Chapter Six Small Business Entry: Paths to Entrepreneurship Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Because learning changes everything.® Planning a Path into Business Causal or predictive reasoning is a useful technique regardless of whether you want a full-time or a part-time business. An entrepreneur uses effectual reasoning when they imagine what can be accomplished with the resources at hand. Affordable loss is the practice of bringing your product/service to market with the minimum expenditure of capital, effort, and time. Strategic partnerships can be either formal or informal with others who provide support to your efforts at starting your business. Leveraging contingencies is another way of saying “recognizing and using opportunities.” © McGraw-Hill Education ‹#› Bootstrapping, Bricolage, and Lean Business Practices These three ideas fit into both the causal and the effectual approaches. Bootstrapping is finding a low-cost, or no-cost way to do something. Bricolage is the practice of using whatever you have at hand. Lean business practices mean eliminating waste and producing a minimum viable product. Both lean operations and bootstrapping share three ideas: Waste not, want not. Create, standardize, repeat. Keep in touch. The key ideas of bootstrapping are simple: Do without as long as you can and cut all expenses to the bone. Borrow, barter, rent or lease rather than buy and consider offering equity if you must buy. Borrow money from yourself first. Minimize debt and limit credit card balances. Always keep track of your cash. © McGraw-Hill Education ‹#› The Five Paths to Business Ownership The entrepreneur can start a completely new business. They can purchase franchise rights to an existing business. They can purchase a fully operating business. They can work in a small business and eventually gain ownership. They can inherit a business from a family member. © McGraw-Hill Education ‹#› Starting a New Business The riskiest path, but promises the greatest rewards. 87% of start-ups using an incubator are still in operation after 5 years. Not all businesses that close are a failure. Access text alternative for this image. © McGraw-Hill Education ‹#› Advantages and Disadvantages of Start-Ups You can “do it your way.” You begin with a clean slate. You can use the most up-to-date technologies. You can provide new, unique products/services. You can keep the business small to limit losses. You may take the time to perfect your product/service and processes. There will be no initial name recognition. A start-up requires significant time to get established. Difficult to finance with no assets, sales, or cash flow. Cannot easily gain revolving credit from suppliers or banks. A start-up may lack experienced mangers and workers. You must train employees and garner management support. © McGraw.

1. Chapter Six
Small Business Entry: Paths to Entrepreneurship
Copyright 2021 © McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Because learning changes everything.®
Planning a Path into Business
Causal or predictive reasoning is a useful technique regardless
of whether you want a full-time or a part-time business.
An entrepreneur uses effectual reasoning when they imagine
what can be accomplished with the resources at hand.
Affordable loss is the practice of bringing your product/service
to market with the minimum expenditure of capital, effort, and
time.
Strategic partnerships can be either formal or informal with
others who provide support to your efforts at starting your
business.
Leveraging contingencies is another way of saying “recognizing
and using opportunities.”
© McGraw-Hill Education
‹#›
Bootstrapping, Bricolage, and Lean Business Practices
These three ideas fit into both the causal and the effectual
approaches.
Bootstrapping is finding a low-cost, or no-cost way to do

2. something.
Bricolage is the practice of using whatever you have at hand.
Lean business practices mean eliminating waste and producing a
minimum viable product.
Both lean operations and bootstrapping share three ideas:
Waste not, want not.
Create, standardize, repeat.
Keep in touch.
The key ideas of bootstrapping are simple:
Do without as long as you can and cut all expenses to the bone.
Borrow, barter, rent or lease rather than buy and consider
offering equity if you must buy.
Borrow money from yourself first.
Minimize debt and limit credit card balances.
Always keep track of your cash.
© McGraw-Hill Education
‹#›
The Five Paths to Business Ownership
The entrepreneur can start a completely new business.
They can purchase franchise rights to an existing business.
They can purchase a fully operating business.
They can work in a small business and eventually gain
ownership.
They can inherit a business from a family member.
© McGraw-Hill Education
‹#›

3. Starting a New Business
The riskiest path, but promises the greatest rewards.
87% of start-ups using an incubator are still in operation after 5
years.
Not all businesses that close are a failure.
Access text alternative for this image.
© McGraw-Hill Education
‹#›
Advantages and Disadvantages of Start-Ups
You can “do it your way.”
You begin with a clean slate.
You can use the most up-to-date technologies.
You can provide new, unique products/services.

4. You can keep the business small to limit losses.
You may take the time to perfect your product/service and
processes.
There will be no initial name recognition.
A start-up requires significant time to get established.
Difficult to finance with no assets, sales, or cash flow.
Cannot easily gain revolving credit from suppliers or banks.
A start-up may lack experienced mangers and workers.
You must train employees and garner management support.
© McGraw-Hill Education
‹#›
Starting a New Business in an Existing Field
Most start-ups are “me-too” enterprises.
Customers are familiar, offering some protection from failure.
But it can be difficult to differentiate your business from others.
Often the only competitive advantage is location.
The concept leading to a start-up usually comes from the
experience of the person starting the business.
The best predictors of success is the level of experience of the
founders.
© McGraw-Hill Education
‹#›
Increasing the Odds of Start-Up Success
Start the business in an incubator or accelerator.
Take part in a mentoring program.
Have a detailed start-up budget.
Produce a product/service with a proven demand.
Secure outside investment.
Start with more than one founder for synergy.
Have experience managing small firms.

5. Have industry experience.
Have previous experience in creating a start-up business.
Choose a business that produces high margins.
Start the business with established customers – can be a spin-
off, competition, or subcontracting.
Build trust in your “story.”
© McGraw-Hill Education
‹#›
Franchising a Business – What Is Franchising?
A franchise is an agreement between the franchisor who sets
conditions and grants permissions, and the franchisee, who pays
a fee and agrees to the conditions and standards.
Four elements of a franchise agreement.
The franchisor grants the legal right to sell the company’s
products.
The franchisor provides marketing.
The franchisee can use the branding.
The franchisee pays a fee for rights.
The agreement is valued by:
The rights granted.
Cash flow potential to the franchisee.
Four forms of franchising.
Trade name franchising.
Product distribution franchising.
Conversion franchising.
Business format franchising.
Some companies sell master franchises which may sell sub-
franchises.
© McGraw-Hill Education
‹#›

6. Franchising a Business:
Advantages, Opportunities, and Legal Considerations
Perhaps the single greatest advantage is that it comes as a
complete business system – some are actually “turnkey.”
Finding a franchise is easy.
Entrepreneur magazine lists the top 500 franchises.
Government resources include the FTC and the SBA.
There are franchising associations.
Once you have the franchise, perform due diligence, same as for
any other business.
Consider interviewing current franchisees.
Before you sign, study:
The franchise agreement.
The uniform franchise offering circular (UFOC).
You want to know:
If/how you can transfer the license to another.
How you (or franchisor) can end the contract.
What disclosures you are required to make.
© McGraw-Hill Education
‹#›
Buying an Existing Business
Advantages include: established customers and immediate cash
inflows; having business processes in place; and lower cash
outlay required.
Disadvantages include:
Finding a successful firm for sale.
Determining a firm’s worth.
Existing staff may resist change.
The firm may have a bad reputation.
The firm may be in decline due to changes in technology.
Facilities or equipment may be obsolete or in need of major
repair.
Use multiple sources to find the right business to purchase.

7. Make some calls.
Consider a broker.
Networking.
Trade journals.
The internet.
Local businesspeople and associations.
Your employer.
© McGraw-Hill Education
‹#›
Buying an Existing Business: Performing Due Diligence
Due diligence is the process of investigating to determine the
full and complete implications of buying a business - nothing is
taken for granted.
Conduct extensive interviews with the sellers of the business.
Study the financial reports and other records of the business.
Make a personal examination of the site (or sites) of the
business.
Interview the business’ customers and suppliers.
Develop a detailed business plan for the acquisition.
The first five steps make up the process of due diligence, after
which:
Negotiate an appropriate price, based on business plan
projections.
Obtain sufficient capital to purchase and operate the business.
© McGraw-Hill Education
‹#›
Due Diligence
A basic tenet of business law is caveat emptor, or “let the buyer
beware.”
Due diligence has two primary goals.

8. First, look for any wrongdoing – fraud, misrepresentations, or
missing information.
Second, look for inefficiencies, waste, opportunities, or
mismanagement.
The first goal affects the value of the business and the second
shows potential ways to increase the firm’s value.
This gives you a negotiating advantage.
Financial statements should include:
A balance sheet.
An income statement.
A statement of cash flows.
Intangibles are likely to be misstated.
© McGraw-Hill Education
‹#›
Determining the Value of the Business
The most rigorous method uses discounted cash flows.
Based on estimates of future cash outflows and inflows, given
the change in leadership – also highly problematic.
Due to these difficulties, it is common to use less rigorous
methods.
Asset valuation.
Comparable sales.
Financial ratios.
Industry heuristics.
© McGraw-Hill Education
‹#›
Determining the Value of the Business
Asset Valuation Methodology
Asset valuation assumes the firm’s value is assets minus
liabilities, but there are two major problems with this

9. methodology.
Such estimates do not consider the value of an ongoing firm
over the value of its identifiable assets.
It is very difficult to separately identify and value all the assets.
Three methods used to estimate value of a firm’s assets.
Book value is acquisition cost minus depreciation – unreliable
as depreciation is arbitrary and some assets have no book value.
Net realizable value is the amount an asset would sell for, less
the cost of selling it.
Replacement value estimates what an identical asset would cost
to acquire and prepare for service.
© McGraw-Hill Education
‹#›
Determining the Value of the Business:
Comparable Sales and Financial Ratios
There are two major problems with the comparable sales
approach.
First, no two firms are exactly alike, and second, there are often
no recent sales to use for comparison.
Some of the commonly used ratios are:
The earnings multiple ratio is firm’s value divided by
actual/expected annual earnings.
Pretax return on assets (ROA) divides earnings before tax by
asset value.
Net income to equity is determined by dividing income by
owner equity.
Net income to (equity + debt) is an extension of net income to
equity that explicitly includes the value of borrowed capital.
Income capitalization divides projected net income less
depreciation, interest, and owner draws, by the return you could
expect elsewhere.

10. © McGraw-Hill Education
‹#›
Determining the Value of the Business:
Industry Heuristics
Industry heuristics are rules of thumb used to estimate firm
value in relation to some easily observable characteristics of the
business.
For example, two heuristics in the small inn industry are that an
inn should sell for approximately $100,000 per rental room.
The second is that an inn should sell for approximately four
times its annual gross revenue.
Industry heuristics can be amazingly accurate.
Industry heuristics exist for all industries and are usually
available from the group’s trade association.
© McGraw-Hill Education
‹#›
Buying an Existing Business: Structuring the Deal
A buyer and seller get together to negotiate the final price.
The buyer should have performed due diligence and arrived at
the highest price they would pay, the point of indifference.
You will open negotiations with a price below that point as you
want keep the price low and the seller knows the first offer is
low.
In addition to price, you also negotiate the terms of sale.
You may buy out the seller’s interest in the business.
You buy in by acquiring some, not all, of the ownership.
You may buy only the key assets and not the business itself.
You may take over a public business by controlling stock
interest.
© McGraw-Hill Education

11. ‹#›
Structuring the Deal:
Buyouts and Buy-Ins
LLCs, corporations, and some partnerships are subject to
buyouts.
Accomplished through purchasing ownership interest.
The subsequent business is considered a new entity.
Primary advantage is simplicity.
A buyout can take place all at once, in a single point of time.
An employee buyout occurs through an employee stock
ownership plan (ESOP).
A buy-in occurs when someone acquires part ownership.
One advantage is it allows the purchaser to leverage inside
knowledge.
Another is it aids in keeping key employees.
On the other hand, key employees such as the owner or
managers may be a disadvantage when they stay.
© McGraw-Hill Education
‹#›
Structuring the Deal:
Key Resource Acquisitions and Take Overs
Key resource acquisitions, or bulk asset purchases, are the only
way a sole proprietorship is purchased.
The seller keeps cash and receivables and retains short-term
liabilities.
The most difficult aspect is valuing intangible assets.
One important advantage is the buyer is not responsible for any
of the acts of a prior owner.
Takeovers are possible only in firms with transferable stock.
The buyer purchases enough stock to gain control.
The raider gets control without permission of all owners.
Takeovers are hostile events.

12. The raider may liquidate all or parts of the business.
Only a few businesses are vulnerable – corporations and certain
partnerships.
Rare in small businesses.
© McGraw-Hill Education
‹#›
Inheriting a Business
Whether inheriting or bequeathing, the problems are the same.
A successful transition needs specific actions to organize the
business.
Develop a comprehensive business plan with goals and
objectives.
The founder must pass knowledge to successor, who must learn.
The founder must be proactive in bringing family member in.
There is no force used.
Offer experience/training.
Let them use their strengths.
Leadership does not have to be a family member.
Write out your specific decisions and desires.
As successor, you must gain loyalty and walk a fine line.
The essential skills you need:
Technical knowledge.
Financial knowledge.
People skills.
Leadership skills.
Knowledge of your limitations.
© McGraw-Hill Education
‹#›
Inheriting a Business: Ownership Transfer
Do not wait until the founder’s death to transfer ownership.

13. If you are the founder, your desires become irrelevant.
If you are the successor, there is now no authority figure to help
with issues of control and strategy.
In most cases, a gradual transfer is preferable to a single
inheritance.
May not work with multiple heirs.
Of greatest importance is who gets voting stock.
The transfer of ownership is complex and unique to each family
business.
For larger, successful firms, consider using experts and
specialists.
© McGraw-Hill Education
‹#›
Professional Management of Small Business
If a business grows large enough, it becomes too much for one
person and one of two things happens:
The business starts to decline.
Or, professional managers are hired to share the management
load.
Professional managers are not easy to find.
Ideally it would be a current employee.
If you have the skills and experience of a professional manager,
taking a position provides a unique perspective on the business.
If you like the business, you may move to acquire it in the
future.
Employee managers of small firms are often would-be
entrepreneurs.
© McGraw-Hill Education
‹#›
Getting Out of Your Business

14. Succession transfers or terminates a firm.
A token purchase price is a sell off, and no payment is a pass
off.
Closing with no debts is a walkaway.
In a workout, the owner pays off debt by working another job.
The worst case is bankruptcy.
An entrepreneur may close one firm to start another – a serial
entrepreneur.
Access text alternative for this image.
© McGraw-Hill Education
‹#›
End of main content.
Copyright 2021 © McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Because learning changes everything.®
www.mheducation.com
25
Accessibility Content: Text Alternatives for Images
© McGraw-Hill Education
‹#›

15. Starting a New Business – Text Alternative
The bar graph depicts years in business of two years, five years,
ten years, and fifteen years and the percentage of businesses
who survive those lengths of time.
Sixty-eight percent of businesses survive for two years.
Fifty-one percent survive for five years.
Thirty-four percent survive for ten years and twenty-five
percent survive for fifteen years.
Return to parent-slide containing image.
© McGraw-Hill Education
‹#›
Getting Out of Your Business – Text Alternative
The list of nine business outcomes is listed from best to worst
and typical corresponding techniques are associated with some
of the outcomes.
Your nine outcomes, from best to worst are: become rich from
the firm; get a continuing income from the firm; leave the firm
with a nest egg; leave the firm a little better than when I
started; leave the firm with no debts; leave the firm with debts I
can quickly pay off; leave the firm with debts I can eventually
pay off; leave the firm in bankruptcy; and finally, leave the firm
and myself in bankruptcy.
When the firm has debts, termination is the better option, either
declaring bankruptcy or using a workout. Walkaway is the only
form of termination where the entrepreneur is not saddled with
debt.
A firm with no debt or performing in the better scenarios here
are likely to be a transfer – either a pass off, a sell off, a family
business succession, or a straight business sale.
Return to parent-slide containing image.
© McGraw-Hill Education

16. ‹#›
image2.jpg
image3.jpg
image4.jpg
image1.png
Rubric Detail
Select Grid View or List View to change the rubric's layout.
Name:
NRNP_6665_Week8_Assignment_Rubric
·
Grid View
·
List View
Excellent
Good
Fair
Poor
Create a study guide, in outline form with references, for your
assigned disorder. Incorporate visual elements such as concept
maps, charts, diagrams, images, color coding, mnemonics,
and/or flashcards.
27 (27%) - 30 (30%)
The response is in a well-organized and detailed outline form.
Informative and well-designed visual elements are incorporated.
Followed directions correctly by uploading assignment to
Gradebook and submitted to the discussion forum area.
24 (24%) - 26 (26%)
The response is in an organized and detailed outline form.
Appropriate visual elements are incorporated.

17. Partially followed directions by uploading assignment to
Gradebook but did not submit to the discussion forum area.
21 (21%) - 23 (23%)
The response is in outline form, with some inaccuracies or
details missing. Visual elements are somewhat vague or
inaccurate.
Partially followed directions by submitting to the discussion
forum area but did not upload assignment to Gradebook.
0 (0%) - 20 (20%)
The response is unorganized, not in outline form, or is missing.
Visual elements are inaccurate or missing.
Did not follow directions as did not submit to discussion forum
area and did not upload assignment to gradebook per late
policy.
Content areas of importance you should address, but are not
limited to, are:
• Signs and symptoms according to the DSM-5-TR
• Differential diagnoses
• Incidence
• Development and course
• Prognosis
• Considerations related to culture, gender, age
• Pharmacological treatments, including any side effects
• Nonpharmacological treatments
• Diagnostics and labs

18. • Comorbidities
• Legal and ethical considerations
• Pertinent patient education considerations
45 (45%) - 50 (50%)
The response throughly addresses all required content areas.
40 (40%) - 44 (44%)
The response adequately addresses all required content areas.
Minor details may be missing.
35 (35%) - 39 (39%)
The response addresses all required content areas, with some
inaccuracies or vagueness. No more than one or two content
areas are missing.
0 (0%) - 34 (34%)
The response vaguely or inaccurately addresses the required
content areas. Or, three or more content areas are missing.
Support your guide with references to the DSM-5-TR and at
least three evidence-based, peer-reviewed journal articles or
evidenced-based guidelines. Be sure they are current (no more
than 5 years old).
9 (9%) - 10 (10%)
The response is supported by the DSM-5 and at least three
current, evidence-based resources from the literature.
8 (8%) - 8 (8%)
The response provides at least three current, evidence-based
resources from the literature that appropriately support the
assessment and diagnosis of the patient in the assigned case
study.
7 (7%) - 7 (7%)
Three evidence-based resources are provided to support
assessment and diagnosis of the patient in the assigned case
study, but they may only provide vague or weak justification.
0 (0%) - 6 (6%)
Two or fewer resources are provided to support assessment and

19. diagnosis decisions. The resources may not be current or
evidence based.
Written Expression and Formatting - English Writing Standards:
Correct grammar, mechanics, and proper punctuation
5 (5%) - 5 (5%)
Uses correct grammar, spelling, and punctuation with no errors
4 (4%) - 4 (4%)
Contains one or two grammar, spelling, and punctuation errors
3.5 (3.5%) - 3.5 (3.5%)
Contains several (three or four) grammar, spelling, and
punctuation errors
0 (0%) - 3 (3%)
Contains many (five or more) grammar, spelling, and
punctuation errors that interfere with the reader’s understanding
Written Expression and Formatting - The guide follows correct
APA format for parenthetical/narrative in-text citations and
reference list.
5 (5%) - 5 (5%)
Uses correct APA format with no errors
4 (4%) - 4 (4%)
Contains one or two APA format errors
3.5 (3.5%) - 3.5 (3.5%)
Contains several (three or four) APA format errors
0 (0%) - 3 (3%)
Contains many (five or more) APA format errors
Total Points: 100
Name:
NRNP_6665_Week8_Assignment_Rubric
image1.wmf
Assignment
Neurodevelopmental Disorders
I can’t believe I am sitting here talking to this lady. Mom thinks
I am nuts just because I will not do what she asks. She doesn't

20. care about me. She only cares about my little brother and that
man that keeps coming around. I don’t care about her. That is
why I throw things and won’t do what she asks. I don’t care
about anyone. Those kids at school who used to be my friends
don’t know anything. I am so much smarter than they are.
—Jacob, age 11
There are many mental disorders that occur early in the life
course. The
DSM-5-TR described neurodevelopmental disorders
such as intellectual disability and delay, autism spectrum
disorder, language, speech and communication disorders,
ADHD, motor disorders, developmental coordination disorder,
stereotypic movement disorder, tic disorder, and specific
learning disorders (e.g., dyslexia, difficulty mastering
mathematical reasoning) . Diagnosis of these various conditions
can rarely be made in a single office visit and often requires a
comprehensive approach involving multiple stakeholders,
including the child, his or her parents, teachers, other
significant figures in the child's life, and medical and mental
health professionals, such as psychologists who can conduct
comprehensive neuropsychological testing.
The PMHNP must coordinate and integrate several sources of
information to arrive at an accurate diagnosis of these disorders.
Early and accurate diagnosis is essential to developing an
effective treatment plan, which will have the potential to
minimize the impact of these disorders on the child’s
developmental trajectory. When one considers appropriate
diagnosis from this perspective, the importance of diagnostic
accuracy becomes quite apparent.
To Prepare
·
Please complete your assignment on Child- Onset
Fluency Disorder (Stuttering)
· Research your assigned disorder using the Walden Library.
Then, develop an organizational scheme for the important

21. information about the disorder.The Assignment
Create a study guide for your assigned disorder. Your study
guide should be in the form of an outline with references, and
you should incorporate visual elements such as concept maps,
charts, diagrams, images, color coding, mnemonics, and/or
flashcards. Be creative!
It should not be in the format of an APA paper. Your
guide should be informed by the
DSM-5-TR but also supported by at least three other
scholarly resources.
Areas of importance you should address, but are not limited to,
are:
· Signs and symptoms according to the
DSM-5-TR
· Differential diagnoses
· Incidence
· Development and course
· Prognosis
· Considerations related to culture, gender, age
· Pharmacological treatments, including any side effects
· Nonpharmacological treatments
· Diagnostics and labs
· Comorbidities
· Legal and ethical considerations
· Pertinent patient education considerations
Chapter Six
Small Business Entry: Paths to Entrepreneurship
Copyright 2021 © McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written
consent of McGraw-Hill Education.

22. Because learning changes everything.®
Planning a Path into Business
Causal or predictive reasoning is a useful technique regardless
of whether you want a full-time or a part-time business.
An entrepreneur uses effectual reasoning when they imagine
what can be accomplished with the resources at hand.
Affordable loss is the practice of bringing your product/service
to market with the minimum expenditure of capital, effort, and
time.
Strategic partnerships can be either formal or informal with
others who provide support to your efforts at starting your
business.
Leveraging contingencies is another way of saying “recognizing
and using opportunities.”
© McGraw-Hill Education
‹#›
Bootstrapping, Bricolage, and Lean Business Practices
These three ideas fit into both the causal and the effectual
approaches.
Bootstrapping is finding a low-cost, or no-cost way to do
something.
Bricolage is the practice of using whatever you have at hand.
Lean business practices mean eliminating waste and producing a
minimum viable product.
Both lean operations and bootstrapping share three ideas:
Waste not, want not.
Create, standardize, repeat.
Keep in touch.
The key ideas of bootstrapping are simple:

23. Do without as long as you can and cut all expenses to the bone.
Borrow, barter, rent or lease rather than buy and consider
offering equity if you must buy.
Borrow money from yourself first.
Minimize debt and limit credit card balances.
Always keep track of your cash.
© McGraw-Hill Education
‹#›
The Five Paths to Business Ownership
The entrepreneur can start a completely new business.
They can purchase franchise rights to an existing business.
They can purchase a fully operating business.
They can work in a small business and eventually gain
ownership.
They can inherit a business from a family member.
© McGraw-Hill Education
‹#›

24. Starting a New Business
The riskiest path, but promises the greatest rewards.
87% of start-ups using an incubator are still in operation after 5
years.
Not all businesses that close are a failure.
Access text alternative for this image.
© McGraw-Hill Education
‹#›
Advantages and Disadvantages of Start-Ups
You can “do it your way.”
You begin with a clean slate.
You can use the most up-to-date technologies.
You can provide new, unique products/services.
You can keep the business small to limit losses.
You may take the time to perfect your product/service and
processes.
There will be no initial name recognition.
A start-up requires significant time to get established.
Difficult to finance with no assets, sales, or cash flow.
Cannot easily gain revolving credit from suppliers or banks.
A start-up may lack experienced mangers and workers.
You must train employees and garner management support.

25. © McGraw-Hill Education
‹#›
Starting a New Business in an Existing Field
Most start-ups are “me-too” enterprises.
Customers are familiar, offering some protection from failure.
But it can be difficult to differentiate your business from others.
Often the only competitive advantage is location.
The concept leading to a start-up usually comes from the
experience of the person starting the business.
The best predictors of success is the level of experience of the
founders.
© McGraw-Hill Education
‹#›
Increasing the Odds of Start-Up Success
Start the business in an incubator or accelerator.
Take part in a mentoring program.
Have a detailed start-up budget.
Produce a product/service with a proven demand.
Secure outside investment.
Start with more than one founder for synergy.
Have experience managing small firms.
Have industry experience.
Have previous experience in creating a start-up business.
Choose a business that produces high margins.
Start the business with established customers – can be a spin-
off, competition, or subcontracting.
Build trust in your “story.”
© McGraw-Hill Education
‹#›

26. Franchising a Business – What Is Franchising?
A franchise is an agreement between the franchisor who sets
conditions and grants permissions, and the franchisee, who pays
a fee and agrees to the conditions and standards.
Four elements of a franchise agreement.
The franchisor grants the legal right to sell the company’s
products.
The franchisor provides marketing.
The franchisee can use the branding.
The franchisee pays a fee for rights.
The agreement is valued by:
The rights granted.
Cash flow potential to the franchisee.
Four forms of franchising.
Trade name franchising.
Product distribution franchising.
Conversion franchising.
Business format franchising.
Some companies sell master franchises which may sell sub-
franchises.
© McGraw-Hill Education
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Franchising a Business:
Advantages, Opportunities, and Legal Considerations
Perhaps the single greatest advantage is that it comes as a
complete business system – some are actually “turnkey.”
Finding a franchise is easy.
Entrepreneur magazine lists the top 500 franchises.
Government resources include the FTC and the SBA.
There are franchising associations.
Once you have the franchise, perform due diligence, same as for
any other business.

27. Consider interviewing current franchisees.
Before you sign, study:
The franchise agreement.
The uniform franchise offering circular (UFOC).
You want to know:
If/how you can transfer the license to another.
How you (or franchisor) can end the contract.
What disclosures you are required to make.
© McGraw-Hill Education
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Buying an Existing Business
Advantages include: established customers and immediate cash
inflows; having business processes in place; and lower cash
outlay required.
Disadvantages include:
Finding a successful firm for sale.
Determining a firm’s worth.
Existing staff may resist change.
The firm may have a bad reputation.
The firm may be in decline due to changes in technology.
Facilities or equipment may be obsolete or in need of major
repair.
Use multiple sources to find the right business to purchase.
Make some calls.
Consider a broker.
Networking.
Trade journals.
The internet.
Local businesspeople and associations.
Your employer.
© McGraw-Hill Education

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Buying an Existing Business: Performing Due Diligence
Due diligence is the process of investigating to determine the
full and complete implications of buying a business - nothing is
taken for granted.
Conduct extensive interviews with the sellers of the business.
Study the financial reports and other records of the business.
Make a personal examination of the site (or sites) of the
business.
Interview the business’ customers and suppliers.
Develop a detailed business plan for the acquisition.
The first five steps make up the process of due diligence, after
which:
Negotiate an appropriate price, based on business plan
projections.
Obtain sufficient capital to purchase and operate the business.
© McGraw-Hill Education
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Due Diligence
A basic tenet of business law is caveat emptor, or “let the buyer
beware.”
Due diligence has two primary goals.
First, look for any wrongdoing – fraud, misrepresentations, or
missing information.
Second, look for inefficiencies, waste, opportunities, or
mismanagement.
The first goal affects the value of the business and the second
shows potential ways to increase the firm’s value.
This gives you a negotiating advantage.
Financial statements should include:
A balance sheet.
An income statement.

29. A statement of cash flows.
Intangibles are likely to be misstated.
© McGraw-Hill Education
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Determining the Value of the Business
The most rigorous method uses discounted cash flows.
Based on estimates of future cash outflows and inflows, given
the change in leadership – also highly problematic.
Due to these difficulties, it is common to use less rigorous
methods.
Asset valuation.
Comparable sales.
Financial ratios.
Industry heuristics.
© McGraw-Hill Education
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Determining the Value of the Business
Asset Valuation Methodology
Asset valuation assumes the firm’s value is assets minus
liabilities, but there are two major problems with this
methodology.
Such estimates do not consider the value of an ongoing firm
over the value of its identifiable assets.
It is very difficult to separately identify and value all the assets.
Three methods used to estimate value of a firm’s assets.
Book value is acquisition cost minus depreciation – unreliable
as depreciation is arbitrary and some assets have no book value.
Net realizable value is the amount an asset would sell for, less
the cost of selling it.
Replacement value estimates what an identical asset would cost

30. to acquire and prepare for service.
© McGraw-Hill Education
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Determining the Value of the Business:
Comparable Sales and Financial Ratios
There are two major problems with the comparable sales
approach.
First, no two firms are exactly alike, and second, there are often
no recent sales to use for comparison.
Some of the commonly used ratios are:
The earnings multiple ratio is firm’s value divided by
actual/expected annual earnings.
Pretax return on assets (ROA) divides earnings before tax by
asset value.
Net income to equity is determined by dividing income by
owner equity.
Net income to (equity + debt) is an extension of net income to
equity that explicitly includes the value of borrowed capital.
Income capitalization divides projected net income less
depreciation, interest, and owner draws, by the return you could
expect elsewhere.
© McGraw-Hill Education
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Determining the Value of the Business:
Industry Heuristics
Industry heuristics are rules of thumb used to estimate firm
value in relation to some easily observable characteristics of the
business.
For example, two heuristics in the small inn industry are that an
inn should sell for approximately $100,000 per rental room.

31. The second is that an inn should sell for approximately four
times its annual gross revenue.
Industry heuristics can be amazingly accurate.
Industry heuristics exist for all industries and are usually
available from the group’s trade association.
© McGraw-Hill Education
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Buying an Existing Business: Structuring the Deal
A buyer and seller get together to negotiate the final price.
The buyer should have performed due diligence and arrived at
the highest price they would pay, the point of indifference.
You will open negotiations with a price below that point as you
want keep the price low and the seller knows the first offer is
low.
In addition to price, you also negotiate the terms of sale.
You may buy out the seller’s interest in the business.
You buy in by acquiring some, not all, of the ownership.
You may buy only the key assets and not the business itself.
You may take over a public business by controlling stock
interest.
© McGraw-Hill Education
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Structuring the Deal:
Buyouts and Buy-Ins
LLCs, corporations, and some partnerships are subject to
buyouts.
Accomplished through purchasing ownership interest.
The subsequent business is considered a new entity.
Primary advantage is simplicity.
A buyout can take place all at once, in a single point of time.

32. An employee buyout occurs through an employee stock
ownership plan (ESOP).
A buy-in occurs when someone acquires part ownership.
One advantage is it allows the purchaser to leverage inside
knowledge.
Another is it aids in keeping key employees.
On the other hand, key employees such as the owner or
managers may be a disadvantage when they stay.
© McGraw-Hill Education
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Structuring the Deal:
Key Resource Acquisitions and Take Overs
Key resource acquisitions, or bulk asset purchases, are the only
way a sole proprietorship is purchased.
The seller keeps cash and receivables and retains short-term
liabilities.
The most difficult aspect is valuing intangible assets.
One important advantage is the buyer is not responsible for any
of the acts of a prior owner.
Takeovers are possible only in firms with transferable stock.
The buyer purchases enough stock to gain control.
The raider gets control without permission of all owners.
Takeovers are hostile events.
The raider may liquidate all or parts of the business.
Only a few businesses are vulnerable – corporations and certain
partnerships.
Rare in small businesses.
© McGraw-Hill Education
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Inheriting a Business

33. Whether inheriting or bequeathing, the problems are the same.
A successful transition needs specific actions to organize the
business.
Develop a comprehensive business plan with goals and
objectives.
The founder must pass knowledge to successor, who must learn.
The founder must be proactive in bringing family member in.
There is no force used.
Offer experience/training.
Let them use their strengths.
Leadership does not have to be a family member.
Write out your specific decisions and desires.
As successor, you must gain loyalty and walk a fine line.
The essential skills you need:
Technical knowledge.
Financial knowledge.
People skills.
Leadership skills.
Knowledge of your limitations.
© McGraw-Hill Education
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Inheriting a Business: Ownership Transfer
Do not wait until the founder’s death to transfer ownership.
If you are the founder, your desires become irrelevant.
If you are the successor, there is now no authority figure to help
with issues of control and strategy.
In most cases, a gradual transfer is preferable to a single
inheritance.
May not work with multiple heirs.
Of greatest importance is who gets voting stock.
The transfer of ownership is complex and unique to each family
business.
For larger, successful firms, consider using experts and

34. specialists.
© McGraw-Hill Education
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Professional Management of Small Business
If a business grows large enough, it becomes too much for one
person and one of two things happens:
The business starts to decline.
Or, professional managers are hired to share the management
load.
Professional managers are not easy to find.
Ideally it would be a current employee.
If you have the skills and experience of a professional manager,
taking a position provides a unique perspective on the business.
If you like the business, you may move to acquire it in the
future.
Employee managers of small firms are often would-be
entrepreneurs.
© McGraw-Hill Education
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Getting Out of Your Business
Succession transfers or terminates a firm.
A token purchase price is a sell off, and no payment is a pass
off.
Closing with no debts is a walkaway.
In a workout, the owner pays off debt by working another job.
The worst case is bankruptcy.
An entrepreneur may close one firm to start another – a serial
entrepreneur.
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35. © McGraw-Hill Education
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Starting a New Business – Text Alternative
The bar graph depicts years in business of two years, five years,
ten years, and fifteen years and the percentage of businesses
who survive those lengths of time.
Sixty-eight percent of businesses survive for two years.
Fifty-one percent survive for five years.
Thirty-four percent survive for ten years and twenty-five
percent survive for fifteen years.
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36. © McGraw-Hill Education
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Getting Out of Your Business – Text Alternative
The list of nine business outcomes is listed from best to worst
and typical corresponding techniques are associated with some
of the outcomes.
Your nine outcomes, from best to worst are: become rich from
the firm; get a continuing income from the firm; leave the firm
with a nest egg; leave the firm a little better than when I
started; leave the firm with no debts; leave the firm with debts I
can quickly pay off; leave the firm with debts I can eventually
pay off; leave the firm in bankruptcy; and finally, leave the firm
and myself in bankruptcy.
When the firm has debts, termination is the better option, either
declaring bankruptcy or using a workout. Walkaway is the only
form of termination where the entrepreneur is not saddled with
debt.
A firm with no debt or performing in the better scenarios here
are likely to be a transfer – either a pass off, a sell off, a family
business succession, or a straight business sale.
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