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 You may start a new business You may buy an existing business You may franchise a business You may inherit a business You may be hired to be the professional manager of a small business 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  Franchise  A legal agreement that allows a business to be operated using the name and business procedures of another firm. 6-5 © 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. 6-6

Survival Rate of Start-up Businesses 6-7 Figure 6.1 © 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 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 6-8 © 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 6-9 © 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.

Starting a New Business  Cash flows  The actual receipt and spending of cash by a business.  Asset  Something the business owns that is expected to have economic value in the future © 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  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. © 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. 6-11

Top 12 Indicators of Start-up Success 6-12 Exhibit 6.1 © 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. 6-13

“LEAN” Entrepreneurial Methods Waste not, want not. Create, standardize, repeat. Keep in touch. © 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

Buying an Existing Business Advantages of purchasing an existing business  Established customers  Business processes are already in place  Often requires less cash outlay 6-15 © 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 6-16 © 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.

Finding a Business to Buy  First problem is finding a business for sale  Should be in an industry in which you have experience  Product or service that has demand and high margins  Adequate financing  Contact business brokers 6-17 © 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.

Steps to Follow When Acquiring a Business 1.Conduct extensive interviews with the sellers of the business. 2.Study the financial reports and other records of the business. 3.Make a personal examination of the site (or sites) of the business. 4.Interview customers and suppliers of the 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.

Steps to Follow When Acquiring a Business (cont.) 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 © 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 6-20 © 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.

Goals of Due Diligence 1.You are attempting to find any wrongdoing: (1) fraud, (2) misrepresentations of the sellers and (3) missing information 2.You are trying to find any inefficiencies, unnoticed opportunities, waste, and mismanagement © 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. 6-22

Determining 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  Book value  The difference between the original acquisition cost and the amount of accumulated depreciation. © 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. 6-23

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. 6-24

Determining the Value of the Business Comparable Sales Financial Ratios Industry Heuristics © 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. 6-25

Structuring the Deal  Point of indifference  The price at which a buyer is indifferent about buying or not buying the business.  Buy-in  The purchase of substantially less than 100 percent of a 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. 6-26

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. 6-27

Structuring the Deal 4 ways to buy  Buy out seller’s interest  Buy in  Buy key assets  Takeover 6-28 © 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.

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. 6-29

Franchising A Business  Conversion franchising  agreement that provides an organization through which independent businesses may combine resources © 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. 6-30

Franchising A Business  Business format franchising  agreement that provides a complete business format, including trade name, operational procedures, marketing and products or services to sell © 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. 6-31

Legal Considerations  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 © 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. 6-32

Inheriting a Business  Family Businesses Succession  Developing a Formal Management Structure  Succession Issues for the Founder  Succession Issues for the Successor  Ownership Transfer © 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. 6-33

Professional Management of Small Business  A professional manager of a small business is one who has the experience and skills to use a systematic approach to analyzing and solving business problems. © 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. 6-34