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Michael Katz
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303-790-4103

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Starting vs. Buying a Business

 

Buying vs. Selling a BusinessWHAT IS THE DIFFERENCE BETWEEN STARTING A BUSINESS, BUYING AN EXISTING BUSINESS & BUYING A FRANCHISED BUSINESS?[1]

So, you know you want to run your own business.  What is your best option?  There are several factors to consider.  The business law experts at Corporon & Katz, LLC. can help you understand the differences and what to consider.

Personal Skills and Experience:  A good place to start is to take an honest assessment of your skills and experience. The skills considered most important to have are skills and experience in the specific industry that you are entering, and experience in operating a company—management, budgeting, cash flow, etc.  If you have these skills, starting your own business is an option.  Otherwise, you may want to consider buying an existing business or   a franchised business.

Freedom:  When you think about running your own business, you probably think about finally making all of your own choices.  This is true in varying degrees, depending on the business you choose.  If you start your own business, the sky is the limit—you can choose your product/service, your team, and every little detail.  If you purchase an existing business, you’ll have a little less freedom—you will have purchased an existing brand, existing management and employees and clients.  You can change certain parts of the business moving forward, but your choices are more limited.  If you purchase a franchise, you’ll have even less freedom.  The franchisor will tell you what products you will sell, what manner you will sell them, and even small details like what business hours you will stay open.

What About the Risk and Financial Responsibility?

Stability/Tolerance of Risk:  The flip side of having freedom, is taking on additional risk.  Although estimates vary, most sources agree that starting your own business is more risky than buying an existing business or buying a franchised business.  According to 2014 Washington Post article, about 50% of start-up businesses are still open after four years.[2]    When comparing a franchised to a non-franchised business, the statistics are less clear.  Studies done by the International Franchise Association show that in the US, far more franchised business are still operating after 5 years, compared to non-franchised small businesses.

However, a research done by Timothy Bates, a Wayne State University Economist suggests that after 5 years, only 62% of franchised businesses were still operating compared to 68% of non-franchised small businesses.[3]

Upfront Costs/Ongoing Costs/Availability of Funding:  When you start your own business, you create value, but when you buy an existing or franchised business, you pay for the value created by someone else.  This creates differences in costs.  If you are starting your own business, you may have lower upfront costs but likely higher costs over time, if you want your business to grow.  For example, you may start your business out of your basement, with no employees other than yourself, but over time, if you want your business to grow, you’ll have higher costs – you must purchase/lease office space and supplies, find and hire employees, and develop products and marketing plans.  When you purchase an existing business, you’ll have higher upfront costs (you’ll need to pay the purchase price for the business) and likely moderate ongoing costs (to continue the business and grow the business).  For a franchised business,  you’ll likely have high upfront costs (to pay the initial franchise fee and purchase supplies, space, etc.) and high ongoing costs (to grow the business and pay the ongoing royalty fees).

However, although the upfront costs of starting your own business is lower, you are much less likely to be able to obtain financing through traditional sources – banks, angel investors, etc.  Traditional sources of financing are more willing to fund businesses with established revenue streams.

How About the Legal Considerations to Consider?

Legal Requirements:  Much like the financial costs, start-up businesses may have less legal requirements/start-up costs upfront  — companies must form their entity, file for EIN #.  But will have greater legal requirements/expenses on an ongoing basis—they must create agreements with employees, vendors, customers, etc.  Buying an existing business will have more legal requirements up front (negotiating to purchase the existing business, and formation documents) and less legal requirements on an ongoing basis since most legal structure is already in place.  Buying a franchised business, will likely require the most legal work both upfront and on an ongoing basis—upfront you must review and negotiate the Franchise Agreement, the lease and other set-up documents.  Ongoing, you you’ll have all of the legal requirements of a start-up business, plus additional requirements, like negotiations with franchisor and incorporating franchise requirements into lease.

These are just some of the questions you should consider when you’re ready to own your own business.  When deciding between starting a business from the ground up, or purchasing an existing business or franchise, the business law experts at Corporon & Katz, LLC. are here for you.  We can help you make sure you’re making the right decisions and considering all the possibilities. Call us today at 1-888-780-0910 or 303-790-4103 to see how we can help you get started down the road to business ownership.

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[1]  When you purchase a franchised business,  you can either choose to start a new franchised business (i.e., you buy the franchise from the franchisor and start from scratch in a new territory) or you can purchase an existing franchised business (i.e., you buy the franchise from an existing franchisee and take over his or her existing franchised business).  For purposes of this blog, I will just be discussing the option of purchasing a new franchised business.

[2] Do Nine out of 10 New Businesses Fail, as Rand Paul claims?, Washington Post, January 27, 2014; by Glenn Kessler.

[3] See https://www.sba.gov/content/survival-patterns-among-franchise-and-nonfranchise-firms-started-1986-and-1987.

 

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