The following information displays the 5 traditional methodologies for an entrepreneur to engage in a business. Worldwide Associates reality4me is a reality4u helps you for FREE to get started. Click Here and fill out the top section and then scroll down and fill out the short form to get started NOW!!! Limited Time Only Click Here
Introduction
Juxtaposed with the innate desire to allow one’s entrepreneurial spirit to catapult to a reality, it is of great importance for an entrepreneur to obtain the applicable knowledge and apply what is learned in order surpass from a conceptual idea its origination context to that of a tangible successful business or enterprise.
Jerome Katz and Richard Green are recognized as two world renowned and prominent mentors aiding in the impartation of entrepreneurial business, from small businesses and medium size businesses, to (SME) small and medium enterprises. The authors assert in their 2nd edition of ESB Entrepreneurial Small Business text, that there are five venues to enter into small business arena. The author’s purport, starting a new business from inception, buying an existing business with both assets and liabilities, franchising, inheriting a business or becoming a professional manager of a small business are amongst the five choices to enter into the small business arena. The following will depict the concepts of the five gateways to enter into the small business environment, including the advantages and disadvantages of each option.
Starting a new business
Under the auspice of starting a new business, the entrepreneur perpetrates a vision in his or her mind from its embryonic stage, to a reality in the market place. Often times, this new start-up business accentuates the innate, internal desire of the entrepreneur. It is, exclusively, the responsibility of that entrepreneur to compile the resources which will manifest the blueprints to catapult his or her dream, idea, or vision into a reality. The start-up process does, emphatically, demand a tenacious entrepreneurial attitude, with the potentiality to not attribute any recognizable benchmarks for long periods of time when engaging in a start-up business. The entrepreneur, who chooses the start-up sanction of business, must withhold a persistent attitude of faith, conviction, and belief. Although, the start-up methodology may be the most rewarding, this aspect can also be categorized as the highest degree of risk. Entrepreneurs must evaluate their personal and financial risk reward ratio’s relevant to their personal risk tolerance levels.
Advantages of starting a new business
The start-up new business could be the most invigorating and positively challenging for an entrepreneur. Often times, an entrepreneur chooses to work hard, outside of the contingent workforce or under the control of those delegated for that position. The classic entrepreneur begins with his or her vision and can make all the unilateral decisions, without the impedance or barriers of other individuals. This entrepreneur in the start-up venue usually has few influences as to the managerial processes, when starting from inception.
There may be partners in this entrepreneurial endeavor, however, more often than not; the start-up stage is usually one person or few like minded individuals who work ceaselessly to accomplish milestones and benchmarks. This new business usually does not reflect any negative or positive occurrences until an action is perpetuated through the decision making process. Once an action has been orchestrated, then the effect is substantiated. The entrepreneur can gauge its success and further embellish or ease off on decisions once the effects of the decision making process are displayed.
There are no problems from the inception stage, it is until decisions are made and acted upon, based on the decision making process to determine if the action were a solution or a problem. “A start-up begins with a, ‘clean slate’. There are no existing employee problems, debts, lawsuits, contracts, or other legal commitments that need to be satisfied” (Green & Katz, 2009, p. 143).]
An entrepreneur often times may have a successful business model and enterprise concept as a small business. Expansionary measures un-seemingly may affect the overall productivity of the current business. A small business doing well in a particular demographic area does not necessarily mean that the business will do well in another area or overseas. The entrepreneur in the start-up mode makes the determinations to how small or how large its organization will be or how large or small its market penetration will be. “A start-up can be kept small deliberately to limit the magnitude of possible losses” (Green & Katz, 2009, p. 151). In many instances, change and growth may be detrimental to an organization. Penetrating into other markets could result in more liabilities with potential losses along with incurring higher degrees of lack of control within the scope of the company’s internal and external environments. The start-up entrepreneur is not forced to encumber more liabilities or potential risks; this decision is gauged contingent upon the risk tolerance levels of the start-up business owner.
Disadvantages of starting a new business
Branding, brand awareness, and brand equity are all important facets for product lines and services rendered to a customer base. The start-up venue also includes new products and services which are to penetrate into a particular market place or market segment. Many customers are not willing to test or try out a product or service which does not have some sort of performance record, history, or recognition. “A start-up business has no initial name recognition” (Green & Katz, 2009, p. 144). The onset of a niche market may be able to withstand the nomenclature of an unrecognized product or service name brand. This unrecognized name brand should be considered a test market to service or produce and meter the viability of a potential market share, through statistical inferences. The entrepreneur in a new start-up business must allocate more than sufficient resources for branding purposes and often times perform with higher standards than their potential competitors; the age old adage of, “buyer beware” seems to be more and more prevalent in today’s domestic and global society. There exists with any product and/or service the auspice of competition; competitive forces producing higher quality products and superior services with more than sufficient customer satisfaction and customer service. Where there are good opportunities for consumers there exists lower caliber of service to outright scams. The lack of brand recognition makes it difficult for a customer to purchase products or services, due to the very nature of not receiving quality products or services to the point of the potential of purchasing a product or service and receiving nothing at all.
The funding aspect of a new start-up may be the most difficult of tasks to undertake. The financing of a concept may be the very component which will refrain the actual business to catapult into a reality. “A start-up can be very difficult to finance” (Green & Katz, 2009, p. 144). From the mind of the entrepreneur to the actual sales and customer base is, quite often, the most difficult and cumbersome process. The financing of a start-up is tedious and difficult because of lack of past performance levels. The investment banking and venture capital arena, more often than not, choose to invest in a proven business with financial proof as to the applicable potential in the marketplace and managerial operations.
Buying an existing business
The purchasing of an existing business is considered to be the second most common way an entrepreneur engages in a new business venue or small business management. The acquisition of an existing business has benefits and can provide for the potential of an immediate operational business and could result in a quicker sanction for the entrepreneur to become a small business owner. “The second most common way to enter small business management is to purchase an existing business” (Green & Katz, 2009, p. 151). Although this alternative is a common thread amongst entrepreneurial engagements within the small to medium sized business, there are advantages and disadvantages in doing so as disclosed in the following paragraphs.
Advantages of buying an existing business
In many cases, the alternative from starting a new business from inception to purchasing an existing business will unequivocally allow the entrepreneur to utilize the existing benefits from such business, especially if the business is currently successful.
Some of the many advantages are, including but not limited to, existing client and customer base. The existing business means the acquisition of the entire businesses asset base, customers are considered assets, due to the revenues derived from such clientele. “Established customers provide immediate sales and cash flows” (Green & Katz, 2009, p. 151). Often times, customers are an asset base combined with future asset valuations of owning or obtaining a certain customer base in a specified sector of industry. For instance, if an entrepreneur has purchased the licensing and equipment as a Competitive Local Exchange Carrier, the telephone company acquisition would include the assets of the company, including asset valuations for obtaining and owning a paying customer base.
Another advantage of buying an existing business is the mere fact that, the business models and managerial components are already intact. “Business processes are already in place in an existing, operating business” (Green & Katz, 2009, p. 151). The ideologies and managerial processes are in place, to remain as is or enhanced for profitability, free cash flow, and maximization of shareholder/stakeholder wealth.
Disadvantages of buying an existing business
There are however, disadvantages when purchasing an existing business. When acquiring an existing business all assets of the current business are accumulated into the new enterprise with change of ownership, however, the liabilities are absorbed also. The liabilities of the current business do not necessarily mean only those financial liabilities as reflected on the balance sheet; these liabilities could range anywhere from disgruntled employees and/or customer base to lawsuits. Often times, the financial statements may reflect the pictorial financial condition of the company, however, if a company has, for whatever reason, lowered customer or employee satisfaction the new business owner, through this acquisition may not recognize the negative impact until sometime in the near or distant future.
Customers and employees generally resist change, unless the change is proven and spoken of as an even greater benefit to the parties involved. Customer may not recognize the change in ownership of a small business as positive maneuver, customers may not be the only group who may resist change, employees and managers, often times, resist change also. “Existing mangers and employees may resist change” (Green & Katz, 2009, p. 151). It is of good practice, when delving into an acquisition, to apprise those in a managerial capacity and/or prepare the employee base by simply making all parties involved privy to the change of ownership, hence, attempt to minimize the potential resistance to change until individual levels of comfort is ascertained during this transition period. If the acquisition process is not carefully addressed and processed accordingly, diminished sales and employee satisfaction may create a major negative impact on the business.
It is very important, as in the case of starting a new business, the business owner become an integral part of all operational functionalities of the business and enjoys what he or she is engaged in. Although, a business owner may not be technologically inclined, since technological advancements and efficient software and hardware applications are created everyday, in many facets of business, i.e. customer resource management systems, Internet Marketing software, Information Technology interfacing, the new business owner may find that the current technological configurations are not adaptable in today’s new and future economic and technical environment. “The business may be declining because of changes in technology” (Green & Katz, 2009, p. 151). This criterion demands the new entrepreneur to further adapt and obtain the necessary knowledge to accomplish seamless integrations for keeping ahead of competition and a continuum of customer satisfaction.
Franchising
Franchising is similar to purchasing an existing business; however, there are many differences. Franchising can grant the franchisee the ability to engage in a small business similar to, the assistance offered by small business incubators. The small business incubator comprises of external organizations, usually, within the city or county which aid in the resourcefulness of the entrepreneur’s business perspective and model. The incubator may consist of consultants, offices, office equipment, etc.
Franchising to some degree has its own form of incubation processes. “Franchising is a legal agreement that allows one business to be operated using the name and business procedures of another” (Green & Katz, 2009, p. 159). Franchising in its truest form are to assist the purchaser, the franchisee, with the business itself.
Advantages of franchising
If an entrepreneur has sufficient capitalization, the entrepreneur can leverage off of the branding and hopeful proven business models the franchisor is selling. “Franchises may range from “turnkey,” in which every part of setting up the business is handled by professionals, to those in which the only thing that is franchised is the right to use the business name” (Green & Katz, 2009, p. 143). Once the sufficient capital is exchanged to the franchisor, under usual circumstances, the franchisor will provide a turn-key business application for the entrepreneur/franchisee to engage in sales, including name recognition for the entrepreneur/franchisee to obtain credibility.
The entrepreneur can utilize a vast array of venues when locating an apropos business suitable for his or her demand within the scope of franchising. Locating an existing small business for sale is not nearly as easy as locating a franchise, nor are small businesses for sale as voluminous as it pertains to quantity of business opportunities available. Franchises can be sought and found easily with many options to choose from. Whether the rationalization process is to have a “turnkey” operation or the use of business name, the entrepreneur contemplating the concept of franchising must equate the capital expenditures and determine if the franchise fee and its policies and procedures are a viable solution.
A franchise offers four basic functionalities which may serve as advantageous to an entrepreneur, the entrepreneur may want to use the trade name for recognition and brand equity. The entrepreneur may use current franchisor’s channels of distribution or product distributions currently in place. The franchisor, due to name recognition in many cases, may offer the franchisee higher conversion ratio’s to sales and the franchise offering usually has a set guideline, business plan, and/or business format which has proven to be successful with track record performance levels. These four constituents will eliminate cost prohibitive market tests, advertising dollars, and trial and error limited return on investment capital. Although the initial franchise costs are to be considered start-up cost, most franchises offer a proven system with records to justify the capital investment; franchises usually provide the managerial expertise and training programs to assist the franchisee, hence, eliminating must of the risk as opposed to the common risks associated with an actual start-up business.
Disadvantages of franchising
Entrepreneurs usually engage in their own business to create and establish their own set of rules and business models to accomplish their professional objectives. The entrepreneur, under the auspice of a franchise, as a franchisee, is to some degree under the confines and jurisdiction of the franchise circular, rules, regulations, policies and procedures set forth within the confines of the franchise agreement from the franchisor and its legal board. “One disadvantage of franchising is that you give up control of marketing and operations” (Green & Katz, 2009, p. 161). The contractual restrictions within the franchise agreements usually preclude the franchisee the freedom and latitude to be creative and grow the business, except when permissible or within the guidelines of the agreement. This disadvantage generally is classified by the individual entrepreneur. Many entrepreneurs like to utilize their creativity and decision making processes. In the case of franchising, the entrepreneur has very minimal, if any, means of control as to the marketing or operations pertaining to the business. "Policies, programs, and procedures that treat the self-employed as if they were entrepreneurs create false hopes and overlook the most critical ingredients necessary for helping them to succeed in the new economy." (Hansen, 2004, p. 8).
Another potential disadvantage is that there are many franchisees and the more voluminous the franchisor base becomes, the more subject to customer dissatisfaction. Any negative connotation on the franchise itself may impact the success of the individual franchisee’s business. Much of the individual franchisee’s success is contingent upon the success and branding of the franchise he or she has purchased. .
Inheriting a business
Many people, who inherit a massive amount of money or win the lottery, often times, end up financially distraught, due to the lack of knowledge pertaining to money management. Similarly when inheriting a business, the business could result in a detrimental and negative position in the marketplace. The successful or unsuccessful bequeathed entity may not remain the successful operation once managed and turned over into the hands of its new owners. The predecessors usually have built an organization; if the organization is worth while to bequeath to its rightful heirs, more often than not, the company was to a degree, successful. This notion of the business being a success does not directly mean that the operation will continue to be a success.
Advantages of inheriting a business
The rightful heirs of a business must have the mindset of a start-up entrepreneur to a franchisor, in other words, the entrepreneur must have the innate desire to make the business work. The advantage of inheriting a business, if desirous in continuing to make the business a success, is that an operational business with track record has been established. The new owner of the business can expand on its original successes and turn the business into more of a success.
Another advantage of inheriting a business is there often times will be no initial investment or net capital outlay. However, as previously stated, given the scenario of inheriting a business, the new business owner should be desirous in running the business and making it a success, because the new business will, in the least, require time investment.
Disadvantages of inheriting a business
Many times, family members involved around the family business, take the business for granted. Often time’s complacency becomes a major issue. The family usually helps one another with the business and quite frankly will cover one another because all parties have a vested interest in the business. This fact precludes the potential likelihood for a business success because the new owner has the ultimate responsibility. “The combination of a small selection pool, along with the lack of motivation by family
members who are guaranteed jobs, predictably leads to less successful businesses. (NA, 2007, p. 24).
Becoming a professional manager of a small business
Another entree into obtaining a small business is to work your way into it. Instead of monetary value many will engage in time value and leverage their resourcefulness for equity in a business or to become part of a business. “A professional manager of a small business is one who has the experience and skills to use a systematic approach to analyzing and solving business problems” (Green & Katz, 2009, p. 165).
Advantages of becoming a professional manager of a small business
Small, Medium, and Large businesses are interested in paying for a precious commodity. This precious commodity is talent. “The most important corporate resource over the next 20 years will be talent—the resource in the shortest supply—according to a recent study by McKinsey and Company” (Lewis, 2009, p. 17). Professional managers can position themselves by working closely in a certain business, obtain and quantify all the pertinent talent pertaining to the operations of a certain business and soon thereafter be a small business owner without investing money. This is mainly due to the high demand for quality and resourceful talent, in juxtaposition, with expansionary measures revolving around the small businesses arena.
More than likely, when a small business expands professional managers will manage much of the expansionary measures. “The study found that the demand for talented people between the ages of 35 and 45 will increase 25 percent—but that the supply of this asset will decrease by 15 percent. In addition, the study said, 75 percent of managers say they lack talent at various times and are unable to pursue growth opportunities because of it. Finally, only about 10 percent to 20 percent of corporate officers say that improvement of the talent pool is one of their firm’s top three priorities” (Lewis, 2009, p. 17).
Disadvantages of becoming a professional manager of a small business
For the most part, the entrepreneurial mindset is that of freedom; freedom to do as will. "Policies, programs, and procedures that treat the self-employed as if they were entrepreneurs create false hopes and overlook the most critical ingredients necessary for helping them to succeed in the new economy." (Hansen, 2004, p. 8). These very policies and procedural aspects of a certain company may preclude the professional manger to excel, due to the fact, that he or she is not granted sufficient latitude to build the business as he or she sees fit.
Another potential disadvantage in becoming a professional manager of a small business is there usually is no voluntary risk capital. The only investment is time and the professional manager usually gets paid for the time allocated to the business venture. As is the case with employees and even employers, complacency may set in because of the minimal vested interest in the project or company. The entrepreneur, not only has time invested but monetary capital also.
Conclusion
It is one thing to obtain a vision and a dream. It is another to put that dream into a reality. The entrepreneur has five alternatives to enter into the small business arena. The aforementioned gateways to entering into the small business environment have its pros and cons, risk and rewards, and its advantages and disadvantages. An entrepreneur must arm him or herself with the applicable knowledge and perform the necessary due-diligence most relevant to his or her scenario. Upon this proper due-diligence and research the entrepreneur must choose the best congruent solution most suitable for his or her new business venture. "An entrepreneur is someone who perceives an opportunity and creates an organization to pursue it." (Hansen, 2004, p. 8). The entrepreneur, no matter what the entree into the small business arena, should understand and accept entrepreneurial activity takes a different type of person, one that realizes a vision and consistently and persistently perform the mandated duties to put the vision into a reality
References:
Green, R. & Katz, J. (2009). Entrepreneurial Small Business. 2nd Ed. McGraw-Hill
Companies Inc: NY, NY.
Hansen, C. L. Broker Magazine. October/November (2004). Volume 6, Issue 5, p. 8.
Lewis, B. J. Journal of Management in Engineering. May/June (2000). Volume 16 Issue
3, p. 17.
NA. Foreign Policy. March/April (2007). Issue 159, p. 24.
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