Small Business Entry                           Paths to Full-Time                           Entrepreneurship              ...
Learning ObjectivesLO1 Describe five ways that people get into    small business managementLO2 Compare the rewards with th...
Learning ObjectivesLO5 Compare the advantages with the    disadvantages of buying a franchiseLO6 Explain the issues of inh...
Five Paths to Business Ownership   You may start a new business   You may buy an existing business   You may franchise ...
The Five Paths to Business            Ownership Franchise               Start-up  – A legal agreement      – A new busin...
Survival Rate of             Start-up BusinessesFigure 6.1                                   6-6
Starting a New Business           Advantages of start-ups   Begin with a clean slate   Use the most up-to-date technolog...
Starting a New Business          Disadvantages of start-ups   No initial name recognition   Require significant time   ...
Starting a New Business Cash flows                 Revolving credit  – The actual receipt        – A credit agreement   ...
Top 12 Indicators of                Start-up SuccessExhibit 6.1                                     6-10
Special Strategies for Starting          from Scratch Home-based businesses  – Businesses that are operated from the    o...
Special Strategies for Starting          from ScratchBecause of the contributions of the partner, the founder of the start...
Buying an Existing Business       Advantages of purchasing            an existing business Established customers Busines...
Buying an Existing Business      Disadvantages of purchasing           an existing business Finding a successful business...
Finding a Business to Buy First problem is finding a business for sale Should be in an industry in which you  have exper...
Steps to Follow When Acquiring a              Business1. Conduct extensive interviews with the sellers  of the business.2....
Steps to Follow When Acquiring a          Business (cont.)5. Develop a detailed business plan for  the acquisition.6. Nego...
QuestionWhat is due diligence?A.An agreement between the buyer and the      sellerB. Process of separating part of an oper...
Due Diligence Due diligence            Caveat emptor  – process of              – Latin: let the buyer    investigating ...
Purposes of Due Diligence1. You are attempting to find any   wrongdoing: (1) fraud,   (2) misrepresentations of the seller...
Determining the Value of the            Business Discounted cash flows  – Cash flows that have been reduced in    value b...
Determining the Value of the            Business Net realizable value         Replacement value  – The amount for       ...
Determining the Value of the            Business Comparable Sales Financial Ratios  – Earnings multiple Industry Heuris...
Structuring the Deal                 4 ways to buy   Buy out seller’s interest   Buy in   Buy key assets   Takeover   ...
Franchising A Business Trade name franchising  – agreement that provides to the    franchisee only the rights to use the ...
Franchising A Business Conversion franchising  – agreement that provides an organization    through which independent bus...
Franchising A Business Business format franchising  – agreement that provides a complete    business format, including tr...
Question  All of the following are advantages of  franchising, except:A.Marketing, product placement, advertising,   and  ...
Legal Considerations If and how you can transfer the  franchise license to someone else How you may terminate the contra...
Inheriting a Business Family Businesses Succession Developing a Formal Management  Structure Succession Issues for the ...
Professional Management        of Small Business A professional manager of a small  business is one who has the  experien...
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  • Each of these five methods is discussed in turn.
  • When starting your own company there are no preconceived notions about what a company should be, what your image is, or what can or cannot be done. Often, new technology must be purchased and thus it is the most up-to-date on the market giving you a technological advantage over your competitors. Many entrepreneurs start their own company because of the unmet need mentioned in the opening story. Thus the products are unique, unlike anything already out there. While some entrepreneurs start companies to grow and harvest, many choose to keep their company small and under their own control. They make a career of running their company.
  • There are also many problems with starting a new company. While no one has a pre-conceived notion about your company, the bankers don’t know you either. Thus, banking and credit is more difficult.
  • When you purchase an existing business you are also purchasing the current customers. Processes and suppliers are already in place. Name recognition has already been established.
  • When you purchase an existing business you are also purchasing the current customers. Processes and suppliers are already in place. Name recognition has already been established.
  • When you purchase an existing business you are also purchasing the current customers. Processes and suppliers are already in place. Name recognition has already been established.
  • Entrepreneurs are most successful with a business suited to their skills and interests. Finding one such company, at the time you are looking to buy is not always an easy task. Additionally, employees may be very resistant to change. They may want to continue in past patterns and have difficulties adjusting to a new boss when they have been working their several years. Often they feel they know more about how the business should run than their new boss does. Existing businesses also come with existing reputations- some good, some bad. Fighting a bad reputation, such as a restaurant with poor service, or being known as a company who does not pay it’s bills, is a difficult hurdle.
  • Answer: d
  • When performing due diligence it may be helpful to hire an accountant or lawyer familiar with the process. Often these outside sources can be more methodical and unbiased. They also have access to more resources, data, and staff and may be able to complete a more thorough task in shorter time.
  • There are different ways to buy a business. You can buy the owners interest completely. You can buy a partial share and be a part owner in the company. You can buy the key assets such as machinery and/or inventory but start your own company. And you can force a takeover. This is primarily done only for publicly held companies.
  • Answer: c
  • smb300_Chap006 wk2

    1. 1. Small Business Entry Paths to Full-Time Entrepreneurship Chapter 06McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. Learning ObjectivesLO1 Describe five ways that people get into small business managementLO2 Compare the rewards with the pitfalls of starting a small businessLO3 Compare the opportunities with the pitfalls of purchasing an existing businessLO4 Explain four methods for purchasing an existing business 6-2
    3. 3. Learning ObjectivesLO5 Compare the advantages with the disadvantages of buying a franchiseLO6 Explain the issues of inheriting a family- owned businessLO7 Describe how hired managers become owners of a small business 6-3
    4. 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. 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. 6-5
    6. 6. Survival Rate of Start-up BusinessesFigure 6.1 6-6
    7. 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. 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. 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. 6-9
    10. 10. Top 12 Indicators of Start-up SuccessExhibit 6.1 6-10
    11. 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. 12. Special Strategies for Starting from ScratchBecause 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. 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. 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. 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. 16. Steps to Follow When Acquiring a Business1. 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. 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. 18. QuestionWhat is due diligence?A.An agreement between the buyer and the sellerB. 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 6-18
    19. 19. Due Diligence Due diligence  Caveat emptor – process of – Latin: let the buyer investigating a beware business to determine its value 6-19
    20. 20. Purposes of Due Diligence1. You are attempting to find any wrongdoing: (1) fraud, (2) misrepresentations of the sellers and (3) missing information2. You are trying to find any inefficiencies, unnoticed opportunities, waste, and mismanagement. 6-20
    21. 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. 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. 6-22
    23. 23. Determining the Value of the Business Comparable Sales Financial Ratios – Earnings multiple Industry Heuristics 6-23
    24. 24. Structuring the Deal 4 ways to buy Buy out seller’s interest Buy in Buy key assets Takeover 6-24
    25. 25. Franchising A Business Trade name franchising – agreement that provides to the franchisee only the rights to use the franchisors 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. 26. Franchising A Business Conversion franchising – agreement that provides an organization through which independent businesses may combine resources 6-26
    27. 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. 28. Question All of the following are advantages of franchising, except:A.Marketing, product placement, advertising, and promotion is all controlled for youB. Often less risky than starting or acquiring a businessC.Franchisor often sets policiesD.Receive training and management support 6-28
    29. 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. 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. 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
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