Three Options for Aspiring Entrepreneurs

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Another option is to buy an existing business and take over its operation. What are the pros and cons there?

Buying an existing operation is probably less risky because it presumably has a track record and is a known commodity. You already have a name and a market to step into.

The issue here is, can you as the buyer continue in the same way as the previous owner? Business is very people-oriented, very service-oriented. Some people don't have the personality to deal with the public on a daily basis. Customers will be looking for bargains, returns, making complaints, and you have to have a smile on your face because they're your customers and they're right and you're wrong. If you work for a big corporation in a cubicle all day, are you going to be able to handle that?

Aside from assessing your own fitness as a business owner, what about assessing the financial health of the company you're going to buy?

There's a lot to it. A lot of drilling down through the profit-and-loss statement, looking at gross revenue, salary, and expenses. Are they buying supplies from a neighbor or cousin who won't give you the same rate? What kind of lease do they have, and is it transferable? Or will you be buying property along with the business? Are you obligated to pay out all the money they owe, or can you negotiate on existing obligations?

You need to bring in someone very familiar with business transactions to help you evaluate the opportunity. You want to ask why the person is selling this business. There are good, legitimate reasons, but is the owner really planning to retire, or is he or she just trying to escape the crushing debt the business has accumulated? A business that is marginally profitable may not be able both to pay off the debt service on the loan and to pay you a living wage.

Another popular option is purchasing a franchise. Is this, at least theoretically, the least risky choice?

It is easier to get started because there's a known brand, for the most part. And when you buy a franchise, you also buy marketing support, business strategy, and assistance with site location. The franchisors have the process nailed down. But you're paying for all that, both up front and ongoing, so you need somebody familiar with this kind of transaction working for you. The franchisor has done this a thousand times and has its own attorneys; you're at a big disadvantage if you don't have an advocate.

One advantage, especially right now, is that franchisors may be willing to finance new purchases. The question is, what will they charge you? What will they demand of you? If the franchisor's not willing to finance the transaction, where will you get the money? Another potential downside to franchising is that you'll never have the final say in all business decisions, because franchisors typically retain rights to ensure your business is run their way.

Again, the research is all-important.

Absolutely. Thoroughly investigate the franchisor, which is going to become your business partner. And talk to other franchisees—not only the successful ones but also the ones who have failed. If several former franchisees tell you the company didn't fulfill the promises of the franchise agreement, beware.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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