Management Chapter 10

Financing the New Business

Sources of New Business Financing: Personal Resources, Strategic Alliances, Lenders, Venture Capital Companies, Small-Business Investment Companies, SBA Financing Programs

Small Business

A business that is privately owned by one individual or a small group of individuals; it has sales and assets that are not large enough to influence its environment. In most industries the Small Business Admin. sets the employee threshold at < 500. For merchants it is usually < 100.

Small Business Failure Rates

About 30% of new businesses fail within the first year and 36% fail within their second Education and health services have the highest survival rates. Leisure and hospitality sectors (including restaurants) have the lowest. The failure rate of startup restaurants is reported to be between 81% and 90% Study by Restaurant Start & Growth Magazine puts the figure at 60%.

Advantages/Disadvantage of Financing

Advantages Reduced financial risk of new business success through experience provided by franchiser. Training, financial, and management support by franchiser.Disadvantages Start-up fees to purchase franchise. Limitations of franchise (market area, product, customers). Loss of independence due to imposed operational controls of franchiser.

Legal Issues

Advertising Law Employment & Labor Law Finance Law Intellectual Property Online Business Law Privacy Law Environmental Regulations Uniform Commercial Code Workplace Safety & Health

Strategy for Entrepreneurial Organizations

Basic Strategic Challenges: Choosing an industry in which to compete, Emphasizing distinctive competencies, Gaining first mover advantage

Writing a Business Plan

Business Plan is a document that summarizes the business strategy and structure. It should include: business goals and objectives. the reasons why they are believed to be attainable (SWOT). strategies used to achieve these goals and objectives. a plan of how the entrepreneur will implement these strategies.

Basic Business Plan

Cover sheet Executive summary (statement of the business purpose) Table of contents Body of the document Business (description, SWOT, etc...) Financial data (all accounting records) Supporting documents Tax returns of principals (partners in the business) for last three years, personal financial statements (all banks have these forms) Copy of franchise contract and all supporting documents provided by the franchisor (for franchise businesses) Copy of proposed lease or purchase agreement for space Copy of licenses and other legal documents Copy of resumes of all principals Copies of letters of intent from suppliers, etc.

Strategy for Entrepreneurial Organizations

Emphasizing Distinctive Competencies Identifying Niches in Established Markets Niches represent a market segment currently unexploited in a market where several large firms compete. A special area of demand for a product or service. Niches offer a competitive advantage to small businesses. Identifying New Markets Using the transfer of an existing product/service to explore a new market. Creating new industries/products/services.

Writing a Business Plan

Entrepreneurship and International Management Expansion and growth potential in foreign markets. Entering a foreign country's market can be an important catalyst for success. Many opportunities are created by E-commerce.

First Mover Advantages

First-Mover Advantage Exploiting an opportunity before any other firm does. Sources of First-Mover Advantage Technological leadership (learning curve) Preemption of scarce assets Switching costs and buyer choice under uncertainty Why first-mover advantage is not taken by larger firms: Decisions are slowed by organizational hierarchy. Size of the assets at risk makes large firms overly cautious.

First Mover Disadvantages

Free-rider effects (learn from first-mover) Resolution of technological or market uncertainty Shifts in technology or customer needs Incumbent inertia Increased risk of failure

Survival Rate by Sector (2005-2010)

Mining (51.3 percent) Manufacturing (48.4 percent) Services (47.6 percent) Wholesaling and agriculture (47.4 percent) Retailing (41.1 percent) Finance, insurance, and real estate (39.6 percent) Transportation, communications and utilities (39.4 percent) Construction (36.4 percent)

The Role of Entrepreneurship in Society

Most new businesses fail, those that survive often do so because the entrepreneur works for little income. More than 98% of U.S. businesses have fewer than 100 employees. Most U.S. workers work for small businesses (roughly 80%). The majority of small businesses are owner operated. Small business is a strong presence in both mature and emerging economies Small businesses have a strong effect on job creation, innovation, and are important to big businesses.

Small Business's Importance to Large Businesses

Most products made by large manufacturers are sold to customers by small businesses. Small businesses as suppliers provide large firms with essential services, supplies, and raw materials. Large businesses outsource many routine business operations such as packaging, delivery, and distribution to small businesses

Definitions of the financing of new businesses

Most small businesses fail due to undercapitalization! Personal Resources Using your own money and money borrowed from friends and relatives to finance the business [major source]. Strategic Alliances Partnering with established firms such as suppliers in a mutually beneficial relationship. Lenders Obtaining funding from traditional lenders (e.g., banks, independent investors, and government loans). Venture Capital Companies Groups of small investors who provide capital funds to small high-growth potential start-up firms in exchange for an equity position (stock/ownership) in the firms. Small-Business Investment Companies (SBICs) Investor-owned companies that borrow money from the SBA to loan to small business with high growth potential. Minority Enterprise Small-Business Investment Companies (MESBICs) specialize in financing businesses owned by minorities. SBA Financial Programs The Small Business Administration has several financing programs (e.g., SBA-guaranteed loans) for small businesses that are unable to obtain private financing at reasonable terms.

What is the fastest growing industry among small businesses?

Services

Entrepreneurship's Role in Society

Small Businesses' Role in Job Creation Create 80% of the new jobs in the U.S.* Dominate sectors that have added the most jobs. Represent 92% of all U.S. exporters. Innovation Major innovations are as likely to come from small businesses as from large firms. Much of what is created in the high-technology sectors comes from start-up companies.

Legal Business Structures

Sole Proprietorship - One individual or married couple in business alone. In this structure the owner(s) is personally liable for all debts incurred by the business, and may also be held liable in the event of lawsuits against the company arising from business situations. General Partnership - Composed of two or more persons. Each partner shares the profits, losses, and management of the business, and each partner is personally and equally liable for the debts of the partnership. Corporation - As a chartered legal entity, a corporation has certain rights, privileges, and liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial benefits, but these can offset by other considerations, such as increased licensing fees or decreased personal control. Must declare profit or non-profit Limited Liability Company (LLC) - An LLC is formed by one or more individuals or entities through a special written agreement. Owners are only liable for the amount of their investment.

Entrepreneur

Someone who engages in entrepreneurship

Seeking New Business Advice

Sources Of Management Advice: Advisory Boards, Management Consultants, Small Business Administration, Networking with others

Structure of Entrepreneurial Organizations

Starting the New Business Buying an Existing Business Business has a proven ability to draw customers and make a profit (the business is a going concern). Networks (e.g., customers and suppliers) are established. Negative: New owners inherit any existing problems. Starting from Scratch Avoids problems associated with previous owners. Freedom to choose suppliers, equipment, location, and workers. Negative: More business risk and uncertainty.

Franchising

The Franchising Agreement Governs the operation of a franchise business by the entrepreneur (the franchisee) under a license by a parent company (the franchiser). The entrepreneur pays the parent company for use of trademarks, products, formulas, and business plans.

The Performance of Entrepreneurial Organizations

The emergence of E-Commerce, Increases entrepreneurial opportunities for minorities and women, crossovers to small business by formal large business employees, better survival rates for small businesses

Entrepreneurship

The process of planning, organizing, operating, and assuming the risk of a business.