Entrepreneurship Exam 1: Small Business Entry - Paths to Full Time Entrepreneurship

Advantages of Franchising

-Less risky than starting a business -Proven successful business model -Receive training and support -Proprietary computer programs -Marketing, product placement, advertising, and promotion

Disadvantages of start-ups

-No initial name recognition -Require more resources -Subject to more mistakes than franchises -More difficult to finance -Generally higher risk -Cannot easily gain revolving credit -No experienced managers and workers

Asset

-Something business owns -Expected to have economic value in the future

Due Diligence

•Process of investigating a business to determine its value -Discover potential inefficiencies -Conduct extensive interviews -Study financial reports -Personal examination of site -Interview customers and suppliers -Detailed business plan

Determine Value of a Business (5 Methods)

1. Discounted Cash Flows 2. Book Value 3. Net realizable value 4. Replacement value 5. Earnings multiple avg.

5 Paths to Business Ownership

1. Start a new business 2. Buy and existing business 3. Franchise a business 4. Inherit a business 5. Be hired to be manager of a business w/ equity stake

Discounted Cash Flows

Cash flows reduced in value because they were received in future

Replacement Value

Cost to acquire an essentially identical asset

Trade Name Franchising

Franchisee only has rights to use franchisor's trade name/trademarks

Takeover

Seizing of control of a business by purchasing its stock and selecting board of directors

Cash Flows

-Actual receipt and spending of cash -Measurement of what resources you have immediate access to

Advantages of start-ups

-Begin w/ a clean slate -Autonomy to call your own shots -Provide new unique products/services -Use the latest technology -Can be kept small deliberately

Spin Off

-Business created by separating part of an operating business into a separate entity -It can create additional revenue opportunities -It can eliminate conflicts of interest -It can keep problems of one entity from taking down another

Revolving Credit

-Credit agreement -Borrower can pay all or part of balance at any time -As loan balance is paid off it becomes available to be borrowed again

Buying Existing Business (Advantages)

-Established customer base -Business processes in place -Often requires less cash outlay

Inheriting a Business

-Family owned businesses usually fail after death or retirement of founder -Less than 30% successfully transferred to second generation -Less than 13% succeed long enough to be inherited by the third generation

Buying Existing Business (Disadvantages)

-Finding successful business appropriate for you -Existing employees may resist change -Reputation -Facilities and equipment -Business you buy could be hiding problems from you

Disadvantages of Franchising

-Give up control of marketing and operations -Franchisor often sets policies -some franchises are greedy -Must buy inventory from specific vendors -Regularly inspected -Success determined by success of franchise

Key Legal Considerations in Franchising

-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

Net realizable value

Amount for which asses will sell, less selling cost

Book Value

Cost of the asset minus the accumulated depreciation of the assets involved in the business

Conversion Franchising

Organized so independent businesses may combine resources (Century 21)

Home Based Businesses

Plus: Cuts overhead costs Minus: Hurts legitimacy, work/life balance

Partnering

Plus: Reduce resource strain, leverage partner's talents Minus: Loss of control, increased opportunities for conflict

Point of Indifference

Price at which the buyer is indifferent about buying or not buying the business

Business Format Franchising

Provides complete business format (McDonald's)

Buy-In

Purchase of substantially less than 100% of a business

Earnings multiple/industry average

Ration of value of firm to annual earnings

Product Distribution Franchising

Specific brand name products resold by franchisee in territory (auto dealers)