Married couple Robert and Therese Norman both have something of an entrepreneurial spirit. Robert went to business school and has learned that he loves the retail format, although he dreams of working for himself rather than a big company. Therese has experience with photography. The couple discovered the DIY-picture-framing industry and immediately began researching the viability of the industry. The town they plan to open shop in has—per their research—enough people to sustain at least one picture framing shop. The industry is growing, although there is some competition in the region.
Their research helped them establish a business strategy and plan. The plan included place, space, funding, market, and other important considerations. They eventually succeeded in convincing the bank for a $75,000 loan, while also pitching in $25,000 of their own funding to reach $100,000 for the initial startup investment. Unfortunately, they underestimated their startup costs and are in need of at least an additional $10,000 to open their doors.
There are a variety of problems the startup is facing. To begin, they did not secure enough funding. They discovered that their suppliers require payment before delivery, and also that there were a variety of costs they had not anticipated—rental deposits, inventory, and so on. Without at least an additional $10,000 they will never be able to open their doors.
Their confidence may also be suffering. Robert and Therese put considerable effort into researching the opportunity. Not only did the bank meet them with resistance, but their research failed to account for all costs. They also found themselves susceptible to persistent salespeople who oversold them.
There are also some external threats that stand independent of these internal problems. The town they are opening in has a population of 35,000 people, and their research revealed that a population of 25,000 people would be required to sustain a framing shop. There is already a framing shop in Brandon though, and the possibility of another shop expanding to the area. That means that in order to survive they’ll already have to outcompete one shop and they need to open soon before the other shop puts their expansion plans in motion. Added to this, while the DIY framing industry may be growing, retail itself is becoming increasingly obsolete.
Alternative 1: Call it a Day
The first alternative is simply to abandon the plan. Entrepreneurial wisdom suggests that not all businesses will work and knowing the difference between an opportunity worth pursuing and an opportunity worth giving up is important. In this case, Brandon and Therese have already made some critical mistakes early on. The business environment, though not absent opportunities, has some fairly salient threats. The risk simply may not be worth the reward.
• Escape a bad deal before it’s too late; return the loan and emerge without any risks having been realized.
• Chalk this up to a learning experience and use the experience to plan a different venture
• Would need to cede defeat which might hurt pride and confidence toward future ventures
• May be giving up “too early” and not have exhausted
Alternative 2: Get Creative with Funding
The next alternative is to simply proceed as planned. They need funding, and this can be secured through other means. They might take out a smaller loan from a smaller bank to make up the difference. They might even use credit cards or some other form of high-interest funding just to get started.
• The efforts to date will not have been wasted
• The business can still open and they will be able to test their ideas and commit to something they love
• The additional funding may be very expensive and stifle growth due to interest
• In the long term, the combination of the high leverage and the rigid competition may mean they never reach a sustainable competitive advantage
Alternative Three: Restructure the Business as an Online Vendor
The third alternative is to restructure the business. Instead of having a storefront drive sales, they could become an online frames vendor. They could still open a storefront later on once they are soluble.
• Risks and Costs of the retail format are avoided
• Market expands considerably to anyone with an Internet connection
• Would require “starting over” with research, funding, etc.
• The dream of a retail format would not be realized, and therefore Robert and Therese may lose motivation or be uninterested in this option
Alternative Three—Restructure the Business as an Online Vendor is the best option. This way they may not need as much funding since they only need space for inventory, not also a storefront. This also would be a more sustainable model. The local market is packed tightly with competition; opening up an online storefront would widen the market considerably. Down the road, they would be able to open a storefront if the digital storefront succeeds. The only other con is that they may have to “start over” but this is sufficiently overcome by the fact that their new model keeps them in business longer and doesn’t require them to take out exorbitant loans which would sink them quickly if they insisted on starting in the retail format. This option best combats external threats while still leveraging the growth of the industry.