Chapter 6: Small Business Entry: Paths to Full-Time Entrepreneurship

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

Advantages of start-ups

- begin with a clean slate - use the most up-to-date technologies - provide new, unique products or services - can be kept small deliberately to limit the magnitude of possible losses

Advantages of purchasing an existing business

- established customers - business processes are already in place - often requires less cash outlay

Disadvantages of purchasing an existing business

- finding a successful business for sale that is appropriate for you is difficult - existing employees may resist change - reputation may be a hindrance - facilities and equipment may be obsolete

Disadvantages of start-ups

- no initial name recognition - require significant time - very difficult to finance - cannot easily gain revolving credit - may not have experienced managers and workers

Five paths

1) you may start a new business 2) may buy an existing business 3) franchise a business 4) inherit a business 5) may be hired to be the prof manager of a small business

Steps to Follow When Acquiring a Business

1. conduct extensive interviews w the sellers of the business 2. study the financial reports and other records of the business 3. make a personal examination of site of business 4. interview customers and suppliers of the business 5. develop a detailed business plan for the acquisition 6. negotiate an appropriate price for the business, based upon the business plan projections 7. obtain sufficient capital to purchase and operate the business

Goals of due diligence

1. you are attempting to find any wrongdoing : fraud, misrepresentation, missing info 2. you are trying to find any inefficiencies, unnoticed opportunities, waste, and mismanagement

Discounted cash flows

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

Takeover

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

Asset

something the business owns that is expected to have economic value in future

Replacement value

the cost to acquire an essentially identical asset

Point of indifference

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

Business format franchising

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

Product distribution franchising

agreement that provides specific brand name products which are resold by the franchise in a specific territory

Trade name franchising

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

Intangibles

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

Buyout

purchase of substantially all of an existing business

Net realizable value

the amount for which an asset will sell, less the costs of selling

Book value

the difference between the original acquisition cost and the amount of accumulated depreciation

Buy-in

the purchase of substantially less than 100 percent of a business

Conversion franchising

agreement that provides an organization through which independent businesses may combine resources

caveat emptor

latin: let the buyer beware

due diligence

process of investigating a business to determine its value

Spin-off

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

Franchise

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

Start-Up

a new business that is started from scratch

Cash flows

the actual receipt and spending of cash by a business