STARTUPS AND BUYOUTS CH. 4 SMALL BUSINESS MANAGEMENT BY LONGENECKER—11 TH ED.

STARTING A BUSINESS FROM SCRATCH A NEW PRODUCT OR SERVICE IDEAL LOCATION, ETC. AVOIDING OTHER’S MISTAKES

QUESTIONS WHAT ARE SOME IDEAS? WHERE CAN I FIND NEW IDEAS? HOW DO I KNOW A GOOD THING? HOW DO I REFINE A GOOD THING? WHAT CAN I DO TO INCREASE MY ODDS?

KINDS OF IDEAS TYPE A—NEW MARKET TYPE B—NEW TECHNOLOGY TYPE C—NEW BENEFIT

WHERE DO YOU GET IDEAS? PRIOR WORK EXPERIENCE PERSONAL INTERESTS AND HOBBIES BY CHANCE DELIBERATE SEARCH

HOW DO YOU KNOW IF IT’S REALLY A GOOD IDEA? CLEARLY DEFINED MARKET NEED COMPETITIVE ADVANTAGE PROFIT POTENTIAL GOOD FIT—FEELS RIGHT NO FATAL FLAW (GOVT. OR SOCIAL NEGATIVES)

Pros and Cons of Buying an Existing Business

WHERE DO YOU LOOK? TALK TO PEOPLE SUPPLIERS SALES REPS TRADE ASSOC. BANKERS REALTORS MATHCHMAKER

WHY IS THE OWNER REALLY SELLING? REASONS STATED MAY OR MAY NOT BE THE REAL REASONS BE WARY

REASONS OLD AGE ILLNESS WANTS TO RELOCATE TAKES ANOTHER JOB BUS. NOT PROFITABLE FRANCHISE NOT RENEWED LACK OF POTENTIAL

THE MATH EXAMINE FINANCIAL STATEMENTS GO BACK AS FAR AS YOU CAN REALIZE MAY NOT BE WHAT IT SEEMS—UNDER OR OVERSTATED

ASSET-BASED ESTIMATE THE VALUE OF THE ASSETS MODIFIED BOOK VALUE—ADJUSTING BOOK VALUE TO REFLECT DIFFERENCES BETWEEN HISTORICAL COST AND CURRENT VALUE OF THE ASSETS

ASSET CONT. REPLACEMENT VALUE—WHAT WOULD IT COST TO REPLACE LIQUIDATION VALUE—HOW MUCH WOULD YOU GET IF YOU LIQUIDATED THE ASSETS

MARKET-BASED RELIES ON FINANCIAL MARKETS IN ESTIMATING VALUE—LOOKS AT THE ACTUAL MARKET PRICES OF FIRMS THAT ARE SIMILAR PRICE-TO-EARNINGS RATIO=MARKET PRICE/AFTER-TAX EARNINGS

EARNING-BASED DETERMINED BY FUTURE RETURNS – value based on ability to produce future profits FIRM’S VALUE=NORMALIZED EARNINGS/CAPITALIZATION RATE

EARNINGS CONT. NORMALIZED EARNINGS—EARNINGS THAT HAVE BEEN ADJUSTED FOR UNUSUAL ITEMS CAPITALIZATION RATE– BASED ON THE LEVEL OF RISK INVOLVED IN THE BUSINESS AND THE EXPECTED GROWTH RATE OF FUTURE EARNINGS

CAP. RATE CONT MORE RISKY – HIGHER THE CAP. RATE AND LOWER THE FIRM’S VALUE LESS RISKY – LOWER THE CAP. RATE AND HIGHER THE FIRM’S VALUE FIGURE 4-4 NOT JUST A SCIENCE, BUT AN ART

CASH FLOW-BASED COMPARING THE EXPECTED AND REQUIRED RATES OF RETURN ON THE INVESTMENT REQUIRED RATE OF RETURN=RISK- FREE RATE OF RETURN + RISK PREMIUM

NONQUANTITATIVE FACTORS COMPETITION MARKET FUTURE COMMUNITY DEVELOPMENT LEGAL COMMITMENTS UNION CONTRACTS BUILDINGS PRODUCT PRICES

INCREASING YOUR CHANCES TEAM EFFORT EXPERIENCE HAVE STARTED OTHER BUS. SERVICE OR MFG. –ALMOST HALF HIGH TECH SHARE OWNERSHIP DON’T LIMIT TO LOCAL MARKETS