4 Chapter Becoming the Owner of a Small Business
Decide to go into business? • Search for a needed product • Study the market for the product • New business, existing one, or franchise? • Strategic plan (mission, objectives, strategies) • Operational plans (policies, budgets, standards, planning and marketing the product) • Financial plans (estimating income and expenses, initial investment, locating sources of funds) • Develop detailed business plan • Implement plan
Niche Marketing • The process of finding a small but profitable demand for something, then producing a custom-made product for that market. • Don’t forget to look at the past for a “new” product • Hobbies, recreation, and working at home can lead to creation of new products
Questions to Ask to Help Eliminate Possible Businesses • How much capital is required to enter and compete successfully in this business? • How long will it take to recoup my investment? • How long will it take to reach an acceptable level of income? • How will I live until that time? • What degree of risk is involved? Am I willing to take that risk? • Can I make it on my own, or will I need the help of my family or others? continued
Questions to Ask to Help Eliminate Possible Businesses (cont’d) • How much work is involved in getting the business going? In running it? Am I willing to put out that much effort? • Do I want to acquire a franchise from an established company, or do I want to start from scratch and go it on my own? • What is the potential of this type of business? What are my chances of achieving that potential? • Is sufficient information available to permit reaching a meaningful decision? If so, what are the sources of information? • Is it something I would enjoy?
Places to look for help • SCORE – Service Corps of Retired Executives • A group of retired managers from all walks of life who help people develop their business ideas. (388 chapters) • SBA • US Department of Commerce • Local colleges • Public libraries • Chambers of commerce
Market Research • Gathering, recording, and analyzing of data related to the marketing of goods and services. • Library • US Census (10 yrs) (census.gov)
Estimating the Size of the Market • How large is the industry? • Where is the market for the company, and how large is it? • Are sales to be made to a selected age group, and, if so, how large is that group? • What are the size and distribution of income within the population? continued
Estimating the Size of the Market (continued) • Is the sales volume for this kind of business growing, remaining stable, or declining? • What are the number and size of competitors? • What is the success rate for competing businesses? • What are the technical aspects (state of the art) of the industry?
Buying an Existing Business • Find – Classified Section, Business Broker, Small Business Administration, Chamber of Commerce • Advantages – • Already has customers, suppliers, and procedures • Seller may train new owner • Prior records of revenues, expenses and profits • Financial arrangements can be easier • Disadvantages – • Not making profit • Poor reputations with customers, suppliers or poor location • Capital is required – can’t purchase existing business
Steps to Purchase a Business • Objectives about type of business you want to buy. • Meet with business brokers • Visit during business hours to observe • Ask owner for finances for the last 3 years • Ask for information in written form – suppliers, pending legal action, copy of lease/mortgage • Determine how you would finance business • Get expert help to determine a price for business (valuator)
Enter a Family Business • Advantages? • Disadvantages?
Franchise • A legal agreement that give an individual the right to market a company’s products or services in a particular area. • Franchisee – the person who purchases a franchise agreement • Franchisor – person or company who offers a franchise for purchase • UFOC – Uniform Franchise Offering Circular • More than 500,000 people in US own franchises
Operating Costs • Initial franchise fee – payment in return for the right to run the franchise (few thousand to few hundred thousand) Nonrefundable • Start-up costs – renting, purchasing inventory etc. • Royalty fees – weekly or monthly payments made by the owner to the seller of franchise (% of income) • Advertising fees – TV, Mag., etc. • Ex. Marry Maids – 14,000 – 22,000 Franchise Fee, 12-20,000 start-up Costs, 7% Royalty Fee
Business Math • You have purchased a car wash franchise. The franchise fee was $25,000. You must return 6% of your earnings in royalty fees. During your first year, you spent $10,000 on equipment, $4,300 on operating costs (water and electricity), and $10,700 on your part-time employee. Your first year total revenues were $120,000. Calculate the total expenditures for the first year. What was your profit? • 120,000 x 6% = $7200 • 25,000 + 10,000 + 4,300 + 10,700 + 7,200 = 57,200 • 120,000 – 57,200 = 62,800
Advantages • Established product or service • Franchisors offer management, technical, and other assistance • Equipment and supplies can be less expensive • A guarantee of consistency attracts customers
Disadvantages • Franchises cost lots of money and cut down on profits • Owners have less freedom to make decisions • Franchisees are dependent of the performance of other franchises in chain • The franchisor can terminate the franchise agreement
Myths of Franchising • Franchising is the safest way to go into business because franchises never fail. • The bigger the franchise the more successful I’ll be. • All franchises are the same. • The franchiser will solve my business problems for me; after all, that’s why I pay an ongoing royalty fee. • Once I open my franchise, I’ll be able to run things the way I want to
Expected Areas of Growth in Franchising • RESTAURANTS • Examples: McDonald’s, Burger King, Wendy’s, Chili’s, The Olive Garden, Howard Johnson’s • MOTELS • Examples: Motel 6, Holiday Inn • CONVENIENCE STORES • Examples: Bread Basket, T-Shirts Plus, Health Mart • TECHNOLOGY • Examples: Radio Shack, Circuit City, Babbage’s, Muzak continued
Expected Areas of Growth in Franchising (continued) TM 4-13B • AUTOMOTIVE PARTS, ACCESSORIES, SERVICE • Examples: General Tire, Midas International, Precision Tune, Jiffy Lube, Valvoline Instant Oil Change • COMBINATION FRANCHISING • Examples: KFC/Taco Bell; Exxon and Subway Sandwiches • GLOBAL FRANCHISING • Examples: KFC (Kentucky Fried Chicken), McDonald’s, Pizza Hut, Pepsi, Chick-fil-A, Mail Boxes Etc.
Teaming Up • Synergy: Concept that two or more people, working together in a coordinated way can accomplish more than the sum of their independent efforts. • Some franchisers currently using the DUAL-BRAND CONCEPT include: • Arby's + Sbarro • Baskin‑Robbins + Dunkin' Donuts • Carl’s Jr.. + Long John Silver's • Denny's + Baskin‑Robbins • KFC + Taco Bell • Taco Bell + T. J. Cinnamons