What is a turnkey business?
The concept of the turnkey business is extremely simple but it is often shrouded in misinformation or poor description. The definition of a turnkey business is a business that is fully functional and operational at the time of purchase. The name comes from the idea of buying a business and turning the key to open the door and begin operating.
There are many advantages with turnkey businesses. The most important is the fact that these businesses are already designed and constructed. This is a tremendous cost benefit because the startup for any given business can be tremendous- even websites depending on what you are doing.
The primary problem with turnkey businesses is that they are often poorly understood by the purchaser. I have witnessed many individuals purchase these types of businesses only to fail within a few months or to spend an enormous amount of time learning the business. There are many different types of turnkey business models and their cost, complexity for operating, and potential vary tremendously.
Existing or Preowned Businesses
There are many people who start a business and run it successfully and choose to sell the business in order to move on to something else, retire, or simply to make money. There are also many people who start a business and run it unsuccessfully and choose to sell it because the business was a headache, not worth the time, and a multitude of other reasons that are all just as bad if not worse than the ones mentioned.
It makes sense to buy an existing business because there is no startup cost other than the purchase price. If the business is profitable, this is absolutely the right way to go. However, a profitable business is likely to be expensive because it is going to have a trusted name and brand, and it will already have its operations standardized. Another issue with purchasing an existing business is the problem of new leadership. Whether you are a big business or small business this is an issue. When new ownership enters a business, it is a delicate process of change that can result in massive losses and turnover. I personally believe that this issue is worse at the small business level because many new owners are inexperienced with being owners and do not understand their place in the company. Worse yet, the small business owner is likely going to have to wear the hat of manager and owner which presents role conflict issues. For example, owners are the face of the company and this becomes difficult to accomplish when you are also trying to manage the operations of the company and in many cases get the work done.
Purchasing an existing business can also be expensive for the sake of ignorance. Many people who set out to buy an existing business, look at the profits and value of the assets but fail to realize that this combination of profit and asset is intrinsic. Pricing the worth of a business is really complicated because it is highly subjective. From an accounting perspective, a business is only worth its assets. But from an investment stance a business has potential or intrinsic value. Without getting too deep into the concept of intrinsic value, one can oversimplify it to mean what the value is to the investor. This value is extremely open to interpretation. One person might assess a company to have tremendous potential and be willing to pay a lot for it. Another person may look at it and see issues and be willing to pay less. Personally, I believe that one should lean towards the pure or asset value of a business because it is the only tangible value, but many people believe otherwise and as such they purchase businesses leaning more to the intrinsic value.
I wanted to mention intrinsic value first, before I mentioned that fact that no business that you purchase is a guarantee for profit. The bottom line is that you could purchase a business and it could go under because of factors outside of your control. For instance, you could buy a business and it go under due to some new technology that gives your competitor advantage over you. It could be something as simple as the customers being fearful of the change. There are any number of issues that could cause a business to fail and you need to examine the purchase thoughtfully before deciding whether to buy.
The franchise model is one of the preferred turnkey models. Typically, franchises are established businesses that often have a recognizable brand such as McDonalds or KFC. There are all different sizes of franchises and their cost varies considerably due to the brand and other factors such as cost of construction. For instance, a Subway restaurant is considerably less expensive to open than a McDonalds. The type of franchise one wishes to purchase is dependent on budget but even with a large budget this does not guarantee success.
While the franchise model has the advantage of having a brand and standardized operation, the franchise still needs the same work as a custom business in many respects. For example, while franchises have the brand name, you will still need to have advertising at the local level and your business will still have all the same issues that other businesses have such as location and workforce issues. You will also need to pay franchise fees which are typically a charge to the business that covers the brand and other areas of the business such as national advertising. You also have the constraint of the franchise which means that you must maintain your business to conform to the franchise’s predetermined rules of operations. Depending on the franchise this can be very stringent.
Franchises can be a great choice if you have the startup cost but you still have to perform your due diligence. Despite the fact that Not all franchises are equal and there are many factors that one needs to consider when purchasing a franchise. For instance, what level support and training are provided from the parent company? How much are the franchise fees? There are many other questions that need to be answered to determine what franchise is best for you, but suffice it to say that these turnkey business models are not perfect and they may often require heavy investment and time to get them running.
Multilevel Marketing (MLM)
The MLM system or business model is defined by its networking. Typically, this business model works with you purchasing product from a company as a representative and then you resell the product to other consumers. These systems work by having what is called downlines where you recruit representatives who work under you or in your downline. Whenever people in your downline sell or recruit people you get a percentage of their earnings. The way this is supposed to work is that you increase the size of your sales network (downlines) and you begin earning large amounts of residual income from other people selling. But this generally does not occur for very basic economic reasons.
The MLM is a turnkey business because you are purchasing a system of selling but the problem is that the selling system is always flawed. Let’s look at it from the standpoint of the seller and let’s say the seller is responsible for paying their up-line such that anyone in your downline must pay you the percentage rather than the parent company. Say I manufacture a good called a sprocket. The sprocket costs $10 to make. Now I mark the product up by say $1. Then I market it through a MLM system. The person who is selling my sprocket must mark-up the product by another dollar again in order to make their money. Then the person below them needs to mark-up an additional dollar on the product in order to make their profit. The further downline you go the higher the cost of the product. Very quickly the cost of the product becomes uncompetitive with other sprockets on the market. Now take the entire scenario and reverse it from the company standpoint. I know as the sprocket manufacturer that in order to make the downline system of marketing work, I need to over-price the product from the start. As such, this model typically only works if one can sell extremely overpriced goods. Even if you are a great salesperson, the price is going to naturally limit your market.
The solution to this marketing issue, is to create a membership system where you recruit marketers. This recruitment typically comes with a fee that ‘allows you to sell’ the products. This can be a onetime fee but normally it is a recurring fee. What is really funny about this model is that the money you make from the recruitment is normally far more than what you make from selling the product. This fee is really a bunch of nonsense. It is supposed to cover a variety of areas such as selling tools, brochures, etc. I am sure that they stipulate these ‘benefits’ when one purchases a membership; but isn’t that what the cost of the product is supposed to do? If the recruitment fee is $100, then sure every time you recruit someone, the company will pay you $50 or $90- why not? It’s all profit at that point.
The MLM is perhaps the worst turnkey business model that exists. This model has been abused over and over again. If you are thinking about purchasing an MLM ask yourself these questions:
- Why should you have to pay to sell someone else’s product?
- What exactly does that membership or seller fee get me and is it worth the price?
- Can I find a similar product to the one I am supposed to sell for less cost? How much less?
You can easily spend $500 to a $1000 on a MLM business only to figure out within a few days that the business does not work.
This is a broad area of turnkey businesses as there are numerous models for ecommerce. Many people mistakenly enter into buying an ecommerce turnkey business only to find that it is a tremendous amount of work or they have to spend a lot on advertising. There are a variety of ecommerce business models but we will discuss the more prominent ones which include: affiliate marketing, digital goods, and drop shipping. Typically, most turnkey ecommerce models are designed in one of these ways.
I use to think that affiliate marketing was a good business model but I am now convinced that it is a really poor approach to selling. The way affiliate marketing works is by taking content such as articles and blogs and placing special links on certain words which lead to products. The idea with affiliate marketing is that a person will read the content and then click on the link and go to the website and buy a product. This turnkey business model makes sense but there are some factors that one has to consider when buying an affiliate marketing ecommerce. What are you trying to sell? Amazon has an affiliate program where you can place links on your webpages but how much content do you have with this turnkey business? What kind of content? Whatever affiliate system you buy needs to have content and a decent amount of it in order to be a worthwhile business; otherwise you will spend a lot of money or time making content. There are also inherent issues with affiliate marketing. Typically, the percentage of a sale is not very much, this means you need to have an enormous amount of content in order to make any substantial money from traffic. Again this goes back to the volume of content as well as to the quality of it. (We are going to get into this content subject again so bear with me.)
Another problem with affiliate marketing is that it is not directly selling so it can be construed as either misleading or missed entirely. For instance, say I am thinking of switching from Android to iPhone and I want to look up the differences in systems. Well, if I get to an article concerning this topic and start reading my intention is to learn about the phones not purchase. I think this intention of the buyer is a highly underrated idea that is often minimalized in discussions concerning ecommerce. If I wanted to purchase the phone at that moment, I would have just gone to Apple or Android but instead I went to your site so I could read about the phones. This brings in the idea of bias. If I am reading your article and it is discussing how perfect the iPhone is compared with Android and you have links or ads all over the page selling iPhone, I am now likely to leave because I don’t think you are being objective, I may even think you are a fraud.
Most affiliate marketing systems do not pay that well. These systems typically pay small percentages of sales or flat rates which means you need an enormous amount of traffic to get it to make money. Again this goes back to the idea that you are going to need a lot of content to make it work. As a turnkey business, this could potentially be a good purchase if a site is established and has a strong revenue stream. However, it begs the question why anyone would sell a site that brings in money from people clicking on links? With no real overhead I cannot imagine why someone would sell this business unless it did not make money and they are just selling the website.
The drop ship business model is a business that operates by selling products for suppliers, manufacturers, wholesalers, or large retailers. This model works by giving the seller reduced cost for the sale of a product and then the seller can mark the product up and sell it. The seller will place the order through the manufacturer and the product is shipped direct to the customer. This is a good business model because you don’t have to carry large inventories and there is no cost for product until it sells. There are however, inherent issues with this model that are often caused by the supplier or manufacturer.
One of the largest issues for drop shippers is the fact that good suppliers are difficult to find. What I mean by this is that many manufacturers and retailers offer drop shipping but they do not spend any time trying to make it efficient or workable for the seller. I have seen it occur with drop shippers where they could not get access to complete or necessary information or they could not get timely responses from the company. The point is that you may find yourself spending some time locating good suppliers.
Another problem occurs in pricing. If suppliers have not thoroughly thought through their pricing schemes, you can end up having overpriced goods because the supplier has already lowered their price too far. Again, you really have to look around in order to find the right products to sell.
Digital goods are tremendously profitable Essentially, once you have created a good such as an e-book, application, song, DIY, etc.…you can market this good and sell it over and over again. As a turnkey business, you would need to purchase a complete digital good or goods that may or may not come with a website. There are several different ways that a person can get into the digital goods industry but as a turnkey business you will need to purchase these goods or be marketing them for others.
Despite all the benefits of digital goods, there are some issues with them. First, you have to create them or you have to buy them. If you are going to create a digital good this takes time and effort and this can limit the number of goods you can produce. Unless you are planning on heavily marketing your good, you will need to produce a sizable number of them. It really depends on what you are planning to sell.
Another issue with digital goods is that they can be expensive to purchase upfront. This is due to the fact that you need to purchase the copyright. It is possible to work out a licensing agreement with someone to sell their goods but this is not an ideal situation. You really need to own the digital goods in order to maximize your profit and make this model work.
There is also the issue of people stealing your work and selling it. I have dealt with this issue for close to 10 years and I can tell you for certain- if you have a high demand digital good some spammer will be selling it. This situation is unavoidable.
The Content Issue
All ecommerce models have the issue of content. The manner in which search engines work, creates an issue for all online businesses as well as nonbusiness sites. This is the problem of having to create and maintain content. Even if you purchase a site that comes with content, you will need to update and continue adding more content to the site in order to maintain it in search engines. This is a very bad problem that all ecommerce faces today. Because search engines rank web pages based on their amount and quality of content, this forces online marketers to continuously create content in order to establish and maintain their selling. The problem is so bad that companies are forced to pay for content which can get expensive or in the case of small companies, their websites become window dressing. Within the scope of turnkey businesses, no matter which ecommerce model you buy you will have to deal with content as your main source of selling.
Which is right for you?
Only you can determine which form of turnkey business is the correct fit for you. Having overviewed these models, you can now begin the process of choosing by assessing your desires, needs, skills, strengths; and comparing these elements with the various business models and if you have what it takes to run a particular turnkey.