Setting up a new business
Potential entrepreneurs would consider setting up a new business because:
- A new idea, invention or solution has been created.
- Other existing businesses cannot satisfy the needs of customers (ie. market gap).
- The market has grown and existing businesses cannot support additional customers.
There are advantages and disadvantages to setting up a new business.
| Advantages | Disadvantages |
|---|---|
| The owner has the freedom to set up as they wish | High risk and uncertainty |
| Flexible (can start up as a SME or micro business) and can determine the pace of growth and change | Small customer base, needs time to develop reputation |
| Able to start up on a smaller scale with limited funds | Hard to generate profit initially and can easily bankrupt |
| Unforeseen competition can be stressful for new start-up businesses |
Purchasing an existing business
- This is to buy a business that is already operating and everything that is associated with it. This includes: stock, equipment, staff, reputation, existing customer base and goodwill.
- Goodwill is an intangible asset recorded when one company acquires another. It concerns brand reputation, intellectual property and customer loyalty.
- It is critical to investigate the reason behind the sale of business because existing owners will always (and only) present the best side of the business.
- Researching about its history and obtaining legal & financial advice is highly recommended.
There are advantages and disadvantages to purchasing a new business.
| Advantages | Disadvantages |
|---|---|
| Existing customer base can generate instant income | If the previous owner has poor reputation, it may be difficult to change |
| Easier to obtain finance with a history | Existing customer base could be lost, or reduced |
| Stock, equipment, patent and staff are already acquired and can be utilised immediately | Employees may be reluctant to the new change (new management style |
| Seller may provide some assistance and training |
Purchasing a Franchise
- A person (franchisee) buys the right to use the business name and sells goods and services of an existing business (franchisor).
- This is a convenient method if the franchisee has no previous experience and can avoid potential problems when starting a new business.
- The franchisee has to pay a fee to the franchisor, and the franchisor takes a cut of profits. In return the franchisor has to pay for training, equipment, etc.
There are advantages and disadvantages to purchasing a franchise.
| Advantages | Disadvantages |
|---|---|
| Possible strong good will and customer base, linking to possible profit | Franchisor has the complete control including price, products, suppliers and health regulations |
| Equipment and advertisement already exists. Inventory would be cheaper | Profits must be shared with the franchisor (according to contract) |
| Low risk | Franchisee or store owner might not feel like an owner, limited rights |
| Franchisee does not need previous business experience, training will be provided | Franchisor charges service fee for advice |