Chapter 6: Small Business Entry: Paths to Full-Time Entrepreneurship
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
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
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
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
Five paths
1) you may start a new business 2) may buy an existing business 3) franchise a business 4) inherit a business 5) may be hired to be the prof manager of a small business
Steps to Follow When Acquiring a Business
1. conduct extensive interviews w the sellers of the business 2. study the financial reports and other records of the business 3. make a personal examination of site of 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
Goals of due diligence
1. you are attempting to find any wrongdoing : fraud, misrepresentation, missing info 2. you are trying to find any inefficiencies, unnoticed opportunities, waste, and mismanagement
Discounted cash flows
cash flows that have been reduced in valued because they are to be received in the future
Takeover
seizing of control of a business by purchasing its stock to be able to select the board of directors
Asset
something the business owns that is expected to have economic value in future
Replacement value
the cost to acquire an essentially identical asset
Point of indifference
the price at which a buyer is indifferent about buying or not buying the business
Business format franchising
agreement that privdes a complete business format , including trade name, operational procedures, marketing and products or services to sell
Product distribution franchising
agreement that provides specific brand name products which are resold by the franchise in a specific territory
Trade name franchising
agreement that provides to the franchisee only the rights to use the franchisor's trade name and/or trademarks
Intangibles
assets, such as patents, or trademarks, and liabilities, such as accounts payable, that have no physical existence
Buyout
purchase of substantially all of an existing business
Net realizable value
the amount for which an asset will sell, less the costs of selling
Book value
the difference between the original acquisition cost and the amount of accumulated depreciation
Buy-in
the purchase of substantially less than 100 percent of a business
Conversion franchising
agreement that provides an organization through which independent businesses may combine resources
caveat emptor
latin: let the buyer beware
due diligence
process of investigating a business to determine its value
Spin-off
a business that is created by separating part of an operating business into a separate entity
Franchise
a legal agreement that allows to be operated using the name and business procedures of another firm
Start-Up
a new business that is started from scratch
Cash flows
the actual receipt and spending of cash by a business