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smb300_Chap006 wk2


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Discussion powerpoint Week 2

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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