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- 1. 20 Achieving Success in the Small Business McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
- 26. Chapter 20 20-
Editor's Notes
- Every business looks a little different and proceeds at a different pace. But most firms follow a general path and encounter the same stages along the way.
- This pre-step seems obvious to those on the outside, but rarely is this formally done. Many firms start as hobbies or crafts that the entrepreneur never intended to turn into a business. It’s the ebay seller who started by cleaning out the basement and ends up with a consignment shop running full time. Or the hobbyist who carves wooden figurines for his grandkids and ends up selling them at craft fairs. It is a small percentage of entrepreneurs who actually stop and think “I’m going to come up with an idea and start my own company”.
- Existence means you’re just barely getting by. In this early stage, you made the choice to run a business but you’re not established and stable. Your customer base is small and unsteady. Entrepreneurs are generally new to running a business and haven’t figured out all the details yet (that’s why you take a class like this one). Owners may need to learn about reading balance sheets, how to hire employees, wage laws, taxes, etc… These skills are necessary and learned over time. The more quickly they are learned the more quickly you move into success. The success stage is a comfortable one and it can last for a long time. Sales and employees increase during this stage. Processes become more formalized. The owners role becomes more managerial.
- Stage 4 sees a leveling off of sales and company size. Consistency breeds efficiency which breeds complacency which needs to be avoided. Marketing is minimal at this time, steady reminder advertising.
- Take-off is a unique phase which most small-businesses will never see. This comes from an unexpected wind-fall and can be either good or bad depending on whether the firm can meet the demand. Sometimes a large contract may come through but if payment is at the end it may require all the firm’s resources to complete the contract.
- Example How Quickly Should I Grow? A matter of timing and starting on the exact date on which you will begin applying the elements of any one, or multiple, growth strategies "How Quickly" you attempt to grow your business is called your "pace" of growth Growth occurs when your business is experiencing permanent increases in profit as a direct result of measurable and sustainable increases in sales volume growth is best achieved by matching the timing and pace of your business's growth initiatives to market demand
- While take-off is unplanned, there are 2 strategies for controlled growth. High-growth ventures aim to achieve 25% or more growth and sales of over $1,000,000. Many times these are designed to grow quickly in order to harvest the business. High-performing small businesses level off under $1,000,000 but continue to grow at 5-15% per year. Growth is steady, but manageable. Owners tend to stay with these businesses rather than sell them.
- Traditional small businesses are very small “mom and pop” operations. They are full time, they are open when it is convenient for the customer. Sales and profits are small but reasonable. Lifestyle firms are the largest percentage of small businesses. They are part time, and thus have very small sales Many owners of these firms have stable full time jobs or have retired and are content then to keep it part-time.
- Nearly 4 Million firms change existence a year. They may change ownership in a variety of ways, or close. Harvesting is one popular method particularly with high growth firms. IPO happens with larger ideas but not the typical small firm. Other method are charted on the next slide.
- Nearly 4 Million firms change existence a year. They may change ownership in a variety of ways, or close. Harvesting is one popular method particularly with high growth firms. IPO happens with larger ideas but not the typical small firm. Other method are charted on the next slide.
- Example The ABCs of IPO's Entrepreneurs, venture capitalists and angel investors are openly discussing the IPO as a realistic benchmark Company begins the process by retaining a law firm to assist in producing a detailed firm disclosure Company will interview various investment banks and then select one (or more) to handle the underwriting of the IPO On the IPO date, the company and its team do their last-minute edits and negotiate the final offer price, and the last version of the prospectus is filed with the SEC, usually within the half hour prior to the opening of trading on the exchange.
- Transfers are about 25% of changes in small business per year. Most family companies will transfer ownership still within the family. Only the largest of full time small businesses are worth transferring. Smaller one will simply close.
- One problem with transfers, as seen in the opening story, is to minimize the tax effects. A pass off is used fairly often because of the tax implications. It works particularly well within a family. The sell off is also frequently used and works will if a close competitor exists and is willing to buy the company or inventory.
- Younger firms are more likely to simply close. A walkaway means closing the firm and quickly paying off any debts. This is the ideal situation for small stable firms. A workout happens when the debt can’t quickly be paid off, but the owner can make arrangements to pay it off over time. The worst situation is declaring bankruptcy for the firm, the owner, or both. This may happen if a lot of money was invested and the company never hit the successful stage.
- There are several steps which can be taken to improve the chance for long term success of a firm. Incorporating requires the use of a lawyer. And lawyers often can share their vast experience with the novice business owner. Hiring employees allows companies to take advantage of larger contracts and helps to reach and serve more customers. Additionally by hiring employees with differing skill sets, the firm can can more experience and expertise with each new hire.
- There are several steps which can be taken to improve the chance for long term success of a firm. Incorporating requires the use of a lawyer. And lawyers often can share their vast experience with the novice business owner. Hiring employees allows companies to take advantage of larger contracts and helps to reach and serve more customers. Additionally by hiring employees with differing skill sets, the firm can can more experience and expertise with each new hire.
- Too much money is a good thing. Businesses with no start up capital tend to watch every penny they spend very closely and control their costs. Businesses with over $50,000 in start up capital have a major investor who will do everything he or she can to make sure the company survives. Businesses in the middle are at a significant disadvantage. Protectable property also helps increase the chance of survival by reducing the risks of copycats. Your competitive advantage is protected and thus unique.
- Being able to affiliate with a proven brand name also lends legitimacy and recognition to your firm. And of course, it helps to start a company in a growing field and take advantage of the trend. Even a mediocre firm can see growth using this method. Pre-sales are more difficult and rarely done. However, by contracting for the order before production is ensures that only the necessary product is produced.