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The Paths to Entrepreneurship

By Nikhil Prabhu and Sonjui L. Kumar Email By Nikhil Prabhu and Sonjui L. Kumar
May 2011
The Paths to Entrepreneurship

The tough economy of the past few years has a lot of negatives, but one bright side has been the resurgence of the American entrepreneur. Less than 30 years ago, only the most innovative and inspired amongst us ever thought of starting a business, but now new college graduates, laid-off managers and older workers are just a few of the people that are joining the bandwagon. There are many ways to become your own boss today. The traditional model of coming up with your own idea and opening a company may be the hardest. Most business owners are either purchasing an existing operation or buying into a franchise. Each path has different advantages and disadvantages that need to be considered.

Before deciding which path is best for you, there are a few universal things to consider. First of all, be passionate about what you are about to do. Running a business is hard enough, so make sure it’s something you want to do each and every day for at least a few years. Second, research the industry thoroughly. There is a lot of information and training available on almost any business and most of it is freely accessible. The Small Business Administration, the Census Bureau and Chambers of Commerce are just a few of the organizations that are ready to help you think through this important decision. Next, think about the hours and capital you are willing to invest into the venture. Unless you are the next Facebook, most businesses need a considerable investment of time and money. The amount and source of funding is a very important factor. Lack of sufficient capital is one of the most common reasons for a business to go under in those first critical years. Finally, be honest about your own strengths and weaknesses. Are you a hard worker? Are you willing to give up your weekends and vacations? Is your family supporting this venture? All of those criteria can make or break your business.

1.     Starting from Scratch
The first option is starting your own business from the ground up. This route is definitely more appropriate for the risk takers and will also require the most lead time, preparation and resources. Many internet and technology companies start with an idea that is transformed into a viable business enterprise. A particular difficulty of starting a business from scratch is the lack of immediate cash flow. Although there may be similar businesses, you will need to map your own strategic plan to be successful. One advantage is that you may be able to ramp up slowly and with very little cash investment. The main advantage of this option is that you can customize the business according to your own vision. Creative types and the very particular may be most suited for this type of a start-up.

2.     Buying an Existing Business
The second option is buying an existing business. If you don’t have an original idea or you prefer something tried and true, buying an existing business might be the right path for you. Special considerations for this endeavor include the initial cost to purchase the business. When buying an existing business, the price will be higher since the business is already operational. The risk has already been taken by the seller, so the price will reflect their investment of time, effort, and cash. However, while the purchase price might be high, the start-up costs should be low and cash flow could be immediate if the business is operating successfully. The most important factor to take into consideration when buying an existing business is to conduct a thorough due diligence to make sure you are buying what you think you are buying. Just because a business is running, it does not mean that everything is fine. Customer history, employee records, financial statements, industry trends, licensing and litigation are just a few of the critical items that should be evaluated to your satisfaction. You want to buy an operating business, but avoid buying someone else’s problems or mistakes

3.     Buying a Franchise
A very popular option is to buy a franchised business. Buying a franchise requires all the same initial steps as starting a business or buying an existing business, but is a good alternative if you have limited experience and need more guidance. When you purchase a franchise, it is usually an established name with all the tools and information you need for success. Most franchisors will provide you with an estimated budget, list of suppliers of goods, and a marketing strategy. They will also help you find the right location. In exchange you will pay them a franchise fee up front and on an ongoing basis. The biggest disadvantage of a franchise is that you are bound by the franchisor’s rules and regulations. You will not have the freedom to change much about the business or its operations. You will also be prohibited from competing within their industry and territory for a long period of time. Buying a franchise requires the same due diligence as purchasing an existing business—you need to talk to existing franchisees and carefully research the success of existing operations.  

There are pros and cons to whichever route you choose, but there is no substitute for being prepared and researching the venture that you are about to start.

[Business Insights is hosted by the Law Firm of Kumar, Prabhu, Patel & Banerjee, LLC]

SONJUI L. KUMAR is a founding member and partner in Kumar, Prabhu, Patel & Banerjee, LLC. Her areas of practice include general corporate law, complex commercial transactions, and trust and estate planning.

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