Entrepreneurship Exam #2 Ch. 7-12

Pluses and Minuses of Advertising

*+*Raise customer awareness of a product. *+*Explain a product's comparative features and benefits. *+*Create associations between a product and a certain lifestyle. *-* Low credibility. *-*The possibility that a high percentage of people who see the ad will not be interested. *-*Message clutter. *-*Relative costliness compared to other forms of promotion. *-*Intrusiveness.

AdWords and Adsense

*AdWords*: Advertisers benefit because they are able to place their ads in front of people who are already searching for information about their product. (through google search_ *Adsense*: Allows advertisers to buy ads that will be shown on other Web sites instead of Google's home page.

In most states, there are three different categories of licenses and permits that you may need to operate a business

*Business Registration Requirements.* Some states require all new businesses to register with the state. *Sales Tax Permits*. Most states and communities require businesses that sell goods, and in some cases services, to collect sales tax and submit the tax to the proper state authorities. *Professional and Occupational Licenses and Permits.* In all states, there are laws that require people in certain professions to pass a state exam and maintain a professional license to conduct business. Examples includes barbers, nurses, and real estate agents.

Selling Direct Vs. Selling Through an Intermediary

*Selling Direct:*- Many firms sell direct to the customer, maintaining control of the distribution and sales process. *Selling Through an Intermediary*-Other firms sell through intermediaries and pass off their products to wholesalers who place them in retail outlets to be sold. (Producer -> Wholesaler -> Retailer -> Consumer)

establishing a brand

-A brand is the set of attributes—positive or negative—that people associate with a company. -These attributes can be positive, such as trustworthy, dependable, or easy to deal with. -Or they can be negative, such as cheap, unreliable, or difficult to deal with. -The customer loyalty a company creates through its brand is one of its most valuable assets. -A firm's name, logo, Web site design, Facebook page, and even its letterhead are part of its brand.

Forecasts

-Are an estimate of a firm's future income and expenses, based on past performance, its current circumstances, and its future plans. -New ventures typically base their forecasts on an estimate of sales and then on industry averages or the experiences of similar start-ups regarding the cost of goods sold and other expenses.

Advantages of Sole Proprietorship

-Creating one is easy and inexpensive. -The owner maintains complete control of the business and retains all of the profits. -Business losses can be deducted against the sole proprietor's other sources of income. -It is not subject to double taxation. -The business is easy to dissolve.

Advantages of General Partnership

-Creating one is relatively easy and inexpensive compared to a corporation or limited liability company. -The skills and abilities of more than one individual are available to the firm. -Having more than one owner may make it easier to raise funds. -Business losses can be deducted against the partners' other sources of income. -It is not subject to double taxation (explained later).

Ways Lenders and Investors Add Value to an Entrepreneurial Firm

-Help identify and recruit key management personnel. -Help the venture fine-tune its business model. -Provide introductions to additional sources of capital. -Provide insight into the markets that the new venture plans to enter. -Serve as a sounding board for new ideas. -Serve on the new venture's board of directors or board of advisors. -Recruit customers -Serve on the board of directors or board of advisors -Help to arrange business partnerships -Provide a sense of stability and calm

board of directors

-If a new venture organizes as a corporation, it is legally required to have a board of directors. -A board of directors is a panel of individuals who are elected by a corporation's shareholders to oversee the management of the firm. -A board is typically made up of both inside directors and outside directors, people inside and outside of the firm

Efficiency

-Is how productively a firm utilizes its assets relative to its revenue and its profits. Southwest Airlines, for example, uses its assets very productively. Its turnaround time, or the time its airplanes sit on the ground while they are being unloaded and reloaded, is the lowest in the airline industry.

Disadvantages of Sole Proprietorship

-Liability on the owner's part is unlimited. -The business relies on the skills and abilities of a single owner to be successful. -Of course, the owner can hire employees who have additional skills and abilities. -Raising capital can be difficult. -The business ends at the owner's death or loss of interest in the business. -The liquidity of the owner's investment is low.

Disadvantages of General Partnership

-Liability on the part of each general partner is unlimited. -The business relies on the skills and abilities of a fixed number of partners. Of course, the owners can hire employees who have additional skills and abilities. -Raising capital can be difficult. -Because decision making among the partners is shared, disagreements can occur. - The business ends with the death or withdrawal of one partner unless otherwise stated in the partnership agreement. -The liquidity of each partner's investment is low.

Common Mistakes Firms Make in Regard to Protecting Their Intellectual Property

-Not properly identifying all of their intellectual property. -Not fully recognizing the value of their intellectual property. -Not legally protecting the intellectual property that needs protecting. -Not using their intellectual property as part of their overall plan for success.

Size of the Founding Team

-Studies have shown that 50% to 70% of all new ventures are started by more than one individual. -Experts disagree about whether new ventures started by a team have an advantage over those started by a sole entrepreneur.

Disadvantages of Starting a Venture as a Team

-Team members may not get along. -If two or more people start a firm as "equals," conflicts can arise when the firm needs to establish a formal structure and designate one person as the CEO. -If the founders have similar areas of expertise, they may duplicate rather than complement one another. -Team members can easily disagree in terms of work habits, tolerances for risk, levels of passion for the business, ideas on how the business should be run, and similar key issues.

Advantages of Starting a Venture as a Team

-Teams bring more talent, resources, and ideas to a new venture. -Teams bring a broader and deeper network of social and professional contacts to a new business. -The psychological support that the cofounders of a business can offer one another can be an important element of a new venture's success.

Power of a Strong Brand

-Ultimately, a strong brand can be a very powerful asset for a firm. -Over 50% of consumers say that a known and trusted brand is a reason to buy a product. -A brand allows a company to charge a price for its products or services that is consistent with its image. -A successful brand can increase the market value of a company by 50% to 75%.

venture capital

-Venture capital firms fund very few entrepreneurial firms in comparison to business angels. -A distinct difference between angel investors and venture capital firms is that angels tend to invest earlier in the life of a company, whereas venture capitalists come in later.

The Importance of Intellectual Property

-any product of human intellect that is intangible but has value in the marketplace. Traditionally, businesses have thought of their physical assets, such as land, buildings, and equipment as the most important. Increasingly, however, a company's intellectual assets are the most important.

A strong ethical culture leads to

-better access to capital -improved brand reputation -improved employee commitment -improved customer loyalty -decreased vulnerability -potential avoidance of fines

Commercial Banks

-commercial banks have not been viewed as a practical source of financing for start-up firms. -banks are risk averse, and financing start-ups is a risky business.

Business Angels

-individuals who invest their personal capital directly in start-ups. -The number of angel investors in the U.S. has increased dramatically over the past decade, yet are difficult to find. -Are valuable because they are willing to make small investments ($10,000-$500,000) in companies that have the potential to grow between 30% to 40% per year.

profitability

-the ability to earn a profit. Many start-ups are not profitable during their first one to three years while they are training employees and building their brands. However, a firm must become profitable to remain viable and provide a return to its owners.

Key Elements of a Successful Founding Team

Heterogeneous rather than homogenous teams tend to be more effective.

Preferred Attributes of Sole Entrepreneurs and Members of a New-Venture Team

Higher Education Prior Entrepreneurial Experience Relevant Industry Experience Broad Social and Professional Network

When a business is launched, a form of legal entity must be chosen. The most common legal entities are...

Sole Proprietorship Partnership Corporation Limited Liability Company

Preparing to raise debt or equity financing

Step 1: Determine precisely how much money is needed Step 2: Determine the type of financing or funding that is the most appropriate Step 3: Develop a strategy for engaging potential investors or bankers

Statement of Cash Flows

Summarizes the changes in a firm's cash position for a specified period of time and details why the changes occurred.

SBIR and STTR Grants

The *Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR)* programs are two important sources of early-stage funding for technology firms. The SBIR Program is a competitive grant program that provides over $1 billion per year to small businesses in early-stage and development projects.

most legal disputes are the result of ______

misunderstandings, sloppiness, or a simple lack of knowledge of the law. Getting bogged down in legal disputes is something an entrepreneur should work hard to avoid.

C Corporation Advantages

Owners are liable only for the debts and obligations of the corporation up to the amount of their investment. The mechanics of raising capital is easier. No restrictions exist on the number of shareholders, which differs from subchapter S corporations. Stock is liquid if traded on a major stock exchange. The ability to share stock with employees through stock options or other incentive plans can be a powerful form of employee motivation.

Sources of Debt Financing

1. Commercial Banks 2. SBA Guaranteed Loans 3. Vendor Credit (when a vendor extends credit to a business in order to allow the business to buy its products and/or services up front but defer payment until later.) 4. Factoring (a financial transaction whereby a business sells its accounts receivable to a third party, called a factor, at a discount in exchange for cash.) 5. Merchant Cash Advice (Type of loan in which the lender provides a business a lump sum of money in exchange for a share of future sales that covers the payment plus fees) 6. Peer to Peer Lending

Sources of Personal Financing

1. Personal Funds 2. Friends and Family 3. Bootstrapping -used when there is high risk with uncertain return

Financial Objectives of a Firm

1. Profitability 2. Liquidity 3. Efficiency 4. Stability

Four key forms of intellectual property

1. patents 2. trademarks 3. copyrights 4. trade secrets

Process of Financial Management

1. preparation of historic financial statements 2. preparation of forecasts 3. preparation of pro forma financial statements 4. ongoing analysis of financial results

Items to Include in a Founders' Agreement

1.) nature of the prospective business 2.) identity and proposed titles of the founders 3.) legal form of business ownership 4.) apportionment of stock (or division of ownership) 5.) consideration paid for stock or ownership share of each of the founders 6.) identification of any intellectual property signed over to the business 7.) description of the initial operating capital 8.) buyback clause

Limited Liability Company Disadvantages

Setting up and maintaining one is more difficult and expensive. Tax accounting can be complicated. Some of the regulations governing LLCs vary by state. Because LLCs are a relatively new type of business entity, there is not as much legal precedent available for owners to anticipate how legal disputes might affect their business. Some states levy a franchise tax on LLCs—which is essentially a fee the LLC pays the state for the benefit of limited liability.

Determining What Intellectual Property to Legally Protect

1: Determine whether the intellectual property in question is directly related to the firm's competitive advantage. 2: Decide whether the intellectual property in question has value in the marketplace.

Roles of the Board of Directors

A board of directors has three formal responsibilities. -Appoint the officers of the firm. -Declare dividends. -Oversee the affairs of the corporation. -They also provide guidance and lend legitimacy. -Most boards of directors meet three to four times a year. -New ventures are more likely to pay their board members in company stock or ask them to serve on a voluntary basis rather than pay a cash honorarium.

Corporations

A corporation is a separate legal entity organized under the authority of a state. Corporations are organized as either C corporations or subchapter S corporations.

Guerilla Marketing

A low-budget approach to marketing that relies on ingenuity, cleverness, and surprise rather than traditional techniques.

sales forecast

A sales forecast is a projection of a firm's sales for a specified period (such as a year). It is the first forecast developed and is the basis for most of the other forecasts. A sales forecast for a new firm is based on a good-faith estimate of sales and on industry averages or the experiences of similar start-ups. A sales forecast for an existing firm is based on (1) its record of past sales, (2) its current production capacity and product demand, and (3) any factors that will affect its future product capacity and product demand.

Liquidity

Is a company's ability to meet its short-term financial obligations. Even if a firm is profitable, it is often a challenge to keep enough money in the bank to meet its routine obligations in a timely manner.

SBA Guaranteed Loans

Approximately 50% of the 9,000 banks in the U.S. participate in the SBA Guaranteed Loan Program. The loans are for small businesses that are not able to obtain credit elsewhere. The SBA can guarantee as much as 85% on loans up to $150,000 and 75% on loans over $150,000.

Budgets

Are itemized forecasts of a company's income, expenses, and capital needs and are also an important tool for financial planning and control.

pro forma financial statements

Are projections for future periods based on forecasts and are typically completed for two to three years in the future. Pro forma financial statements are strictly planning tools and are not required by the SEC.

When should an entrepreneur select an attorney when developing a business venture?

As early as possible

Why Most New Ventures Need Financing or Funding

Cash Flow Challenges Capital Investments Lengthy Product Development Cycles

S corporation

Combines the advantages of a partnership and a C corporation. Is similar to a partnership in that the income of the business is not subject to double taxation. Is similar to a corporation in that the owners are not subject to personal liability for the debts or behavior of the business. A Subchapter S Corporation does not pay taxes. Profits and losses are passed through to the tax returns of the owners.

Pricing

Cost-Based Pricing = The list price is determined by adding a markup percentage to a product's cost. Value-Based Pricing = The list price is determined by estimating what consumers are willing to pay for a product.

Financial Ratios

Depict relationships between items on a firm's financial statements. An analysis of its financial ratios helps a firm determine whether it is meeting its financial objectives and how it stacks up against industry peers.

viral marketing

Facilitates and encourages people to pass along a marketing message about a particular product or service.

Limited Liability Company (LLC)

Is a form of business ownership that is rapidly gaining popularity in the U.S. Along with the Subchapter S, it is a popular choice for start-up firms. The limited liability company combines the limited liability advantage of the corporation with the tax advantages of a partnership. A limited liability company does not pay taxes. Profits and losses are passed through to the tax returns of the owners.

C Corporation

Is a separate legal entity that, in the eyes of the law, is separate from its owners. In most cases a corporation shields its owners, who are called shareholders, from personal liability for the debts of the corporation. A corporation is governed by a board of directors, which is elected by the shareholders. A corporation is formed by filing articles of incorporation. A corporation is taxed as a separate legal entity.

Balance Sheet

Is a snapshot of a company's assets, liabilities, and owner's equity at a specific point in time.

New-Venture Team

Is the group of founders, key employees, and advisors that move a new venture from an idea to a fully functioning firm. Usually, the team doesn't come together all at once. Instead, it is built as the new firm can afford to hire additional personnel. The team also involves more than paid employees. Many firms have boards of directors, boards of advisors, and professionals on whom they rely for direction and advice.

Stability

Is the strength and vigor of the firm's overall financial posture. For a firm to be stable, it must not only earn a profit and remain liquid but also keep its debt in check.

non-disclosure agreement

It binds an employee or other party (such as a supplier) to not disclose a company's trade secrets.

Strategic Partners

Many partnerships are formed to share the costs of product or service development, to gain access to particular resources, or to facilitate speed to market. Older established firms benefit by partnering with young entrepreneurial firms by gaining access to their creative ideas and entrepreneurial spirit.

Equity Funding

Means exchanging partial ownership in a firm, usually in the form of stock, for funding. -used when there is high return

Limited Liability Company Advantages

Members are liable for the debts and obligations of the business only up to the amount of their investment. The number of shareholders is unlimited. An LLC can elect to be taxed as a sole proprietor, partnership, S corporation, or corporation, providing much flexibility. Because profits are taxed only at the shareholder level, there is no double taxation.

C Corporation Disadvantages

Setting up and maintaining one is more difficult than for a sole proprietorship or a partnership. Business losses cannot be deducted against the shareholder's other sources of income. Income is subject to double taxation, meaning that it is taxed at the corporate and the shareholder levels. Small shareholders typically have little voice in the management of the firm.

Public Relations

Public relations refer to efforts to establish and maintain a company's image with the public. The major difference between public relations and advertising is that public relations is not paid for—directly.

Taglines

clever phrases used at the end of an advertisement to summarize the ad's message. "Just Do It"

Reasons that Motivate Firms to Go Public

Reason 1: Is a way to raise equity capital to fund current and future operations. Reason 2: Raises a firm's public profile, making it easier to attract high-quality customers and business partners. Reason 3: Is a liquidity event that provides a means for a company's investors to recoup their investments. Reason 4: Creates a form of currency that can be used to grow the company via acquisitions.

Income Statement

Reflects the results of the operations of a firm over a specified period of time. It records all the revenues and expenses for the given period and shows whether the firm is making a profit or is experiencing a loss.

Creative Sources of Financing or Funding

crowdfunding, leasing, SBIR and STTR programs, other grant programs, strategic partners

Standards for a business to qualify as an S Corporation

The business cannot be a subsidiary of another corporation. The shareholders must be U.S. citizens. Partnerships and C corporations may not own shares in a subchapter S corporation. Certain types of trusts and estates are eligible to own shares in a subchapter S corporation. It can only have one class of stock issued and outstanding (either preferred stock or common stock). It can have no more than 100 members. Husbands and wives count as one member, even if they own separate shares of stock. All shareholders must agree to have the corporation formed as a subchapter S corporation.

Core Product vs. Actual Product

The core product is the product itself, while the actual product includes attributes that come with owning the product like quality level, features, design, packaging, and warranty.

On the local level, there are two categories of licenses and permits that may be needed.

The first is to operate a certain type of business. The second category is permits for engaging in certain types of activities.

Initial Public Offering (IPO)

The first public offering of a corporation's stock. An IPO is an important milestone for a firm. Typically, a firm is not able to go public until it has demonstrated that it is viable and has a bright future.

ratio analysis

The most practical way to interpret or make sense of a firm's historical financial statements is through ratio analysis, as shown in the next slide.

Sole Proprietorship

The simplest form of business entity is the sole proprietorship. -A business owned by one person

Importance of Financial Statements

To assess whether its financial objectives are being met, firms rely heavily on analysis of financial statements. A financial statement is a written report that quantitatively describes a firm's financial health. The income statement, the balance sheet, and the statement of cash flows are the financial statements entrepreneurs use most commonly.

Sweat Equity

Unpaid work, mental and physical, that a business owner puts into a business, increasing its value.

Segmentating the market

What groups of customers in my market are similar enough that the same product or service will appeal to all of them? Markets can be segmented in a number of different ways, including: - Product type. - Geography (city, state, region). - Demographic variables.

Establishing a Unique Position

What position will my firm occupy in the minds of my customers that will differentiate it from the competitors? -A firm establishes a unique position in its customers' minds by drawing attention to two or three of the product's attributes.

Selecting a Target Market

Which specific group of customers have I decided to target? -The market must be sufficiently attractive and the firm must have the capability to serve it. -By focusing on a clearly defined market, a firm can become an expert in that market and then be able to provide customers a high level of service.

Partnership

a business owned by two or more people. Partnerships are organized as either general or limited liability partnerships. General Partnership- two or more people run the company. The primary disadvantage is that all partners are liable for all the partnership's debts and obligations. Limited Partnership: -The major difference between the two is that a limited partnership includes two classes of owners: general partners and limited partners. -The general partners are liable for the debts and obligations of the partnership, but the limited partners are only liable up to the amount of their investment.

skills profile

a chart that depicts the most important skills that are needed and where skills gaps exist

Code of Conduct

a formal statement of an organization's values on certain ethical and social issues.

virtual assistant

a freelancer who provides administrative, technical, or creative assistance to clients remotely from a home office

percentage of sales method

a method for expressing each expense item as a percentage of sales

board of advisors

a panel of experts asked by a firm's management to provide counsel and advice on an ongoing basis. Unlike a board of directors, an advisory board possesses no legal responsibility for the firm and gives non-binding advice. An advisory board can be established for general purposes or can be set up to address a specific issue or need. Many people are more willing to serve on a company's board of advisors than its board of directors because it requires less time and there is no potential legal liability involved.

ethical dilemma

a situation that involves doing something that is beneficial to oneself or the organization, but may be unethical.

founders agreement

a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash or the "sweat equity" they put into the firm, and how long the founders will have to remain with the firm for their shares to fully vest

debt financing

arranging funding by borrowing money. -used when there is low risk with a more predictable return

Bootstrapping

finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost cutting, or any means necessary.

The first step toward prudent financial management is:

keeping good records.

Freelancer (or contractor)

person who is in business for themselves, works on their own time with their own tools and equipment, and performs services for a number of different clients

Alternatives for Raising Money for a New Venture

personal funds, equity capital, debt financing, creative sources

non-compete agreement

prevents an individual from competing against a former employer for a specific period of time.

The Four P's of Marketing for New Ventures

product, price, promotion, place

Financial management deals with two things:

raising money and managing a company's finances in a way that achieves the highest rate of return

liability of newness

the fact that new companies often falter because the people involved can't adjust fast enough to their new roles and because the firm lacks a track record of success

Crowdfunding

the practice of funding a project or new venture by raising monetary contributions from a large number of people (the "crowd") typically via the Internet. -There are *two types* of crowdfunding: *Rewards-based crowdfunding* allows entrepreneurs to raise money in exchange for some type of amenity or reward. (Kickstarter) *Equity-based crowdfunding* helps businesses raise money by tapping individuals who provide funding in exchange for equity in the business.

sources of equity funding

venture capital, business angels, initial public offerings