BUSINESS ENTRY OPTIONS: PATHS TO BUSINESS OWNERSHIP

There are several entry options to business for an aspiring entrepreneur and these include new
start-ups, buying an existing business, a franchise, joint venture. Even though starting a new
business start-up is the popular choice, it is not always the appropriate option. Sometimes it may
be more appropriate to purchase an existing enterprise with its established systems, production
processes and customer base. It may also be more beneficial to enter into a franchise agreement
with an existing franchise system with an established business model.

Several factors can guide an entrepreneur to make a choice concerning the business entry options
and may include:
 The personal goals, characteristics and abilities of the Entrepreneur. An entrepreneur’s goals of
going into business and what they hope to achieve may guide their choice, is it to make money,
to be independent, personal freedom, need for achievement.
 Ability to start and run a given business will determine whether one chooses a new startup or
an established business or a franchise.
 Personal risk profile of the entrepreneur is also an important factor to consider – how much
risk is one able and willing to take? Are you risk- averse, moderate risk-taker or a high risk
taker? Risk averse individuals may prefer already established businesses, while high risk takers
may prefer new high risk start-ups.
 Resource requirement and availability. Access to resource may be a key determinant of the
business entry option. One of the most important resource is finance to start and operate the
business, personnel requirements and their skills and time as a resource are also important
considerations.
 The opportunity- different opportunities impose implied constraints on the type of business
entry options chosen. If an entrepreneur has a unique product idea for a business opportunity
that has not been previously tried in the market, then a new start-up will be more appropriate,
while on the other hand if an entrepreneur sees an opportunity to run a McDonalds store, Bata
shop then a franchise will be more appropriate.
 Type and nature of business

1. NEW START-UPs
- Involves starting a totally new business venture from scratch. Start-up is an entrepreneurial
venture at its first or early stage of operation. Starting at this stage entails resource
mobilization, laying of structures, deciding on the market, production processes, obtaining
human resources, initiating operations.
- The goal of an entrepreneur at the start-up involves figuring out the right thing to do, the right
product for the market, business model to build customers who are willing to pay for the
product/ service.
- Most common option

Advantages of Start ups

 Offers autonomy to the entrepreneur and room for creativity
 Flexibility – Because the business starts on a blank slate on inception, it can be molded and
shaped to fit in the needs, abilities, and characteristics of both the owner and the market.
 Gives the entrepreneur the opportunity to determine the business direction in terms of
products, target customers, organizational structure and culture, technology, location, size etc
 The business starts on a clean slate with no baggage from the previous business- e.g. product
quality, employee problems, legal commitments, liabilities, lawsuits
 The entrepreneur is able to purchase and use the up to date technologies and equipment
 A start-up has the opportunity of providing new, unique products and services not available
from existing businesses
 An entrepreneur can control the growth and size of business based on his/ her circumstances.
 Good financial and personal returns for start-ups that survive

Disadvantages
 Is the most risky option for business entry – (Many business start-ups don’t survive up to the
fifth year in Kenya)
 It lacks initial name or brand recognition and that influences market acceptance. The
entrepreneur will need to work hard for recognition and market acceptance.
 Start-ups lack an established customer base, takes time and resources to create and maintain
their customer-base.
 Start-ups require significant time to be established and to provide positive cash-flows unlike
established businesses that have already have established customers
 Difficult to finance and establish because they lack assets, sales and cash-flows that would
facilitate external financing. Many financial institutions are reluctant to extend credit for
unknown and unproven businesses / business models
 Most start-ups lack experienced employees as it is difficult to attract and maintain them
 Most Start-ups suffer from limited resources, technology and experience
 Learning curve expenses- that include developing a name / brand, deciding on suitable
premises, processes, technology, recruitment and training of staff, marketing etc.
Enhancing Business Start-up Success
Business Incubation
Consider starting your business in a business incubator. Business incubators support new
enterprises through the entrepreneurial process, to help increase their chances of survival.
Business incubation involves a combination of business development services, processes,
infrastructure and people designed to nurture new and start-up businesses through the vulnerable
early stages of development.

Most incubators offer new start-ups

 Physical space- office space, laboratories and pilot facilities
 Technology
 Management support- , Management, Business planning, product development,
administrative services, training, marketing
 Development and commercialization of new products and technologies.
 Technical support – R&D, technical personnel
 Networks, Information, databases
 Legal assistance- contracts, intellectual property rights, licensing
 Financial support, fundraising
Business incubators are sponsored by the Government, development partners, academic
institutions and entrepreneurs
Examples:
 KIRDI-Offers technology incubation services, facilities, infrastructure, nurturing environment
 Chandaria ( KU) – Supports business ideas and innovations from students
 Kenya Kountry Business incubators
 Nailab
 I-hub techies
 Afri-lab- African technology Lab
 M-lab
 7 Seas Technologies Innovation
 iBiz Africa

Other ways include;

- Taking part in a mentoring program or get a mentor to help, who will offer their experience
and networks to help you avoid some pitfalls
- Effective Business planning - Prepare a detailed business plan to guide you
- Proper Marketing starting with Market research- Industry and market analysis
- Start with others in a partnership
- Avoid starting off with completely new products that may face market acceptance problems.
You can start your business with established products from previous employment, through sub-
contracting to an existing business
- Build trust in your business from the start

2. ACQUIRING AN EXISTING BUSINESS

Sometimes the business goals and ambitions of an entrepreneur are better meet through the
acquisition of an already existing business or a going concern. This option allows the
entrepreneur to start trading immediately, since there is an already established business
operation, structure, product range, staff and customers. This allows the entrepreneur to make a
more objective evaluation of the likely performance of the business
Buying a going concern involves a complex transaction that requires the “due-diligence”
process of analyzing and evaluating the business to reveal its real condition and value.

Evaluating an existing business

i. Evaluate your personal factors and preferences in relation to the business
ii. Analyse the business environment to establish the survival and growth potential of the
business
iii. Evaluate the venture’s attractiveness: profit potential- profits, sales and operating ratios
iv. Assess the Business Assets- Inventory, accounts receivable, Intellectual property if any

Questions a prospective buyer should ask him/herself include:

- Why is the Business being sold?
- What is the current physical condition of the Business?
- What is the condition of the Inventory and other assets?
- How many employees are there and how many will remain?
- What type of competition does the business face?
- How does the firm’s financial picture look like?
- Is it the right type of business based on my background, knowledge, skills, interests and
experience
- Is it ideal in the market in which you want to operate?
- Is there still an opportunity for the business in the current market?
- Does the business have potential for growth?
- Will the Business generate sufficient cash to pay for itself and provide some reasonable
returns?
A major concern for buying an existing business is the valuation of the business. How much is the
business worth. This is complicated due to different ways used in valuation which can be
 Market-based valuations- determined by reference to previous sales
 Asset based valuation-Price set based on the assets and liabilities of the business
 Earning based valuations- Based on future earning potential and ability to earn income- return
on investment
The buyer of an existing business should factor in other costs in addition to the buying price
that include legal fees, valuation costs, due-diligence related costs, goodwill, transfer and
registration fees etc
Another issue for the buyer is to consider including a restraint of trade clause in the sale
contract. This prohibits the seller from establishing a rival business within reasonable distance of
the premises.

Advantages
 The business may already have initial name recognition and market acceptance
 Business may be in a strategic location
 Buying a successful business increases the chances of it remaining successful
 It already has established customers who provide immediate sales and cash flows.
 It already has experienced employees
 It already has developed products with market acceptance
 The business processes, equipment and inventory are already in place &trade credit
established
 Requires less cash outlay as compared to a start-up
 The new owner can benefit from the experience of the previous owner
 Is easier to finance as it attracts external financing better than start-ups. The business may
already have established relationships with lenders
 Some existing business may be real bargains for the entrepreneur. The current owners may
need to sell the business quickly for various reasons or emergencies

Disadvantages
 The business might be on sale because of challenges that the owner is unable to cope with
 It is difficult to find a business for sale that fits in an entrepreneur’s skills, abilities, experience
 Valuation of existing businesses is usually hard and tricky
 Existing managers and employees may resist change from a new owner, also Employees
inherited from the business may not be suitable
 The reputation of the business may be a hindrance for future success. Sellers are usually
reluctant to tell you their history and past problems
 The business may be on the decline due to various changes in the business environment e.g.
technology, customers
 Facilities, equipment and technology may be obsolete, inefficient and require replacement
 It is relatively hard to implement change and innovation in an established business
 The business may be overpriced for its value and this may impair the business to earn a profit
and generate sufficient cash-flows
 Business growth maybe on the decline, past its optimal stage and returns are diminishing

FRANCHISING
It is a contractual relationship between a franchisor and a franchisee in which the former agrees to
produce, distribute or market a product or service in accordance to the business model of the
franchisor.
Franchising arises when a franchisor grants a licence (franchise) to another business
(franchisee) to allow it trade using the brand / business format.
Franchisees do not establish their own autonomous businesses, instead they get business model/
from the franchisor. Unlike independent business owner, the franchisee doesn’t have the freedom
to change the way the business operates.
A franchise is a legally independent but economically dependent on the integrated business
system of a franchisor.
The franchisor in addition may provide other services that include; general advise, support,
research & development and help in marketing and advertisement. In return the franchisee pays an
initial franchise fee and an ongoing royalty or management service normally based on the level of
turnover
- Examples of franchises include Mc Donalds outlets, Coca cola, Toyota, Chicken inn, Hilton
hotel, Gallitos, Bata shops, Woolworth, Shell, national oil, Total, Ken chic, KFC

Advantages
 The franchisee gets the opportunity to own a business relatively quickly and reaches break-
even point faster than independent business due to being identified with an already established
brand, trademark and business.
 The franchisee benefits from the franchisors business experience, avoiding costly mistakes.
 The franchisee benefit through accessing a business model with a proven track record
reducing inherent risks to the business. For example Mc Donald’s specifies every aspect of the
business, from the required temperatures to use for the burgers, the time of cooking, etc
 The franchiser in a bid to reduce business failures offers managerial training and support to
the franchisee
 Name appeal- A franchisee enjoys the benefit of using a well known brand name or trademark
for his/ her products and services
 The franchisee can ride on the good reputation of the franchiser who seeks to maintain
standards in all the outlets
 The franchiser offers regional/ national marketing and advertising programs that benefit all the
franchisee and the entire products and chain
 Franchisers help franchisees to obtain the required finances and other resources from lenders
and other institutions
 The franchisee has the benefit of participating in the franchiser’s centralized and large volume
buying power.
 Franchisers my help franchisees to enter prime locations and may offer territorial protection
which gives existing franchisees the right to exclusive distribution of brand name goods
within a particular geographical area
 Starting a business as a franchisee reduces the amount of risk exposed to the business, giving
the business a higher chance of succeeding
Disadvantages
 The franchiser exercises strict control over the franchisee to maintain standards leaving no
room for the franchisee to personalize the business or add some creativity and innovation.
 There is a possibility of the franchise agreement not fulfilling the franchisee’s expectations,
both in terms of sales, profits and the franchisor fulfilling their obligations
 The services provided by the franchiser may constitute a heavy expense to the franchisee. The
franchisee may be obliged to buy equipments and materials from the franchisor or list of
approved suppliers at comparably high prices
 Should the trade name or brand name of the franchise be tarnished by the shortcomings in
other franchisees, all franchisees will suffer for the sins of others
 The success of the entrepreneur is determined to a large extend by the success of the franchise
 Franchise fees and ongoing royalties may be high for the franchisee especially if the business
is not doing well
 The entrepreneur is stripped off the advantage of being autonomous and independent
 In most cases the franchise agreement stipulates that the franchise can only sell products
approved by the franchiser. This restricts growth though product line expansion