along the possibility of
unknown or contingent liabilities.
10. You will not risk inheriting any pre existing ill will from previous customers, suppliers, creditors,
or employees.

Disadvantages:
 1. There is a great uncertainty about the market demand for the new product or service.
2. It takes time and energy to create an image, build patronage, works out new system and
procedures, and reach a break even level of sales.
3. Added risks in an investment will not be recouped.
4. Unexpected competition may emerge and potential customers may be more difficult to attract.
5. High commitment - Starting your own business requires a higher commitment of time and
energy
6. High risk - Success depends totally on you and your business talents
7. Delayed profitability - Where the market may not already be established, it may take longer to
become profitable.
8. Limited financing - Financing for a new business is more difficult to obtain
9. You will need to look in to every small detail that goes into running your business and that may
mean long working hours and fewer chances of vacation.
10. Running a full-fledged business is not easy. A lot of processes are involved which may make your
existing education inadequate. Thus you may need to learn a lot of new subjects like
administration, planning, promotion, human resource development, research and development
etc.
11. Owning a business means exposure to direct legal problems, which you would not face as an
employee in a company.
12. If somehow you are not able to run your business yourself and your spouse or children take
over, then there is a huge risk that the customers may leave you owing to different methods of
business employed them.

B. Buying an Existing Business

For some entrepreneurs, buying an existing business represents less of a gamble than starting a new
business from scratch. While the opportunity may be less risky in some aspects, you must perform due
diligence to ensure that you’re fully aware of the terms of the purchase.

Deciding on the right type of business to buy

Ideally any business you buy needs to fit your own skills, lifestyle and aspirations. Before you start looking,
think about what you can bring to a business and what you'd like to get back.

List what is important to you. Look at your motivations and what you ultimately want to achieve. It is useful
to consider:

 Your abilities - can you achieve what you want to achieve?

 Your capital - how much money do you have to invest?
 Your expectations in terms of earning - what level of profit do you need to be looking for to
accommodate your needs?
 Your commitment - are you prepared for all the hard work and money that you will need to put into the
business to get it to succeed?
 Your strengths - what kind of business opportunity will give you the chance to put your skills and
experience to good use?
 The business sector you're interested in - learn as much as you can about your chosen industry so you
can compare different businesses. It's important to take the time to talk to people already in similar
 businesses. The internet and your local library will also be good sources of information. Find out how to
comply with all the regulations and licences that apply to Your business sector.
 Location - don't restrict your search to your local area. Some businesses can be easily relocated.

Advantages to Choosing an Existing Business

There are many favorable aspects to buying an existing business:

 Drastic reduction in startup costs

 Facilties, technology already available
 Cash flow may be immediate because of existing inventory and receivables
 Existing goodwill and easier financing opportunities, assuming the business has a good
reputation
 They already have available personnel with know how.
 It may be easier to obtain finance as the business will have a proven track record.
 A market for the product or service will have already been demonstrated.
 There may be established customers, a reliable income, a reputation to capitalise and build on
and a useful network of contacts.
 A business plan and marketing method should already be in place.
 Existing employees should have experience you can draw on.
 Many of the problems will have been discovered and solved already.

Disadvantages to Choosing an Existing Business

The following are some downsides to buying an existing small business:

 Purchasing cost may be much higher than the cost of starting a new business because the initial
business concept, customer base, brand and other fundamental work has already been done
 Hidden problems associated with the business and receivables that are valued at the time of
purchase, but later turn out to be non-collectible
 Some of the groundwork to get the business up and running will have been done.
 It may be easier to obtain finance as the business will have a proven track record.
 A market for the product or service will have already been demonstrated.
 There may be established customers, a reliable income, a reputation to capitalise and build on
and a useful network of contacts.
 A business plan and marketing method should already be in place.
 Existing employees should have experience you can draw on.
 Many of the problems will have been discovered and solved already.

How to value a business

Valuing a business can be one of the most worrying parts of buying an existing business.
There are several valuation methods you can use. For specific advice on valuation methods see our
guide on how to value and market your business. Your accountant may be able to help you value the
business, but a business transfer agent, business broker or corporate financier will be best qualified to
provide valuation advice.
A healthy business
To get a general idea of how healthy the business is, look at:
 the history of the business
 its current performance - sales, turnover, profit
 future projections or a business plan
 its financial situation – cash flow, debts, expenses, assets
 why the business is being sold
 any outstanding or major litigation the business is involved in
 any regulatory changes which might have an impact on the business
As part of your investigations, talk to the vendor and, if possible, the business' existing customers and
suppliers. The vendor must be comfortable with you doing this and you must be sensitive to their
position. Customer and suppliers may be able to give you information that affects your valuation, as well
as information about market conditions affecting the business. Such research can also be done on the
internet or at your local reference library.
For example, if the vendor is being forced to sell due to decreasing profits, your valuation might be
lower.
Intangible assets
The most difficult part is valuing the intangible assets. These are usually difficult to measure and could
include:
 the company's reputation
 the relationship with suppliers
 the value of goodwill
 the value of licenses
 patents or intellectual property
You should consider how the value of these assets could be affected if you decide to buy the business.
Other considerations.

The list below details other factors that will affect the value:
 stock
 location
 assets
 products
 debtors
 creditors
 suppliers
 employees
 premises
 competition
 benchmarking - what other businesses in the sector have sold for
 who else in the sector is for sale or on the market
 the economic climate - will any new government legislation have an impact on the business

Once you have considered all these factors you can then decide how much you want to offer, or
whether you want to buy it at all.

If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to
verify that all of the information you have been told is accurate. This is known as due diligence. See the
page in this guide on how to make sure a business is worth buying: due diligence.
Step-by-step: how to buy a business

1 Get professional advice

Professional help is invaluable as you go through the negotiation, valuation and purchase process. You
can find details of how to find professional help in our guides on how to choose and work with a
solicitor and how to choose and work with an accountant.

2 Research
Research the sector you're interested in, including the best time to buy, and shortlist two or three
businesses.

3. Initial viewing and valuation

Be discreet - the owner may not want staff to know they are selling, but be thorough and record key
findings.

4 Arrange finance
Lenders generally require:

 details of the business/sales particulars

 accounts for the last three years
 financial projections - if no accounts are available
 details of your personal assets and liabilities

There are several possible sources of finance you could consider. For specific advice, see our guides on
bank finance, financing from friends and family and equity finance.
Use our interactive tool to identify the right finance for your business.

5. Make a formal offer

If you make your initial offer by phone, follow this up in writing. Head your letter subject to contract
and include this phrase in all written communication.

6 .Negotiation
Before completing the sale, it may be worth trying to negotiate an overlap period so you have time to
become familiar with the business before taking over.

7. Completion
Even after you reach an agreement on the price and terms of sale, the deal could still fall through. You
have to meet certain conditions of sale to complete, including:

 verification of financial statements

 transfer of leases
 transfer of contracts/licenses
 transfer of finance
 transfer of existing or new VAT registration
 C. Franchising

Concepts of Franchising

Franchise – an agreement whereby an independent person is given exclusive rights to sell a

specified good or service.

Franchising – a marketing system based on a legal agreement wherein one party (franchisee or
franchiser) is given the right to handle a business as an independent owner but is required to abide by
the terms and conditions specified by the other party (franchisor).

Franchisor - The franchisor owns the overall rights and trademarks of the company and allows its
franchisees to use these rights and trademarks to do business. The franchisor usually charges the
franchisee an upfront franchise fee for the rights to do business under the franchise name. In addition,
the franchisor usually collects an ongoing franchise royalty fee from the franchisee.

Franchisee - A franchisee is an individual who purchases the rights to use a company’s trademarked
name and business model to do business. The franchisee purchases a franchise from the franchisor. The
franchisee must follow certain rules and guidelines already established by the franchisor, and in most
cases the franchisee must pay an ongoing franchise royalty fee to the franchisor.

Franchising Contract - The franchise agreement is a legally binding agreement which outlines the
franchisor's terms and conditions for the franchisee. The franchise agreement also clearly outlines the
obligations of the franchisor and the obligations of the franchisee. The franchise agreement is signed at the
time an individual has made the final decision to buy the franchise. It is strongly suggested that anyone who
is considering buying a franchise should consult with a professional franchise attorney.

Types of Franchising:

1. The Product Franchise.

With this the manufacturer uses the franchise agreement to determine how the product is
distributed by the person buying the franchise. A retail company can be provided with a franchise to
distribute, for example, a range of tyres. The franchisee can utilize the brand name and the trademark
owned by the manufacturer to distribute or sell the car tyres. The owner of the store will pay the
manufacturer a franchising fee or agree to purchase a minimum inventory to sell on to their customers.
The manufacturer gets the income from the purchase of the retailer, and/or the franchise fee, and the
retailer gets the benefit of the brand and experience of the franchisor.

2. The Manufacturing Franchise.

The franchisee is permitted to manufacture the products under license and sell them using the
originator's trademark and name. They also get the benefit of the national advertising of the product
they manufacture. The company owning the product gets the franchise fee and sometimes a fee for
every unit sold. Examples include the food and beverage industry.

3. The Business Franchise Venture.

The franchisee purchases and distributes the products for the franchise owner. A client base is
provided by the product owner for the franchisee to maintain. Vending machines are a classic example
of this, where the franchisee purchases the vending machines and distributes and services them, taking
their share of the takings of the machines.

4.A Business Format Franchise

This opportunity is very popular, and involves providing the franchisee a proven business model
using a recognized product and brand. Training is provided by the franchise owner and assistance in
setting up the business. Supplies are purchased from the franchisor and the franchisee pays a royalty
fee. Frequently the franchisor will sell the franchisee the products or raw materials to provide the same
quality of product. Most well known fast food franchises are of this type, and also many jewelers and
other ubiquitous High Street names.

What Does Franchise Provide

Like other businesses, franchising also requires commitment , time, effort and the money that would
spend on franchising. The franchisor not only looks at the business location of the outlet but also the
financial and management capability.

1. Business name– The franchisee may have a different company name but it’s the product
should have the names that are patented by the franchisor. The name and the way it is
written designed or printed should be uniform with the other franchise outlets.
2. Market Research – The marketing research of the franchisor should benefit the
franchisee. It will serve as guide to help the franchisor in evaluating the proper location,
promotions, personnel, distribution and market segment.
3. System Ideas and the Operating Manual – the system ideals are written on the operating
manual which should be provided by the franchisor. It describes how things should be
conducted in the operating of the system. The operating manual communicates the
complete operating procedures necessary to maintain the standards of the franchise
4. Propriety Marks – Include logo, slogans, and other printed signs that show distinction of
the franchise. The franchisee is allowed to use the patented marks of the franchisor.
5. Experience – This is an important service that the franchisor provides to the franchisee.
With the vast experiences of the franchisor, the franchisee avoids mistakes committed
by one by a new and growing company. It will help reduce losses brought about by the
miscalculation of risks.
6. Training- Franchisor provide training assistance to the franchisee. Not only the
knowledge but the conceptual framework of the business.
7. Location Assistance and Approval - Give ideas on where a franchise would likely to get
more sales.
8. Store Layout and Construction Supervision – Franchisor give the franchisee the
specification for the construction of the store. These specifications are based on careful
planning that would bring the efficient operations. (color, decor, walls, pertinent
materials)
9. Exclusive Area Coverage – Franchisors provide exclusive territories to franchise holders.
Exclusive territory means that no others franchise coming from the same organization
may overlap territorial limit.
10. Procurement Programs – Franchise organizations share the system of procurement with
the franchisee. It provides the list of authorized suppliers for the different needs of the
franchise outlet.
 11. Hiring Assistance – The franchisor usually gives the franchisee the guidance needed in
hiring personnel that would fit the nature of the organization.
12. Grand Opening Assistance – The opening is the highlight event of the franchise outlet.
The opening day is when all the training and plans will be operational zed. The franchise
organization’s management and staff lend a helping hand to make sure that everything
goes smoothly starting at the day one.
13. Marketing Strategies – The franchisor is generally familiar with tested and proven
strategies to guide the franchisee to remain competitive. It includes the aspects of
advertising and different promotional tactics design to ensure continued profit.
14. Research and Development – the franchisee must see to it that the business does not
remain stagnant. The franchisor spends time to ensure that improvement in the
products, services, equipment, operation processes. R&D is necessary to beat the
competition.

Advantages of Franchising:
1) The business you are franchising is already successful and is a proven idea. Usually, before
offering the business for franchising, the original owners have already build it up and have
already made it successful. Franchising, for them, is a way to expand the business; it is not a way
to build the business from a small one to a big one.

2. The brand name is already recognized and name-recall is already very easy. Plus the
franchisor or the owner of the franchise will take it upon himself to promote the franchised
name or product, which will benefit the franchisee.

3) You may have exclusive rights to market the franchised products in your territory. One
example is Starbucks Philippines. This one is franchised, yes, but the franchise belongs to just a
single entity in the whole country.

4) A franchisee will enjoy the benefits of being supported by the franchisor. This is part of the
franchise agreement. In return for the franchise fee the franchisee pays the franchisor, the latter
commits to support, to train, to share ideas and even manpower to the franchisee.

5) Systems are already in place. From getting the supplies to cooking the food (if you’re
franchising a fast food or a food cart business) to selling the products or services to summarizing
your numbers and producing your financial reports, the systems are already there for you. You
just need to follow them.

6) You will get to leverage on the good name and purchasing power of your franchisor when it
comes to sourcing your supplies from suppliers.

7) Lower Failure Rate - When you buy a franchise, you are buying an established concept that
has been successful. Statistics show that franchisees stand a much better chance of success
than people who start independent businesses; independent businesses stand a 70 to 80
percent chance of NOT surviving the first few critical years while franchisees have an 80
percent chance of surviving
 8) Buying Power - Your franchise will benefit from the collective buying power of the parent
company as the franchisor can afford to buy in bulk and pass the savings along to franchisees.
Inventory and supplies will cost less than if you were running an independent company.

4) Star Power – Many well-known franchises have national brand-name recognition. Buying a
franchise can be like buying a business with built-in customers.

5) Profits - A franchise business can be immensely profitable. (Think of Macdonalds and Tim
Hortons, for instance.)

Disadvantages of Franchising:
1) Their Way or The Highway - The main disadvantage of buying a franchise is that you have to
do it their way - sometimes right down to the way the napkin holders are filled. As a franchisee,
you are not the one actually running the show, and some franchisors exert a degee of control
that you may find excruciating.

2) Ongoing Costs – Besides the original franchise fee, royalties, a percentage of your franchise’s
business revenue, will need to be paid to the franchisor each month. The franchisor may also
charge additional fees for services provided, such as the cost of advertising.

3) Ongoing Support? Not all franchisors offer the same degree of assistance in starting a
business and operating it successfully. Some are just startup operations – and everything after
startup is up to you. Others make promises of ongoing training and support that they don't
follow up on.

4) Cost - Buying into well-known franchises is very expensive. If this is your choice, you will have
to have extremely deep pockets or the ability to arrange the necessary financing

5) Shark-Infested Waters - Buying a little-known, perhaps inexpensive franchise can be a real

gamble. Just because a business is offering franchises is no guarantee that the franchise you buy
will be successful. In some cases, franchising is the business; all the franchisor is interested in is
selling more franchises. Whether or not the individual franchises are successful is irrelevant to
them. This is not to say that no little known, inexpensive franchises are worthwhile, but just a
reminder that any franchise you're thinking of buying needs to be investigated carefully