Management Final Exam
Advantages of Start ups - #2
-Provides the owner with the opportunity to use the most up to date technologies
Starting a new business is at once the most ______ path into business and the path that promises the ______ rewards for success
-Risky -Greatest
Advantages of Start ups - #1
-Start - up begins with a clean slate where there are 1. No employee problems 2. Debts 3. Lawsuits 4. Contracts 5. Legal Commitments that must be satisfied
If at first you fail....
BE PERSISTANT
Me-too enterprise
Creation of another common business such as beauty shop, restaraunt, bar, yard care
Buy - Out
The purchase of substantially of an existing business
Lean #1
Waste not, want not
Franchise
a legal agreement that allows a business to be operated using the name and business procedures of another firm
Net realizable value
amount for which an asset will sell, less the costs of selling
Intangibles
assets, such as patents or trademarks and liabilities such as accounts payable that have no physical existence.
Discounted cash flows
cash flows that have been reduced in value because they are to be received in the future
Synergy
combination in which the whole is greater than the sum of its component parts
replacement value
cost to acquire an essentially identical asset
Book value
difference between the original acquisition cost and the amount accumulated depreciation
2/3rds of start-ups are based on ___________
ideas from prior work experience
Buyouts - transfer of stock
is done at once, buyer keeps entity, owning assets and maintaining responsibility for liabilities
because
it can be very difficult to convince employees to adapt to new business methods, procedures, and processes that can provide increased profits
because
makes it easier to quickly move from task to task without allowing any task to ultimately go uncompleted -process can be overwhelming for inexperienced managers
Exisiting businesses and franchises exist because ____
of their success in providing proven products and services
Disadvantage
potential lawsuits may arise from previous ownership
Point of indifference
price at which a buyer is indifferent about buying or not buying the business
because
sellers are usually reluctant to tell you about problems the business has. Business owners are especially sensitive about discussing past disputes and lawsuits with vendors and customers
Copycat business provides __________
some protection from business failure as it makes it difficult to differentiate from others though
Assets
something that a business owns that is expected to have economic value in the future
Disadvantages of purchase an existing company #5
the business may be declining because of changes in technology
disadvantages of purchasing an exisiting company #6
the facitilies and equipment may be obsolete or in need of major repair
Disadvantages of purchasing an existing company #4
the reputation of the business may be a hinderance for future success
because
the seller will provide financing that makes it possible for you to buy the business
Caveat Emport
Latin for buyer beware -Must ask right questions to get right answers
Ex:
Making do with a old, but free laptop
Because...
Mentors help you avoid mistakes and make good business decisions
because
if the business is already successful, it has proven that there is a sufficient demand for its products and services to operate profitably
because..
you will immediately have cash inflows
Lean #3
Keep in touch -Be in close with your customer
Disadvantages of Start-Ups - #2
Will require significant time to become established and provide positive cash flows. -Established business or franchise already has built-in customers to provide immediate cash inflows
Spin off
a busienss that is created by separating part of an operating business into a separate entity
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.
because
this elimates the need to hire employees, find vendors, set up accounting systems and establish production processes
Start - Up
A new business that is started up from scratch
Increasing the Odds of Start-Up Success #12
Build trust in your "story"
Advantage of buying an existing company #1
Established customers provide immediate sales and cash inflows
Disadvantages of buying an existing company #1
Finding a succesful business for sale that is appropriate for your experience, skills, and education is difficult and time consuming
Chapter 6
Full Time Entrepreneurship
Increasing the Odds of Start-Up Success #7
Have experiencing managing small firms
Increasing the Odds of Start-Up Success #8
Have industry experience
Due diligence
process of investigating a business to determine its value
Because
Might be able to convinve suppliers, employees, customers that the business is now successful and will be in the future. Otherwise there will be no business
because
Most learners acquire expertise through a process of repitition
Disadvantages of Start-Ups - #1
There is no initial name recognition -Existing business or franchise has invested in developing its market and the brand rights can guarantee immediate acceptance of the business
Increasing the Odds of Start-Up Success #3
Have a detailed start up budget
Increasing the Odds of Start-Up Success #9
Have previous experiences in creating a start-up business
Ex:
Helps you know if your product or service is doing its job. Customers and their needs change so to keep up you need to keep in touch
Disadvantages of purchasing an existing company #2
It is very difficult to determine what a small business is worth
because
It provides a buffer for lots of mistakes
"LEAN" Entrepreneurial Methods
LEAN is a set of tried and true methods that can lessen the capital requirements and reduce financial risk of start up
Disadvantages of Start-Ups - #5
a start up may not have experienced managers or workers. -Established businesses and franchises provide experienced workforces, training, and management support
Lean #2
Create, standardize, and repeat
Disadvantages of purchasing an existing company #3
Existing managers and employees resist change
earnings multiple
ratio of the value of a firm to its annual earnings.
A purchased business or franchise requires _____ to meet ongoing obligations
immediate and constant cash flows
#2 Continues...There are no _____
"Legacy" locations, buildings, equipment, or software that can hamper activity
The vast majority of start-up businesses are _______
"Me-too" enterprises
Small Business Administration Stats
- 66% of new employers survice 2 or more years - 50% survive at least 4 years -40% survive more than 6 years
Buyouts
- accomplished through purchasing the ownership interest in the entity - does not include partnerships and sole proprietorships`
Determining the value of the business
- consult with your business, financial, and legal advisors to arrive at an estimate of the value of the business -discounted cash flow methodology is similar to having an annuity -asset valuation methods are based on the assumption that a business is worth the value of its assets minus the value of any liabilities
Buying an existing company
-2nd most common way to enter small business management
______ of startups that begin in business incubators are still in operation ____ years later
-87% -5 years
Advantages of start ups - #4
-Can be kept small deliberately to limite the magnitude of possible losses.
Advantages of start ups - #3
-Can provide new, unique products or services that are not available from existing businesses or franchises.
3 Methods used to estimate the value of a firm's assets
1. Book value 2. Net realizable value 3. Replacement value
4 basic ways a business may be bought
1. Buy out the seller's interest in the business 2. Buy in, by acquiring some, if not all of the ownership 3. Buy only the key assets of the business such as the inventory or equipment of the business 4. You may take over a public business by buying a controlling inerest of its stock
3 ways
1. Creating a spin-off 2. Going into competition with your current employer 3. Subcontracting services to an exisiting business
Five Paths to Business Ownership
1. Start a new business 2. Buy an exisiting business 3. Franchise a business 4. Inherite a business 5. Be hired to be the professional manager of a small business
When a business is acquired there is a clear order of steps to be followed
1. conduct interviews with sellers and customers 2. study financial reports 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. Negotitate an appropriate price for the busienss, based on the business plan projections 7. Negotiate an appropriate price for the business, based on the business plan projections 8. Obtain sufficient capital to purchase and operate the business
because
1. process of obtaining investment funds means that your business will be critically examined by outsiders who have not vested interest in your idea, project, or service 2. The fact that you are able to convince outsiders to invest in your busines indicates a level of belief in the business and you that provides legitimacy
Reasons to open low
1. want to make the purchase at the lowest price possible 2. recognize that the seller assumes than any opening offer is less than what you are actually willing to pay
becasue
Only through experience can you learn through a process of repitition
Increasing the Odds of Start-Up Success #4
Produce a product or service for which there is a proven demand
Because...
Produces a product/service for which there is a proven demand, the risk of product failure can be reduce
Because...
Provides a road map for necessary spending during the start up phase
Because....
Provides access to angel investors, public grants, and technology support. Provide legitimacy by furnishing the business with a location and with established business processes
Increasing the Odds of Start-Up Success #5
Secure outside investemnt
Finding a business to buy
Should have adequate financing available so you can continue operations and make the business grow.
Ex:
Some firms standardize their most imporant characteristics so customers get the same result wherever they buy, for example, in franchise restrataunt. -App that thousands of people can download at once
Increasing the Odds of Start-Up Success #1
Start the business in a businesss incubator
because...
provides business with more experience, skills, and resources
Advantages of buying an exisiting company #3
pruchasing a business often requires less cash outlay thatn does creating a start-up
Buy-In
purchase of substantially less than 100 percent of a business
Increasing the Odds of Start-Up Success #10
Choose a business that produces high margins
8 Steps
1. Decide what type of business you are interested in buying 2. Search the yellow pages and the internet to find business brokers active in your area 3.Search your local newspaper 4. Make al ist of businesses that seem to meet the requirements that you wrote down in step 1 5. Contact the busiensses that you have identified 6. Visit a business that is engaged in the industry you have identified as being right for you 7. Obtain sample copies of the industry journals 8. Make an appointment with a loan officer in the commercial loan department
Disadvantes of Start-Ups - #3
A start-up can be very difficult to finance -Established business or franchise already provide immediate assets, sales, and cash inflows that can be used to obtain financing for the business
Disadvantages of Start-Ups - #4
A start-up usually cannot easily gain revolving credit from suppliers and financial institutions. -An existing business or franchise often has lines of credit that transfer with the business
Problem with me-too businesses
Can be very difficult to differentiate from other similar businesses with location usually being the only competitive advantage
Advantages of buying an existing company #2
Business processes are already in place in an exisiting, operating business
Increasing the Odds of Start-Up Success #11
Start the business with established customers
Increasing the Odds of Start-Up Success #6
Start with more than one founder
Increasing the Odds of Start-Up Success #2
Take part in a mentoring program
Cash Flows
The actual receipt and spending of cash by a business
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
because
the value can never be known with certainty -must rely on analyses, comparisons, and estimates