ch 6- Small Business Entry: Paths to Entrepreneurship

minimum viable product

where you make a minimum product that can be sold. Developing a product at a minimum cost

book value

the original acquisition cost of the asset, minus all depreciation expense recognized to date

pass off

the owner gives the business to someone else without a payment

due diligence

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

buy-in

the purchase of substantially less than 100% of a business

lean business practices

systematically eliminating waste of time, materials, and money throughout a business

walkaway

the entrepreneur ends the business with its obligations met

causal or predictive reasoning

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

buyouts

the purchase of substantially all of an existing business

bootstrapping

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

point of indifference

the price at which a buyer is indifferent about buying or not buying the business

affordable loss

the practice of bring your product or service to market with the minimum expenditure of capital, effort, and time -attempt to sell a product to a customer before it is complete

takeover

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

Business format franchising

use trade names, operating methods, marketing plan, and national advertising. Franchisee pays an up-front fee and percentage of gross sales Ex: McDonald's

Increasing the odds of start-up success

"Start the business in a business incubator" is an example of...

leveraging contingencies

"recognizing and using opportunities"

True

(T/F) The "Lean Start-up" is an approach to entrepreneurship that emphasizes the importance of producing a "minimum viable product" and an iterative process of building a business.

1. Affordable loss 2. Strategic partnerships 3. leveraging contingencies

3 principles that are critical in the process of effectual reasoning

1. Trade name franchising 2. Product distribution franchising 3. Conversion franchising 4. Business format franchising

4 basic forms of franchising

1. Start a new business 2. Franchise a business 3. Inherit a business 4. Buy an existing business 5. Be a professional manager

5 general paths to full-time business

employee stock ownership plan (ESOP)

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

bankruptcy

A legal process to get out of debt when you can no longer make all your required payments

- You can do it your way - Begin on a clean slate - Opportunity to use most up-to-date technologies - New, unique products or services - Can deliberately keep the business small to limit financial losses - Take the time to perfect your product, services, and processes

Advantages of start-ups

- Established customers provide sales - Business procedures are in place - Requires less cash outlay, seller will often provide help

Advantages to buying an existing business

All of these

The five paths to business ownership include... -Franchise a business -Inherit a business -Buy an existing business -All of these

due diligence

The process of investigating a business to determine its value is known as...

non-value added

Things customers will not pay for are called "_____"

value added

Things people are willing to pay for are called "______"

product distribution

What form of franchising involves providing specific brand name products for the franchisee to resell within a specified territory?

business format

What form of franchising involves the right to use trade names, product specifications, operating methods, marketing plans, and national advertising?

heuristic

a commonsense rule; rule of thumb

franchising

a legal agreement that allows one business to be operated using the name and business procedures of another

effectual reasoning

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

serial entrepreneur

a person who opens multiple businesses throughout his or her career

transfer

an endgame strategy in which the owner closes down a business

intangibles

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

synergy

business results are greater than the sum of the input

workout

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

sell off

business transfer where the seller gets only a fraction of the value of the business

Discounted Cash Flows

cash flows that have been reduced in value because they are to be received in the future

spin off

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

net realizable value

estimate of the amount for which an asset would sell, less the costs of selling it

subcontracting services

ex: janitorial services, accounting, research etc. for your former employer

earnings multiple ratio

firm value divided by actual or expected annual earnings

start-up

new business started from scratch - 87% are still in operation 5 years later

3

on average, an entrepreneur suffers ___ start-up failures before achieving success

accelerator

organizations that provide financial, technical, and managerial help

1. Waste not, want not 2. Create, standardize, repeat 3. Keep in touch (with customers)

Both lean operations and bootstrapping are based on 3 ideas:

- No initial name recognition - Will take time to become establishes and provide positive cash flow - Can be difficult to finance- no assets (something the business owns that is expected to have economic value in the future) - Cannot easily gain revolving credit (allows the borrower to pay all or part of the balance at any time) - May not have experienced workers - Have to train employees and obtain management support

Disadvantages of start-ups

- Hard to find successful business for sale that is appropriate for you - hard to determine what a S.B. is worth - existing employees may resist change - reputation may be a hindrance to future success - may be declining because of changes in technology - may be in need of major repair

Disadvantages to buying an existing business

a balance sheet, an income statement, and a statement of cash flows

Financial statements should include:

bricolage

French word meaning "to putter around"- practice of making something from whatever you have at hand

1. Defects- resources used to inspect for and to repair defective products 2. Transport- moving parts that are not required 3. Overprocessing- performing work unnecessarily because of deficient processes 4. Inventory- excess materials, finished goods 5. Overproduction- making product in quantities that exceeds demand 6. Waiting- next step is not ready to begin 7. Motion- people or equipment moving when not necessary

7 sources of waste (seek to prevent)

strategic partnerships

formal or informal relationships with other businesses and individuals who can provide support to your efforts at getting into business for yourself

Conversion franchising

independent businesses may combine resources. Ex: Century 21 Real estate

founders

people who create or start new businesses

Product distribution franchising

provides franchisee with specific brand name products, resold by franchisee in a specified territory. Ex: snap-on tools in auto dealerships

trade name franchising

provides only the rights to use the franchisor's trade name and/or trademark. Ex: TrueValue hardware

replacement value

what an identical asset would cost to be acquired and readied for service

buy-in

when someone acquires only a part of the ownership of an existing business