This is the starting point for finding your small business idea. There are many different types of businesses and you need to find one that works for you. There’s no point starting a business and finding out 12 months later that it doesn’t fit your lifestyle or your values.
Different Types of Businesses
It’s better to think through what you really want before you start and know what you’re letting yourself in for. Align your values, time available, lifestyle choice … and you’re far more likely to be successful. Here are the main differences…
- Retail or Wholesale
- Franchise or Independent
- Product or Service (or a mix of both)
- Online or From a Physical Location (or a mix of both)
- Which Industry or Sector
- Lifestyle or Growth Business (Scalable)
- Side Hustle, Part Time or Full-Time Business
- Sole Trader or a Limited Company
It’s important to understand the different types of businesses and know what type you want to run, before coming up with your business idea.
Read on to see what works for you…
#1. Retail or Wholesale Business
If you want to sell goods, you have the choice between selling to customers as a retailer (B2C – Business to Customer) or selling to other businesses as a wholesaler (B2B – Business to Business).
Usually, retailers buy from wholesalers and sell to customers in small quantities.
Wholesalers buy from manufacturers or importers and sell to retailers in large quantities.
The traditional supply chain goes from manufacturer to (importer to) wholesaler to retailer.
Well maybe. Everything has changed with the internet.
These days just about anything goes.
You have retailers selling to customers, with products drop shipped directly from the manufacturer.
Manufacturers with retail websites and wholesalers operating as both B2B and B2C.
It’s a total carve up.
Drop shipping is the model adopted by most wannabes on Shopify.
The attraction is much lower start-up costs.
The customer buys goods from your website. The order goes straight to the wholesale supplier who ships the goods directly to your customer.
Sounds great, doesn’t it? A business you can run from a beach in Portugal.
The only problem? Lower start-up costs mean more retailers jumping on popular products and drastically reduced margins.
There are many other pitfalls which I’ll tell you about another time. My view is drop shipping is a lot harder than it looks.
#2. Manufacturing Business
Manufacturers make products. Okay, sometimes they just design them and get someone else to make them.
But the big point is originality. This gives you uniqueness. It’s much easier to have a Unique Selling Point (USP), to throw around some business speak.
The business world loves a bit of USP and you’ll find that governments also love manufacturers.
Set up a successful small manufacturing business and you’ll be skipping down to Downing Street to meet the PM.
I digress, but manufacturing is a terrific place to be for building a brand.
#3. Franchise or Independent Business
A franchise is basically a copy of someone else’s independent business. And no that doesn’t mean you can just go around copying businesses.
You knew that.
You buy a franchise off the parent company and in return have the right to sell goods and services under the parent company’s name.
The support you get can vary widely.
Sometimes you’ll pay on-going royalties or fees to the parent company. It can be great for some people and not so great for others. You really need to do your homework before taking one on.
Becoming a franchise company is a popular way of scaling a growing business. (Beloved by Venture Capital (VC) firms).
The most famous franchise is McDonald’s. (Good pub quiz question) …
#4. Product or Service (or a mix of both)
Provide a service or supply physical products. An example of both would be a clothing store with an alteration service.
Physical products have the drawback of needing to carry stock.
This MAY be reduced if you manage to set up a “just-in-time” supply arrangement (where the manufacturer resupplies you as soon as your stock hits a low threshold).
As mentioned above, drop shipping also reduces, or even eliminates your stock levels.
To provide a service on the other hand you must be good at something that people want to pay money for.
That is the catch.
For example, I’m can cross my little toe. I could try and teach someone how to cross their little toe, but I really doubt anyone’s going to pay me for the service.
#5. Online or From a Physical Location (or a mix of both).
The days of selling physical goods from just a High Street store are pretty much over.
Granted there are a few exceptions, selling rock at the seaside perhaps, but the bricks only store model is rapidly diminishing.
It may work if you have a destination store in a popular location (somewhere customers are really excited to visit), but most businesses selling physical goods follow a “bricks and clicks” or online only model. (Bricks and clicks = in-store and online).
My last small business was a “bricks and clicks” model.
We were selling outdoor clothing to women, and to begin with, our sales in-store accounted for half our trade.
Over the years, the town became busier, but our in-store sales steadily declined, eventually accounting for just 10% of revenue.
You could blame the recession, but at the same time, our online sales were soaring.
We found that customers would come into the store and start price checking on their phones.
Often, they were comparing our prices in-store with online prices of an old model or a garment in the wrong size.
Customers became harder to please and suspicious of a store they’d just come across on their holiday.
For me, the glory days of selling physical products in-store are over.
But it depends on your aspirations, your location, and your niche.
There’s still a lot of retailers making a good living on the High Street.
Online the opportunities for small business ideas are immense.
The competition can also be immense.
This is where you need to put a lot of research into your business idea and get a crystal ball to predict the future.
When I started out selling outdoor clothing online there wasn’t much competition.
A lifestyle business supporting a few local families could be successful.
Ten years later, it was a completely different market.
The large discounters moved in.
The distinction of being aimed at women only wasn’t enough of a niche for selling branded products.
We were up against high volume sellers with much bigger seller discounts.
For services, it’s a different story.
You can’t get a haircut online and a virtual assistant can’t walk your dog.
These are the types of businesses that flourish in small towns up and down the country.
Check out your local competition, try and better it and you’re away…
But don’t overlook the opportunities for a service industry on the internet.
I’d personally love to see a centralised booking service for haircuts, just saying…
Ideas for Internet-based service businesses are just limited by your imagination.
If you can explain your idea, you can probably build a website around it!
#6. Which Industry or Sector?
This one’s down to you…
It’s always amused me the way websites run headings such as “The Top 10 Tech Ideas Guaranteed to Make You Money In 2018”.
So, what? Who’s that helping? The people in the Tech Industry will already be in the know.
Is everyone else supposed to start designing Apps overnight?
If you’re someone who’s computing skills are limited to checking your social feed, the Tech Industry’s probably not your bag.
Better to stick with a sector you either know a lot about already or one you can learn a lot about quickly. Start doing your homework. Find out how the sector works. Especially what sales tactics businesses use.
More on that in the next section.
#7. Lifestyle or Growth Business (Scalable)
Lifestyle businesses are set up to sustain your chosen way of life and no more.
They’re not all about growth.
They’re about being able to live the way you want to and there’s nothing wrong with that.
My own lifestyle business meant I was there when my son came home from school.
It meant we had a great little community that sustained several local families for 10 plus years.
It was fun and some of us still meet up to run together.
There is some confusion around about what a lifestyle business really is.
You don’t have to be a high rolling, working from the beach, type of entrepreneur, to have a lifestyle business.
As for growth businesses – well it’s in the name.
Loved by Wall Street and MBA graduates, it’s the idea that bigger is better.
These startups are set up with a plan for growth from the word go.
Often with seed capital from outside investors, your startup can be a high-pressure environment with a lot at stake.
Investors will always want results and within a relatively short time frame, (usually three years).
The startup is grown rapidly then sold off (usually merged with a bigger company) to recoup the investors’ money.
You may also hear the term organic growth.
It just means a business grown at a more sustainable rate, probably self-funded through business activity.
It’s a common approach for many companies. Slow and steady growth without loss of independence.
Here’s my advice.
Think about what you want and know what model you’re following before you start your business.
#8. Side Hustle, Part-Time or Full-Time Business
Starting out as a side hustle is a very prudent way to get your business going.
It’s not always wise to leave the security of a full-time job to launch your business.
It can take time before a new business starts providing a regular income.
Building a business whilst in a regular job will give you time to build up some funds as a security cushion.
Maybe you’re not looking to start a full-time business?
Maybe you just need to make a bit of extra money. Don’t be put off – there are lots of opportunities…
#9. Sole Trader or a Limited Company
A Sole Trader is basically a self-employed person who is the sole owner of the company.
It’s easier to set up but the downside is unlimited liability.
If the business gets into debt, you as the owner are liable.
Passed a certain level of earnings, tax rates are a disadvantage and it can be harder for a sole trader to raise capital.
A Limited Company has the benefit of limited liability as Incorporating (forming) the Company forms a legal distinction between the owner and the Company.
Basically, what belongs to you doesn’t belong to the company and importantly, what belongs to the company doesn’t directly belong to you.
For example, if you set up a bar as a limited company, helping yourself to free drinks is effectively stealing. The drinks belong to the company, not you.
Just be warned…
Understand the different types of businesses?
Know what you’re getting yourself into and what will work for you? Then it’s time for the next step – How To Find your Business Idea.