Entrepreneurship Exam 1: Small Business Entry - Paths to Full Time Entrepreneurship
Advantages of Franchising
-Less risky than starting a business -Proven successful business model -Receive training and support -Proprietary computer programs -Marketing, product placement, advertising, and promotion
Disadvantages of start-ups
-No initial name recognition -Require more resources -Subject to more mistakes than franchises -More difficult to finance -Generally higher risk -Cannot easily gain revolving credit -No experienced managers and workers
Asset
-Something business owns -Expected to have economic value in the future
Due Diligence
•Process of investigating a business to determine its value -Discover potential inefficiencies -Conduct extensive interviews -Study financial reports -Personal examination of site -Interview customers and suppliers -Detailed business plan
Determine Value of a Business (5 Methods)
1. Discounted Cash Flows 2. Book Value 3. Net realizable value 4. Replacement value 5. Earnings multiple avg.
5 Paths to Business Ownership
1. Start a new business 2. Buy and existing business 3. Franchise a business 4. Inherit a business 5. Be hired to be manager of a business w/ equity stake
Discounted Cash Flows
Cash flows reduced in value because they were received in future
Replacement Value
Cost to acquire an essentially identical asset
Trade Name Franchising
Franchisee only has rights to use franchisor's trade name/trademarks
Takeover
Seizing of control of a business by purchasing its stock and selecting board of directors
Cash Flows
-Actual receipt and spending of cash -Measurement of what resources you have immediate access to
Advantages of start-ups
-Begin w/ a clean slate -Autonomy to call your own shots -Provide new unique products/services -Use the latest technology -Can be kept small deliberately
Spin Off
-Business created by separating part of an operating business into a separate entity -It can create additional revenue opportunities -It can eliminate conflicts of interest -It can keep problems of one entity from taking down another
Revolving Credit
-Credit agreement -Borrower can pay all or part of balance at any time -As loan balance is paid off it becomes available to be borrowed again
Buying Existing Business (Advantages)
-Established customer base -Business processes in place -Often requires less cash outlay
Inheriting a Business
-Family owned businesses usually fail after death or retirement of founder -Less than 30% successfully transferred to second generation -Less than 13% succeed long enough to be inherited by the third generation
Buying Existing Business (Disadvantages)
-Finding successful business appropriate for you -Existing employees may resist change -Reputation -Facilities and equipment -Business you buy could be hiding problems from you
Disadvantages of Franchising
-Give up control of marketing and operations -Franchisor often sets policies -some franchises are greedy -Must buy inventory from specific vendors -Regularly inspected -Success determined by success of franchise
Key Legal Considerations in Franchising
-If and how you can transfer the franchise license to someone else -How you may terminate the contract -How the franchisor may terminate the contract -What disclosures you are required to make
Net realizable value
Amount for which asses will sell, less selling cost
Book Value
Cost of the asset minus the accumulated depreciation of the assets involved in the business
Conversion Franchising
Organized so independent businesses may combine resources (Century 21)
Home Based Businesses
Plus: Cuts overhead costs Minus: Hurts legitimacy, work/life balance
Partnering
Plus: Reduce resource strain, leverage partner's talents Minus: Loss of control, increased opportunities for conflict
Point of Indifference
Price at which the buyer is indifferent about buying or not buying the business
Business Format Franchising
Provides complete business format (McDonald's)
Buy-In
Purchase of substantially less than 100% of a business
Earnings multiple/industry average
Ration of value of firm to annual earnings
Product Distribution Franchising
Specific brand name products resold by franchisee in territory (auto dealers)