CH 6 MGMT 183 Small Business Management

Heuristic

rule of thumb

Advantages of start-ups

No existing rules Begin with a clean slate Opportunity to use the newest technologies Provide new, unique products or services Deliberately keep the business small Take time to perfect product, services, processes

Disadvantages of start-ups

No name recognition Requires significant time Can be difficult to finance Cannot easily gain revolving credit from suppliers and financial institutions May not have experienced managers and workers Training employees and obtaining management support

Workout

A form of business termination in which the firm's legal or financial obligations are not fully met at closing

Employee Stock Ownership Plan (ESOP)

A formalized legal method to transfer some or all of the ownership of a business to its employees

Serial entrepreneur

A person who opens multiple businesses throughout his or her career

Trade name franchise

An agreement that provides to the franchisee only the rights to use the franchisor's trade name and/or trademarks

Lean Business Practices

An application created by Eric Ries that addresses the specifics of new business creation, particularly Internet-based businesses, where rapid experimentation and constant monitoring of viewers' choices are possible.

Spin-off

A business that is created by separating part of an operating business into a separate entity

Synergy

A combination in which the whole is more than the sum of its parts

Discounted cash flows

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.

5 paths to business ownership

Start a completely new business Buy an existing business Franchise a business Inherit a business Work in a small business and eventually gain ownership

Increasing the Odds of Start-Up Success

Start the business in an accelerator Take part in a mentoring program Have a detailed start-up budget Produce a product or service for which there is a demand Secure outside investment Start with more than one founder Have experience managing small firms Have industry experience Have previous experience in creating a start-up business Choose a business that produces high margins Start the business with established customers Build trust in your story

Net realized 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

Pass off

A type of business transfer where the owner gives the business to someone else without payment

Sell-off

A type of business transfer where the seller gets only a fraction of the value of the business.

3 principles critical in the process of effectual reasoning

Affordable loss, strategic partnerships, leveraging of contingencies

Business format franchising

An agreement that provides a complete business format, including trade name, operational procedures, marketing, and products or services to sell

Conversion franchising

An agreement that provides an organization through which independent businesses may combine recourses.

Product distribution franchise

An agreement that provides specific brand-name products that are resold by the franchisee in a specified territory

Transfer

An endgame strategy in which ownership is moved from one person or group to another

Accelerator

An organization that supports start-ups, typically of a particular type with a financial investment, free or inexpensive office space, mentoring, a variety of free or low-cost support services, and other resources. The goal of an accelerator is to accelerate a start-up from its early stages to being ready to pitch for investment. Most accelerators take an equity stake in the companies they help

Intangibles

Assets, such as patents or trademarks, and liabilities, such as accounts payable, that have no physical existence

Walkaway

Business termination in which the entrepreneur ends the business with its obligations met.

Strategic partnerships

Formal or informal relationships with customers, vendors, or mentors to ensure the success of an entrepreneurial venture.

Point of indifference

Price at which a buyer is different about buying or not buying the business

Buyout

Purchase of substantially all of an existing business

Buy-in

Purchase of substantially less than 100% of a business

Takeover

Seizing of control of a business by purchasing its stock to be able to select the board of directors

Affordable loss

The minimum possible expenditure of capital and other resources in order to bring an entrepreneurial idea to market.

Leveraging contingencies

The practice of and ability to seize upon novel opportunities that become apparent during the conduct of business.

Bricolage

The process of analyzing the resources available and creating a product or service from them

Due diligence

The process of investigating a business to determine its value and potential for investment

Causal (predictive) reasoning

The process of setting a goal and then determining the strategy and resources required to attain the goal.

Earnings multiple

The ratio of the value of a firm to its annual earnings

Bootstrapping

Using low-cost or free techniques to minimize your cost of doing business.

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

Effectual Reasoning

A logical process in which one analyzes the resources available and restraints on the use of resources to create an attainable goal.

Start-up

A new business that is started from scratch