Small Business Entry: Paths to Full-Time Entrepreneurship Chapter 6 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Learning Objectives LO1 Describe five ways that people get into small business management LO2 Compare the rewards with the pitfalls of starting a small business LO3 Compare the opportunities with the pitfalls of purchasing an existing business LO4 Explain four methods for purchasing an existing business 6-2 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Learning Objectives LO5 Compare the advantages with the disadvantages of buying a franchise LO6 Explain the issues of inheriting a family-owned business LO7 Describe how hired managers become owners of a small business 6-3 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The Five Paths to Business Ownership  Franchise  A legal agreement that allows a business to be operated using the name and business procedures of another firm. 6-4 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The Five Paths to Business Ownership  Start-up  A new business that is started from scratch.  Buyout  The purchase of substantially all of an existing business. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6-5

Starting a New Business 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 6-6 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Starting a New Business 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 6-7 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Increasing the Odds of Start-Up Success  Spin-off  A business that is created by separating part of an operating business into a separate entity. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6-8

Buying an Existing Business Advantages of purchasing an existing business  Established customers  Business processes are already in place  Often requires less cash outlay 6-9 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Buying an Existing Business 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 6-10 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Due Diligence  Due diligence  process of investigating a business to determine its value  Caveat emptor  Latin: let the buyer beware 6-11 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Due Diligence  Intangibles  Assets, such as patents or trademarks, and liabilities, such as accounts payable, that have no physical existence. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6-12

Determining the Value of the Business  Net realizable value  The amount for which an asset will sell, less the costs of selling.  Replacement value  The cost to acquire an essentially identical asset. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6-13

Structuring the Deal  Takeover  Seizing of control of a business by purchasing its stock to be able to select the board of directors. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6-14

Franchising A Business  Trade name franchising  agreement that provides to the franchisee only the rights to use the franchisor's trade name and/or trademarks  Product distribution franchising  agreement that provides specific brand name products which are resold by the franchisee in a specific territory © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6-15