Oct 14 ecd lecture 6 starting the business(1)

ENTERPRISE CREATION & DEVELOPMENT

Lecture 6:

Starting the BusinessMr Nicholas Tan Tian Leng

([email protected])

Oct 14 ECD / ttl / Lecture 6

Lecture objectives• Pathways to new ventures for entrepreneurs

• Business structures

• Harvest strategies

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Recommended reading• Donald F. Kuratko ENTREPRENEURSHIP – THEORY,

PROCESS AND PRACTICE, 9th Edition, CENGAGE, Chp 8

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Pathways to new ventures for entrepreneurs

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(1) Bootstrapping

(2) Creating new ventures

(3) Acquiring existing

ventures

(4) Buying a franchise

(5) Establishing a social venture

(6) Taking over a family business

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(1) Bootstrapping• Some say bootstrapping means starting a new business

without financing.

• Look for the ‘low-hanging fruit’. Use a copycat idea. Find quick, break-even, cash-generating products.

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Bootstrapping• A means of starting a new venture through highly creative

acquisition and use of resources.

• Relies greatly on networks, trust, cooperation and wise use of existing resources.

• Having a healthy cash flow is critical to survival.

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Some ways to bootstrap a business• Buy on consignment

• Buy used equipment instead of

new

• Hire staff for shorter periods instead of

employing permanently

• Deliberately delay payment to suppliers

• Obtain loans from relatives and friends

• Work from home

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At the end of the month, I’ll

pay you for the goods that

were sold.

I misplaced your invoice...can you

mail it to me again?

(2) Creating new ventures

• New-new approach

o New products or services frequently enter the market • Eg smart phones, MP3 players, plasma TVs & GPS

o All these products are introduced as a result of R&D efforts by major corporations. However, unique ideas are not produced by only large companies.

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Creating new ventures

• New-new approach

o One way to discover new products is to make a list of annoying experiences or hazards encountered with various products or services.

o These are PITA products or ‘pain in the arse’ products

o Eg Facebook was founded by

Mark Zuckerberg, a Harvard University

student who was frustrated by a

lack of networking facilities

on campus

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Creating new ventures• New-new approach

o Eg ironing gloves for ironing sleeves & collars more easily

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Ironing glove

Creating new ventures• New-old approach

o Most small ventures do not start with a totally unique idea.

o Instead, an individual piggybacks on someone else’s idea by either improving aproduct or offering a service which is not currently available.

o Eg setting up restaurants, clothing stores in suburban areas that do not have an abundance of these stores.

o Risky because competitors can move in easily.

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(3) Acquiring existing ventures

Advantages

• 1) Since the business is already in operation, its successful future operation is likely

• 2) Time & effort associated with starting a new business are eliminated

• 3) Possible to buy an ongoing business at a bargain price

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Acquiring existing ventures

1) Less fear about successful future operation

• Existing business has demonstrated ability to attract customers, control costs & make a profit

• Also, many of the problems faced by a newly formed firm faces are side stepped.

Eg where should the company be located? How should it advertise?

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Acquiring existing ventures

2) Reduced time & effort

• An existing business already has assembled the inventory, equipment, personnel & facilities necessary to run it

• In many cases, this has taken the owners a long time to do

• In addition, owners have established relations with suppliers etc

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Acquiring existing ventures

3) A good price

• Owner may want to sell quickly because of a retirement decision, illness or to raise money for emergency purposes

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What to ask when buying a business venture?

• Why is the business being sold?

• What is the current physical condition of the business?

• What is the condition of the inventory and other assets?

• How many of the employees will remain?

• What type of competition does the business face?

• What does the firm’s financial picture look like?

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(4) Franchising

• Any arrangement in which the owner of a trademark, trade name or copyright has licensed others to use it in selling goods or services.

• Eg 7-11, Subway, McDonald’s

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Advantages of franchising

• Provided by the franchisorTraining & guidance

• Franchisor’s name is a drawing card Eg McDonald’s

Brand-name appeal

• Franchisor has already proven that the operation can be successful

A proven track record

• Franchisor may help the franchisee to secure financial assistance

Financial assistance

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Disadvantages of franchising

• The more successful the franchise, the greater the fee

Franchise fees

• Franchisor exercises control over the operation

Franchisor control

• Franchisor may overpromise & under deliver

Unfulfilled promises

• No specific franchising legislation in Singapore

Franchise law

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(5) Social venturing• Aka social enterprise

• Business-like organizations structured as a social-purpose business

• Double challenge of finding a strategy to accomplish social change & making profits

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(6) Family Business• Entrepreneurs can inherit from family members

• A powerful economic force (with right mix of entrepreneurial spirit & family cohesion) and rewarding way of life

• Can generate profit & at the same time, provide employment for children

• A substantial accomplishment for entrepreneur

• Eg Lee Kum Kee, Eu Yan Sang, Seng Choon Farm

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Business structures• In Singapore, you can choose to register any of the following:

o A sole-proprietorship

o A partnership

o A company

o A limited liability partnership (LLP)

o A limited partnership (LP)

IMPORTANT:

o http://www.enterpriseone.gov.sg/Business%20Stages/Start/Choosing%20A%20Business%20Structure.aspx

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Harvest Strategies• Component of the business plan where an entrepreneur

describes a method by which investors can realise a tangible return on their investment

“Build a great company but do not forget to harvest”

Keep harvest options open & think of harvesting as a vehicle for reducing risk & creating future

entrepreneurial choices & options.

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Sell business to another investor

Shares of the company are offered for sale in a public stock exchange

Withdrawal of owner’s investment in the form of cash, instead of reinvesting the firm’s cash to grow the business

Ways to harvest a business

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“Capital Cow”

Employees own a share of the company they work for

Outright Sale

Public Offering

Employee Stock Ownership Plan

Ways to harvest a business

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Employees own a share of the company they work for

Shares of the company are offered for sale in a public stock exchange