ChapterBecoming the Owner of a Small Business4

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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

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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

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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

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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?

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Places to look for help

SCORE – Service Corps of Retired ExecutivesA group of retired managers from all walks of life who help people develop their business ideas. (388 chapters)

SBAUS Department of CommerceLocal collegesPublic librariesChambers of commerce

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Market Research

Gathering, recording, and analyzing of data related to the marketing of goods and services.

LibraryUS Census (10 yrs) (census.gov)

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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

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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?

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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 easierDisadvantages – • Not making profit• Poor reputations with customers, suppliers or poor location• Capital is required – can’t purchase existing business

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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)

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Enter a Family Business

Advantages?

Disadvantages?

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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 CircularMore than 500,000 people in US own franchises

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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

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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% = $720025,000 + 10,000 + 4,300 + 10,700 + 7,200 = 57,200120,000 – 57,200 = 62,800

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Advantages

Established product or serviceFranchisors offer management, technical, and other

assistanceEquipment and supplies can be less expensiveA guarantee of consistency attracts customers

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Disadvantages

Franchises cost lots of money and cut down on profits

Owners have less freedom to make decisionsFranchisees are dependent of the performance of

other franchises in chainThe franchisor can terminate the franchise agreement

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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

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Expected Areas of Growth in Franchising

continued

RESTAURANTSExamples: McDonald’s, Burger King, Wendy’s, Chili’s, The Olive Garden, Howard Johnson’s

MOTELSExamples: Motel 6, Holiday Inn

CONVENIENCE STORESExamples: Bread Basket, T-Shirts Plus, Health Mart

TECHNOLOGYExamples: Radio Shack, Circuit City, Babbage’s, Muzak

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Expected Areas of Growth in Franchising (continued)

AUTOMOTIVE PARTS, ACCESSORIES, SERVICEExamples: General Tire, Midas International, Precision Tune,

Jiffy Lube, Valvoline Instant Oil Change

COMBINATION FRANCHISINGExamples: KFC/Taco Bell; Exxon and Subway Sandwiches

GLOBAL FRANCHISINGExamples: KFC (Kentucky Fried Chicken), McDonald’s, Pizza

Hut, Pepsi, Chick-fil-A, Mail Boxes Etc.

TM4-13B

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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