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