Chapter 6 Paths to Full-Time Entrepreneurs

1. Chapter 6Paths to Full-Time Entrepreneurs Small Business Management 4660

2. 1. Five Paths to Business Ownership • Start a new business • Buy an existing business • Franchise a business • Inherit a business • Be hired to be the professional manager of a small business

3. Although paths vary - exact details vary from person to person. • May happen all at once or slowing evolve from the most part-time operation. E.g. Author, Trainer, Caterer • Start-ups may be deliberate and well planned or “just happen.” • E.g. Airasia, Youtube, Bihunsufi.com

5. 2. Rewards of Starting a New Business. • Developing a business from scratch, a start-up - most risky path - most likely to produce greatest rewards. • Success rates - much higher – mentor • E.g. Cradle, Micro Franchise, ActionCoach etc

6. Advantages of Start-Ups • Begins with a "clean slate." • Opportunity to use most up-to-date technologies. • Provide new, unique products or services - not available from existing business or franchises. • Can be deliberately kept small to limit the magnitude of possible losses.

7. Disadvantages of Start-Ups • No initial name recognition. • Requires significant time to become established - provide positive cash flows. • Can be very difficult to finance – no pre-existing assets to pledge. • Cannot easily gain revolving credit from suppliers and financial institutions. • May not have experienced managers and workers.

8. 2. Top 10 Indicators of Start-up Success • Prior experience by the founder - increases chances of success • Without experience - a number of ways to increase the chances of a successful start-up: • Take part in a mentoring program.

9. 2. Start a business in an incubator– provide financial, technical and managerial help and legitimacy to start-up businesses. E.g. Technology Park Malaysia 3. Have a detailed start-up budget – helps exactly what needs to be spent - where it will get the funding

10. 4. Produce a product or service for which - a proven demand. 5. Secure outside investment - provides legitimacy - some outside eyes to double-check the business plan.

11. 6. Start with > 1 founder - increases the synergy of business with new ideas - different strengths. 7. Have experience managing small firms. E.g. basic business functions. * An average entrepreneur has three start-up failures before a success – it’s a learning experience. 8. Have industryexperience.

12. 9. Choose a business - produces high margins -a nice buffer for possible errors. 10. Start a business with established customers. • Spin-off from current employer’s business. • Subcontract services to former employer or to other established businesses.

13. 3. Special Strategies from Scratch Four other strategies that can help “from scratch” start-up businesses. • Starting a home-basedbusiness - reduce cash flow requirements and expenses in the early stages of a start-up. 2. Partnering - reduces personal time and money investment - partner may provide skills and abilities you lack.

14. 3. Add individuals with special competencies as partner, stakeholders, employees or advisors; strengthen your weak area with their expertise. 4. If not directly competitive - current employermay be a source of support.

15. 4. Opportunities of Purchasing an Existing Business. • Advantages • Established customers - provides immediate sales and cash inflows. • Business processes - already in place in an existing business. • Often requires less cash outlay than does creating a start-up.

16. Disadvantages • Finding a successful business for sale - appropriate with experience, skills, and education is difficult and time-consuming. • Difficult to determine what a small business is worth. • Existing managers and employees may resist change.

17. Reputation - a hindrance to future success. • Business - declining due to changes in technology. • Facilities and equipment - obsolete or in need of major repair.

18. 5. Problems to Buy A Business • The more sources you consult - more likely to increase the chances of finding the right opportunity. • Brokers advertise and facilitate the sale of a business for a fee. • Networking by letting attorneys, accountants, insurance agents and other small business owners - can be effective.

19. Trade journals / magazine exist for nearly every industry and advertise businesses for sale. • Search the Internet. • Ask current employer; they network and may have heard of opportunities.

20. Once found - start due diligence. • Due diligence involves an exhaustive investigation – legitimate - suitable. • Caveat emptor* when it comes to purchasing a business. *A warning that notifies a buyer that the goods he or she is buying are "as is," or subject to all defects.

21. Once a business for sale has been found: • Conduct extensive interviews - sellers of the business. • Study financial reports and other records of the business. • Make a personal examination of the site (or sites).

22. Interview customers and suppliers. • Develop a detailed business plan for acquisition. • Negotiate an appropriate price for the business, based upon the business plan projections. • Obtain sufficient capital to purchase and operate the business.

23. Due diligence has two goals: 1. To find any wrongdoing: • Fraud committed by owners or managers; • Misrepresentationsof sellers (i.e improperly recognised revenues or expenses) and • Missing information (i.e pending or threatened litigation, technological obsolescence of equipment, processes, product or service, and unpaid taxes)

24. 2.To find any inefficiencies, unnoticed opportunities, waste and mismanagement. • Financial statements - examined first - readily available, familiar, accepted as representative of business and indicators of future business results. Why? Don’t ask, don’t tell.

25. The following should be examined: • Income statement - to confirm the amount of revenues and expenses. • Beware - income statements of small businesses - often misstated by charging personal expenses e.g. cars, club membership, travel) – to avoid taxes • Tend to overstate revenues and understate expenses – highest profits.

26. Balance sheet - to verify the assets and liabilities and their respective values. Most common problems include misstated values of intangibles (e.g. account receivable, licenses, patent), and undisclosed liabilities. • Borrowed money, outstanding accounts with the suppliers

27. The last five years’ income tax returns will confirm timing of cash inflows and outflows and profitability of the business. • Due diligence also examines the non-financial picture as well. • Why is the business for sale? • Who are the key employees?

28. What is the extent of obsolescence of equipment • What opportunities can the company reasonably expect to have in the future?

29. Revision