What we’re going to touch on now are the three different types of options you have in terms of primary ways of going into business.

The first one is creating a business from scratch. You know, if you have a really good idea, we encourage you to go out and develop it. If you don’t have an idea or the skills to do that, then the next option is to buy an existing business. This is something that somebody else has started and built to a certain point—something where there’s a historic track record, there’s predictable cash flow, and you’re going to pay a premium for that predictability.

The third option is you can buy a franchise business. This is typically the least risky way for somebody to go into business, especially if it’s your first time in business. So, we’ll spend more time in this area.

Starting a business from scratch is the most common way that people go into business for themselves. Again, if you have a really good idea, I would encourage you to do that. The advantages of going into business starting from scratch are:

1. You have complete control. Nobody tells you what to do or when to do it. That means you get to make all of the decisions—you get to call the shots.

    

2. You have a ton of room for creativity. This is critical because starting a business from scratch means you’ll need to create systems and processes. With that creativity, you’re going to have to come up with those ideas in order to make things work.

    

3. There are no predetermined rules, so you can do anything you want or feel like doing.

    

4. It also has the biggest upside, because you’re starting from zero, and you get to keep all the profits—all of the equity value that you build in that business over time.

A lot of start-from-scratch businesses are born from a passion for something, and this can be very fulfilling. But it’s not all rosy—there are certain disadvantages you want to be aware of.

While creativity is an advantage, the disadvantage is that you have to create all the systems from scratch. This is where industry experience is critical. Think of it this way: you want to build a boat. You go to the edge of the water, gather all the wood, nails, and parts you need, throw it in the water, jump on the biggest piece of wood, and start hammering and putting things together as you’re floating down the river. The metaphor is: the marketplace is the river. You don’t know the currents, the depth of water, the speed, or the dangers—but you know how to build a boat. That’s the good idea. It comes with a lot of risk.

You also have limited financing options. Banks are very reluctant to lend money to start-from-scratch businesses that are unproven. So, you typically have to use your own financial resources to fund that business.

Because you’re building systems from scratch and often reinvesting in the business, it’s common for these businesses to take a long time to ramp up to profitability. It can take years before you’re making money, and you have no way of knowing how well your idea or product will work or be accepted in the marketplace.

An important disadvantage is that you have no one to turn to for support. You can talk to your lawyer for legal advice, and your accountant for financial advice, but you have nobody in your corner who understands your business and can coach or guide you on how to run it. You’re alone.

A big disadvantage of starting a business from scratch is that these businesses carry the highest failure rate. Depending on what year of data you read from Industry Canada, you’re seeing a 40% to 49% failure rate after five years in business.

A lot of people who start businesses from scratch are younger. They’re thinking, “If this doesn’t work out, I still have some runway left to reset my career and recover.” For people who are older, they don’t have that runway. They have one shot to get it right.

Now let’s look at buying an existing business. The next way of going into business is to buy an existing business—something somebody else has already built. There are several advantages here.

One of the biggest advantages is cash flow predictability and some degree of goodwill. You get to see the financial and historical results. I would suggest this is one of the biggest reasons why people consider buying an existing business.

Goodwill is the intangible value of the business’s relationships in the marketplace—relationships with customers, staff, and suppliers. Goodwill often ensures the retention of these relationships as the business transitions to the new owner.

The financial history and track record make this type of business appealing for financing by some lenders. Depending on the nature of the business, there’s often a customer base and a location you’re inheriting as part of the purchase.

You also have trained and skilled employees in place to help you manage through the transition. Because the previous owner likely created systems and processes, you’ll be able to take over and optimize those.

Another big advantage is that the existing owner may finance part of the purchase. We call it seller financing or vendor take-back. For example, if the business costs $300,000, you might pay the owner $200,000 upfront, with $50,000 due at three months and another $50,000 at six months. This means the owner is with you during the transition, and you get to spread the payment over time.

As a matter of fact, I would recommend you insist the current owner finance some of the purchase. That helps keep them focused on making sure you’re successful when you take over the business.

One of the biggest disadvantages is that it’s really hard to determine the actual cash flow. While you can see historical results, you don’t know how much the current owner is running through the company for personal lifestyle needs. For example: their cell phone, their car, or other expenses you might not carry. This reduces the reported profitability for tax purposes, and it’s hard to get full visibility.

Another disadvantage is sometimes there’s hidden bad will. You may not know if the business has a damaged reputation in the market or what past employees have said. It’s hard to find out.

Valuing the business is also difficult. Owners almost always overestimate the worth of their business. It’s very common for existing businesses to be overpriced.

That’s why we recommend vendor take-back financing—because after you buy the business, it’s hard to control how often the previous owner will be available to support or coach you. They might be on a trip, funded by your purchase, when you need them most.

There are always hidden agenda items—hidden seller motives—behind a sale. They might say they’re retiring, but maybe negative trends are forcing their decision. Ask yourself: if this is such a good business, why are they selling it instead of hiring a manager and keeping the annuity income?

While having employees in place is an advantage, it can also be a disadvantage. You might inherit weak performers or the wrong people in the wrong jobs. You may even see employee defection. Sometimes staff are loyal to the previous owner and leave after the business changes hands—or worse, they leave and follow the former owner to a new business that might compete with yours.

The last disadvantage we’ll talk about is debt service. Depending on the purchase price and type of business, your debt load could be high, and you’ll need to fund that through the business’s cash flow.

Now let’s talk about buying a franchise business.

First, the advantages:

• Name recognition and trademark protection. The more mature the brand, the more powerful it is at attracting early customers for a new franchisee.

   

• Proven, time-tested business model. Franchisors use sophisticated processes, systems, and marketing intelligence to outperform independent operators.

   

• Coaching and support. Strong franchisors offer extensive support—pre-launch, during launch, and ongoing—helping you grow and improve consistently.

   

• Operational roadmaps. Because many franchise locations run under the same systems, franchisors are able to create detailed roadmaps that reduce uncertainty.

   

• Bank and lender appeal. Franchises are attractive to banks because they come with proven systems that create predictability and mitigate risk.

   

• Franchise family. One of the most overlooked advantages. Every other franchisee is doing what you’re doing and becomes part of a built-in support and peer network—something you don’t get when starting from scratch or buying an existing independent business. You gain access to a community of motivated individuals sharing tips, experiences, and system improvements.

   

Now, the disadvantages:

• Oversaturation. There are over 1,200 franchise concepts in Canada. Just because it’s franchised doesn’t mean it’s good—it only means it’s been duplicated. Some systems are led by inexperienced leadership, are undercapitalized, or face unfavorable trends. You should run from those.

   

• Structure and control. Franchising is often highly structured. Some franchisors leave very little room for creativity or operational freedom. While some are more flexible, you need to know what level of structure you’ll need to comply with.

   

• Restricted product range. For quality control, some franchisors limit the range of products you can carry. That can be a downside for some people.

   

• Fees. You have to pay an initial franchise fee and ongoing royalties. Whether that’s a disadvantage or a value benefit depends on the franchise. In a good system, royalties are built into the profitability model—but some people still see them as a downside.

   

We’re now going to transition into the next segment in this series, where we’ll take a deeper look at franchising.