Ch. 6 Paths to Full-Time Entrepreneurship
Increasing the Odds of Start-Up Success
synergy and spinoff
Employee stock option plan (ESOP)
a method for employees to purchase the business for which they work.
Causal (predictive) reasoning
The process of setting a goal and then determining the strategy and resources required to attain the goal. Causal reasoning is used to create a business plan.
Buyout
The purchase of substantially all of an existing business
Four basic ways that a business may be bought:
(1) you may buy out the seller's interest in the business, (2) you may buy in -the purchase of substantially less than 100 percent of a business (3) You may buy only the key assets of the business such as the inventory or equipment of the business, and not the business itself, and (4) you may take over a public business by buying a controlling interest of its stock.
Accountant or lawyer familiar w process
help p`erform due diligence
business format franchising
agreement that provides a complete business format, including trade name, operational procedures, marketing and products or services to sell
conversion franchising
agreement that provides an organization through which independent businesses may combine resources
What a purchased bus or franchise requires
immediate and constant cash flows to meet ongoing obligations. A start-up can be very difficult to finance. Established businesses and franchises provide immediate assets , sales, and cash inflows that can be used to obtain financing for the business.
Comparable Sales
of other firms in the same industry are commonly used to estimate the value of a business. This method has two major problems. First, no two firms are exactly alike. Second, there are often no recent sales to use for comparison.
due diligence
the process of investigating a business to determine its value
Franchise
A legal agreement that allows a business to be operated using the name and business procedures of another firm
Discounted cash flow
Cash flows that have been reduced in value because they are to be received in the future
Asset
Something the business owns that is expected to have economic value in the future
Advantages of purchasing an existing business
-Established customers -Business processes are already in place -Often requires less cash outlay
Disadvantages of purchasing an existing business
-Finding a successful business for sale that is appropriate for you is difficult -Existing employees may resist change -Reputation may be a hindrance -Facilities and equipment may be obsolete
Goals of Due diligence
-You are attempting to find any wrongdoing: (1) fraud, (2) misrepresentations of the sellers and (3) missing information -You are trying to find any inefficiencies, unnoticed opportunities, waste, and mismanagement
Termination
An endgame strategy in which the owner closes down a business.
Bankruptcy
An extreme form of business termination that uses a legal method for closing a business and paying off creditors when debts are substantially greater than assets.
net realizable value
The amount for which an asset will sell, less the costs of selling
Replacement value
The cost to acquire an essentially identical asset
Book value
The difference between the original acquisition cost and the amount of accumulated depreciation
Leveraging contingencies
The practice of and ability to seize upon novel opportunities that become apparent during the conduct of business.
point of indifference
The price at which a buyer is indifferent about buying or not buying the business
Buy-in
The purchase of substantially less than 100 percent of a business
Lean Business Practices
addresses the specifics of new business creation, particularly Internet-based businesses, where rapid experimentation and constant monitoring of viewers' choices are possible.Lean business practices include a set of tried-and-true methods that can lessen the capital requirements and, as a result, reduce the financial risk of a start-up.
product distribution franchising
agreement that provides specific brand name products which are resold by the franchisee in a specific territory
Financial Ratios
are often used to place a value on businesses, because industry ratios are independent of the size of the business.
Industry Heuristics
are simply rules of thumb that are commonly used to estimate firm value in relation to some easily observable characteristic of the business.
Business faces more debts
arrange a workout, where the owner takes another job and pays offs the remaining debts of the business.
earnings multiple
the ratio of the value of a firm divided by its annual earnings
Spin-off
A business that is created by separating part of an operating business into a separate entity
Bootstrapping
using low-cost or free techniques to minimize your cost of doing business
Affordable loss
The minimum possible expenditure of capital and other resources in order to bring an entrepreneurial idea to market.
Heuristic
A common-sense rule, a rule-of- thumb.
transfer
An endgame strategy in which ownership is moved from one person or group to another.
caveat emptor
Latin: let the buyer beware
4 ways to buy
-Buy out seller's interest -Buy in -Buy key assets -Takeover
trade name franchising
agreement that provides to the franchisee only the rights to use the franchisor's trade name and/or trademark
Cash flows
The actual receipt and spending of cash by a business
Start-up
A new business that is started from scratch.
serial entrepreneur
Person who opens multiple businesses throughout his or her career.
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. 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.
Both lean operations and bootstrapping are based on and share three underlying ideas:
1.Waste not, want not2.Create, standardize, repeat. 3.Keep in touch.
The Five Paths to Business Ownership
1.You may start a new business 2.You may buy an existing business 3.You may franchise a business 4.You may inherit a business 5.You may be the manager of a business
Buyouts
A buyout may take place all at once, with all stock being transferred at a single point in time. Sometimes buyouts are made with ownership being transferred over some agreed-upon timerange. Buyouts made by employees are examples of changes of ownership over time.
synergy
A combination in which the whole is more than the sum of its parts
Minimum viable product
A concept central to lean business practices where you make a minimum product, but one that can be sold. By selling to customers and collecting feedback, an entrepreneur can develop a product at minimum cost.
Revolving credit
A credit agreement that allows the borrower to pay all or part of the balance at any time -As the loan balance is paid off, it becomes available to be borrowed again
workout
A form of business termination in which the firm's legal or financial obligations are not fully met at closing. More than one-half of all business closings are workouts.
Effectual reasoning
A logical process in which one analyzes the resources available and restraints on the use of resources to create an attainable goal. * refer to research by Saras Sarasvathy(University of Virginia)
Pass off
A type of business transfer where the owner gives the business to someone else without a payment. done to maintain employment for the staff and service for the customers, but the business is not profitable enough to give the original owner any revenue.
Sell off
A type of business transfer where the seller gets only a fraction of the value of the business. most often done to maintain employment for the staff and service for the customers, but the business can generate only a small amount of profit with which the original owner can be paid, or the new owner does not have much money to buy the business.
Sarasvathyhas defined three principles of reasoning that are absolutely critical in the process of effectual reasoning:
Affordable loss Strategic partnerships Leveraging contingencies
Intangibles
Balance sheet items likely to be misstated. Assets, such as patents or trademarks, and liabilities, such as accounts payable, that have no physical existence
There are three other important ideas that fit into both the casual and effectuation approaches to entrepreneurship:
Bootstrapping Bricolage Lean business practices
Walkaway
Business termination in which the entrepreneur ends the business with its obligations met.
Advantages of purchasing an existing business
Established customers Business processes are already in place Often requires less cash outlay
Inheriting a Bus
Family Businesses Succession (by being inherited in one form or another) Developing a Formal Management Structure Succession Issues for the Founder Succession Issues for the Successor Ownership Transfer
Disadvantages of purchasing an existing bus
Finding a successful business for sale that is appropriate for you is difficult Existing employees may resist change Reputation may be a hindrance Facilities and equipment may be obsolete
Finding a Business to Buy
First problem is finding a business for saleShould be in an industry in which you have experienceProduct or service that has demand and high marginsAdequate financingContact business brokers
Strategic partnerships
Formal or informal relationships with customers, vendors, or mentors to ensure the success of an entrepreneurial venture.
Legal Considerations
If and how you can transfer the franchise license to someone elseHow you may terminate the contractHow the franchisor may terminate the contractWhat disclosures you are required to make
Professional manager
In a small business, they are the one who has the experience and skills to use a systematic approach to analyzing and solving business problem
Disadvantages of start-ups
No initial name recognition The lack of an acceptedbrand can put off potential customers.Require significant time to become established and provide cash flows. Very difficult to finance. A new business will not have the existingassets, sales, and cash inflows that can be used to obtain financing for the business.Cannot easily gain revolving credit from suppliers and financial institutionsMay not have experienced managers and workersYour start-up businesses will be faced with training employees and obtaining management support
Bricolage
Refers to the process of analyzing the resources available and creating a product or service from them.
Takeover
Seizing of control of a business by purchasing its stock to be able to select the board of directors
There are basically three ways that you can go about obtaining committed customers prior to start-up:
Spin-off A business that is created by separating part of an operating business into a separate entity. You can start a business to specifically go into competition with your employer Or you can start a business to subcontract services to your employer or to other established businesses.
Advantages of start-ups
When you start a new business, you can "do it your way." There are no existing rules, processes, or culture that will be difficult to change.Begin with a clean slate: There are no existing employee problems, debts, lawsuits, contracts, or other legal commitments that must be satisfied.Use the most up-to-date technologiesThere are no "legacy"locations, buildings, equipment, or software that can hamper productivity.Provide new, unique products or services that are not available from existing businesses or franchises. Existing businesses and franchises exist because of their success in providing proven products and services.Can be kept small deliberately to limit the magnitude of possible lossesYou may take time to perfect your product, services, and processes.
Founder
person who establishes (an organization or business)
