Establishment Options

Definition:

There are three main ways to establish an SME (or add more outlets as part of growth strategy):

• Establishing the business from scratch;

• Buying and overtaking an existing business;

• Entering a franchise agreement

The decision an owner makes regarding their establishment options will depend upon the type of business, the required purchasing of capital equipment, the financial position of the owner, the costs involved in buying a business or entering a franchise agreement and the degree of control the owner desires over the operation of the business. 

Starting from Scratch:

Building a business from the ground up. This  approach is good for businesses that are based on a new and original idea, when there is a gap in the market (no pre-existing businesses), when the market is growing (more customers) or when there is unmet demand.

• Advantages: The owner has complete freedom to set up business how they envision; have complete control over the pace of growth of business; do not have to pay goodwill (the price of a business’ brand / reputation); can begin small and grow.

• Disadvantages: Large investments of time and money with no revenue into business (need large amount of start-up capital); no business reputation; all staff need hiring and training; slow initial sales and possible losses during first years of operation.

Buying and Existing Business:

Buying an existing business that is for sale by the owner. The purchase of the business includes all stock, premises, equipment, staffing arrangements.  This approach is good for an already competitive market, when there is an opportunity to use business expertise to turn a business around (renewal), or to expand a business quickly into new markets or regions.

• Advantages: Instant revenue from sales; pre-existing customer base and consumer awareness;  seller can provide advice and training; employees already trained and hired; easier to obtain finance (less risk as revenue arriving instantly).

• Disadvantages: Business may have poor brand / reputation; rebranding costs; equipment may be old / faulty; staff holding bad habits from previous workplace culture; challenges in management change; hard to asses value of goodwill; previous success may have been due to previous owner's connections / networks / personality.

Buying into a Franchise:

A franchise business has a higher rate of success than independently owned and operated businesses. The well-recognised brand name, reputation and successful business model generates revenue and lowers the risks in starting a business (this comes at a cost)

• Advantages: Franchisor provides training; volume buying from suppliers (inputs); risk of capital investment lowered; immediate benefit from reputation of franchise (more revenue, faster; equipment and design set by franchisor; advertising budget across entire franchise (marketing fee).

• Disadvantages: High level of franchisor control; portion of revenue / profits go to franchisor (for use of brand name) according to the franchise agreement; service fees for advice; no room for individual products / designs; incompatible goals; mistakes across the franchise can taint individual franchise business.