small business entryentrepreneurship. learning objectives lo1 describe five ways that people get...
TRANSCRIPT
Chapter 06
McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Small Business Entry
Paths to Full-Time Entrepreneurship
Learning Objectives
LO1 Describe five ways that people get into small business management
LO2 Compare the rewards with the pitfalls of starting a small business
LO3 Compare the opportunities with the pitfalls of purchasing an existing business
LO4 Explain four methods for purchasing an existing business
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Learning Objectives
LO5 Compare the advantages with the disadvantages of buying a franchise
LO6 Explain the issues of inheriting a family-owned business
LO7 Describe how hired managers become owners of a small business
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Five Paths to Business Ownership
You may start a new businessYou may buy an existing businessYou may franchise a businessYou may inherit a businessYou may be hired to be the professional
manager of a small business
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The Five Paths to Business Ownership
Franchise – A legal agreement
that allows a business to be operated using the name and business procedures of another firm.
Start-up – A new business that
is started from scratch.
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Survival Rate ofStart-up Businesses
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Figure 6.1
Starting a New Business
Advantages of start-upsBegin with a clean slateUse the most up-to-date technologiesProvide new, unique products or
servicesCan be kept small deliberately to limit
the magnitude of possible losses
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Starting a New Business
Disadvantages of start-upsNo initial name recognitionRequire significant timeVery difficult to financeCannot easily gain revolving creditMay not have experienced managers
and workers
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Starting a New Business
Cash flows– The actual receipt
and spending of cash by a business.
Asset– Something the
business owns that is expected to have economic value in the future.
Revolving credit– A credit agreement
that allows the borrower to pay all or part of the balance at any time; as the loan balance is paid off, it becomes available to be borrowed again.
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Top 12 Indicators ofStart-up Success
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Exhibit 6.1
Special Strategies for Starting from Scratch
Home-based businesses– Businesses that are operated from the
owner’s home
Partnering– the process of two or more entities
agreeing to work together for a common goal
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Special Strategies for Starting from Scratch
Because of the contributions of the partner, the founder of the start-up may either:
Reduce the amount of personal investment in time and money required to make the business succeed
“Leverage” the contributions of the partner to provide faster growth and higher returns on the investment made in the start-up
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Buying an Existing Business
Advantages of purchasing an existing business
Established customersBusiness processes are already in
placeOften requires less cash outlay
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Buying an Existing Business
Disadvantages of purchasing an existing business
Finding a successful business for sale that is appropriate for you
Existing employees may resist changeReputation Facilities and equipment may be obsolete
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Finding a Business to Buy
First problem is finding a business for saleShould be in an industry in which you
have experienceProduct or service that has demand and
high marginsAdequate financingContact business brokers
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Steps to Follow When Acquiring a Business
1. Conduct extensive interviews with the sellers of the business.
2. Study the financial reports and other records of the business.
3. Make a personal examination of the site (or sites) of the business.
4. Interview customers and suppliers of the business.
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Steps to Follow When Acquiring a Business (cont.)
5. Develop a detailed business plan for the acquisition.
6. Negotiate an appropriate price for the business, based upon the business plan projections.
7. Obtain sufficient capital to purchase and operate the business.
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Question
What is due diligence?A.An agreement between the buyer and the
seller B.Process of separating part of an operating
business into a separate entityC.Process of finding an existing business to
purchaseD.Process of investigating a business to
determine its value
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Due Diligence
Due diligence– process of
investigating a business to determine its value
Caveat emptor– Latin: let the buyer
beware
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Purposes of Due Diligence
1. You are attempting to find any wrongdoing: (1) fraud, (2) misrepresentations of the sellers and (3) missing information
2. You are trying to find any inefficiencies, unnoticed opportunities, waste, and mismanagement.
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Determining the Value of the Business
Discounted cash flows – Cash flows that have been reduced in
value because they are to be received in the future
Book value– The difference between the original
acquisition cost and the amount of accumulated depreciation.
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Determining the Value of the Business
Net realizable value– The amount for
which an asset will sell, less the costs of selling.
Replacement value– The cost to acquire
an essentially identical asset.
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Determining the Value of the Business
Comparable SalesFinancial Ratios
– Earnings multiple
Industry Heuristics
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Structuring the Deal
4 ways to buyBuy out seller’s interestBuy inBuy key assetsTakeover
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Franchising A Business
Trade name franchising– agreement that provides to the
franchisee only the rights to use the franchisor's trade name and/or trademarks
Product distribution franchising– agreement that provides specific brand
name products which are resold by the franchisee in a specific territory
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Franchising A Business
Conversion franchising– agreement that provides an organization
through which independent businesses may combine resources
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Franchising A Business
Business format franchising– agreement that provides a complete
business format, including trade name, operational procedures, marketing and products or services to sell
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Question
All of the following are advantages of franchising, except:
A.Marketing, product placement, advertising, and promotion is all controlled for you
B.Often less risky than starting or acquiring a business
C.Franchisor often sets policiesD.Receive training and management support
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Legal Considerations
If and how you can transfer the franchise license to someone else
How you may terminate the contractHow the franchisor may terminate the
contractWhat disclosures you are required to
make
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Inheriting a Business
Family Businesses SuccessionDeveloping a Formal Management
StructureSuccession Issues for the FounderSuccession Issues for the SuccessorOwnership Transfer
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Professional Managementof Small Business
A professional manager of a small business is one who has the experience and skills to use a systematic approach to analyzing and solving business problems.
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