Entrepreneurial Alternatives

7/28/2019 Entrepreneurial Alternatives

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Entrepreneurial alternatives


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Starting a new venture


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Pro(s) and con(s) for setting up a new business

Except for a higher earning potential, starting a new enterprise

is usually also considered as a good route for 'living one's

pashions' and finding a meaningful job. Entrepreneurs also

highly value freedom to direct their career, i.e. 'being their own

boss', as well as being able to organize their own work andachieve more flexibility.

Potential disadvantages of the entrepreneurial career include:

feelings of instability and fear of future, possible failure of the

entrepreneurial venture, long working hours and the disturbedwork/life balance, as well as problems in growing and

developing a business.

Source: Babb, D. (2009): The Accidental Startup, Alpha/Penguin Group, New York

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Practical steps for setting up a new business (I)

Devising a realistic business idea/business model

Researching/evaluating the idea:

Analysis of the target market/customers

Analysis of the existing competitors

Other relevant market research

Performing financial calculations

Planning required office space, equipment, etc., as well as paid employees,

required services and other costs

Deciding on initial sources of financing

Putting together a formal business plan

Securing financing


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Practical steps for setting up a new business (II)

Developing a time management plan, which balances the

business-related obligations to other plans and duties

Developing the plan for transition from the current

employment to the full-time employment in the new venture

Deciding on the legal form of a new business and registering

the venture with the state/regional authorities (doing the 'red

tape')

Opening the business to the public


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Buying existing businesses and basics of their

evaluation


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Advantages of buying an existing business

Entrepreneur does not need to do everything by himself/herselfthe

business is already 'operational'.

There is no need to spend time and money in experimenting the

existing business incorporates a degree of experience of the previous

owners, who set up the initial rules, structures and systems. The existing business has a certain amount of goodwill, expressed

through its customer base, value of its brands and reputation in the

local community.

In general, risk for the entrepreneur acquiring the existingbusiness is lower than in the case of a start-up.

Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

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How to choose the industry/trading activity?

The business to be acquired needs to satisfy both the

entrepreneur's interests/entrepreneurial motives and

provide adequate financial rewards.

Ideally, the entrepreneur should have some previousknowledge of the industry, i.e. the product/type of service

provided by the acquired business, its customers,

suppliers, competitors and other key stakeholders in its

environment.


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How to find businesses offered for sale?

The classifieds in daily papers listing businesses for sale by owner

Financial press, trade shows & trade journals

On the internet:

Businessesforsale.com

Bizquest.com

Bizbuysell.com

Mergernetwork.com

Businessbroker.net

Google & other search engines

Professional brokers in your area


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Caveat emptor!

Why does the owner sell his/her business? Is this a 'caveat emptor'

(buyer beware!) situation? Talk to the customers, the local business

community, etc.

Is the success of the business connected tightly to the person of the

previous owner (his/her skills, social connections, etc.)? Are there any imminent threats to the business (from the changes

introduced by the government, big competitors, changes in the

customer base...)?

What is the 'financial health' of the business? How much investmentis required and what will be its impact to profitability?


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Fundamentals of business valuation (I)

Fundamental considerations:

What is the fair (market) value of the assets owned by the business?

If a business is sold below the fair (market) price of its assets, the

owner either quickly needs cash, or senses a problem in its future.

How much should the asset value be adjusted for the intangiblevalue of the business (goodwill value of its brands, customer base

and loyalty, intellectual property...)?

How much should the asset value be adjusted for the earning

potential of the business?


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Fundamentals of business valuation (II)

Approaches to valuation:

The price of a business equals the value of its assets, adjusted

for their changed market value, including the intangibles. (OR)

The price is established by looking into the Return OnInvestment (ROI), i.e. predicted net profit/sales price. Look for

businesses which will provide at least the average level of ROI

in the industry. (OR)

The price is established by multiplying the predicted annual

net profit by a predetermined number of years.


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Franchises


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Basic terms

Franchise a 'business system', including the business model, 'how-

to' produce and market a product/service, name/logo/marketing

approach, offered for sale to prospective entrepreneurs (i.e.

investors), who wish to replicate the way in which an existing

business already functions. Franchise usually includes both trainingand a systematic plan/consulting for developing a business.

Franchisora company offering the opportunity to buy the

'business system' and apply it in a certain geographical area/market

segment.

Franchisee

an entrepreneur who buys the franchise.


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(Dis)advantages of a franchise

The fundamental advantages are comparable to those of buying an

existing business, i.e. by acquiring a proven system and

training/advice from the franchisor, the entrepreneur's risk might be

significantly reduced.

At the other hand, the initial price and subsequent franchise fees,esp. for well-known brands, are usually quite high. The franchisee

needs to be sure that they justify the benefits received from the

franchisor.

Franchisor is always in charge over the franchisee: the franchisee

has to do the franchisor's way, as he/she is legally bound by the

franchising contract.


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How to choose the right franchise? (I)

Research the general conditions of a franchisor. (What kind of

investment is expected and is any financing available? What kind of

training and advice will be received? What fees will need to be

paid?)

Talk to other franchisees, to see whether the franchisor's systemworks for them and where the potential problems are.

See what kind of promises can be received in writing from the

franchisor.

Research the general reputation of the franchisor, includingclass-actions, lawsuits, government regulation, etc.


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How to choose the right franchise? (II)

Determine the investment and all fees (initial fee, annual royalties,

marketing fees...) required by the franchisor.

What is the degree of flexibility in your operations (or do you have

to follow the rules strictly)? Is there any flexibility in the contract

and what about its renewal? Take a look into the franchisor's research & development: you don't

want to be stuck in a business with obsolete products/services and

technology.

Talk to your lawyer, both about the 'prospectus'

the UniformFranchise Offering Circular, and your specific contract.


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Succession of a business


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Succession of a family business

Succession is a specific issue, related to family businesses,

which requires the transfer of assets and

managerial/entrepreneurial responsibilities to the new

generation of owners.

In practice, businesses have a limited lifespan. This also

applies to family businesses, which sometimes retain their

success in the second generation, but rarely do so in the third,

or even the fourth generation.

If a family business is to survive the succession and retain itsbusiness performance, the transition needs to be carefully

planned.

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Family business succession plan

Succession planning needs to be started well before the

retirement of the previous owner/entrepreneur, i.e. the actual

transition takes place. The plan needs to be openly discussed

and agreed with all the family members.

The actual successor(s) need to be agreed

both related to the

management and ownership of the family business. The other

family members should be compensated accordingly.

The succesor(s) have to be trained for their new role for an

adequate period of time (typically

several years) before theyassume ownership and responsibility for the family business.

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Stages of family business succession

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Stage IPre-Business Stage IIIntroductory

Entry of Successor

Child becomes aware of

facets of firm and/or

industry. Orientation of

child by family member

is informal.

Child is exposed to

business jargon,

employees, and the

business

environment.

Stage IIIIntroductoryFunctional

Child works as part-time

employee. Work

becomes more difficult.

Includes education and

work for other firms.

Stage IVFunctional

Potential successor begins

work as full-time employee.

Includes all nonmanagerial

positions..

Stage VAdvanced FunctionalPotential successor assumes

managerial position. Includes

all management positions prior

to becoming president..

Transfer of Leadership

Successor assumes presidency.Includes period in which thesuccessor becomes dejurehead

of company.

Stage VIIMature Succession

Successor becomes defacto

head of company.

Stage VIEarly Succession

Stage IPre-Business Stage IIIntroductory

Entry of Successor

Child becomes aware of

facets of firm and/or

industry. Orientation of

child by family member

is informal.

Child is exposed to

business jargon,

employees, and the

business

environment.

Stage IIIIntroductoryFunctional

Child works as part-time

employee. Work

becomes more difficult.

Includes education and

work for other firms.

Stage IVFunctional

Potential successor begins

work as full-time employee.

Includes all nonmanagerial

positions..

Stage VAdvanced FunctionalPotential successor assumes

managerial position. Includes

all management positions prior

to becoming president..

Transfer of Leadership

Successor assumes presidency.Includes period in which thesuccessor becomes dejurehead

of company.

Stage VIIMature Succession

Successor becomes defacto

head of company.

Stage VIEarly Succession

Source: Longenecker, J. G.;

Schoen, J. E. (1978):

Management Succession in the

Family Business, Journal of

Small Business Management,

Vol. 16, pp. 16.

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