2. Learning Objectives
LO1 Describe five ways that people get into
small business management
LO2 Compare the rewards with the pitfalls of
starting a small business
LO3 Compare the opportunities with the
pitfalls of purchasing an existing business
LO4 Explain four methods for purchasing an
existing business
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3. Learning Objectives
LO5 Compare the advantages with the
disadvantages of buying a franchise
LO6 Explain the issues of inheriting a family-
owned business
LO7 Describe how hired managers become
owners of a small business
6-3
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
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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
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. 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. 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
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. Special Strategies for Starting
from Scratch
Because 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. 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. 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. 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. Steps to Follow When Acquiring a
Business
1. 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. 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. Question
What is due diligence?
A.An agreement between the buyer and the
seller
B. Process of separating part of an operating
business into a separate entity
C.Process of finding an existing business to
purchase
D.Process of investigating a business to
determine its value
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19. Due Diligence
Due diligence Caveat emptor
– process of – Latin: let the buyer
investigating a beware
business to
determine its value
6-19
20. Purposes of Due Diligence
1. You are attempting to find any
wrongdoing: (1) fraud,
(2) misrepresentations of the sellers and
(3) missing information
2. You are trying to find any inefficiencies,
unnoticed opportunities, waste, and
mismanagement.
6-20
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.
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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. Determining the Value of the
Business
Comparable Sales
Financial Ratios
– Earnings multiple
Industry Heuristics
6-23
24. Structuring the Deal
4 ways to buy
Buy out seller’s interest
Buy in
Buy key assets
Takeover
6-24
25. Franchising A Business
Trade name franchising
– agreement that provides to the
franchisee only the rights to use the
franchisor's 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. Franchising A Business
Conversion franchising
– agreement that provides an organization
through which independent businesses
may combine resources
6-26
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. Question
All of the following are advantages of
franchising, except:
A.Marketing, product placement, advertising,
and promotion is all controlled for you
B. Often less risky than starting or acquiring a
business
C.Franchisor often sets policies
D.Receive training and management support
6-28
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. 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. 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
Notas del editor
Each of these five methods is discussed in turn.
When starting your own company there are no preconceived 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.
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.
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.
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.
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.
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.
Answer: d
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.
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.