September 26, 2023

Describe the place of small business in history and explore the strengths and weaknesses of small business.

Please Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing is not allowed.

you must commit to the number of words needed.

Requirements: 1000-1100

College of Administrative and Financial Sciences

Assignment-1

MGT 402-Entrepreneurship and small business

Due Date: 14/10/2023 (End of Week-7) @ 23:59

For Instructor’s Use only

Instructions – PLEASE READ THEM CAREFULLY

The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.

Assignments submitted through email will not be accepted.

Students are advised to make their work clear and well presented; marks may be reduced for poor presentation. This includes filling your information on the cover page.

Students must mention question number clearly in their answer.

Late submission will NOT be accepted.

Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.

All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).

Submissions without this cover page will NOT be accepted

Place of Submission is Blackboard.

Weight 10 Marks

1. Describe the place of small business in history and explore the strengths and weaknesses of small business.

2. Design a solid projected financial plan and conduct a breakeven analysis for a small company.

3. Demonstrate the ability to deliver and communicate marketing massages in coherent and professional manner.

4. Illustrate the ability to think independently and systematically on developing a viable business model.

Assignment Workload:

This assignment is an individual assignment.

An entrepreneur Start-up

Business Plan

A business plan is any simple plan, not only limited to the business start-up plan that helps the management to understand the current situation of the enterprises (strengths, weakness, opportunities and threats) and look forward into the future. A start-up plan is a business plan which consists of the mission, vision, objectives and action plans for the future of the new enterprises while the business plan drawn during the operation of the firm is vital for running the firm effectively, acquire new customers, partners, loans and so on. According to Fiore (2005), a business plan involves two dimensions; an organizing tool to simplify and clarify your business goals and strategy, the second one is a selling document that sells the business idea and shows that a product or a service can make a profit and attract funding and company resources.

Imagine you started a new business as an entrepreneur in Saudi Arabia. Briefly mention the specific steps which you consider necessary to a successful business plan.

Please, think and share information on the following items:

Owners, capital structure and company profile (2 Marks)

a. Your Business Name, Address, E‐Mail

b. Form of ownership: What is the legal structure? Sole proprietor, Partnership, Corporation….

C. Investment capital

Company Business Description (300 – 400 words)

A. Scope and type of business (4 Marks)

What business will you be in? What will you do? What market segment will you choose?

• Business idea: what is your big idea? Is it a product or a service? What makes your idea different?

• Mission Statement

• Company’s short-term and long-term goals and objectives.

• Target market and demographics: Who will your customers be? Where do they live? What is your target market passionate about?

B. Business Philosophy (4 Marks)

What is important to you in your business?

• Describe your Industry: Is it a growth industry? What long-term or short-term changes do you foresee in the industry? How will your company take advantage of it?

• Describe your most important company strengths and core competencies: What factors will make the company succeed? What do you think your major competitive strengths will be? What background experience, skills, and strengths do you personally bring to this new venture?

• Risk Assessment: Evaluate the strengths and weaknesses of your business using SWOT.

•Who is your competition and how do you beat them?

Note: Use APA style of referencing

Answers:

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. In the U.S., entrepreneurs start more than 6.5 million businesses a year! Global Entrepreneurship Monitor (GEM) Approximately 13% of the U.S. population aged 18-64 is actively involved in entrepreneurial activity The global average is also 13% 1-3

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Entrepreneur: One who creates a new business in the face of risk and uncertainty for the purpose of achieving profit and growth by identifying opportunities and assembling the necessary resources to capitalize on them 1-5

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Characteristics of Entrepreneurs: Desire and willingness to take initiative Preference for moderate risk Confidence in their ability to succeed Self-reliance Perseverance Desire for immediate feedback 1-7

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. More Characteristics of Entrepreneurs: High level of energy Competitiveness Future orientation Serial entrepreneurs Skilled at organizing Value of achievement over money 1-8

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Conclusion? Diversity seems to be a central characteristic of entrepreneurs Anyone – regardless of age, race, gender, color, national origin, or any other characteristic – can become an entrepreneur (although not everyone should) Entrepreneurship is a skill that is learned 1-10

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Creativity vs. Innovation Creativity – the ability to develop new ideas and to discover new ways of looking at problems and opportunities Innovation – the ability to apply creative solutions to problems and opportunities to enhance or to enrich people’s lives 1-11

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Monitor Trends and Exploit Them Early On Independa Travel – and Be Inspired Eileen Fisher Take A Different Approach To An Existing Market I Do Now I Don’t Put a New Twist on an Old Idea Vitaband 1-12

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Look for Creative Ways to Use Existing Resources Dig This Realize That Others Have the Same Problem That You Do MileWise Take Time to Play Flash Pals Notice What Is Missing Viking Range Corporation 1-13

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The opportunity to: Gain control over your own destiny Make a difference Social entrepreneurs Reach your full potential Reap impressive profits Contribute to society and be recognized for your efforts Do what you enjoy doing 1-14

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Uncertainty of income Risk of losing your entire invested capital Long hours and hard work Lower quality of life until the business gets established High levels of stress Complete responsibility Discouragement 1-15

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Entrepreneurs as heroes Entrepreneurial education Demographic and economic factors Shift to a service economy Technological advancements Outsourcing Independent lifestyles E-Commerce, the Internet, and mobile computing International opportunities 1-16

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Young entrepreneurs Women entrepreneurs Minority enterprises Immigrant entrepreneurs Part-time entrepreneurs Home-based business owners 1-23

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 1-24 Rules for a Successful Home-Based Business Rule 1. Do your homework. Rule 2. Find out what your zoning restrictions are. Rule 3. Create distinct zones for your family and business dealings. Rule 4. Focus your home-based business idea. Rule 5. Discuss your business rules with your family. Rule 6. Select an appropriate business name. Rule 7. Buy the right equipment. Rule 8. Dress appropriately. Rule 9. Learn to deal with distractions. Rule 10. Realize that your phone can be your best friend—or your worst enemy.

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 1-25 Rules for a Successful Home-Based Business Rule 11. Be firm with friends and neighbors. Rule 12. Maximize your productivity. Rule 13. Create no-work time zones. Rule 14. Take advantage of tax breaks. Rule 15. Make sure you have adequate insurance coverage. Rule 16. Understand the special circumstances under which you can hire outside employees. Rule 17. Be prepared if your business requires clients to come to your home. Rule 18. Get a post office box. Rule 19. Network. Rule 20. Be proud of your home-based business.

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Small business: one that employs fewer than 100 people Small businesses: Comprise 99.7% of the 27.2 million businesses in the U.S. Employ 49.2% of the nation’s private sector workforce Pay 43% of the nation’s total private payroll Create more jobs than big businesses 1-29

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Small businesses: Are leaders in offering training and advancement opportunities to workers Provide 67% of workers with their first jobs Produce 46% of the nation’s private GDP Account for 47% of business sales Play a key role in innovation: Produce 16.5 times more patents per employee than large companies 1-31

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. About 52% of new companies fail within 5 years Entrepreneurs are not paralyzed by the prospect of failure Failure is a natural part of the creative process Successful entrepreneurs learn to fail intelligently 1-32

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Know your business in depth Prepare a business plan Manage financial resources Understand financial statements Learn to manage people effectively Set your business apart from the competition Maintain a positive attitude 1-34

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Creativity: the ability to develop new ideas and to discover new ways of looking at problems and opportunities Thinking new things Innovation: the ability to apply creative solutions to those problems and opportunities to enhance or to enrich people’s lives Doing new things Entrepreneurs succeed by thinking and doing new things or old things in new ways 3-3

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Intuit identified six enablers of small business innovation: 1.Passion 2.Customer connection 3.Agility and adaptation 4.Experimentation and improvisation 5.Resource limitations 6.Information sharing and collaboration 3-4

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Innovations can be: Reactive in response to customer feedback or changing market conditions Proactive in response to new opportunities on which to capitalize Revolutionary creating market-changing, disruptive breakthroughs that are the result of generating something from nothing Evolutionary, developing market-sustaining ideas that elaborate on existing products, processes, and services Putting old things together in new ways or from taking something away to create something simpler or better 3-5

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Entrepreneurs must go beyond relying in what has worked in the past Cast off limiting assumptions, beliefs, and behaviors Develop new insights Change perspectives Look at the world in new and different ways 3-6

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Can Creativity be Taught? Creativity is a skill Anyone can learn to be creative and to get better at it Need to understand creative thinking 3-8

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Each hemisphere of the brain processes information differently One side tends to be dominant The left brain handles language, logic, and symbols Thinking is narrowly focused and systematic The right brain handles emotional, intuitive, and spatial functions Thinking is unconventional, unsystematic, and unstructured 3-9

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Right brain, lateral thinking is at the heart of the creative process Individuals can learn to control which side of the brain is dominant in a given situation Can learn to ‘turn down’ the dominant left side and ‘turn up’ the right side Successful entrepreneurs need both left and ride side thinking The right side generates innovative ideas The left side judges market potential 3-10

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Mental locks that can limit individual creativity: 1.Searching for the one “right” answer 2.Focusing on “being logical” 3.Blindly following the rules 4.Constantly being practical 5.Viewing laughter and play as frivolous 6.Becoming overly specialized 7.Avoiding ambiguity 8.Fearing looking foolish 9.Fearing mistakes and failure 10.Believing that “I’m not creative” 3-11

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Enhancing Organizational Creativity 1.Include creativity as a core company value and make it an integral part of the company’s culture 2.Hire for creativity 3.Embrace diversity 4.Establish an organizational structure that nourishes creativity 5.Expect creativity 6.Expect failure and learn from it 7.Incorporate fun into the work environment 8.Encourage curiosity 9.Design a workspace that encourages creativity 3-12

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 10.View problems as opportunities 11.Provide creativity training 12.Provide support 13.Develop a procedure for capturing ideas 14.Talk with customers – or better yet, interact with them 15.Monitor emerging trends and identify ways your company can capitalize on them 16.Look for uses for your company’s products or services in other markets 17.Reward creativity 18.Model creativity 3-13

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Enhancing Individual Creativity 1.Allow yourself to be creative 2.Forget the “rules” 3.Give your mind fresh input everyday 4.Travel – and observe 5.Collaborate with other people 6.Observe the products and services of other companies, especially those in different markets 7.Recognize the creative power of mistakes and accidents 3-14

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 8.Be positive 9.Notice what is missing 10.Periodically ask yourself, “Am I asking the right question?” 11.Keep a journal handy to record your thoughts and ideas 12.Listen to other people 13.Get adequate sleep 14.Watch a movie 15.Talk to a child 3-15

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 16.Do something ordinary in an unusual way 17.Keep a toy box in your office 18.Take note of your ‘pain points’: do other people experience them as well? 19.Do not throw away seemingly ‘bad’ ideas 20.Read books on stimulating creativity or take a class on creativity 21.Take some time off 22.Be persistent 3-16

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Creative ideas are the result of seven step process: 1.Preparation 2.Investigation 3.Transformation 4.Incubation 5.Illumination 6.Verification 7.Implementation 3-17

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 1: Preparation Adopt the attitude of a lifelong student Read—a lot—and not just in your field of expertise Clip articles of interest to you and create a file for them Take time to discuss your ideas with other people, including those who know little about it as well as experts in the field Join professional or trade associations and attend their meetings Develop listening skills. Eliminate creative distractions 3-18

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 3: Transformation Two types of thinking: 1.Convergent thinking: the ability to see the similarities and the connections among various and often diverse data and events 2.Divergent thinking: the ability to see the differences among various data and events 3-22

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Transforming information into a purposeful idea: Evaluate the parts of the situation several times, trying to grasp the big picture Rearrange the elements of the situation Try using synectics (a term derived from the Greek words for “to bring together” and “diversity”),taking two seemingly nonsensical ideas and combining them Before locking into one particular approach to a situation, remember that several approaches might be successful 3-23

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 4: Incubation Ideas may require a gestation period Walk away from the situation Take the time to daydream Relax – and play – regularly Dream about the problem or opportunity Work on the problem or opportunity in a different environment 3-25

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 6: Verification Is it really a better solution to a particular problem or opportunity? Will it work? Is there a need for it? Is there a need for it? If so, what is the best application of this idea in the marketplace? 3-29

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Does this product or service idea fit into our core competencies? How much will it cost to produce or to provide? Can we sell it at a reasonable price that will produce adequate sales, profit, and return on investment for our business? 3-30

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. There is no one “best” form of ownership The best form of ownership depends on an entrepreneur’s particular situation The key to choosing a form of ownership is understanding how each form’s characteristics affect an entrepreneur’s specific business and personal circumstances 5-3

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Factors to consider: Tax considerations Liability exposure Start-up and future capital requirements Control Managerial ability Business goals Management succession plans Cost of formation Cost of maintaining 5-5

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Sole proprietorship: the simplest and most popular form of ownership The sole proprietor is the only owner and ultimate decision maker for the business 5-7

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Advantages of a Sole Proprietorship Simple to create Least costly form to establish Profit incentive Total decision-making authority No special legal restrictions Easy to discontinue 5-8

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Disadvantages of the Sole Proprietorship Unlimited personal liability Failure of the business can ruin a sole proprietor financially Limited access to capital Limited skills and abilities Feelings of isolation Lack of continuity for the business 5-9

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Partnership: an association of two or more people who co-own a business for the purpose of making a profit Take the time to create a written partnership agreement: a document that states all of the terms of operating the partnership for the protection of each partner involved Addresses in advance potential conflicts 5-10

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. A partnership agreement contains: 1.Name of the partnership 2.Purpose of the business 3.Location of the business 4.Duration of the partnership 5.Names of the partners and their legal addresses 6.Contributions of each partner to the business, at the creation of the business and later 7.Agreement on how the profits or losses will be distributed 8.Agreement on salaries or drawing rights against profits for each partner 5-11

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 9.Procedure for expansion through the addition of new partners 10.Distribution of the partnership’s assets if the partners voluntarily dissolve the partnership 11.Sale of the partnership interest 12.Absence or disability of one of the partners 13.Voting rights 14.Decision-making authority 15.Financial authority 16.Handing tax matters 17.Alterations or modifications of the partnership agreement 5-12

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The Uniform Partnership Act Uniform Partnership Act: codifies the body of law dealing with partnerships in the United States Three key elements: 1.Common ownership interest in a business 2.Sharing the business’s profits and losses 3.Right to participate in managing the partnership Partners must abide by: Duty of loyalty Duty of obedience Duty of care Duty to inform 5-13

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Advantages of the Partnership Easy to establish Complementary skills Division of profits Larger pool of capital Ability to attract limited partners Little government regulation Flexibility Taxation 5-14

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Disadvantages of the Partnership Unlimited liability of at least one partner Capital accumulation Difficulty in disposing of partnership interest Potential for personality and authority conflicts Partners are bound by the law of the agency 5-15

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Limited Partnerships Limited partnership: a partnership composed of at least one general partner and one or more limited partners The general partner in a limited partnership is treated exactly as in a general partnership The limited partner has limited liability and is treated as an investor in the business The limited partner does not take an active role in managing the business 5-16

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Limited Liability Partnerships Limited liability partnership: a partnership in which all partners in the business are limited partners, having only limited liability for the debts and obligations of the partnership Usually restricted to professionals – attorneys, physicians, dentists, accountants, etc. 5-17

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Corporation: an artificial legal entity created by the state that can sue or be sued in its own name, enter into and enforce contracts, hold the title to and transfer property, and be found civilly and criminally liable for violations of the law 5-18

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. C-corporations: creations of the state Domestic corporation: a corporation doing business in the state in which it is incorporated Foreign corporation: a corporation chartered in one state and doing business in another state Alien corporation: a corporation formed in another country but doing business in the United States 5-19

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Publicly held corporation: a corporation that has a large number of shareholders and whose stock usually is traded on one of the large stock exchanges Closely held corporation: a corporation in which shares are controlled by a relatively small number of people, often family members, relatives, or friends 5-20

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Requirements for incorporation: 1.The corporation’s name 2.The corporation’s statement of purpose 3.The company’s time horizon 4.Names and addresses of the incorporators 5.Place of business 6.Capital stock authorization 7.Capital required at the time of incorporation’ 8.Provision for preemptive rights, if any, that are granted to stockholders 5-21

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 9.Restrictions on transferring shares Treasury stock Right of first refusal 10.Names and addresses of the officers and directors of the corporation 11.Rules under which the corporation will operate Bylaws  Corporate charter: approved articles of incorporation 5-22

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Advantages of the Corporation Limited liability of stockholders Ability to attract capital Private placement Public offering Ability to continue indefinitely Transferable ownership 5-23

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Disadvantages of the Corporation Cost and time involved in the incorporation process Double taxation Potential for diminished managerial incentives Stock option Stock ownership plan Legal requirements and regulatory red tape Potential loss of control by the founders 5-24

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Professional Corporations Professional corporation: offers professionals such as lawyers, doctors, dentists, accountants, and others, the advantages of the corporate form of ownership 5-25

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. S corporation: a distinction that is made only for federal income tax purposes No different from any other corporation from a legal perspective For tax purposes, however, an S- corporation is taxed like a partnership, passing all of its profits (or losses) through to the individual shareholders To elect “S” status, all shareholders must consent, and the corporation must file with the IRS within the first 75 days of its tax year 5-26

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. S-corporations must meet the following criteria: Must be a U.S.-based corporation No nonresident alien shareholders Only one class of common stock No more than 100 shareholders (increased from 75) No more than 25% of corporate income from passive investment sources Corporations and partnerships cannot be shareholders 5-27

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Advantages of an S Corporation All of the advantages of a regular corporation Passes all of its profits or losses through to individual shareholders Income is only taxed once at the individual tax rate Avoids the double taxation disadvantage of the C corporation Avoids the tax C corporations pay on assets that have appreciated in value and are sold 5-28

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Disadvantages of an S Corporation Tax advantages may not be permanent When is an S Corporation a Wise Choice? Beneficial to start-up companies that anticipate net losses and to highly profitable firms with substantial dividends to pay to shareholders Also attractive to companies that plan to reinvest most of their earnings to finance growth 5-29

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Resembles an S-Corporation but is not subject to the same restrictions Two documents: Articles of organization Operating agreement 5-30

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. An LLC cannot have more than two of these four corporate characteristics: Limited liability Continuity of life Free transferability of interest Centralized management 5-31

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Nonprofit organizations Uses revenues to pursue social value rather than to create personal value for investors To form a non profit organization: File the certificate of incorporation Purpose clause Select individuals to serve on the board of directors Develop a mission statement Establish bylaws and board policies File require forms with the IRS Develop a fund-raising plan 5-32

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. For-Profit Social Venture Primary goal is creating social value, but financial viability is required Dual focus Double bottom line Are subject to market forces 5-33

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. New Forms of Social Ventures The low-profit limited liability company (L3C) is a cross between a nonprofit and a for-profit LLC Builds on the structure of the existing LLC; it provides the liability protection of a corporation, can sell shares of ownership, and is not tax exempt Formed to pursue a social mission Meant to integrate the best of both the nonprofit and the for-profit LLC by creating a market for investments in financially risky but socially beneficial activities 5-34

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Shoppers can now buy virtually every product or service imaginable through franchises More than 757,000 franchise outlets in the United States Employ almost 8.2 million people Generate $802 billion in annual economic output – adding $460 billion to the country’s GDP 6-3

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Franchising in Global Markets International Franchise Association survey: 61% percent of members operate in international markets 74% plan to accelerate global growth 32% of the units of the 200 largest U.S. franchisors are located outside the U.S. Hot markets: Brazil, Russia, India, China, and nations in the Middle East and North Africa 6-5

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Franchising: semi-independent business owners pay fees and royalties to a parent company in exchange for the right to sell its products and services under the franchiser’s trade name and often to use its business format and system Going into business for yourself, but not by yourself 6-6

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Three basic types: 1.Trade-name franchising 2.Product distribution franchising 3.Pure franchising (or comprehensive franchising or business format franchising 6-7

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Primary reason to buy a franchise is the mutual benefits to the franchisor and franchisee Franchisees are buying the franchiser’s experience Franchisees get a proven business system and avoid having to learn by trial-and-error Before buying, ask: “What can a franchise do for me that I cannot do for myself?” 6-8

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. What do you get when you buy a franchise? A business system Management training and support Brand name appeal Standardized quality of goods and services National advertising program Financial assistance Proven products and business formats Centralized buying power Site selection and territorial protection Increased chance for success 6-10

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. What are the drawbacks of a franchise? Franchise fees and ongoing royalties Strict adherence to standardized operations Restrictions on purchasing Limited product line Market saturation Limited freedom No guarantee of success 6-12

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Franchisors are required to file a Franchise Disclosure Document (FDD) Key tool for protection Franchisers must deliver a copy of a FDD before any offer or sale of a franchise The FTC requires that FDDs use ‘plain English’ 6-14

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The FDD contains information on 23 topics, including: Franchiser’s business experience Franchise fees and costs Lawsuits involving the franchiser Financial assistance available Territorial protection granted Restrictions on purchasing 6-15

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Preparation, common sense, and patience are vital ingredients in choosing the right franchise Evaluate yourself What do you like and dislike? Research the market Consider your franchise options Get a copy of the FDD and study it 6-16

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. What should you look for? A unique concept or marketing approach A profitable business model A solid brand name and a registered trademark A business system that works A solid training program Affordability A positive relationship with franchisees 6-17

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. A franchise contract summarizes the details that will govern the franchisor-franchisee relationship Outlines the rights and obligations of each party Often favors the franchisor FTC requires that franchisees receive a complete and revised contract at least 5 days before signing it 6-19

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 6-20 Pros Cons New Franchise Can be new and exciting Business concept can be fresh and different in the market Possibility of getting lower fees as a “pioneer” of the concept Potential for a high return on investment Business is not tested or established in the market Unknown brand and trademark Possibility that the concept is a fad with no staying power Franchiser may lack the experience to deliver valuable services to franchisees Established Franchise Business concept likely is well-known to consumers and market for the products or services is already established Franchiser has experience in delivering services to franchisees Franchiser has had time to work the “bugs” out of the business system High franchise fees and costs that often are non-negotiable Concept may be on the wane in the market Franchiser’s brand and trademark may remind customers of an outdated concept Franchiser’s “trade dress” may be in need of updating and redesigning

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Three terms responsible for most disputes: 1.Termination Franchisees are usually prohibited from terminating the agreement, but franchisors can terminate ‘with or without cause’ 2.Renewal Franchisors usually have the right to renew or refuse contract renewal 3.Transfer and buybacks Franchisees are usually not free to sell their business without approval 6-21

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Three major growth waves since the beginning of franchising 1.Early 1970s – fast food boom 2.Mid-1980s – shift to the service sector 3.Early 1990s – focus on specific market niches 6-22

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Changing face of franchisees Today’s franchisees are: More diverse Better educated More experienced More financially secure Multiple unit franchising Multiple-unit franchising is more efficient International opportunities Key to success: Adaptation 6-23

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Smaller, nontraditional locations Intercept marketing Conversion franchising Conversion franchising offers instant name recognition Refranchising Refranchising is reducing the number of company-owned stores 6-24

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Area development and master franchising Area development offers exclusive rights to an area Master franchises or subfranchises can be a good option in international markets Cobranding Cobranding or combination franchising involves teaming up with complementary products or services Serving dual-career couples and aging baby boomers 6-25

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Entrepreneurs can use franchising as a growth strategy To create a successful franchise operation you need: A unique concept A replicable concept An expansion plan To do due diligence Legal guidance Initial cost to launch a franchise business is $100,000 to $750,000 To provide support for franchisees 6-26

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Buying an existing business can help reduce risk for the entrepreneur But, take your time! Conduct a thorough analysis of the business and the opportunity it presents Important questions: Does the business meet your lifestyle and financial expectations? Do you have the ability to operate the business successfully? 7-3

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Advantages of Buying an Existing Business Business may continue to be successful Leverage the experience of the previous owner Owning a business guarantees a job The turnkey business Superior location Employees and suppliers in place Equipment installed with known production capacity Inventory in place Trade credit established Easier access to financing High value 7-4

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Disadvantages of Buying an Existing Business Cash requirements Business is losing money Paying for “ill will” Unsuitable employees Unsatisfactory location Obsolete or inefficient equipment and facilities Customers may be loyal to previous owner Change may be challenging to implement Obsolete inventory Value of accounts receivable Business is overpriced 7-5

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Four steps to conduct an effective search for the right business to buy: 1.Conduct a self-inventory 2.Develop a list of the key criteria that define the “ideal business” 3.Seek help to develop a list of potential candidates for acquisitions that meet your criteria 4.Investigate the potential acquisition targets that best meet your criteria 7-8

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 1.Self-Inventory Conducting a self-inventory beforehand will help the entrepreneur develop a list of criteria that a company must meet before it becomes a purchase candidate 7-9

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 3.Potential Candidates Begin the search using: The Internet Bankers Accountants Attorneys Investment bankers Trade associations Contacting owners Newspapers and trade journals Networking 7-11

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 4.Investigation Research the customer base Existing and potential customers Competitor analysis Direct competitors Level of competition Motivation of the seller Real reason for selling Review finances At least three years of performance 7-12

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The deal stage includes: Valuing the business Formalizing the financing of the purchase Negotiating details Letter of intent Due diligence 7-13

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Methods for Determining the Value of a Business Assessing tangible assets is usually straightforward Valuing intangible assets is difficult Goodwill No single best method for determining value Consider using several Deal must work for both parties 7-14

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Three basic techniques to determine value: 1.Balance Sheet Technique Variation: Adjusted Balance Sheet Technique 2.Earnings Approach Variation 1: Adjusted Earnings Approach Variation 2: Excess Earnings Approach Variation 3: Capitalized Earnings Approach Variation 4: Discounted Future Earnings Approach 3.Market Approach 7-16

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 1.Balance Sheet Technique Computes the book value of the company’s net worth or owners equity Book Value of Net Worth = Total Assets – Total Liabilities = $266,091 – $114,325 = $151,766 Variation: Adjusted Balance Sheet Technique Adjusted Net Worth = $279,738 – $114,325 = $165,413 7-17

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 2.Earnings approach Considers future income potential Variation 2: Excess earnings method Estimates goodwill 1.Compute adjusted tangible net worth 2.Calculate the opportunity cost of investing in the business 3.Project net earnings 4.Compute extra earning power 5.Estimate the value of intangibles 6.Determine the value of the business 7-19

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 2.Earnings approach Considers future income potential Variation 3: Capitalized earnings approach Divides estimated net earnings by the rate of return that reflects the risk level 7-20

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 2.Earnings approach Considers future income potential Variation 4: Discounted future earnings approach 1.Project earnings for five years into the future 2.Discount these future earnings using the appropriate present value factor 3.Estimate the growth stream beyond five years 4.Discount the income estimate beyond five years using the present value factor for the sixth year 5.Computer the total value of the business 7-21

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 3.Market approach Disadvantages: Necessary comparisons between publicly traded and privately owned companies Unrepresentative earnings estimates Finding similar companies for comparison Applying the after-tax earnings of a private company to determine its value 7-23

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The best method? There is no single best method The final price will be based on the valuation used and the negotiating skills of both parties 7-24

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Negotiating the Deal The structure of the deal – the terms and conditions of payment – is more important than the actual price the seller agrees to The ‘art of the deal’ Both parties need to work to achieve their goals, while making concessions to keep the negotiations alive 7-25

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Negotiating tips to help reach a mutually satisfying deal: 1.Establish the proper mindset 2.Know what you want to have when you walk away from the table 3.Develop a negotiating strategy 4.Recognize the other party’s needs 5.Be an empathetic listener 7-27

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 6.Avoid seeing the other side as “the enemy” 7.Educate, don’t intimidate 8.Be creative 9.Keep emotions in check 10.Be patient 11.Don’t become a victim 12.Remember that “no deal” is an option 7-28

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The Buyer’s Goals: Get the business at the lowest price possible Negotiate favorable payment terms, preferably over time Get assurances that he is buying the business he thinks it is Avoid enabling the seller to open a competing business Minimize the amount of cash paid up front. 7-29

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The Seller’s Goals: Get the highest price possible for the company Sever all responsibility for the company’s liabilities Avoid unreasonable contract terms that might limit future opportunities Maximize the cash from the deal Minimize the tax burden from the sale Make sure the buyer will make all future payments 7-30

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The structure of the deal Straight business sale Often the safest exit for an entrepreneur Usually the most expensive option Seller must be willing to finance part of the purchase price Use a two-step sale Business is purchased in two phases 7-31

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Letter of Intent A firm commitment by both sides that they are ready to move toward closing the sale Only 25% of deals make it from the letter of intent to the final closing 7-32

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The Due Diligence Process Involves investigating three critical areas of the business and the potential deal beyond those already evaluated earlier in the search and deal processes: 1.Confirming valuation: What is the real value of the business? 2.Legal issues: What legal aspects of the business are known or hidden risks? 3.Financial state: Is the business financially sound? 7-33

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 1.Confirming valuation Are the assets really useful, or are they obsolete? Will the assets require replacement soon? Do the assets operate efficiently? Book value is not the same as market value Other factors: Accounts receivable Lease arrangements Business records Intangible assets Location and appearance 7-34

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 2.Legal issues Liens Contract assignments Due-on-sale clauses Covenants not to compete Ongoing legal liabilities Physical premises Product liability claims Product liability lawsuits Labor relations 7-35

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 3.Financial state Income statement and balance sheet for at least three years Income tax return for at least three years Cash flow Be wary if the seller refuses to disclose financial records! 7-36

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Closing the sale of a business is a complex legal process Closing documents include: Asset purchase agreement Bill of sale Asset list Buyer’s disclosure statement Allocation of purchase price Non-compete agreement Consulting/Training agreement Transfer of subsidiaries associated with business 7-37

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Transfer of utilities Transfer of Web sites, social media addresses, and phone numbers Documentation of new entity that will own the business and documentation of new bank account for that business Transfer of merchant accounts Notice to creditors Lease assignments 7-38

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Financing documents, security agreement, promissory note, and UCC Financing Statement if seller is financing all or part of the sale Sales tax and payroll tax clearance Escrow instructions Closing adjustments/proration Transfer of any third party contracts Corporate resolution authorizing sale of the corporate assets 7-39

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. To smooth the transition, a buyer should: Concentrate on communicating with employees Be honest with employees Listen to employees Devote time to selling the vision for the company to key stakeholders Consider asking the seller to serve as a consultant until the transition is complete 7-40

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. The easiest part of launching a new business is coming up with the idea But, the great idea is just the start Planning for a new business requires: 1.Feasibility analysis: should we proceed with this idea? 2.Business model: how should we proceed with this idea? 3.Business plan: transforming the idea into a successful business 8-3

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. A feasibility analysis consists of four interrelated components: 1.An industry and market feasibility analysis 2.A product or service feasibility analysis 3.A financial feasibility analysis 4.An entrepreneur feasibility analysis 8-5

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Industry and Market Feasibility Analysis Two areas of focus: 1.Determining how attractive an industry is overall as a “home” for a new business 2.Identifying possible niches a small business can occupy profitably 8-7

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Begin with a broad look at the industry Use Porter’s five forces model Five forces interact with one another to determine the setting in which companies compete and, hence, the attractiveness of the industry: 1.Rivalry among competing firms 2.Bargaining power of suppliers 3.Bargaining power of buyers 4.Threat of new entrants 5.Threat of substitute products or services 8-8

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 1.Rivalry among companies competing in the industry Strongest of the five forces Industry is more attractive when: Number of competitors is large, or, at the other extreme, quite small Competitors are not similar in size or capacity Industry is growing fast Opportunity to sell a differentiated product or service exists 8-10

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 2.Bargaining power of suppliers to the industry The greater the leverage of suppliers, the less attractive the industry Industry is more attractive when: Many suppliers sell a commodity product Substitutes are available Switching costs are low Items account for a small portion of the cost of finished products 8-11

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 3.Bargaining power of buyers Highest when the number of customers is small and cost of switching to a competitor’s product is low Industry is more attractive when: Customers’ switching costs are high Number of buyers is large Customers want differentiated products Customers find it difficult to collect information for comparing suppliers Items account for a small portion of customers’ finished products 8-12

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 4.Threat of new entrants to the industry The larger the pool of potential new entrants, the less attractive the industry Industry is more attractive to new entrants when: Advantages of economies of scale are absent Capital requirements to enter are low Cost advantages are not related to company size Buyers are not loyal to existing brands Government does not restrict the entrance of new companies 8-13

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 5.Threat of substitute products or services Substitute products or services can turn an industry on its head Industry is more attractive to new entrants when: Quality substitutes are not readily available Prices of substitute products are not significantly lower than those of the industry’s products Buyers’ switching costs are high 8-14

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. A niche strategy can be a good way to enter a market, but carries some risks: Can require adaptability of initial plans Niches change Niches can go away Niches can grow 8-16

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 2.Product or Service Feasibility Analysis: Is There a Market? Determines the degree to which a product or service idea appeals to potential customers and identifies the resources necessary to produce it Two questions: Are customers willing to purchase our good or service? Can we provide the product or service to customers at a profit? 8-18

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Primary research: collect data firsthand and analyze it Customer surveys and questionnaires Focus groups Prototypes In-home trials “Windshield” research 8-19

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Secondary research: gather data that already has been compiled and analyze it Trade associations and business directories Industry databases Demographic data Forecasts Market research Articles Local data The Internet 8-20

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 3.Financial Feasibility Analysis: Is There Enough Margin? Capital requirements Must have an estimate of how much start-up capital is required to launch the business Bootstrapping Estimated earnings Forecasted income statements Time out of cash Surviving at current rate of negative cash flow Return on investment: How much investors can expect their investments to return 8-22

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 4.Entrepreneur Feasibility: Is This Idea Right for Me? Entrepreneurial readiness: knowledge, experiences, and skills necessary to have any chance of being successful 8-24

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Most entrepreneurs use a visual process such as whiteboarding when developing their business models Develop a business model canvas comprised of nine segments 8-25

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 1.Value Proposition Products and/or services offered to meet the needs of the customers 2.Customer Segments Narrowing the target market focuses resources on serving a specific group of customers 3.Customer Relationships How do customers want to interact with the business? 8-27

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 4.Channels Channels refer to both communication channels and distribution channels Define how the customers seek out information about this type of product 5.Key Activities Build a basic checklist of what needs to be done 6.Key resources Human, capital, and intellectual resources needed 8-28

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 7.Key partners Suppliers, outsourcing partners, and so on 8.Revenue streams How will the value proposition generate revenue? 9.Cost structure What are the fixed and variable costs necessary? 8-29

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Developing a business model is a four phase process: 1.Create an initial business model canvas 2.Test the problem that the entrepreneur thinks the business solves for the customer 3.Test the business model in the market Business prototyping Lean start-up Minimum viable product 4.Make changes and adjustments in the business pivots 8-30

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Business plan: a written summary of an entrepreneur’s proposed business venture, its operational and financial details, its marketing opportunities and strategy, and its managers’ skills and abilities Serves two functions: 1.Guides the company’s growth and development 2.Attracts lenders and investors 8-31

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Common elements of a business plan Title page and table of contents Executive summary Mission statement Company history Business and industry profile Business strategy Description of products/services Business and industry profile Goals and objectives 8-33

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Business strategy Competitor analysis Marketing strategy Showing customer interest Documenting market claims Target market Advertising and promotion Market size and trends Location Pricing Distribution 8-34

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Description of the management team Plan of operation Pro forma (projected) financial statements Forecasts should be realistic Include a statement of assumptions The loan or investment proposal Funding sources Repayment schedule Implementation timetable 8-35

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Visualizing a Venture’s Risks and Rewards A working business plan is used to guide the entrepreneur A presentation business plan is used to attract capital 8-37

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. An entrepreneur should: Make sure the plan has an attractive cover Rid your plan of all spelling and grammatical errors Make the plan visually appealing Include a table of contents to allow readers to navigate the plan easily Make it interesting! Use spreadsheets to generate financial forecasts Always include cash flow projections Keep your plan “crisp” – long enough, but not too long Tell the truth – always 8-38

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. A business plan presentation should cover five basic areas: 1.Your company and its product or services 2.The problem to be solved – use a compelling story 3.A description of your solution to the problem 4.Your company’s business model 5.Your company’s competitive edge 8-40

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. When making the presentation: 1.Prepare 2.Practice your delivery and then practice some more 3.Demonstrate enthusiasm about the business but don’t be overemotional 4.Focus on communicating the dynamic opportunity your idea offers and how you plan to capitalize on it 5.Hook investors quickly with an up-front explanation of the new venture, its opportunities, and the anticipated benefits to them 8-42

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 6.Use visual aids 7.Follow Guy Kawasaki’s 10/20/30 rule for PowerPoint presentations 8.Explain how your company’s products or services solve some problem and emphasize the factors that make your company unique 9.Offer proof 10.Hit the highlights 11.Keep the presentation “crisp” just like your business plan 8-43

Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 12.Avoid the use of technical terms 13.Remember to answer the question “What’s in it for me?” 14.Close by reinforcing the potential of the opportunity 15.Be prepared for questions 16.Anticipate the questions the audience is most likely to ask and prepare for them in advance 17.Be sensitive to the issues that are most important to lenders and investors by reading the pattern of their questions 18.Follow up with each potential investor 8-44

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Describe the place of small business in history and explore the strengths and weaknesses of small business.

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