But what if you've lost your job, taken a package, and are looking for a business in which to invest proceeds of your package? All of a sudden risk of your new business failing looms very large indeed.

One way of reducing that risk is to consider buying a franchised business.

WHAT IS A FRANCHISE?

Simply put, franchising involves owner of business which is being franchised ("the franchisor") granting to person who wants to offer products and services of franchisor ("the franchisee") rights to use its trademarks, business names, associated intellectual property, know-how, business systems, training systems and operating manuals in exchange for monetary payment in form of an initial franchise fee/purchase price and/or ongoing royalty payments which are typically calculated as a percentage of franchisee's turnover.

ADVANTAGES OF A FRANCHISE

-> Proven system

The franchisor has already done work of establishing a system for business being offered for franchise. This system provides you, franchisee, with a roadmap to follow, hopefully to success. The franchisor has already tested and refined all aspects of business and has created a "business success formula" for franchisee to follow. This means that you are spared trial and error of working out what works and what doesn't and are therefore freed to focus on "working system", hopefully generating profits within a short period of time.

-> Avoid many start-up problems

Starting a business from ground up requires a lot of time and effort just getting basics in place. These include major undertakings such as developing a reputation in market place, obtaining finance to fund new venture and overcoming competitive threats, as well as more mundane such as what business licenses to obtain and what insurance cover to purchase. The franchisor will have already done a lot of this work. For example, franchisor will already have developed a reputation for business in market place, will have identified competitive threats and opportunities, incorporating ways of meeting them within franchise system and will usually have already established relationships with service providers such as financiers.

-> Existing name and reputation

As stated above, you do not need to invest significant time and effort into getting your business known in marketplace as franchisor will already have done this for benefit of group as a whole.

-> Support when needed

You are not on your own when things go wrong. Got a business problem? Contact your franchisor for assistance. The franchisor will have employed many different specialists within its organization who are there just to assist franchisees successfully operate their businesses. In my 14 years of experience in franchising, most successful franchisees were those who were not afraid to ask for help when needed. The most unsuccessful were those who thought they knew it all or, for whatever reason, refused to ask for help when they needed it.

-> Group buying power

Depending on size of franchise network, group should benefit from being able to negotiate favorable buying prices because of their ability to generate volume sales for supplier.

-> Group advertising

By contributing advertising fees into a group fund, individual franchisees are able to benefit from much greater advertising exposure than they could afford if each franchisee had to market their business on an individual basis.

-> Greater knowledge base

The franchisor is likely to have invested in market research for benefit of group as a whole. This means group has a much greater knowledge of their market(s) than does local "independent" competitor. The results of this market research can be put to good use in group's advertising and marketing programs.

DISADVANTAGES OF A FRANCHISE

-> Restrictions on autonomy

That's a true statement as far as it goes but it doesn't take into account that way you arrive at a value for your business can give you much-needed ammunition when it comes to justifying your asking price and therefore allow you to influence what prospective purchaser is willing to pay.

Here's a quick primer of various methodologies commonly used for valuing businesses (for purposes of imminent sale or otherwise):

1. Asset Valuation

This is used by businesses with predominantly physical assets, especially inventory. Typical businesses that would use this approach are manufacturing and retail. The valuation takes into account following figures: (a) fair market value of fixed assets and equipment; (b) value of leasehold improvements; (c) owner benefit (the seller's discretionary cash for one year - comes from adjusted income statement); and (d) inventory.

2. Capitalization of Income Valuation

This is used by businesses with predominantly intangible assets. It places no value on physical assets, only intangibles. Typically used by service businesses. Under this method, various factors are given a weighting of 0-5 with 5 being most positive score. The average of these factors yields "capitalization rate" which is then multiplied by buyer's discretionary cash (75% of owner benefit defined in 1. above) to arrive at market value of business. The factors to be rated are: (a) owner's reason for selling; (b) length of time company has been in business; (c) length of time current owner has owned business; (d) degree of risk; (e) profitability; (f) location; (g) growth history; (h) competition; (i) barriers to entry; (j) future industry potential; (k) customer base; and (l) technology.

3. Capitalized Earnings

This method is based on rate of return anticipated by investor. Small businesses are expected to have a rate of return of 20-25%. So, if your small business has expected earnings of $10,000 for year, its value may be $40,000 - $50,000.

4. Cash Flow

This method is simply based on how much of a loan purchaser could get based on adjusted cash flow of business. The adjustments to cash flow are for amortization, depreciation and equipment replacement. Obviously, when using this method, value of business fluctuates with changing interest rates.

5. Discounted Cash Flow

This method discounts business's projected earnings to adjust for real growth, inflation and risk. It calculates value today (i.e., discounted for time) of business's future earnings.

6. Leapfrog Start-up

This is used when buyer wants to save him or herself cost, time and effort of ramping up a new business. The buyer estimates what it would have cost to do startup less what is missing plus a premium for saved time. The more difficult, expensive or time consuming start-up would otherwise be, higher value that will be arrived at using this method.

7. Excess Earning Method

Similar to capitalized earnings approach, but return on assets is separated from other earnings which are deemed "excess" earnings generated. The return on assets is usually determined by industry averages.

8. Owner Benefit Valuation