Discussion powerpoint Week 2

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
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3. 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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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
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5. The Five Paths to Business
Ownership
 Franchise  Start-up
– A legal agreement – A new business that
that allows a is started from
business to be scratch.
operated using the
name and business
procedures of
another firm.
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6. Survival Rate of
Start-up Businesses
Figure 6.1
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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
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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
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9. Starting a New Business
 Cash flows  Revolving credit
– The actual receipt – A credit agreement
and spending of that allows the
cash by a business. borrower to pay all
 Asset or part of the
balance at any
– Something the
time; as the loan
business owns that is balance is paid off, it
expected to have becomes available
economic value in to be borrowed
the future. again.
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10. Top 12 Indicators of
Start-up Success
Exhibit 6.1
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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
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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
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13. Buying an Existing Business
Advantages of purchasing
an existing business
 Established customers
 Business processes are already in
place
 Often requires less cash outlay
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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
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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
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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.
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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.
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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
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19. Due Diligence
 Due diligence  Caveat emptor
– process of – Latin: let the buyer
investigating a beware
business to
determine its value
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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.
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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.
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22. Determining the Value of the
Business
 Net realizable value  Replacement value
– The amount for – The cost to acquire
which an asset will an essentially
sell, less the costs of identical asset.
selling.
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23. Determining the Value of the
Business
 Comparable Sales
 Financial Ratios
– Earnings multiple
 Industry Heuristics
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24. Structuring the Deal
4 ways to buy
 Buy out seller’s interest
 Buy in
 Buy key assets
 Takeover
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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
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26. Franchising A Business
 Conversion franchising
– agreement that provides an organization
through which independent businesses
may combine resources
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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
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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
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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
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30. Inheriting a Business
 Family Businesses Succession
 Developing a Formal Management
Structure
 Succession Issues for the Founder
 Succession Issues for the Successor
 Ownership Transfer
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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.
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