1. Paths to Full-Time Entrepreneurship6
Small Business Entry:
Paths to Full-Time Entrepreneurship

2. Chapter 6
Objectives:
Describe five ways that people get into small business management
Learn the rewards and pitfalls of starting a small business
Understand the opportunities and pitfalls of purchasing an existing business
Explain four methods for purchasing an existing business
Understand the advantages and disadvantages of buying a franchise
Understand the problems of management succession in a family-owned business
Describe how hired managers become owners of a small business
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3. Chapter 6 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
Each of these five methods is discussed in turn.
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4. Chapter 6 Starting a New Business
Often, the most risky path promises the greatest rewards.
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5. Chapter 6
Advantages of start-ups: several advantages over buying, franchising, or being an employee
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
When starting your own company there are no preconcieved 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.
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6. Chapter 6 Disadvantages of start-ups: offset the advantages
No initial name recognition
Require significant time
Very difficult to finance
Cannot easily gain revolving credit
May not have experienced managers and workers
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.
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7. Chapter 6 Creating a New Business
Step One: Determine what the business is to be
Starting a copycat business provides some protection from failure
Two-thirds of all start-ups are based on ideas from prior work experience, hobbies, and family-businesses
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8. Chapter 6
Increasing the Chance of Start-up Success
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9. Chapter 6 Special Strategies for Starting from Scratch
Home-based businesses: Businesses that are operated from the owner’s home
One author says get an office ASAP – Why? Do you agree?
Partnering: the process of two or more entities agreeing to work together for a common goal
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
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.
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10. Chapter 6 Buying An Existing Business
Advantages of purchasing an existing business:
Established customers
Business processes are already in place
Often requires less cash outlay
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.
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11. Chapter 6 “Information asymmetry”
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
“Information asymmetry”
Pro and con
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.
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12. Chapter 6 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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13. Chapter 6 Performing Due Diligence
Due diligence: process of investigating a business to determine its value
Caveat emptor
Searching for fraud, misrepresentation, omissions
Searching for things that can be improved
Conduct extensive interviews
Study financial reports
Personal examination of the site
Interview customers and suppliers
Detailed business plan
Negotiate an appropriate price
Obtain sufficient capital
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.
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14. Example 10 Things to Look Out for When Buying a Business
Chapter 6
Example
Example 10 Things to Look Out for When Buying a Business
Ask about sales taxes and payroll taxes
Find out if you can assume the seller's lease
Are there prepaid expenses?
Negotiate a "letter of intent”
Watch out for bulk sales laws
Get an indemnity from the seller
Make sure the seller sticks around for a while
Get to know the employees
Determine who will deal with the accounts receivable
Make sure you're buying the assets, not the business –why?
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15. Chapter 6 Determining the Value of the Business 5 Methods:
Discounted cash flows: cash flows reduced in value because they are to be received in the future
Book value: difference between original acquisition cost and the amount of accumulated depreciation
Discounted cash flows are commonly used and are the most theoretically vigorous method.
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16. Chapter 6 Determining Value Cont.
Net realizable value: amount for which an asset will sell, less the costs of selling
Replacement value: cost to acquire an essentially identical asset
Earnings multiple: ratio of value of a firm to its annual earnings
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17. Chapter 6 Structuring the Deal 4 ways to buy Buy out seller’s interest
Buy in
Buy key assets
Takeover
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.
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18. Chapter 6 Franchising A Business
A legal agreement that allows one business to be operated using the name and business procedures of another
Trade name franchising: agreement that provides to the franchisee only the rights to use the franchisor's trade name and/or trademarks (e.g. TruValu Hardware)
Product distribution franchising: agreement that provides specific brand name products which are resold by the franchisee in a specific territory (e.g. car dealerships)
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19. Chapter 6 Franchising A Business
Conversion franchising: agreement that provides an organization through which independent businesses may combine resources (e.g. Century 21)
Business format franchising: agreement that provides a complete business format, including trade name, operational procedures, marketing and products or services to sell (e.g. McDonald’s)
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20. Chapter 6 Advantages of franchising: Proven successful business model
Receive training and management support
Proprietary computer programs
Marketing, product placement, advertising, and promotion is all controlled for you (but sometimes national advertising contribution)
Often less risky than starting or acquiring a business
Franchising is a proven low risk way to get into business.
You will receive training in following a proven, successful model.
Areas which you may be personally week in, such as advertising, are controlled by a standard formula.
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21. Chapter 6 Disadvantages of franchising:
Give up control of marketing and operations
Franchisor often sets policies
Must buy inventory from specific vendors
Regularly inspected
Success is determined by success of franchise itself
Location issues
Includes cannibalization by other franchisees
Because everything is controlled you have lost your freedom to be creative, change hours, try something new, etc…
Oftentimes vendor may even be controlled irregardless of their performance with you.
Ultimately success can depend on the success of the parent company. If your store is running well, but others are not, the whole corporate structure may shut down and you would lose your business.
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22. Chapter 6 Franchise Opportunities Entrepreneur Magazine
Entrepreneur.com lists over 500 franchises
Google search of “franchise opportunity” returned 788,000 pages
International Franchise Association
Australian site
British Government site
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23. Chapter 6 Example 2007 Fastest-Growing Franchises Top Ten 1. Subway
2. Jan-Pro Franchising Int'l. Inc.
3. Dunkin' Donuts
4. Coverall Cleaning Concepts
5. Jazzercise Inc.
6. Jackson Hewitt Tax Service
7. RE/MAX Int'l. Inc.
8. CleanNet USA Inc.
9. Bonus Building Care
Jani-King
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24. Chapter 6 Inheriting A Business
Family-owned businesses usually fail after death or retirement of the founder
Less than 30% are successfully transferred after a second generation
Less than 13% succeed long enough to be inherited by the third generation
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25. Chapter 6 Keys to Success: Establish a formal management structure
Develop a comprehensive business plan
Hire professional managers to run those functions that family members cannot
Founder and successor have to work closely together
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