One advantage to buying an existing small business relates to negligible startup costs. Due to existing inventory, and receivables already in place, cash flow is likely to be well-established. If the business has existing goodwill due to a good reputation, financing may be easy to obtain. Or, the seller may be willing to accept a cash down payment, and agree to receive the rest out of earnings over a set period of time.
Among the biggest downsides to buying a small business is the larger initial purchase cost. Since development of the business concept , customer base, branding, and other fundamental work has already been done, the costs of acquiring an existing small business are usually greater than starting a new one. Other possible disadvantages include hidden problems associated with the business, such as receivables that are valued at the time of purchase, but may not actually be collectable.
Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing. Business surveys show that fewer than 20 percent of all franchised businesses fail. This is in comparison to a 60 to 80 percent failure rate for ALL new businesses started in this country each year.
Franchisors are not required to make earnings claims, but if they do, the FTC's Franchise Rule requires franchisors to have a reasonable basis for these claims and to provide you with a document that substantiates them. This substantiation includes the bases and assumptions upon which these claims are made. Franchisors may restrict the goods and services you sell. For example, if you own a restaurant franchise, you may not be able to make any changes to your menu. Franchisors are not required to make earnings claims, but if they do, the FTC's Franchise Rule requires franchisors to have a reasonable basis for these claims and to provide you with a document that substantiates them. This substantiation includes the bases and assumptions upon which these claims are made.
Franchisors may impose design or appearance standards to ensure customers receive the same quality of goods and services in each outlet. Some franchisors require periodic renovations or seasonal design changes. Franchisors maintain broad discretion over how to administer the advertising fund. In a case against Meineke Discount Muffler Shops, for example, it was discovered that Meineke was using the advertising fund for costs wholly separate from advertising, yet the court ruled in Meineke's favor, saying that the franchisor has no fiduciary duty to its franchisees. Franchisors may underestimate these expenses in an effort to make the cost of purchasing a franchise seem lower than it really is. If the estimate is too low, you may find yourself with insufficient cash to carry on until the business produces a profit.
Franchisors would rather have two stores making 100K each, than one store making 200K. It gives them better control. Franchisors will often provide pro forma financial statements to prospective Franchisees to indicate how they think the business venture will perform. Look these financial statements with a critical eye; things are not always what they seem, and often, it's just someone's best estimate of future (not past) performance. Franchisors with marketing machines are doing just fine, even in these troubled economic times.
Franchisors won't usually make financial projections for any new business, but should be able to provide you with figures based either upon the performance of an existing franchise or company-owned outlet. Some offer work or income guarantees that may be attractive to the newcomer.
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