Different approaches to starting your own business A good business idea
A good business idea could be: - an invention, - a new product or service, or - an original idea or solution to an everyday problem. It might also be: • a gap in the market that you can fill • a business related to the work you do already • an interest or hobby that you can turn into a business Whatever your idea is, you need to be sure that it fits with your needs as an individual, as well as being a viable business proposition.
Questions to ask yourself What is it that you will personally bring to the business in terms of relevant experience and expertise?
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Is there a market - a need for the idea, and customers who will pay for it?
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How big is the market, and how will you reach it? Who will be your main competitors?
What is special about your idea, making it different from similar products or services already out there?
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How will you fund your idea? What might go wrong?
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To turn your answers to these questions into key documents for your business, you need to prepare a business plan and write a marketing plan.
Sources of help • You can get free professional help from your local enterprise agency. • Discuss your ideas with friends and colleagues, particularly those who know about the business.
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? A tried and tested business model
Some self-starters choose a well-trodden path - such as buying an existing business or rights to a franchise - which can carry fewer risks than going it alone. Advantages
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It is usually easier to get finance.
A market for the product or service will have already been demonstrated.
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A business plan and marketing method will be in place. You should have valuable experience to draw on.
Many of the problems will already have been discovered and solved.
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A franchise comes with financial support too.
Disadvantages Some businesses that are up for sale may be experiencing difficulties. Make sure you fully understand the reasons for selling, as you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.
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The rights to a franchise or to sell particular products or services may be expensive.
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With a franchise, there may be a particular way to run the business that you have to stick with.
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? A specific business opportunity
Sometimes the possibility of owning your own business can come as a complete surprise. Perhaps you are offered the opportunity to buy out your employer, or take on a family business. Opportunities like these are like any other business start-ups. You still need lots of personal commitment and you may need to put your own money on the line. You also need to carefully assess the business to make sure it is viable. Advantages Development, planning and market testing should already be in place.
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There may be established customers, a reliable income, a reputation to capitalise and build on, and a network of useful contacts.
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You probably already have expertise in the product or service and a good understanding of the business you're taking on.
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Disadvantages You may be taking on someone else's problems when you take on the business. Ask yourself if there are problems with the business, and if so, can you solve them?
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If you are buying out your employer, you may lose support services that you take for granted now. You won't just be responsible for your core role, but for everything else as well, such as accounting, staff management and payroll.
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More help
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You can get free professional help from your local enterprise agency Talk to people already in the business about your plans and ideas. What can they pass on from their own experiences?
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A business with social aims
You may want to start a business that isn't just for profit but also has a social purpose. For example, you might want to provide a service for a disadvantaged group in your local community, or help improve the local environment. Although any business can have social objectives, you might want to consider setting up a specific type of business known as a social enterprise. Although a social enterprise is run as a business, and often operates under the same financial and profit-driven pressures, it also aims to provide a clear social benefit. The profits are mostly reinvested, or used to support its social aims, rather than being paid to the owners of the business. Advantages
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You earn a living doing something you feel is worthwhile.
As your business grows and matures, your community or beneficiary will also benefit. Customers may be more willing to buy from a business that supports a good cause.
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It may be easier to attract and motivate employees (or even volunteers) to work in a social enterprise.
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You may qualify for a grant, or be able to raise finance from people or organisations sharing your social aims.
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Disadvantages Making profits and achieving your social aims can sometimes conflict with each other. You may have to make difficult choices.
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Although you can earn a reasonable income working for a social enterprise, you will not make your fortune - most of the
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surplus profits are put back into the business or go to support its aims.
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Buy a franchise
Taking on a franchise is an option worth considering for anyone who wants to run a business but doesn't have a specific business idea or prefers the security provided by an established concept. The right franchise can give you a head start. Instead of setting up a business from scratch, you use a proven business idea. Typically, you trade under the brand name of the business offering you the franchise, and they also give you help and support. Successful franchises have a much lower failure rate than completely new businesses. But it isn't all plain sailing. Some franchises are better than others. And some people find that running a franchise just isn't for them.
What is franchising? The term franchising can describe some very different business arrangements. It is important to understand exactly what you're being offered.
Business format franchise This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchisor) grants a license to another person or business (the franchisee) to use their business idea - often in a specific geographical area.
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The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or trade name and benefits from the franchisor's help and support. In return, the franchisee usually pays an initial fee to the franchisor and then a percentage royalty on sales. The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used. Well-known businesses that offer franchises of this kind include TIM, GOODYS, EVEREST,…..
Other types of arrangement Different types of sales relationships are also sometimes referred to as franchises. For example: Distributorship and dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.
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Agency - you sell goods or services on behalf of the supplier.
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Licensee - you have a license giving you the right to make and sell the licensor's product. There are usually no extra restrictions on how you run your business.
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Multi-level marketing Some businesses offer franchises that are really multi-level marketing. Self-employed distributors sell goods on a manufacturer's behalf. You get commission on any sales you make, and also on sales made by other distributors you recruit. Be aware that some multi-level marketing schemes may be dishonest or illegal.
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Advantages and disadvantages of franchising Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks. Advantages Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
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You can use a recognised brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise - the "franchisor".
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The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
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You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same region.
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Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
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Risk is reduced and is shared by the franchisor.
If you have an existing customer base you will not have to invest time looking to set one up. Relationships established.
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with
suppliers
have
already
been
Disadvantages
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Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing royalties and you may have to agree to buy products from the franchisor.
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The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local market.
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The franchisor might go out of business, or change the way they do things.
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Other franchisees could give the brand a bad reputation.
You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
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Reduced risk means you might not generate large profits.
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Assess a franchise opportunity a sound business
To assess if a franchise represents opportunity, you'll need to consider:
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what the business is and how it operates the location of the franchise
the success of the franchise concept - the number of franchises in the UK and how financially successful they are the strength of competition from other businesses in the same market sector
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how long the franchisor - the business offering the franchise - has been in business and how financially secure it is
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levels of initial and ongoing costs
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how much training and support you'll get in setting up and running the business
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conditions and restrictions in the franchise agreement, including how long it will run and whether you'll have the option to renew
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The franchisor will probably give you an information pack but you shouldn't just rely on this. Ask questions and look for evidence of their claims. Visit other franchisees and talk to them. Ask the franchisor for a full list of past and present franchisees, not just the two most successful ones. Take advantage of other sources of information and advice. Ask your bank - many have franchising specialists. And make the most of other advisers your solicitor or your accountant. How a business plan can help Just as you would for any other business, you need to draw up a business plan when buying a franchise. This will help you assess the prospects for the business and identify potential weaknesses. A business plan is also essential for raising finance.
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How to purchase a franchise There are a number of key things you need to consider when planning to purchase a franchise. It might be worth thinking about the following: Assess yourself to see what kind of franchise, if any, will suit you.
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Find out what franchises are available and draw up a shortlist.
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Assess franchise opportunities carefully, ask questions and talk to other franchisees.
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When you find a business, investigate its financial prospects. Base this on a thorough research of performance figures. Include an analysis of three years' accounts - if they have been trading for that period - and management figures.
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If you'll need to raise bank finance, ask your bank if it will consider a loan for the type of franchise you're considering.
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Do your own market competitors in your area.
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research
into business
and
Draw up a business plan.
Check the franchise agreement and get professional advice. However, it is advisable to make sure you don't: take up the first opportunity before investigating alternatives
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allow yourself to be hurried into making a decision pay any non-refundable deposit commit yourself before you're completely satisfied
assume a business will work in your area just because it works elsewhere
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rely on the forecasts provided by the business selling you the franchise
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sign any agreement without legal advice
Tips on franchise agreements The franchise agreement is crucial. Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice from a solicitor. Get a specimen contract for them to review.
Areas covered by a typical agreement Term - how long does the franchise last? Will you have the option to renew it, and on what terms?
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Territory - what area does your franchise cover? Do you have exclusive rights to sell within it?
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Fees - what initial fees will you pay? What royalties will you pay on sales? Will you pay a regular management fee - and if so, what does it cover? Will you have to pay other costs? How are the costs worked out?
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Support - how much help will you get starting the business? What continuing support will you get?
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Restrictions - what restrictions are there on what you're allowed to do and how you must run the business?
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Exit - what happens if you can't continue in business for some reason - perhaps due to ill health? What happens if you want to sell your franchise?
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The costs of a franchise
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When calculating the likely cost of a franchise, you need to take both initial and ongoing fees into account. Initial costs ? The franchisor - the business that sells you the franchise - usually charges an up-front fee, which should be relatively low, and covers the costs of administration. Good franchisors make the most of their profits from continuing royalties.
? Your largest initial costs are usually your investment in:
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premises equipment initial stock
? You will need to establish a business entity. Although a
franchisee holds a contractual agreement with the franchisor, each franchisee is an independent business, and it is this business entity that will enter into the franchise agreement. Your chosen business structure could be a limited company, partnership or sole trader each of which will involve different costs - or your franchisor might have specific requirements.
Continuing costs ? You usually pay a royalty - a percentage of sales - to the franchisor. Alternatively you may pay a management fee of some kind.
? Under the terms of the franchise agreement, you may
have to purchase stock from the franchisor. Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their purchasing power.
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? You also have to pay the usual business costs - for example, rent for premises, utilities or the costs of any employees you take on. Again, check if the things that you pay for through the franchisor have a realistic cost.
? Check too if the agreement includes additional charges.
For example, you may be required to pay for training, or to contribute to the cost of national advertising campaigns.
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? Should I franchise? As with any new business venture, you need to consider carefully whether you have got the right skills and attitude to run a successful franchise. Analysing your own temperament can also help you decide which type of franchise would be right for you. Assess yourself You must be prepared to sell and you will need entrepreneurial flair. A franchise gives you a business blueprint - but it won't automatically give you customers.
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You'll need to work hard, probably for long hours. Do you have the necessary stamina?
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Running your own business can be stressful. Think how you react to pressure.
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You may be starting up in business because you want to be your own boss. If so, would you be happy with the restrictions imposed by a franchise arrangement?
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On the other hand, you may want to limit your risk. You might be more comfortable with a franchise than starting a new business from scratch.
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The right franchise for you Do you like office work? Or would you prefer a business that involves physical labour or using a particular skill?
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Are you happy working on your own? Or would you be good at recruiting, training and managing employees?
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Do you like dealing with members of the public? Or would you prefer a franchise where you sell to business customers?
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Are you weak in particular business skills such as finance? Can you find a franchise that offers the support you need in those areas?
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Find out about possible franchises Franchises are advertised and written about in various national newspapers and in trade publications. You can find listings using a search engine and employing search terms such as franchise opportunity or franchise directory. Attending a franchise exhibition can also be a good way of finding out what's on offer. But tread carefully. Advertised franchise opportunities particularly multi-level marketing schemes - can be untried, dishonest or even illegal.
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Buy an existing business
If you're thinking about running your own business, buying a company that's already established may be easier than starting from scratch. However, you will need to put time and effort into finding the business that's right for you.
Advantages and disadvantages of buying an existing business If you get it right, there can be many good reasons why buying an existing business could be the right move for you. Remember, though, that you will be taking on the legacy of the previous owner of the business, and need to be aware of every aspect of the business you're about to buy. Advantages Some of the groundwork will already have been done in getting the business up and running.
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It may be easier for you to get finance as the business will have a proven track record.
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A market for the product or service will have already been demonstrated.
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There may be established customers, a reliable income, a reputation to capitalise and build on, and a useful network of contacts.
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A business plan and marketing method should already be in place.
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on.
Existing employees should have experience you can draw
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Many of the problems will have been discovered and solved already.
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Disadvantages You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants etc.
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If the business has been neglected you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.
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You will need to honor or renegotiate any outstanding contracts the previous owner leaves in place.
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up.
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You also need to consider why the current owner is selling
Think about the feelings of current staff - it's possible they may not be happy with a new boss, or the business might have been run badly and staff morale may be low.
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Step-by-step: how to buy a business An organised approach will help you find and acquire the right business. Get professional advice Professional help is invaluable as you go through the negotiation, valuation and purchase process. Choose carefully a solicitor and an accountant. Research Research the sector you're interested in, including the best time to buy, and shortlist two or three businesses. Initial viewing and valuation Be discreet - the owner may not want staff to know they are selling, but be thorough and record key findings. 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 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. Negotiation Before completing the sale, try to negotiate an overlap period so you have time to become familiar with the business before taking over. Record all the main points agreed.
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You and your solicitor need to verify the information you have based your offer on. If you're buying premises, you may want to arrange an independent survey and valuation, even if a lender is also carrying out their own survey and valuation at your expense. You can find a surveyor who specialises in commercial property on a business property website. . 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
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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 and your accountant can help a lot at that topic.
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 • its financial situation - cash flow, debts, expenses, assets • why the business is being sold As part of your investigations, talk to the vendor and the business' existing customers and suppliers. They may be able to give you information that affects your valuation. They may also be able to give you general market information about conditions affecting the business.
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.
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Other considerations The list below details other factors that will affect the value: • stock • assets • products • debtors • creditors • suppliers • employees • premises • competition 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. Having done your research, you should verify the information you have been given about your prospective new business. A period of time is allowed for you to access its books and records. This is known as due diligence. It should give you a realistic picture of how the business is performing now, and how it is likely to perform in the future. Due diligence is about much more than the finances of a business. You need to come out of this period knowing exactly what you are getting into, what needs to be fixed, what it will cost to fix them, and if you are the right person to take on this business.
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Key areas to cover are: • employment terms and conditions • outstanding litigation • major contracts and orders • IT systems and other technology • environmental issues • commercial management including customer research and development, and marketing
service,
Information sources Dig as deeply as you can and use whatever documents are available. For instance, if you're looking at employee records, you could check out: • payroll records • staff files • copies of pension and profit-sharing plans, plus financial statements, if relevant • employment contracts • the staff manual • union contracts, if relevant You may also need information from external sources such as the landlord, tax office or bank. When to begin due diligence Don't start due diligence until you've agreed a price and terms with the seller. For a down payment they may agree to take the business off the market during your investigation. The investigation period is negotiable - but most small businesses need at least three to four weeks.
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Looking after existing employees There are regulations that govern what happens to employees when someone new takes over a business. These apply to all employees when a business is transferred as a going concern, meaning employees automatically start working for the new owner under the same terms and conditions Employment tribunal awards When you buy an existing business, you might decide you need to employ fewer staff. But be careful about making any changes, as an employee might take a case to an employment tribunal for unfair dismissal or unfair selection for redundancy. It's best to consult a solicitor before making any such changes. Inform and consult employees If you do want to discuss reducing employee numbers or reorganising staff, it's a good idea to do this once you've completed the due diligence period, but before you take over the business. As the new employer you should inform and consult all employees - including employee representatives - who may be affected. Pensions As their new employer, you do not have to take over rights and obligations relating to employees' occupational pension schemes put in place by the previous employer. However, if you don't provide comparable pensions arrangements, you could theoretically face a claim for unfair dismissal.
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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. It is useful to consider: Your expectations in terms of earning - what level of profit do you need to be looking for to accommodate your needs?
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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?
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Your strengths - what kind of business opportunity will give you the chance to put your skills and experience to good use?
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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. It is also important to find out how to comply with all the regulations and licenses that apply to your type of business.
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Location - don't restrict your search to your local area. Some businesses can be easily relocated.
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Where to look for a business to buy Many national and local newspapers carry adverts for businesses and business premises for sale. Depending on what sector you're interested in, you could look in trade journals, or approach your trade association.
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You could put in your own advertisement, saying what you are looking for. You can get contact details for most newspapers, magazines and trade journals from press directories available at your local library. Don't forget word of mouth. Ask around among trade contacts, business associates, and at exhibitions and conferences.
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? Personal perspective: A change in circumstances
A major life change can often enable you - or push you - to set up your own business. Maybe a dramatic personal event kickstart you into action or your job situation means that now is the time to take the plunge. Such changes might include: • unemployment • redundancy • a change of family circumstances • coming into money Advantages A change in your circumstances might be an opportunity to start again or do something you've always wanted to do.
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Redundancy payments or receiving a lump sum of money can provide an opportunity to invest in a business.
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At its best, being your own boss can give you the flexibility to work around family commitments.
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Disadvantages Major life-changing events can be very stressful. It may be unwise to make further big decisions at times of personal upheaval.
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Starting your own business is unlikely to provide a speedy return on your investment and you should be prepared for a long haul.
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In the early stages especially, running your own business can mean putting in long hours and making sacrifices elsewhere in your personal life.
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Taking control and changing your lifestyle For many people, the biggest attraction of setting up a business is the independence provided by being your own boss and the chance to have the lifestyle you want. Advantages Starting a business can offer a career with built-in independence and flexibility.
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Being your own boss can give you the choice to work more convenient hours - such as working around your children's school hours and holidays.
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You will be able to choose to do some professional development or training.
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You will be the one in the driving seat, making the decisions that enable you to lead your chosen lifestyle.
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If your business takes off, the payoff in financial and lifestyle terms can be huge.
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Disadvantages
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You may find that you have to work longer hours.
You may find it difficult to separate work and home life, especially if you run the business from home, and this can put extra demands on your family. Some business owners suffer stress when things are not going so well.
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You should be prepared for the loss of perks such as pension schemes, holiday pay and sick leave.
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It's quite common to have financial difficulties, especially when you're starting up.
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Going into business full time The kind of business you've chosen - or your individual circumstances - may mean that you want to take the plunge and jump straight in full time. Advantages You can devote all your time and enthusiasm to your business.
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You can react to new developments as they arise.
If your business depends on a gap in the market or a new idea, time will be of the essence. Disadvantages You will have to manage without an income while your business gets off the ground.
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If you decide to go into business full time you have a few options to help you over the early days: Live off your spouse or partner's income - however, it can be hard to live off one salary if you've been running the household on two.
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Use your savings - if you've been putting money aside for a rainy day, this could be it. Ask yourself if you have enough to cover your living expenses and fund your business? For how long? Will you have anything to fall back on if your business fails?
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Get a loan - banks will often help new businesses with a loan. However, they can be inflexible. You may have to pay back the loan immediately if your business fails, and there
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will be expensive penalties if you don't make agreed repayments. Use your home as capital - if you have capital in your house, you could use it as security. However this is risky, your house may drop in value and if you cannot keep up repayments, you risk losing it.
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Borrow money from family or friends - you can save a lot of money if your friends and family don't charge you interest. But if your business doesn't work out, it could put a big strain on your relationship with them.
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Going into business part time
If your business allows, you could decide to work on it part time, fitting it in with your current job or other responsibilities. Then, when the business is robust enough or circumstances change, you can move over to it entirely. Advantages You can still earn an income while you're getting your new business off the ground.
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Technology such as answerphones, the Internet and email make it possible to communicate out of hours when you're not available in person because you're doing your other job.
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It can make it easier for you to juggle your other commitments - such as childcare - by allowing you to choose when you work.
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Disadvantages It can be difficult to manage the extra hours you need to put in.
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Putting in very long hours can be stressful and tiring. There won't be time for much else.
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It could take much longer for your new business to take off.
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You'll have to pay tax on both incomes if you continue with your other job.
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Many people who set up their own business decide to work on a part-time basis to enable them to balance their home and working obligations. Some people decide that the safest option is to continue with their current job whilst setting up their business. Legally you don't have to tell your employer that you are setting up a business, although there may be a clause in your contract preventing you from doing other work. You might want to ask your employer for more flexible working arrangements. These could involve reducing or re-arranging your existing working hours.
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doc_410489740.doc
A good business idea could be: - an invention, - a new product or service, or - an original idea or solution to an everyday problem. It might also be: • a gap in the market that you can fill • a business related to the work you do already • an interest or hobby that you can turn into a business Whatever your idea is, you need to be sure that it fits with your needs as an individual, as well as being a viable business proposition.
Questions to ask yourself What is it that you will personally bring to the business in terms of relevant experience and expertise?
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Is there a market - a need for the idea, and customers who will pay for it?
• • • •
How big is the market, and how will you reach it? Who will be your main competitors?
What is special about your idea, making it different from similar products or services already out there?
• •
How will you fund your idea? What might go wrong?
1
To turn your answers to these questions into key documents for your business, you need to prepare a business plan and write a marketing plan.
Sources of help • You can get free professional help from your local enterprise agency. • Discuss your ideas with friends and colleagues, particularly those who know about the business.
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? A tried and tested business model
Some self-starters choose a well-trodden path - such as buying an existing business or rights to a franchise - which can carry fewer risks than going it alone. Advantages
• •
It is usually easier to get finance.
A market for the product or service will have already been demonstrated.
• • •
A business plan and marketing method will be in place. You should have valuable experience to draw on.
Many of the problems will already have been discovered and solved.
•
A franchise comes with financial support too.
Disadvantages Some businesses that are up for sale may be experiencing difficulties. Make sure you fully understand the reasons for selling, as you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.
•
The rights to a franchise or to sell particular products or services may be expensive.
•
With a franchise, there may be a particular way to run the business that you have to stick with.
•
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? A specific business opportunity
Sometimes the possibility of owning your own business can come as a complete surprise. Perhaps you are offered the opportunity to buy out your employer, or take on a family business. Opportunities like these are like any other business start-ups. You still need lots of personal commitment and you may need to put your own money on the line. You also need to carefully assess the business to make sure it is viable. Advantages Development, planning and market testing should already be in place.
•
There may be established customers, a reliable income, a reputation to capitalise and build on, and a network of useful contacts.
•
You probably already have expertise in the product or service and a good understanding of the business you're taking on.
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Disadvantages You may be taking on someone else's problems when you take on the business. Ask yourself if there are problems with the business, and if so, can you solve them?
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If you are buying out your employer, you may lose support services that you take for granted now. You won't just be responsible for your core role, but for everything else as well, such as accounting, staff management and payroll.
•
More help
4
You can get free professional help from your local enterprise agency Talk to people already in the business about your plans and ideas. What can they pass on from their own experiences?
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A business with social aims
You may want to start a business that isn't just for profit but also has a social purpose. For example, you might want to provide a service for a disadvantaged group in your local community, or help improve the local environment. Although any business can have social objectives, you might want to consider setting up a specific type of business known as a social enterprise. Although a social enterprise is run as a business, and often operates under the same financial and profit-driven pressures, it also aims to provide a clear social benefit. The profits are mostly reinvested, or used to support its social aims, rather than being paid to the owners of the business. Advantages
• •
You earn a living doing something you feel is worthwhile.
As your business grows and matures, your community or beneficiary will also benefit. Customers may be more willing to buy from a business that supports a good cause.
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It may be easier to attract and motivate employees (or even volunteers) to work in a social enterprise.
•
You may qualify for a grant, or be able to raise finance from people or organisations sharing your social aims.
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Disadvantages Making profits and achieving your social aims can sometimes conflict with each other. You may have to make difficult choices.
•
Although you can earn a reasonable income working for a social enterprise, you will not make your fortune - most of the
•
6
surplus profits are put back into the business or go to support its aims.
7
Buy a franchise
Taking on a franchise is an option worth considering for anyone who wants to run a business but doesn't have a specific business idea or prefers the security provided by an established concept. The right franchise can give you a head start. Instead of setting up a business from scratch, you use a proven business idea. Typically, you trade under the brand name of the business offering you the franchise, and they also give you help and support. Successful franchises have a much lower failure rate than completely new businesses. But it isn't all plain sailing. Some franchises are better than others. And some people find that running a franchise just isn't for them.
What is franchising? The term franchising can describe some very different business arrangements. It is important to understand exactly what you're being offered.
Business format franchise This is the most common form of franchising. A true business format franchise occurs when the owner of a business (the franchisor) grants a license to another person or business (the franchisee) to use their business idea - often in a specific geographical area.
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The franchisee sells the franchisor's product or services, trades under the franchisor's trade mark or trade name and benefits from the franchisor's help and support. In return, the franchisee usually pays an initial fee to the franchisor and then a percentage royalty on sales. The franchisee owns the outlet they run. But the franchisor keeps control over how products are marketed and sold and how their business idea is used. Well-known businesses that offer franchises of this kind include TIM, GOODYS, EVEREST,…..
Other types of arrangement Different types of sales relationships are also sometimes referred to as franchises. For example: Distributorship and dealership - you sell the product but don't usually trade under the franchise name. You have more freedom over how you run the business.
•
Agency - you sell goods or services on behalf of the supplier.
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Licensee - you have a license giving you the right to make and sell the licensor's product. There are usually no extra restrictions on how you run your business.
•
Multi-level marketing Some businesses offer franchises that are really multi-level marketing. Self-employed distributors sell goods on a manufacturer's behalf. You get commission on any sales you make, and also on sales made by other distributors you recruit. Be aware that some multi-level marketing schemes may be dishonest or illegal.
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Advantages and disadvantages of franchising Buying a franchise can be a quick way to set up your own business without starting from scratch. But there are also a number of drawbacks. Advantages Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.
•
You can use a recognised brand name and trade marks. You benefit from any advertising or promotion by the owner of the franchise - the "franchisor".
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The franchisor gives you support - usually including training, help setting up the business, a manual telling you how to run the business and ongoing advice.
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You usually have exclusive rights in your territory. The franchisor won't sell any other franchises in the same region.
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Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
• • •
Risk is reduced and is shared by the franchisor.
If you have an existing customer base you will not have to invest time looking to set one up. Relationships established.
•
with
suppliers
have
already
been
Disadvantages
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Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing royalties and you may have to agree to buy products from the franchisor.
•
The franchise agreement usually includes restrictions on how you run the business. You might not be able to make changes to suit your local market.
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The franchisor might go out of business, or change the way they do things.
• • •
Other franchisees could give the brand a bad reputation.
You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.
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Reduced risk means you might not generate large profits.
?
Assess a franchise opportunity a sound business
To assess if a franchise represents opportunity, you'll need to consider:
• • •
what the business is and how it operates the location of the franchise
the success of the franchise concept - the number of franchises in the UK and how financially successful they are the strength of competition from other businesses in the same market sector
•
how long the franchisor - the business offering the franchise - has been in business and how financially secure it is
• •
levels of initial and ongoing costs
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how much training and support you'll get in setting up and running the business
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conditions and restrictions in the franchise agreement, including how long it will run and whether you'll have the option to renew
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The franchisor will probably give you an information pack but you shouldn't just rely on this. Ask questions and look for evidence of their claims. Visit other franchisees and talk to them. Ask the franchisor for a full list of past and present franchisees, not just the two most successful ones. Take advantage of other sources of information and advice. Ask your bank - many have franchising specialists. And make the most of other advisers your solicitor or your accountant. How a business plan can help Just as you would for any other business, you need to draw up a business plan when buying a franchise. This will help you assess the prospects for the business and identify potential weaknesses. A business plan is also essential for raising finance.
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How to purchase a franchise There are a number of key things you need to consider when planning to purchase a franchise. It might be worth thinking about the following: Assess yourself to see what kind of franchise, if any, will suit you.
•
Find out what franchises are available and draw up a shortlist.
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Assess franchise opportunities carefully, ask questions and talk to other franchisees.
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When you find a business, investigate its financial prospects. Base this on a thorough research of performance figures. Include an analysis of three years' accounts - if they have been trading for that period - and management figures.
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If you'll need to raise bank finance, ask your bank if it will consider a loan for the type of franchise you're considering.
•
Do your own market competitors in your area.
• • •
research
into business
and
Draw up a business plan.
Check the franchise agreement and get professional advice. However, it is advisable to make sure you don't: take up the first opportunity before investigating alternatives
• • • • •
allow yourself to be hurried into making a decision pay any non-refundable deposit commit yourself before you're completely satisfied
assume a business will work in your area just because it works elsewhere
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rely on the forecasts provided by the business selling you the franchise
• •
sign any agreement without legal advice
Tips on franchise agreements The franchise agreement is crucial. Don't sign any agreement, or pay any fees or deposit, until you have taken legal advice from a solicitor. Get a specimen contract for them to review.
Areas covered by a typical agreement Term - how long does the franchise last? Will you have the option to renew it, and on what terms?
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Territory - what area does your franchise cover? Do you have exclusive rights to sell within it?
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Fees - what initial fees will you pay? What royalties will you pay on sales? Will you pay a regular management fee - and if so, what does it cover? Will you have to pay other costs? How are the costs worked out?
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Support - how much help will you get starting the business? What continuing support will you get?
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Restrictions - what restrictions are there on what you're allowed to do and how you must run the business?
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Exit - what happens if you can't continue in business for some reason - perhaps due to ill health? What happens if you want to sell your franchise?
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The costs of a franchise
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When calculating the likely cost of a franchise, you need to take both initial and ongoing fees into account. Initial costs ? The franchisor - the business that sells you the franchise - usually charges an up-front fee, which should be relatively low, and covers the costs of administration. Good franchisors make the most of their profits from continuing royalties.
? Your largest initial costs are usually your investment in:
• • •
premises equipment initial stock
? You will need to establish a business entity. Although a
franchisee holds a contractual agreement with the franchisor, each franchisee is an independent business, and it is this business entity that will enter into the franchise agreement. Your chosen business structure could be a limited company, partnership or sole trader each of which will involve different costs - or your franchisor might have specific requirements.
Continuing costs ? You usually pay a royalty - a percentage of sales - to the franchisor. Alternatively you may pay a management fee of some kind.
? Under the terms of the franchise agreement, you may
have to purchase stock from the franchisor. Check what they charge. They may mark up the prices - or they may be able to offer them to you at a discount because of their purchasing power.
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? You also have to pay the usual business costs - for example, rent for premises, utilities or the costs of any employees you take on. Again, check if the things that you pay for through the franchisor have a realistic cost.
? Check too if the agreement includes additional charges.
For example, you may be required to pay for training, or to contribute to the cost of national advertising campaigns.
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? Should I franchise? As with any new business venture, you need to consider carefully whether you have got the right skills and attitude to run a successful franchise. Analysing your own temperament can also help you decide which type of franchise would be right for you. Assess yourself You must be prepared to sell and you will need entrepreneurial flair. A franchise gives you a business blueprint - but it won't automatically give you customers.
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You'll need to work hard, probably for long hours. Do you have the necessary stamina?
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Running your own business can be stressful. Think how you react to pressure.
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You may be starting up in business because you want to be your own boss. If so, would you be happy with the restrictions imposed by a franchise arrangement?
•
On the other hand, you may want to limit your risk. You might be more comfortable with a franchise than starting a new business from scratch.
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The right franchise for you Do you like office work? Or would you prefer a business that involves physical labour or using a particular skill?
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Are you happy working on your own? Or would you be good at recruiting, training and managing employees?
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Do you like dealing with members of the public? Or would you prefer a franchise where you sell to business customers?
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Are you weak in particular business skills such as finance? Can you find a franchise that offers the support you need in those areas?
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Find out about possible franchises Franchises are advertised and written about in various national newspapers and in trade publications. You can find listings using a search engine and employing search terms such as franchise opportunity or franchise directory. Attending a franchise exhibition can also be a good way of finding out what's on offer. But tread carefully. Advertised franchise opportunities particularly multi-level marketing schemes - can be untried, dishonest or even illegal.
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Buy an existing business
If you're thinking about running your own business, buying a company that's already established may be easier than starting from scratch. However, you will need to put time and effort into finding the business that's right for you.
Advantages and disadvantages of buying an existing business If you get it right, there can be many good reasons why buying an existing business could be the right move for you. Remember, though, that you will be taking on the legacy of the previous owner of the business, and need to be aware of every aspect of the business you're about to buy. Advantages Some of the groundwork will already have been done in getting the business up and running.
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It may be easier for you to get finance as the business will have a proven track record.
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A market for the product or service will have already been demonstrated.
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There may be established customers, a reliable income, a reputation to capitalise and build on, and a useful network of contacts.
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A business plan and marketing method should already be in place.
• •
on.
Existing employees should have experience you can draw
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Many of the problems will have been discovered and solved already.
•
Disadvantages You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants etc.
•
If the business has been neglected you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.
•
You will need to honor or renegotiate any outstanding contracts the previous owner leaves in place.
• •
up.
•
You also need to consider why the current owner is selling
Think about the feelings of current staff - it's possible they may not be happy with a new boss, or the business might have been run badly and staff morale may be low.
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Step-by-step: how to buy a business An organised approach will help you find and acquire the right business. Get professional advice Professional help is invaluable as you go through the negotiation, valuation and purchase process. Choose carefully a solicitor and an accountant. Research Research the sector you're interested in, including the best time to buy, and shortlist two or three businesses. Initial viewing and valuation Be discreet - the owner may not want staff to know they are selling, but be thorough and record key findings. 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 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. Negotiation Before completing the sale, try to negotiate an overlap period so you have time to become familiar with the business before taking over. Record all the main points agreed.
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You and your solicitor need to verify the information you have based your offer on. If you're buying premises, you may want to arrange an independent survey and valuation, even if a lender is also carrying out their own survey and valuation at your expense. You can find a surveyor who specialises in commercial property on a business property website. . 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
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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 and your accountant can help a lot at that topic.
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 • its financial situation - cash flow, debts, expenses, assets • why the business is being sold As part of your investigations, talk to the vendor and the business' existing customers and suppliers. They may be able to give you information that affects your valuation. They may also be able to give you general market information about conditions affecting the business.
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.
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Other considerations The list below details other factors that will affect the value: • stock • assets • products • debtors • creditors • suppliers • employees • premises • competition 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. Having done your research, you should verify the information you have been given about your prospective new business. A period of time is allowed for you to access its books and records. This is known as due diligence. It should give you a realistic picture of how the business is performing now, and how it is likely to perform in the future. Due diligence is about much more than the finances of a business. You need to come out of this period knowing exactly what you are getting into, what needs to be fixed, what it will cost to fix them, and if you are the right person to take on this business.
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Key areas to cover are: • employment terms and conditions • outstanding litigation • major contracts and orders • IT systems and other technology • environmental issues • commercial management including customer research and development, and marketing
service,
Information sources Dig as deeply as you can and use whatever documents are available. For instance, if you're looking at employee records, you could check out: • payroll records • staff files • copies of pension and profit-sharing plans, plus financial statements, if relevant • employment contracts • the staff manual • union contracts, if relevant You may also need information from external sources such as the landlord, tax office or bank. When to begin due diligence Don't start due diligence until you've agreed a price and terms with the seller. For a down payment they may agree to take the business off the market during your investigation. The investigation period is negotiable - but most small businesses need at least three to four weeks.
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Looking after existing employees There are regulations that govern what happens to employees when someone new takes over a business. These apply to all employees when a business is transferred as a going concern, meaning employees automatically start working for the new owner under the same terms and conditions Employment tribunal awards When you buy an existing business, you might decide you need to employ fewer staff. But be careful about making any changes, as an employee might take a case to an employment tribunal for unfair dismissal or unfair selection for redundancy. It's best to consult a solicitor before making any such changes. Inform and consult employees If you do want to discuss reducing employee numbers or reorganising staff, it's a good idea to do this once you've completed the due diligence period, but before you take over the business. As the new employer you should inform and consult all employees - including employee representatives - who may be affected. Pensions As their new employer, you do not have to take over rights and obligations relating to employees' occupational pension schemes put in place by the previous employer. However, if you don't provide comparable pensions arrangements, you could theoretically face a claim for unfair dismissal.
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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. It is useful to consider: 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. It is also important to find out how to comply with all the regulations and licenses that apply to your type of business.
•
Location - don't restrict your search to your local area. Some businesses can be easily relocated.
•
Where to look for a business to buy Many national and local newspapers carry adverts for businesses and business premises for sale. Depending on what sector you're interested in, you could look in trade journals, or approach your trade association.
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You could put in your own advertisement, saying what you are looking for. You can get contact details for most newspapers, magazines and trade journals from press directories available at your local library. Don't forget word of mouth. Ask around among trade contacts, business associates, and at exhibitions and conferences.
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? Personal perspective: A change in circumstances
A major life change can often enable you - or push you - to set up your own business. Maybe a dramatic personal event kickstart you into action or your job situation means that now is the time to take the plunge. Such changes might include: • unemployment • redundancy • a change of family circumstances • coming into money Advantages A change in your circumstances might be an opportunity to start again or do something you've always wanted to do.
•
Redundancy payments or receiving a lump sum of money can provide an opportunity to invest in a business.
•
At its best, being your own boss can give you the flexibility to work around family commitments.
•
Disadvantages Major life-changing events can be very stressful. It may be unwise to make further big decisions at times of personal upheaval.
•
Starting your own business is unlikely to provide a speedy return on your investment and you should be prepared for a long haul.
•
In the early stages especially, running your own business can mean putting in long hours and making sacrifices elsewhere in your personal life.
•
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Taking control and changing your lifestyle For many people, the biggest attraction of setting up a business is the independence provided by being your own boss and the chance to have the lifestyle you want. Advantages Starting a business can offer a career with built-in independence and flexibility.
•
Being your own boss can give you the choice to work more convenient hours - such as working around your children's school hours and holidays.
•
You will be able to choose to do some professional development or training.
•
You will be the one in the driving seat, making the decisions that enable you to lead your chosen lifestyle.
•
If your business takes off, the payoff in financial and lifestyle terms can be huge.
•
Disadvantages
• •
You may find that you have to work longer hours.
You may find it difficult to separate work and home life, especially if you run the business from home, and this can put extra demands on your family. Some business owners suffer stress when things are not going so well.
•
You should be prepared for the loss of perks such as pension schemes, holiday pay and sick leave.
•
It's quite common to have financial difficulties, especially when you're starting up.
•
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Going into business full time The kind of business you've chosen - or your individual circumstances - may mean that you want to take the plunge and jump straight in full time. Advantages You can devote all your time and enthusiasm to your business.
• • •
You can react to new developments as they arise.
If your business depends on a gap in the market or a new idea, time will be of the essence. Disadvantages You will have to manage without an income while your business gets off the ground.
•
If you decide to go into business full time you have a few options to help you over the early days: Live off your spouse or partner's income - however, it can be hard to live off one salary if you've been running the household on two.
•
Use your savings - if you've been putting money aside for a rainy day, this could be it. Ask yourself if you have enough to cover your living expenses and fund your business? For how long? Will you have anything to fall back on if your business fails?
•
Get a loan - banks will often help new businesses with a loan. However, they can be inflexible. You may have to pay back the loan immediately if your business fails, and there
•
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will be expensive penalties if you don't make agreed repayments. Use your home as capital - if you have capital in your house, you could use it as security. However this is risky, your house may drop in value and if you cannot keep up repayments, you risk losing it.
•
Borrow money from family or friends - you can save a lot of money if your friends and family don't charge you interest. But if your business doesn't work out, it could put a big strain on your relationship with them.
•
Going into business part time
If your business allows, you could decide to work on it part time, fitting it in with your current job or other responsibilities. Then, when the business is robust enough or circumstances change, you can move over to it entirely. Advantages You can still earn an income while you're getting your new business off the ground.
•
Technology such as answerphones, the Internet and email make it possible to communicate out of hours when you're not available in person because you're doing your other job.
•
It can make it easier for you to juggle your other commitments - such as childcare - by allowing you to choose when you work.
•
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Disadvantages It can be difficult to manage the extra hours you need to put in.
•
Putting in very long hours can be stressful and tiring. There won't be time for much else.
•
It could take much longer for your new business to take off.
•
You'll have to pay tax on both incomes if you continue with your other job.
•
Many people who set up their own business decide to work on a part-time basis to enable them to balance their home and working obligations. Some people decide that the safest option is to continue with their current job whilst setting up their business. Legally you don't have to tell your employer that you are setting up a business, although there may be a clause in your contract preventing you from doing other work. You might want to ask your employer for more flexible working arrangements. These could involve reducing or re-arranging your existing working hours.
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