Here are 3 Types of Business Models for Entrepreneurs to start with
When you are looking to become an entrepreneur, there are only three options that you have. Either you can start an Independent Business, or you can buy an Existing Business, or you can buy a franchise.
Starting an Independent Business
Before opting for starting an independent business, please consider these pros and cons.
- What is your experience: You need to see what are your background, learning, and idea. Think about whether your idea is great or does it have possibilities.
- Capitalization: If you feel that you are undercapitalized, this is not an option to get into. However, if you feel your idea is great, you can get yourself funded.
- Unlimited possibilities of a business idea: There are unlimited business opportunities that you can choose if you want to start your own business.
- Marketing and sales: Marketing and sales will be something wherein you will be completely independent. It’s you who has to start your own business, so you will be the master and owner of taking decisions in your firm.
- High risk with no support: Since you are starting your business on your own, it’s a high-risk proposition with no support. But, there are a lot of service groups, entrepreneurship cells, peer-to-peer groups that are available for guidance.
- Location selection: If you have selected the wrong location for carrying out your business, then it will never be successful.
- Hiring accountants: In order to run an independent business, you need to hire accountants.
- Backend support: You will need a lot of backend support for all the things that you do not know.
- Low cash flow: You will have a low cash flow initially since you have to do everything on your own. You need to keep your overheads minimal and need to manage the cash flow accordingly.
Buying an Existing Business
Look out for these pros and cons before buying an existing business.
- Current cash flow: Existing business is a running business so you will have the current cash flow available.
- Existing customer base: This type of business will already have an existing customer base because somebody who started this business would already have run it for quite some time.
- Existing reputation: You will have a lot of existing reputation.
- Previous financial records: You have the earlier financial records of the business that will help you in the future.
- Current staff and systems: You will get the trained staff since the business is running, they have been taking care of customers and serving them well. You will be refining systems rather than making them.
- Accuracy of financial records: You don’t know about the kind of financial records or books that have been maintained by the previous owner.
- Debt acquisition: When you purchase a company, you need to see if there is a loan, a vehicle, or anything that is debt to be sure of the situation.
- Previous owner dependency: Since you are buying a business that is currently running, you will have a lot of dependability on the previous owner.
- No support: Once the person sells the business to you, he has no obligation towards you so you won’t be getting any support.
- Unknown and unseen problems: You will have a lot of unknown and unseen problems so you require a lot of due-diligence before-hand before buying an existing business.
- Lack of documentation: Sometimes when an entrepreneur starts a business himself, they don’t make an operational manual. Therefore, it gets very difficult to run a business without having any manuals.
Buying a Franchise
Franchising means rights to exercise so when you pay somebody fees, in return, they give you his brand name and share his business know-how with you. So, he gives you his name, system, and in return, you pay fees to the company. Some of the pros and cons of starting a franchising business include:
- Proven Model: The business that the person is doing is a proven business model. The person would be taking for a business for a while so he would have partners in place. When you invest in someone’s proven system, the chances of losing your money decreases.
- Brand recognition: The larger the brand is, the more the recognition is. Choosing a franchise makes it easier for your brand to stand out above your local competition. Franchises bring brand awareness with their names from day one. Therefore, customers will know about your products that will increase your sales.
- Operational manuals: You get your operational manuals ready and that’s what you get associated for. It’s a proven business model with operating manuals in place.
- Training and Support: The moment you sign up with a franchised system, they give you training which is upfront. They give you support which is ongoing.
- Guidance: You get a lot of guidance and handholding from your franchisors in the initial years. When you tie-up with a franchisor, he tells you how to manage the business locally. You will also get a lot of support from existing franchisees.
- For yourself not by yourself: The franchise business is for yourself but now by yourself. This means you are running your own business but not sailing the ship alone.
- Site selection support: When your start-up is a franchise, you will be getting extensive support from your franchisor. He will help you in selecting the apt location for starting your business.
- Marketing support: Franchisor will also help you in marketing your business.
- Supplier discounts: You get supplier discounts and there is an economy of scale that is worth there. You will buy something for yourself for one unit but the principal company buys for many of the franchisees together.
- Existing sales process: The existing sales process is already in place.
- Potential national accounts or national online orders: If you take up a franchise of an e-commerce company, you get a national account that gets institutional orders.
- Exit strategy: In this type of business, there is an exit strategy in place. If you wish to sell the franchise then you will have everything that is required to do so like manuals, accounting systems, which will help you sell your business ahead.
- Pay franchise fees between 1-50 lakhs: You pay a franchise fee to the franchisor between 1-50 lakhs towards all the support, manuals, research & development, and the brand name that he provides you.
- Royalties: You pay royalties to a franchisor every month. You don’t pay them if you start your own business or buy an existing business. Royalties vary between 4-10% from the top line business that you do.
- Follow the rules: You need to follow the guidelines created by the principal company as a franchisor.
- Need approvals: If you want to make any change in your business, you can’t do it on your own. You have to get approvals from the franchisor to change anything in the business system that is going on.
- Potential territory restrictions: As the principal company will be having other franchise partners also, you will be given your own geographical territory to work in.