An entrepreneur is one of the most difficult yet most rewarding occupations a person can take on. There are many different avenues one can take to embark on the journey of owning their own business which will provide some independence. One of the avenues available is becoming an entrepreneur. According to Scarborough and Cornwall (2019) an entrepreneur is “a person who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying significant opportunities and assembling the necessary resources to capitalize on them.” This avenue is probably the one that requires the most amount of risk and hard work. Seth (2018) believes that there are four crucial elements to acting like an entrepreneur in business which makes an entrepreneur different from a regular business man. That is that entrepreneurs make decisions and invest in products or services that have not been proven and are not guaranteed. They also persuade others to support the mission or product without a guaranteed outcome and therefore they do not shy away from doing things that may not work. There are many benefits and risks in being an entrepreneur or starting any kind of business venture. In this document I am going to discuss the risks and benefits of starting a new business, buying an existing business, and buying a new franchise. I will also elaborate on which kind of business model better suits me by identifying a new business I would like to start in a new location.
Starting a New Business
When choosing the type of business an entrepreneur is going to start there are many things that need to be considered besides the most obvious consideration of the products or services being sold. Choosing the form of ownership can be the most difficult thing to do considering that each form or ownership can have adverse effects. It can be difficult to change in the long run and there are many different considerations that need to be made like the amount of tax an entrepreneur can be expected to pay based on the amount of money expected to be made. The amount of liability an entrepreneur is willing to take on for example if the product sold or service provided is one that may be high risk. Other considerations are the future business goals, the managerial ability of the person, the amount of control in company that is wanted and the amount of capital needed to start and grow the company. According to Scarborough and Cornwall (2018) some forms of ownership can be very costly and once an entrepreneur chooses the type of ownership that best suits them changing it can be a gruesome, time consuming and a costly process.
One of the simplest and most popular forms of ownership amongst entrepreneurs is a sole proprietorship which as it implies means that one person owns and runs the business. Some of the advantages of a sole proprietorship is that is the easiest to create, cheapest to start and the owner has complete authority over any decisions made. While the advantages are great the disadvantages can be just as significant considering the owner will have complete and unlimited personal liability for any debt belonging to the business including but not limited to any lawsuits filed for the company.
Starting a new business from scratch has many advantages as well as disadvantages. The top three benefits of starting a new business are complete control over all decision making in regards to the business. Another advantage is that all profits in the business go to the sole owner and that there is a lot of growth and gratification with every step, especially when accomplishing goals. The disadvantages are many starting with the amount of financial risk the owner is taking on. Most entrepreneurs have a hard
Buying an Existing Business
When an entrepreneur is considering purchasing an existing business there are different advantages as well as disadvantages. In this case let’s start with the similarities between buying an existing business and starting a new business, like the amount work it will take to evaluate the business. Entrepreneurs who are considering purchasing an existing business will have to do their due diligence in vetting the business and evaluating many different aspects of the business beginning with the company’s rate of return. To determine this the buyer will evaluate cash flow statements, debts and assets etc. The entrepreneur will also have to consider and find the answers to a plethora of questions that will help determine if this is the best move for them or if starting a business is a better option. Scarborough and Cornwall (2018) point out that skipping or rushing these steps can lead to costly surprises and a loss. There are five stages an entrepreneur must go through whenever they are considering to buy an existing business. Those stages are as follows: the search stage, due diligence stage, valuation stage, deal stage and once they buy the business comes the transition stage. Completing all of the stages requires a lot of time and effort to ensure that the entrepreneur is making a good decision mentally and financially.
Some advantages to buying an existing business is that successful businesses typically continue to be successful. This is because depending on the business type they tend to have an established customer base, and a set up business system (Scarborough & Cornwall (2018). Some other benefits are a good location, employees and suppliers, equipment, and inventory are also already in place. The new owner can also use the experience of the previous owner to learn from in the future, this includes the keys to success as well as any pain points that may need to be improved upon. The entrepreneur also has the possibility of buying a business that is already profitable and therefore having immediate profits and cash flow upon closing the deal. While all of these benefits sound really good there are also some possible disadvantages that need to be considered when deciding to take over an already existing business.
An existing business has a higher possibility of many surprises especially when the previous owner is trying to unload a business because they lack the tools, and skills needed to turn the business around. While this may not be a complete deterrent when deciding whether or not to buy, it can lead to the seller hiding crucial information about the business’s current financial standing. The three biggest disadvantages can be paying for ill will of the previous owner, meaning that customers have had bad experiences and have spread the word. There can also be ill will with suppliers or even employees which can affect the business for year, even when there is a new owner. When an entrepreneur inherits a business they also inherit all of its employees which can be a blessing or a curse depending on the people and their relationship with change. When creating change in a business sometimes the previous employees can struggle with adapting to the change which can in turn cause a problem for the new owner. In this case the owner will have to make the choice of whether or not to fire the employee and then the task of finding another highly qualified employee. The biggest disadvantage of buying an existing business are the cash requirements since it is more expensive to buy an existing business than it is to just start a new business from the ground up (Scarborough & Cornwall, 2018).
Buying a New Franchise
The last of the three business ventures that will be evaluated in this paper is purchasing of a new franchise. According to Scarborough and Cornwall (2018) “Franchising is a method by which a company distributes its products or services by selling licenses to its products, services and often its business systems to entrepreneurs or franchisees, who will operate the business according to the established business model for an upfront fee and an ongoing royalty fee.” This method of doing business is a proven method and has become popular over the years because it is a more proven method of success. Unlike entrepreneurs who start their own business buying a franchise means that you will not have the autonomy of making their own decisions and changing the way they run the franchise. They are required to run everything through the franchiser in order to ensure that the franchisee is sticking to the brand and model and therefore ensuring that they will be successful. Franchising offers many benefits as well as risks.
Some of the benefits include having a proven system for running the business and having access to the franchisors experience. Most franchisors do not require their franchisees to have any experience in that particular field and therefore offer training classes prior to opening a new location and during. This training is beneficial for all parties involved since it is in the best interest of the franchisor that the franchisee is successful because it ensures that royalties continue to be paid and the reputation of the business stays intact. Some other benefits include brand recognition which basically guarantees customers who are familiar with the brand. That leads to standardized quality of goods and services which means that the franchisee is required to sell the same product or goods as all the other franchises. Scarborough and Cornwall (2018) pointed out that building a good reputation can take years but destroying it can be done expeditiously and can affect the entire chain.
New Business to Start in a New Location
Setting Up the New Business
After analyzing three different types of business models including starting a new business, buying an existing business and buying a new franchise, I have been able to evaluate the benefits and risks of each type. The model that best suits me is starting a new small business from the ground up. A small business is a business that employs fewer than 100 people (Scarborough & Cornwall, 2018). I chose starting a new business because all of the advantages it offers an entrepreneur while also understanding the risks that can be associated with owning one. It is truly important to learn from the mistakes of others and learn as much as possible about the type of business and industry I plan to go into.
Preparing to start a new business is very intimidating but with all the research that I have done up until now I feel more comfortable in doing so. I plan on starting a new nail salon from my home at first and then in a physical business location. The reason I am choosing to go about it this way is because doing it from home can help me in building my clientele base without the expensive overhead cost of leasing a space. I also would like to work out the quirks of the finances and costs to run a business. During this time, I plan on tackling extensive market research to find a physical location and build out my brand so that I can have employees that work for me so that I can focus more on the business and financial aspects of the business. I would like to start off very hands on because it will provide the experience and education I need to acquire in order to be able to run my business, teach and manage my employees with a more hands-on approach.
Target Market
To begin planning this new business venture is figuring out who my target market is. There are some of the aspects which will lead to the conclusion on the target market. First, my salon’s target region. Any salon’s target market is geographically constrained. That is, unless the salon is situated in an area with a high frequency of visitors or is itself a destination salon, the majority of a salon’s clients will likely come from the local region (Richards, 2017). It may be able to focus the marketing efforts on certain communities. Establishing the sorts of employment held by residents of the salon’s target location may provide insight into the pricing the salon may charge and the services it can provide. I am starting out at my home and I will be available for home services; therefore, this salon will target the community around my home area and establish an online base to advertise to the people within my home location for home services (Richards, 2017).
Secondly, I will use Gender-Specific Targeting. While salons are available to individuals of all genders, my marketing efforts may be best directed on the gender that spends the most money on salon services: women. Having said that, I am absolutely capable of having many target markets. For instance, if other salons in the region are largely focused on women, marketing to appearance-conscious guys may result in a profitable market segment (Richards, 2017). My target gender will impact the models I pick and the issues addressed in your commercials, such as graying or sustaining a family budget. As a result, for the sake of precision, I shall target the female gender and because this is the area I am more specialized in. Also, Style as a determinant of target market. Style is a less concrete factor of target market than gender or area, but probably just as significant. Customers who go to an old-fashioned beauty shop specialized in conservative, “mature” nail designs will be much different from those who stroll into a cutting-edge salon specializing in the hottest ‘dos (Richards, 2017). To identify my target market with regard to style, I have explored the mindset of my ideal customer set, including the kind of jobs they work, passions they pursue, magazines and websites they read, and celebrities they idolize and I am targeting the younger generation between teenage to late 30s (Richards, 2017). These are the most prevalent population around my home area and the push by the 21st styles and trends is making many seek for modern and contemporary styles which I am competent in. Therefore, I will maintain the contemporary nail styling and techniques.
Lastly, I am also considering the Target Market’s Socioeconomic Situation. It is good to decide the socioeconomic position of the target market for your salon in order to determine services, pricing, and the expected degree of demand, as well as to assist you aim your advertising efforts (Richards, 2017). For instance, if you are a big-city salon catering to wealthy young professionals, your service options, pricing, and advertising would be very different from those of a rural salon. My salon will be home based, therefore, I will ensure I meet the socioeconomic status of the people within my region with a better touch of class so that I can be on the competitive edge within my region.
Legal Structure of the New Business
A business structure is the accepted legal structure of an organization in a certain jurisdiction. The legal structure of a company is critical in determining the kind of activities it may engage in, such as capital raising, accountability for business responsibilities, and the amount of taxes owed to taxing authorities (Corporate Finance Institute, 2021). Before deciding on a legal structure, company owners should assess their requirements and objectives and get familiar with the characteristics of each business form. In the United States, the four primary business structures are sole proprietorship, partnership, limited liability Company, and corporation. In this case, I have chosen limited liability company (LLC).
LLCs are hybrid business structures that integrate the greatest aspects of both partnerships and corporations, namely, they are able to provide the best of both worlds. It shields company owners from personal accountability while minimizing tax and business obligations (Corporate Finance Institute, 2021). The business’s gains and losses are distributed to the owners, who must report a portion of them on their individual tax returns. A limited liability company, in contrast to an S corporation, does not have a cap on the number of stockholders (Corporate Finance Institute, 2021). Limited liability companies must submit their articles of incorporation with the Secretary of State in the state in which they want to do business. Operating agreements may be necessary in certain states. When opposed to a corporation, a limited liability firm has less rules and regulations. Owners benefit from limited liability, which prevents their assets from being auctioned to cover the obligations of the company. There is no restriction on the number of shareholders that a limited liability corporation may have (Mancuso, 2021). A disadvantage of a limited liability corporation is the high cost of forming one since it must be registered in the state where it plans to do business. To guarantee compliance with tax and regulatory obligations, the organization may need the services of an accountant and an attorney.
The laws regulating limited liability companies differ from state to state, and they are authorized by state legislation. Members are a common term for the people who own an LLC (Fernando, 2021). People, businesses, foreigners and even other LLCs may all be members in many states and nations that do not prohibit ownership. Banks and insurance businesses, for example, are unable to create LLCs. A limited liability company (LLC) must submit articles of formation with the state in order to be recognized as a legal entity (Fernando, 2021). In comparison to corporations, LLCs are simpler to start up, and they provide more flexibility and security for their investors. Limited liability companies (LLCs) have the option of avoiding federal taxes (Fernando, 2021). On the other hand, they disclose their earnings and losses on the owners’ personal tax returns. The LLC has the option of reclassifying itself as another kind of entity, such as a corporation. Debtors have the right to pursue members who are found to be guilty of fraud or who have failed to satisfy their company’s legal and reporting obligations.
While each state has its own regulations for LLCs, there are a few universals. First and first, members or proprietors must decide on a name that will be finalized in the near future. The state will then be able to get a copy of the articles of incorporation (Mancuso, 2021). The LLC’s articles of incorporation spell out each member’s responsibilities, powers, rights, and obligations. On the paperwork, I will also find information such as a list of LLC members and their addresses, as well as a statement of purpose (Mancuso, 2021). There will be submission of articles of organization and pay a fee to the state. Additional payments and paperwork must be submitted to the federal government in order to receive an EIN (Employer Identification Number).
The major reasons I am considering the LLC is because of the advantages and privileges which it comes with. Registration as an LLC is primarily chosen by company owners to restrict the personal responsibility of their partners or investors. There is a common misconception that an LLC is an amalgamation of a partnership and a corporation, with the former offering liability protections and the latter allowing for many owners (Mancuso, 2021). In spite of their many benefits, LLCs have a number of drawbacks. A member’s death or bankruptcy may necessitate the dissolution of an LLC, depending on state legislation (Fernando, 2021). There is no limit on how long a business may remain. LLCs are not the best choice for founders who want to start publicly listed companies and businesses in the future like in my case.
References
Brookes, M., Altinay, L., Wang, X. L., & Yeung, R. (2016). Opportunity identification and evaluation in franchisee business start-ups. Journal of Service Theory and Practice, 26(6), 889–910. https://doi.org/10.1108/jstp-04-2015-0089.
Corporate Finance Institute. (2021, September 6). Business structure. Corporate Finance Institute. Retrieved January 24, 2022, from https://corporatefinanceinstitute.com/resources/knowledge/strategy/business-structure/.
Fernando, J. (2021, August 22). Limited Liability Company (LLC). Investopedia. Retrieved January 24, 2022, from https://www.investopedia.com/terms/l/llc.asp.
Johnson, R. (1998, Apr 20). The pros and cons of buying an existing business: [final edition]. The Standard Retrieved from http://library.capella.edu/login?qurl=https%3A%2F%2Fwww.proquest.com%2Fnewspapers%2Fpros-cons-buying-existing-business%2Fdocview%2F349158846%2Fse-2%3Faccountid%3D27965.
Mancuso, A. (2021). Form your own limited liability company: create an LLC in any state. Nolo.
Richards, L. (2017, November 21). Advertising ideas for Salons. Small Business – Chron.com. Retrieved January 24, 2022, from https://smallbusiness.chron.com/advertising-ideas-salons-3528.html.
Scarborough, N. M., & Cornwall, J. R. (2018). Essentials of Entrepreneurship and Small Business Management (9th Edition). Pearson Education (US). https://capella.vitalsource.com/books/9780134742656
Seth’s blog: The four elements of entrepreneurship (2018). . Chatham: Newstex. Retrieved from http://library.capella.edu/login?qurl=https%3A%2F%2Fwww.proquest.com%2Fblogs-podcasts-websites%2Fseths-blog-four-elements-entrepreneurship%2Fdocview%2F1987673600%2Fse-2%3Faccountid%3D27965
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