Small Business Entry. Chapter 06. Paths to Full-Time Entrepreneurship. Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Transcription

1 Small Business Entry Paths to Full-Time Entrepreneurship Chapter 06 McGraw-Hill/Irwin Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

2 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 6-2

3 Learning Objectives LO5 Compare the advantages with the disadvantages of buying a franchise LO6 Explain the issues of inheriting a familyowned business LO7 Describe how hired managers become owners of a small business 6-3

4 Five Paths to Business Ownership You may start a new business You may buy an existing business You may franchise a business You may inherit a business You may be hired to be the professional manager of a small business 6-4

5 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. 6-5

6 Survival Rate of Start-up Businesses Figure

7 Starting a New Business Advantages of start-ups Begin with a clean slate Use the most up-to-date technologies Provide new, unique products or services Can be kept small deliberately to limit the magnitude of possible losses 6-7

8 Starting a New Business Disadvantages of start-ups No initial name recognition Require significant time Very difficult to finance Cannot easily gain revolving credit May not have experienced managers and workers 6-8

9 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. 6-9

10 Top 12 Indicators of Start-up Success Exhibit

11 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 6-11

12 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 6-12

13 Buying an Existing Business Advantages of purchasing an existing business Established customers Business processes are already in place Often requires less cash outlay 6-13

14 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 change Reputation Facilities and equipment may be obsolete 6-14

15 Finding a Business to Buy First problem is finding a business for sale Should be in an industry in which you have experience Product or service that has demand and high margins Adequate financing Contact business brokers 6-15

16 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. 6-16

17 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. 6-17

18 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 entity C.Process of finding an existing business to purchase D.Process of investigating a business to determine its value 6-18

19 Due Diligence Due diligence process of investigating a business to determine its value Caveat emptor Latin: let the buyer beware 6-19

20 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. 6-20

21 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. 6-21

22 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. 6-22

23 Determining the Value of the Business Comparable Sales Financial Ratios Earnings multiple Industry Heuristics 6-23

24 Structuring the Deal 4 ways to buy Buy out seller s interest Buy in Buy key assets Takeover 6-24

25 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 6-25

26 Franchising A Business Conversion franchising agreement that provides an organization through which independent businesses may combine resources 6-26

27 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 6-27

28 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 policies D.Receive training and management support 6-28

29 Legal Considerations If and how you can transfer the franchise license to someone else How you may terminate the contract How the franchisor may terminate the contract What disclosures you are required to make 6-29

30 Inheriting a Business Family Businesses Succession Developing a Formal Management Structure Succession Issues for the Founder Succession Issues for the Successor Ownership Transfer 6-30

31 Professional Management of 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. 6-31