Entrepreneurial Small Business 5th Edition Katz Solutions Manual 1

1
Entrepreneurial Small Business 5th

edition by Katz Green ISBN
1259573796 9781259573798
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CHAPTER 6: SMALL BUSINESS ENTRY: PATHS TO FULL-

TIME ENTREPRENEURSHIP
Chapter Summary
Similar to chapter 5 on part time entrepreneurship, this chapter discusses the paths to full
time entrepreneurship. The advantages and disadvantages of each path are discussed:
founding, purchasing, franchising, family business and moving from hired manager to
owner. Different methods of purchasing an existing business are also explored.
Learning Objectives
After studying this chapter, the student should be able to:
1. Explain he strategies for going into full time business.

2. Describe five ways that people get into small business management.
3. Compare the rewards with the pitfalls of starting a new business.
4. Compare the opportunities with the pitfalls of purchasing an existing business.
5. Explain four methods of purchasing an existing business.
6. Compare the advantages with disadvantages of buying a franchise.
7. Explain the issues of inheriting a family owned business.
8. Describe how hired managers become owners of small businesses.
© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
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forwarded, distributed, or posted on a website, in whole or part.
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9. Identify the choices for exiting a business.
Focus on Small Business:

TLC Remodeling LLC
Thomas Caldbeck had worked for several companies when one laid him off only to re-
employ him as a consultant. That taste of entrepreneurship led to several others and
Caldbeck discovered ways to circumvent changes in the economy.
Discussion Questions
1. In what ways if Tom’s story like that of a “typical” entrepreneur?
Many entrepreneurs become serial entrepreneurs, starting more than one

business over the life of their careers. When the economy or business
problems tried to swamp him, he persevered and found ways to work around
these difficulties.
2. What experiences Tom had in creating and growing his business would
be considered bootstrapping?
He did the work himself on converting his van and used “no cost” space such
as his garage and an unused bedroom. He uses low cost advertising in the
signs he puts in yards and on his truck.
3. If remodeling is such a pleasant and profitable business, why would Tom

(or anyone else) be conflicted about “walking away” from a failing
construction business?
One reason is that Tom had created that construction business – failing or not,
it’s his “baby.” Additionally, Tom’s experience has him reinventing himself
as things change. He may be reluctant to give up on something that was so
profitable, thinking he might need it again.
4. Suppose you are a consultant to small business. What advice would you
give Tim Caldbeck?
Advice will vary from the more optimistic “life’s too short; do what you now
like” to the more cautious “let the construction firm go dormant but hang onto
its assets just in case.”
Extended Chapter Outline

Note: Key terms are in boldface.
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Objective 1: Explain the strategies for going into business.
• Moving into full time business is sort of like taking a trip. Decide where you
want to go (the goal) and then how you will get there (the strategy).
o This form of planning is called causal or predictive reasoning.
• There is a second way: effectual reasoning. This starts with looking t the
resources and then figuring out what to do.
o All entrepreneurs have four sets of resources:
▪ Access to capital
▪ Their own skills and abilities
▪ Their own knowledge
▪ Their network of friends and business associates.
o There are three principles critical for this process:
▪ Affordable loss: bringing your product or service to market with
the minimum expenditure of capital effort and time.
▪ Strategic partnerships: intentional or chance
▪ Leveraging contingencies: seizing opportunities.
• Also important are bootstrapping, bricolage and lean business start-up.

o Bootstrapping methods are ways to provide no or extremely low costs
ways of getting things done.
o It is essentially important because many firms are faced with
undercapitalization
o Lean business practices are tried-and-true methods to lesson capital
requirements and are based on three underlying principles:
▪ Waste not, want not which includes not only not wasting but
borrowing rather than renting, making do with something older
rather than replacing and similar techniques.
▪ Create, standardize, repeat: anything that can be standardized,
bought in bulk, make use of forms and other ways not to reinvent
the wheel every time.
▪ Keep in touch: be close to your customer to solve problems, find
out what they really need/want and hear how their needs have
changed
o Bootstrapping ideas include:
▪ Do without as long as you can.
▪ Cut your personal and business expenses to the bone.
▪ If you need something, see if you can get it for free, or borrow it,
barter your time for it, or rent it before you buy it.
▪ If you need to buy outside services, consider offering equity
instead, but be stingy with this.
▪ Before you buy, see if you can substitute a lower cost alternative
(e.g. a printing calculator and lock box instead of a cash register).
▪ If you buy, buy used, or at a deep discount, and always ask if you
can stretch out your payments to minimize cash flow.
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▪If you need money, loan it to yourself first, then from family, then
friends, and after that, banks, credit card advances, and finally,
credit companies, in that order.
▪ If mortgage rates are low, consider first or second mortgages to put
money into the business, if you are comfortable risking your house.
▪ To minimize debt, use a cash card like American Express, which
requires repayment in 30 days, instead of a credit card.
▪ When you use a credit card, limit purchases, and keep your credit
balance as clear as possible.
▪ ALWAYS keep track of your cash.
o High quality free software for small businesses is available and using this
is a form of bootstrapping.
• Lean business practices:

o These are based on the fact that the customer is not willing to pay for
everything a company does – particularly, waste of any kind.
o They will pay for what they see as value-added.
o Lean businesses focus on quickly producing the minimum viable
product.
Teaching tip: Bring in one or two local entrepreneurs to discuss how they got into
business and some of the things they experienced during this start-up phase.
Objective 2: Describe five ways that people get into small business management.
• There are five major ways to get into small business management:
o You may start a new business.
o You may buy a new business.
o You may franchise a business.
o You may inherit a family business.
o You may be hired to be the professional manager of a small firm.
Teaching tool: Poll students to see what path they anticipate they will use (or did
use) to start their new businesses. Allow them to give more than one answer, as
they either may not know which path they’ll take or may have several ideas
brewing. Why did they select the ones they did? Did they consciously rule out the
other options or just didn’t consider them?
• Although the paths are established, the exact details vary from person to person.
o Start-ups may be deliberate and well planned or “just happen.”
o They may happen all at once or slowing evolve from the most part-time
operation.
o They may be totally do-it-yourself, or a prepackaged franchise or an
established business may be purchase or inherited.
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o One may get there by working up to professional management of a frim

and being part of a leveraged buy-out.
• Objective 2: Compare the rewards with the pitfalls of starting a new business
o Developing a business from scratch, a start-up, is the riskiest path and the
one most likely to produce the greatest rewards.
▪ Success rates for startups are much higher for those that begin in
business incubators.
Teaching tip: If there is a business incubator in the area, arrange a field trip so
students can experience first-hand what one can do for them. If a field trip is
impossible, have one of the incubator's founders or clients guest lecture.
▪ Actually, outside help of any kind – SBA, SCORE, this class –

increase the chance of survival.
o The advantages of start-ups include:

▪ A startup lets you “do it your way.”
▪ A startup begins with a "clean slate."
▪ A startup has the opportunity to use the most up-to-date
technologies.
▪ A startup can provide new, unique products or services that are not
available from existing business or franchises.
▪ A startup can be deliberately kept small to limit the magnitude of
possible losses.
▪ A startup lets you take time to perfect your product or service.
o On the other hand, disadvantages of a start up include:

▪ A startup business has no initial name recognition.
▪ A startup will require significant time to become established and
thus provide positive cash flows.
▪ A startup can be very difficult to finance because there are no pre-
existing assets to pledge.
▪ A startup usually cannot easily gain revolving credit from
suppliers and financial institutions.
▪ A startup may not have experienced managers and workers.
▪ A startup will need to train employees and get management
support.
Small Business Insight: Surviving a Startup
Josh Fraser and Rob Johnson created a successful land popular app called EventVue.
Well, it was successful and poplar with conference attendees but conference
organizers – the key byer – saw no financial advantage. By the time the owners tried
to revamp and reposition the app, they were out of money.
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o The idea for the new business is often to create something that already
exists.
▪ Imitative businesses offer some protection from business failure –
customers know what you are and already use your
products/services.
▪ Imitation business can be very hard to differentiate from existing
competition.
▪ Prior experience by the founder generally increases the chances of
success. The founder, in this case, generally discovers his/her
ideas through his work, hobbies or family.
▪ There are a number of ways to increase the odds of a successful
start-up:
• Start a business in an incubator. Incubators provide
financial, technical and managerial help and legitimacy to
startup businesses.
• Take part in a mentoring program.
• Have a detailed startup budget. This helps you know
exactly what you need to spend and where you’ll get
money needed.
• Produce a product or service for which there is a proven
demand.
• Secure outside investment. This gives you legitimacy and
also provides some outside eyes to double-check your
business plan.
• Start with more than one founder. This increases the
synergy of the business with new ideas and different
strengths.
• Have experience managing small firms. Remember
Chapter 3? One of the five competencies was knowledge
of basic business functions.
• Have industry experience. Again, chapter 3 discussed the
importance of industry specific knowledge. This also
assists in resource competencies.
• Have previous experience in creating a startup business.
An average entrepreneur has three startup failures before a
success – it’s a learning experience.
• Choose a business that produces high margins. This
provides a nice buffer for possible errors.
• Start a business with established customers.
o Spin-off from your current employer’s business.
o Go into competition with your employer
o Subcontract your services to your former employer
or to other established businesses
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• Build trust in your "story.” This may be one of the most

important – and most difficult tasks.
o Suppliers, employees and customer take risks in
dealing with startups. What if you aren’t here next
week?
o It is bit of a vicious cycle: you need suppliers,
employees and customers to build your operation
into one that is trustworthy, but suppliers,
employees and customers are reluctant to do
business with you.
o Review the legitimacy factors discussed earlier in
chapter 3.
• This list is not a guarantee; many businesses have been
successful with few or none of these characteristics while
others who have religiously followed the list have failed.
Teaching tool: if you have existing – or failed – entrepreneurs in the class, solicit
their stories. Which of these things did they try? How do they think some of these
ideas would have helped? Did they experience the legitimacy vicious cycle and
how did they cope?
Objective 4: Compare the opportunities with the pitfalls of purchasing an existing

business.
• Buying is the second most common way to enter small business management
• The advantages to buying include:

o Established customers provide immediate sales and cash inflows.
o Business processes are already in place in an existing, operating business.
o Purchasing a business often requires less cash outlay than does creating a
startup.
• Disadvantages to buying include:

o Finding a successful business for sale that is appropriate for your
experience, skills, and education is difficult and time-consuming.
o It is very difficult to determine what a small business is worth.
o Existing managers and employees may resist change.
o The reputation of the business may be a hindrance to future success.
o The business may be declining due to changes in technology.
o The facilities and equipment may be obsolete, or in need of major repair.
o The first problem is finding a business to buy.
Skill Module 6.1: Finding a Business for Sale
© This
2018 by McGraw-Hill
exercise leads Education. This is proprietary
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find a business foruse. Not
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o The more sources you consult, the more likely you are to increase your
chances of finding the right opportunity.
• Brokers advertise and facilitate the sale of a business for a fee.
They work for the buyer and the quality of their services can
greatly vary.
• Networking by letting attorneys, accountants, insurance agents and
other “in the know” people hear that you are looking to buy a
business can be effective.
• Trade journals exist for nearly every industry and advertise
businesses for sale.
• Search the internet.
• Ask your current employer; they network and may have heard of
opportunities.
• Once you have found the business you must start due diligence.
o Due diligence involves an exhaustive investigation to see if what you have
found is really suitable.
o Once a business for sale has been found the next steps are as follows:
• Conduct extensive interviews with the sellers of the business.
• Study the financial reports and other records of the business.
• Make a personal examination of the site (or sites) of the business.
• Interview customers and suppliers of the business.
• Develop a detailed business plan for the acquisition.
• Negotiate an appropriate price for the business, based upon the
business plan projections.
• Obtain sufficient capital to purchase and operate the business.
o In the US, it is really an environment of caveat emptor when it comes to
purchasing a business.
o Due diligence has two goals:
• First, you are trying to find any wrongdoing:
o Fraud committed by the owners or managers;
o Misrepresentations of the sellers, such as improperly
recognized revenues or expenses; and
o Missing information, including pending or threatened
litigation, technological obsolescence of equipment,
processes, product or service, and unpaid taxes.
• Secondly, you are trying to find any inefficiencies, unnoticed
opportunities, waste and mismanagement.
o Financial statements are usually what is examined first as they are readily
available, familiar, accepted as representative of the business and
indicators of future business results.
o The following should be examined:
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•
The income statement to confirm the amount and time of revenues
and expenses. Beware that income statements of small businesses
are often misstated by charging personal expenses to the business.
• The balance sheet to verify the assts and liabilities and their
respective values. Most common problems include misstated
values of intangibles and undisclosed liabilities.
o Due diligence also examines the non-financial picture as well. Why is the
business for sale? Who are the key employees?
• After due diligence, the business value must be determined. There are five major
methods of doing this:
o The discounted cash flows method is the most rigorous method and is
based on estimates of future cash outflows and inflows,
• Although rigorous, it is difficult to use, as making estimates is
problematic.
• The basic concept is that the longer you have to wait to receive
money, the less valuable it is right now.
• The primary disadvantage of this method is that it provides the
appearance of certainty.
o Asset valuation methodology is based that the business is worth the value
of its assets.
• One way of finding that value is looking at the book value of the
assets (purchase price less accumulated depreciation).
o One problem is that book value may not reflect the current
value of an asset.
o Depreciation is arbitrary and rarely transfers values at the
correct time.
o Many internally developed assets – patents, trade secrets –
do not have book value but may, in fact, be very valuable.
• Modified book value is the book value of the assets adjusted for
the three problems noted above.
• Other methods include estimating what an asset might sell for (net
realizable value) or determining what you would need to pay to
replace an asset (replacement value). Problems with this method
include:
o Not recognizing the synergy of these assets together.
o The difficulty and length of time needed to consider each
asset separately.
o Comparable sales method looks at the sales of other firms and uses this to
predict a value.
• One problem is that no two firms are exactly alike.
• A second problem is that there are often no recent sales of
businesses to use as a comparison.
o Financial ratios often get around the problems of comparable sales.
• One method is to use the earnings multiplier: the firm’s value
(the selling price) divided by actual or expected annual earnings.
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o This times the forecasted earnings gives an estimate of the

firm’s worth.
• Pre-tax Return on Assets (ROA) is calculated by dividing earnings
before taxes by asset value.
o This times pre-tax ROA estimates net asset value.
• Net Income to Equity is calculated by dividing income by owner’s
equity.
o Multiply your forecasted earnings by this to estimate firm
value.
• Net Income to (Equity + Debt) adds long term debt to the
denominator.
• Income capitalization is calculated by dividing projected net
income excluding depreciation, interest and owner draws by the
best return you could expect to obtain in other investments.
o The next method considered is the use of industry heuristics or rules of
thumb developed over time in a particular industry.
• This method can be extremely accurate.
• Heuristics for your industry are available usually from the
industry’s trade association.
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Objective 5: Explain four methods of purchasing an existing business.
• The highest price you are willing to pay is your point of indifference and is
important to establish before negotiations begin.
o Knowing your point of indifference will allow you to know when to break off
negotiations and go elsewhere.
o It will help you set your low opening bid.
• Besides price, you negotiate terms of sale included seller financing, non-compete
agreements and the like.
• There are four basic ways of buying a business:

o Buyouts can occur of all businesses except sole proprietorships and
partnerships. (For these two, it’s technically a “key resource acquisition” or
“bulk asset sale.”)
▪ This is a simple method; the owner simply transfers his stock to you.
▪ The business continues as an entity.
▪ However, all liabilities including potential lawsuits are also
transferred.
▪ A buyout may take place all at once or over a period of time.
▪ A special form of buyout, the employee buyout is generally through an
ESOP.
o In a buy-in, considerably less than 100% ownership is transferred.
▪ A buy-in allows the purchases to use and leverage inside knowledge.
▪ A buy-in keeps key employees.
▪ Technically, a buy-in to a sole proprietorship makes it a partnership.
▪ Keeping the prior manager and key employees may also be a
disadvantage.
o A key resource acquisition is the only buyout option for a sole proprietorship
or a partnership, but is also usable for other entities.
▪ The seller usually keeps the cash and receivables and retains
responsibility for some short-term liabilities.
▪ Assessing the value of intangible assets is a big problem.
▪ This method relieves the new owner of some of risk of potential
lawsuits stemming from actions before his ownership.
o Takeovers happen only with firms with freely transferable stock.
▪ During a takeover, the buyer acquires enough stock to gain control of
the firm’s board of directors.
▪ Takeovers are hostile events. “Raiders” often fire managers, sell off
assets or even liquidate the business.
Objective 6: Compare the advantages with the disadvantages of buying a franchise.
• Franchising is a legal agreement that allows one business to be operated using the
name and business procedures of another. The franchise is an agreement between
two entities:
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o The franchiser who sets conditions and standards and who grants operating
permission.
o The franchisee, who pays a fee for the rights, and who agrees to abide by the
conditions and standards.
• Four elements are essential for an agreement to constitute a franchise:

o The franchisee has the legal right to engage in the business.
o The agreement provides the franchisee a marketing plan or system from the
franchiser.
o The agreement includes the use of a brand name, trademark, service mark,
logo, etc.
o The franchisee pays a fee for these rights.
• The value of a franchise is determined by the potential cash flow to the franchisee and
the rights granted.
• There are four basic types of franchising:

o Trade name franchising which allows the franchiser to only use the name
and/or trademarks of the franchiser.
o Product distribution franchising provides specific products to be sold in a
specific territory.
o Conversion franchising is where individual businesses combine to create a
nation-wide brand name.
o Business format franchising includes a whole package – trade name, product
specifications, operating and selling methods, etc.
o In addition, master franchisees open multiple stores within a particular region
within a specific time period.
• Franchising has become the predominate method by which entrepreneurs open new
businesses.
o Franchises often offer a win-win for both franchiser and franchisee.
o Franchises offer quick start-ups for a reasonable cost and usually with less
risk.
Small Business Insight: Entrepreneur’s Top 500 Number One Franchise in 2016
James J. Liautaud (Jimmy John) was not exactly the best student in high school. His
father wanted him to join the Army after graduation, but he wanted to start a subway
sandwich business. He finally convinced his father to give him $25, 000 to try an if it
failed, he’d join the Army.
In 2016, Jimmy John’s was the number 1 franchise
• The advantages of franchising are:

o A proven successful business model.
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o A “turn-key” start up with site selection, construction, equipment acquisition

and installation and initial inventory provided.
o Often includes computer software for nearly all business applications.
• For this the franchisee must:

o Pay for all of this.
o Complete training.
o Take an active part in opening and managing the business.
• Finding a franchise to buy is easy; there are literally thousands from which to choose.
Teaching Tool: Log onto www.franchise.org and review the list of potential franchise
options out there. Select a few to explore a bit further. Have the class critique them.
Which ones would likely be good options in your community?
o After finding a franchise, perform due diligence just as if you were buying.
• Look for stability, integrity and financial performance.
• Make sure its good for you and not just the franchiser.
o Two legal documents to review are the Uniform Franchise Offering Circular
(UFOC) and the franchise agreement.
• The Federal Trade Commission Website can advise you on reviewing
the UFOC.
• Look for whether and how you can transfer the license and terminated
the contract.
• Look for how the franchisor may terminate the contract and what
disclosures you are required to make.
o Franchising has a history of fraudulent operations; there are now more laws,
but there are still loopholes and opportunities to be victimized.
Small Business Insight: When Your Franchiser Goes Broke
Burt Benepal was about to open his first Ground Round Grill and Bar restaurant when
he received the news that American Hospitality Concepts, the franchiser had just
declared bankruptcy. Many of the franchisors joined forces to form a co-op and
eventually bought out the firm. Benepal was able to open his initial restaurant and
several others.
While this is an extreme case, there are many other examples when being affiliated
with a franchise may be a detriment to your business.
Ask students to think of examples where the actions of one franchise member or the
parent company reflected poorly on the whole franchise. This includes even cases
when the franchise is later found to be not guilty, like the case of finding a part of a
finger in a bowl of Wendy’s chili.
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Objective 7: Explain the issues of inheriting a family owned business
• You may not be inheriting a business, but you hopefully will one day be leaving a
business for your heirs to inherit.
• Succession issues are one of the most difficult things in a family business.
o A formal management structure and a comprehensive business plan are the
first step.
▪ Recognize the strengths and weaknesses of the family members
staying in the business.
▪ Hire professional managers to handles the functions family members
cannot.
▪ Successors must be adequately trained.
▪ The founder and the successor must work closely together.
o The founder should be proactive in bringing in family members as soon as
possible.
▪ Work to build a respect of each other’s differences by:
• Being certain that all family members know and accept that
they are not forced to enter the management of the business.
• Providing all family members a chance to gain education and
experience outside the family business.
• Not assuming the leadership of the business must come from
within the family.
▪ Once a family member is in the business, provide opportunities for
growth.
▪ Founders must learn to let go.
▪ Set up family board meetings to improve communications.
▪ Write an explicit succession plan and seek buy in from all remaining
family members.
o The successor must work hard to gain the trust and support of the non-chosen
family members.
▪ The successor should be careful making changes to the balance
between making the business a monument to the founder and
instituting wholesale changes to make your mark.
▪ Ideally, the successor would have been brought in early and had plenty
of time to both learn the business and to gain trust and acceptance.
▪ The successor should master
• Technical knowledge about the firm
• Financial knowledge
• People skills
• Leadership skills
• Knowledge of his/her own limitations.
o The succession process should take place before the owner dies, usually in a
gradual transfer of ownership.
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o Make use of experts in the legal and accounting areas to alleviate potential
problems and make the transition smooth.
Objective 8: Describe how hired managers become owners of small businesses.
• As a small business grows, the day-to-day management becomes more than the
founder can handle by him/herself. At that point one of two things can happen:
o The business starts to decline.
o Professional managers are hired to share the load.
• A professional manager is simply not a degree or title, but someone with experience
and knowledge to adequately meet and beat business challenges.
o You may find them through networking.
o You may find them working for your vendors or customers.
o With any luck, they are already working for you and can take on the
additional responsibility.
• Employee managers of small firms are often entrepreneur want-to-be’s.

o Professional management allows a potential entrepreneur to get into small
business with less risk and cost than some of the others.
o Sometimes they will become owners – of their own firms or of yours –
through the same paths discussed for other entrepreneurs - buying,
franchising, or founding
Objective 8: Identify the choices for exiting a business.
• There are many more ways to end a business than to start one. Succession is just one
way of transferring or terminating a business.
o In a sell-off, assets of the business are sold to another business with the
proceeds paying off any outstanding debts and perhaps leaving the owner
some small profit.
o In a pass-off, the owner gives the firm to someone as a gift without
compensation.
o In a walkaway the firm closes down with all debts paid.
o In a workout, the owner arranges to pay off all debts, often doing this after
the business is officially closed.
o The final termination form is a bankruptcy; it requires legal assistance to
handle correctly. (more in Chapter 13 and 14)
• Harvesting is usually a positive experience:

o Nearly half will be made richer through sale and succession.
o Many will be ready to start their next firm and becomes serial entrepreneurs
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Key Terms
Affordable loss: the minimum possible expenditure of capital and other resources in
order to bring an entrepreneurial idea to market.
Asset: something the business owns that is expected to have economic value in the
future.
Bankruptcy: an extreme form of business termination which uses a legal method for
closing a business and paying off creditors when debts are substantially greater than
assets
BASIC: an acronym for Beginner’s All-purpose Symbolic Instruction Code.
Book value: the difference between original acquisition cost and the amount of
accumulated depreciation.
Bootstrapping: using low-cost or free techniques to minimize your cost of doing

business.
Bricolage: a word derived from the French verb bricoler (“to tinker”). In
entrepreneurial usage, bricolage refers to the process of analyzing the resources available
and creating a product or service from them.
Business format franchising: an agreement that provides a complete business format,

including trade name, operational procedures, marketing and products of services to sell.
Buy-in: a purchase of substantially less than 100% of a business.
Buyout: purchasing substantially all of an existing business.
Causal or predictive reasoning: the process of setting a goal and then determining the
strategy and resources required to attain the goal.
Caveat emptor: Latin: let the buyer beware.
Conversion franchising: An agreement that provides an organization through which

individual businesses combine resources.
Discounted cash flows: cash flows that have been reduced in value because they are to
be received in the future.
Due diligence: the process of investigating a business to determine its value.
Earnings multiple: the ratio of the value of a firm to its annual earnings.
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Effectual reasoning: a logical process in which one analyzes the resources available
and restraints on the use of resources to create an attainable goal.
ESOP: Employee Stock Option Plan a method for employees to purchase the business
for which they work.
Founder: people who create or start a new business.
Franchise: a legal agreement that allows a business to be operated using the name and
business procedures of another firm.
Heuristics: a common sense rule; a rule of thumb.
Intangibles: things of value that have no physical existence, for example patents and
trade secrets.
Lean business start-up: an application of lean business practices created by Eric Ries
that addresses the specifics of new business creation, particularly Internet-based
businesses, where rapid experimentation and constant monitoring of viewers’ choices are
possible.
Leveraging contingencies: the practice of and ability to seize upon novel opportunities
that become apparent during the conduct of business.
Minimum viable product: a concept central to lean start-up where you make a
minimum product, but one that can be sold. By selling to customers and collecting
feedback, an entrepreneur can develop a product at minimum cost.
Net realizable value: The amount for which an asset will sell less the costs of selling.
Pass off: a type of business transfer where the owner gives the business to someone else
without payment. This is most often done to maintain employment for the staff and
service for the customers, but the business not profitable enough to give the original
owner any revenue.
Point of indifference: the price at which a buyer is indifferent between buying and not
buying the business.
Product distribution franchising: an agreement that provides specific brand named

products which are resold by the franchisee in a specified territory.
Replacement value: the cost to acquire an essentially identical asset.
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.
18
Sell-off: a type of business transfer where the seller gets only a fraction of the value of
the business. This is most often done to maintain employment for the staff and service
for the customers, but the business can generate only a small amount of profit with which
the original owner can be paid, or the new owner does not have much money to buy the
business.
Serial entrepreneur: a person who opens multiple businesses throughout his or her
career.
Spin-off: a business that is created by separating part of an operating business into a

separate entity.
Start-up: a new business that is started from scratch.
Synergy: a combination where the whole is greater than the sum of its component parts.
Strategic partnerships: formal or informal relationships with customers, vendors, or

mentors to ensure the success f an entrepreneurial venture.
Takeover: seizing control of a business by purchasing its stock to be able to select the
board of directors.
Termination: an endgame strategy where the owner closes down a business.
Trade name franchising: an agreement that provides only the rights to use the
franchisor’s trade name and or trade marks.
Transfer: an endgame strategy where ownership is moved from one person or group to
another.
Walkaways: business terminations where the entrepreneur ends the business with its
obligations met.
Workout: a form of business termination where the firm’s legal or financial obligations
are not fully met at closing.
Discussion Questions
NOTE: many questions allow for a number of different answers. Below are some
suggestions
1. What is the best way to get into business? Why do you think so?
There is no "right" answer to this question. Students may individually prefer any
of the five paths discussed in the chapter. The important issues to discuss are the
19
relative advantages and disadvantages of each:
You may start a new business.

Advantages:
• You start with a clean slate-- no employee problems, debts, lawsuits,
contracts, or other legal commitments.
• You may employ entirely new technologies because you have no legacy
such as locations, buildings, equipment, or software.
• You may create an entirely new product or service.
• You have complete control over business size, form, processes, and
development.
Disadvantages:
• A startup business has no initial name recognition.
• A startup will require significant time to become established and thus
provide positive cash flows.
• A startup can be very difficult to finance.
• A startup usually cannot easily gain revolving credit from suppliers and
financial institutions.
• A startup may not have experienced managers and workers.
You may buy an existing business.

Advantages:
• Established customers provide immediate sales and cash inflows.
• Business processes are already in place in an existing, operating business.
This eliminates the need to hire employees, find vendors, set up
accounting systems, and to establish production processes.
• Purchasing a business often requires less cash outlay than does creating a
startup.
• The seller will often provide financing that makes it possible for you to
buy the business.
Disadvantages:
• Finding a successful business for sale that is appropriate for your
experience, skills, and education is difficult and time-consuming.
• It is very difficult to determine what a small business is worth.
• Existing managers and employees may resist change.
• The reputation of the business may be a hindrance to future success.
• The business may be declining due to changes in technology.
• The facilities and equipment may be obsolete, or in need of major repair.
You may franchise a business.

Advantages:
• Franchisees receive the benefit of a proven successful business model.
• As a franchisee you also receive training and management support.
• Franchisers commonly furnish proprietary computer programs for sales
registers and accounting.
20
• Marketing, product placement, advertising, and promotion is all controlled

and directed from the franchiser’s headquarters.
• Franchising is less risky than either starting a new business or acquiring an
operating business.
Disadvantages:
• You give up control of marketing and operations.
• Franchisers may require that you buy inventory and supplies from
specific, designated vendors.
• The building in which a franchisee operates may be required to meet the
parent company's exacting standards, including design, décor, construction
methods, equipment, and signage.
• Franchisees are regularly inspected to ensure that you are meeting all
contract standards.
• If you fail to meet standards, the franchiser has the right to take your
business from you.
• Success is determined to a large extent by the success of the franchise,
itself.
You may inherit a business.

Advantages:
• No personal cash investment required
• You receive an operating business with established assets, policies,
and procedures.
Disadvantages
• Inheritance taxes may be onerous.
• Other family members may resent that you inherited, not them.
• It may be difficult to make necessary changes in the business because,
"Your Dad/Mom wouldn't have done it that way."
You may be hired to be the professional manager of a small business.

• Advantages:
• No personal cash investment required.
• You take over an operating business with established assets, policies,
and procedures.
• As an employee, you may quit at any time to pursue other
opportunities.
Disadvantages:
• As an employee, you may be fired at any time, for any reason.
• The owner may over-rule your decisions.
• You are not likely to share fully in any success that you create for the
business.
21
2. If you were able to enter into any small business that you desired, what
things would you look for in the business?
Again, there is no one "right" answer. Student responses will vary according to
their individual preferences. An approach would be for each student to state his
or her goal for being in business, such as income replacement or becoming
wealthy. Desired business characteristics then should be those things that
contribute to attaining the goal.
3. Suppose you had arranged enough capital that you could either buy into an
existing Outback Steak House or you could start your own independent steak
house restaurant. What are the advantages and disadvantages of each
alternative? Which would you prefer and why?
Advantages:
Outback
Established brand name
Established policies, procedures, vendors
National advertising
Expert support from franchiser
Independent
You may create unique setting, decor, and menu
You may appeal to customers who dislike chain operations
You may establish business operations, policies and procedures to
suit your management style.
Disadvantages:
Outback
You are subject to franchise requirements
You cannot customize the restaurant to meet local preferences
You will become a partner, not necessarily a boss
Independent
You will initially have no name recognition
You will have to spend time and effort to establish policies,
procedures, vendors
You will have to spend time, effort, and money to attract
customers
You have no easy access to expert management advice
Student answers will vary on their preference and why.
22
5. Suppose that you have developed an idea for a new business service. You
have limited capital and you do not want to drop out of college. How might
you successfully startup a new business to use your idea?
1. Consider starting part-time.

2. Hire fellow students.
3. Create a franchise and have others do the work.
4. Provide your idea and business plan to others for a royalty or
license fee.
6. One evening when you went to pick up your child at the KinderKare, the
owner mentioned to you that she would like to sell the business. You have
always wanted to run a day care, and would like to try to buy her business.
What facts should you consider in making this decision?
1. How much is the business grossing?

2. What are current operating expenses?
3. What licensing is required?
4. What will the business cost?
5. What financing is available?
6. Will you be excited about this business in a year? In 5 years?
7. Can the KinderKare franchise be transferred to you? If so, what
fees will you encounter?
7. After discussing the KinderKare purchase with your banker, you decide to
make a determined effort to purchase the business. To make a good decision,
what information must you have, and how will you get it?
To fully cover this answer could be quite extensive. The response of students
should be consistent with the SWOT and BRIE models that have been presented
earlier in the book. Some things to consider include:
1. Your own strengths and weaknesses
2. The strengths and weaknesses of the business
3. Threats and opportunities of the business
4. Licensing requirements
5. What does the business own, and what are their current fair market
values?
6. What, exactly, are you purchasing when you buy the business?
7. What does the business owe to others?
8. Which, if any, of the liabilities must you assume if you buy the
business?
23
8. Based on the information you developed, you have decided that the
maximum value of the KinderKare, including the building and lot is
$350,000. You have $35,000 that you inherited from your favorite great
aunt. Your parents have promised to invest $35,000. Based on the $70,000
that you have available, the banker has promised to make you a SBA
guaranteed loan of $70,000. What are your options if you wish to pursue this
opportunity?
$140 thousand is less than half of the purchase price. You will need other
financing.
You might finance the building and lot separately through a mortgage.
You might take on a partner.
You might lease the building and lot, and thus not have to raise up front capital to
purchase them.
You might obtain the additional $110 thousand by borrowing it from the seller.
You might negotiate a buy-in, whereby full title will pass to you in the future
through earnings of the business paid to the current owner.
9. You took a job bagging coffee for a business that purchases directly from
Guatemala farmers, thereby getting the coffee at a bargain price, while still
paying the farmers above market for the coffee. Working with all that
caffeine has got you charged up about going into business for your self. The
owner is only 60, but he has told you that he'd like to slow down. He has
offered to sell you all or part of the business. What things should you
consider in making a decision about what to do?
Buy all:
The considerations are the same as those for questions number 5 & 6. In
addition, you should consider to what extent the current owner will be
available to you for advice and support.
Buy part:
The considerations for buying part include everything to be considered in
a buy out decision, plus those factors that affect deciding to go into a
partnership:
1. Can you get along with the current owner as a partner?
2. Will the business produce sufficient revenues for you to be able to take
a salary or wage?
3. To what extent will you be in charge?
4. How will you settle any disputes that you have with the current owner
as a partner?
5. What rights will you have to purchase the current owner's share in the
future?
6. What happens if the current owner dies or becomes disabled after you
become a partner?
24
Experiential Exercises
1. Using the resources of your library, find the name and address of an active
business broker in your area. Arrange an interview with the broker. Write
a report detailing what methods the broker uses to place a value on a
business for sale.
Student answers will vary considerably depending on the particular interview

situation.
2. Find out how did the owner of the business where you are employed get into
business?
Again, student answers will vary.
3. Visit the Small Business Administration web site’s franchising page at

http:///www.sba.gov/starting_business/startup/franchise.html. Using the
links on that site, find a franchise business that you believe might be
successful, were you to buy it. Contact the franchisor, explain your interest,
and find out the specifics of the franchise opportunity. Report your findings
to your class.
Once more, student answers will vary.
Critical Thinking Exercises

Learning objective 1
1. The following entrepreneurs just completed a seminar in bootstrapping. Some of

them listened well, while others must have slept through the lecture. Which ones
did well?
a. Jerre offered to clean his neighbor’s garage if the neighbor, an artist,
would paint a sign for him.
b. Annette cleaned out a corner of her basement to set up her office.
c. Mary Ellen figured she’d buy all her supplies up front so she wouldn’t run
out.
d. Jon found a used van to use for his painting business.
e. Milton figured he was well worth the $10,000 a year salary he paid
himself from his part time business.
f. Cathy charged everything she could up to the credit cards’ maximums.
g. Frances offered everybody equity in her company in exchange for services
they provided.
h. Gil was running a little short of cash so he got a cash advance from one of
his credit cards.
i. Geraldine figured she really didn’t need the special cake pan for her
bakery as long as she could meet orders with what she had at hand.
25
j. August’s motto was “To Be Successful, You Must Look Successful” so he

always bought the best.
Answer:
Jerre, Annette, Jon and Geraldine listened well. Frances heard the part about
offering equity, but offered too much. The others wasted their time attending the
seminar.
2. Match the small business manager to the entry path he/she has used.
a. Elva just opened a Subway Sandwich Shop.
b. Tahir was hired to run Alligator Music.
c. Doug took over Klingman Painting when his father finally retired.
d. Betty is proud of the barbershop she founded.
e. Victor doesn’t want to think of how he scraped up the money, but he is
now the new owner of a locksmith service.
Answer:
a. Franchise
b. Hired professional manager
c. Inherited
d. Start-up
e. Buy
3. Duane wanted to start a limo service and already had a name picked out, Amore
Limos. While many limos offered bar service, he decided to also provide
appropriate snacks – pate, caviar and other high-class nibbles. He figured he’d
be good at this as he had been the manager of a limo services in another state and
had once even owned an auto repair shop. He took a class at the local university
and worked with the mentors in the university’s SCORE office, where they were
able to help him write his business plan, his budget and helped him secure the
money he needed to get going. He had looked at the demographics in the area
and found a large and growing number of teenagers with an above average
income. “Perfect for proms, weddings and the like!” he thought. He was able to
get a verbal commitment for two area wedding planners to be the limo service
they’d provide their brides-to-be. Said Evonne, one of the planners, “Duane
really had his act together and proved to me that I could trust him to never let my
brides down.”
Which of the different tools recommended to make a small business more

successful has Duane used?
26
Answer:
a. Take part in a mentoring program (SCORE)
b. Have a detailed start-up budget
c. Produce a product/service for which there is a proven demand (based on the
demographic research Duane did)
d. Secure outside investment.
e. Have experience in managing small firms. (managed a limo service and auto
repair shop)
f. Have industry experience (managed a limo service and auto repair shop)
g. Have previous experience in creating a start-up business (possibly; implied
in his auto shop experience)
h. Start the business with established customers (one way of interpreting his
contact with the wedding planners)
i. Subcontract service to an existing business (another way of interpreting his
contact with the wedding planners)
j. Build trust in your “story.” (based on Evonne’s comments)
4. Denise received a modest inheritance from a great aunt and wants to use it to buy
a small business. Her problem is that she just doesn’t have the first idea how to
go about finding a business to buy. Advise her.
Answer:
First Denise must decide what kind of business she wants to own. What industry
is it in? How big? Where should it be located?
Then she should look in the Yellow Pages to find a broker as well as start
scanning the classified ads in local newspapers and The Wall Street Journal.
As she finds likely prospects, she should arrange to meet the owners.
Visit the business and ask enough questions to see if it seems a viable option.
Once she has narrowed down her prospects to one or two, she should begin due
diligence and contact a lending agency should she need additional funding.
5. Denise settled on a nail salon in her town. She is ready to perform due diligence.
The current owners have provided her with a set of their financial statements and
the tax reports for the last several years. It’s been a while since Denise took
accounting; can you tell her whether she would be likely to answer the questions
below in the balance sheet, the income statement, the statement of cash flows or
the tax returns?
a. What are the tax rates for this business?

b. How much money does the shop bring in?
c. How much is the equipment in the salon worth?
d. Will I be taking on much long-term debt?
e. How much is depreciation?
27
f. How much has been spent in advertising?
Answer:
a. Tax returns
b. Income statement
c. Balance sheet
d. Balance sheet
e. Balance sheet
f. Income statement
6. Denise is now ready to begin valuing the nail salon. This year the business did
$70,000, which is about the same as it did the previous four years. The owner has
switched hours of operations and services offered a few months back and the
impact is yet undetermined. Denise plans to make significant changes in the
business and will be open nearly 25% more than before, so she’s optimistic that
her income is likely to be higher. Also, a beauty salon in the same strip mall has
just decided to no longer do nails at all.
The equipment in the salon, although not fully depreciated, is obsolete and needs
to be replaced. The salon carries the name of the current owner and Denise
intends to keep that anyway so as not to confuse the large number of customers
the current owner currently has. A local news segment filmed the shop for a
segment on successful small businesses that should appear on the nightly news
sometime later this year.
While researching the industry, she found another nail salon that sold for
$50,000. It had made $500,000 over the past five years. Her research further
showed that the industry was so new that reliable estimates of value were not yet
developed.
Consider the four typical valuation tools mentioned in the text. Which ones
should she probably not use and why? Which one should she use? What would
be the valuation of this salon?
Answer:
Discounted cash flow may not work as it is difficult to determine how much
future income new services and hours of operation have just been instituted, a
competitor has just quit and the impact of the television news segment is
undetermined. (The fact that Denise plans further changes does not impact the
current value of the business.)
Asset valuation method may not be accurate as the equipment is likely valued
higher in the financial statements than its actual worth and its worth to Denise.
What about the value of the current customers? How do you value them?
Industry heuristic method isn’t possible as there are not yet measures for this new
industry. Possibly she could use a close industry – perhaps a beauty salon, but the
accuracy would be questionable.
28
Denise doesn’t have enough information to run any of the financial ratios
discussed in the textbook.
Denise could certainly use the comparable sales method as she has that data. The
other shop sold for $50,000 and had made $ 500,000 over the past 5 years (or
$100,000 per year). The earnings multiple this gives is 2 (100,000/50,000). If
this salon is making about $70,000 a year over the past five years its value should
be $140,000. (Even though Denise is optimistic that she’ll bring in more income
with her changes, what we are trying to assess is current value.)
7. Buy-out, buy-in, key resource acquisition, or takeover: which of the following

examples is which?
g. Dean is buying Hess Construction, a sole proprietorship.

h. Sheri has purchased all the stock belonging to Nomi the current owner.
i. Bernell has acquired 75% ownership of Alcatraz Mini-Storage
j. Rudy is a raider and has purchased a controlling interest in Alltech
Research and Development without the permission of the management.
Answer:
a. Key resource acquisition
b. Buy-out
c. Buy-in
d. Take-over
8. Patsy wants to go into business for herself and is thinking of buying a McDonalds
franchise. Before retiring, Ginger owned a Dairy Queen franchise and Patsy has
come to her for advice. What advice about owning a franchise is Ginger likely to
tell her?
Answer:
Ginger’s advice might be something like this: “First of all, you know you have
something that works and you’ll get all the management training and support you
could want – almost too much sometimes as you don’t have a lot of freedom to
make changes. The business is less risky, but sometimes you don’t really feel you
are doing it yourself. For instance, the franchiser will probably tell you what to
buy and where to buy it, even if you could get it cheaper somewhere else. Any
redecorating or other changes you want to make must get approval. And you are
sort of dependent on the reputation of the franchise. When they found that finger
in a bowl of Wendy’s chili, all the Wendy’s stores suffered, not just the one.
“It’s got its pros and cons – just like any other business. Just be sure to really,
really read all the paperwork, especially the Uniform Franchise Offering Circular
29
and the franchise agreement and make sure you really understand what you can
and can’t do.”
9. Randomly assign different franchise opportunities to students or groups of

students. You can use www.franchise.org for a list of possibilities. Select some
well-known ones and some more obscure choices. Have the students write up
small summaries and their recommendations. You may also set up certain criteria
– a franchise on campus, for example – to help them decide. If done as a group
exercise, the groups might evaluate three or four and then recommend to the class
which one they would choose.
Answers will vary.
10. In Chapter 3, Wilma of Wilma’s Wonderful Winterwear was coping with role
conflict and succession issues. Two of her sons were not much interested in the
business, while her oldest, John and her daughter, Kay both seemed like potential
candidates and both seemed to really want it. When she held the latest family
council though, she was shocked to find out that Kay was getting engaged - to a
man who lived halfway across the country. John dropped another bombshell. It
seems that he had decided some years ago to go to college, but kept it quiet. One
more class and he’ll finish his degree in cinematography and plans to head to
California to try his luck. Jay and Warren, the other two sons, started looking
nervously at each other. Would they be expected to take over?
What should Wilma do now? Can you give her some suggestions for what she
should be looking?
Answer:
Wilma could certainly close the business, but since it appears to be quite
successful and two of her sons are still employed by it, hiring a professional
manager to gradually take her place seems like the best option.
Wilma will need to find someone that can manage the areas her family members
cannot handle. She will need to look for someone who is willing to learn Wilma’s
way of doing business and the things that make Wilma’s Wonderful Winterwear
successful. The manager must be someone who fits in, someone with whom the
family, the employees, the customer and the suppliers all feel comfortable. The
manager should be able to balance between keeping Wilma and the family happy
and making changes that are necessary to keep the business going.
30
11. Wilma, of Wilma’s Wonderful Winterwear, decided to hire two managers and
divide John and Kay’s work between them. Reuel was designated to takeover
when Wilma finally retired and handled most of the strategic decisions of the
operation. Maxine was to be second-in-charge and handle most of the day-to-day
routine. The first two years were great. Maxine in particular was terrific. She
had had some experience running other small businesses and had a strong drive
and great people skills. Wilma happily retired and moved to California to keep
house for John (and to have walk-on parts in several of his films).
Well, as terrific as Maxine was, you can imagine that she didn’t want to be
second for long. Two years after Wilma retired, she decided that she wanted to
be the boss. What are Maxine’s likely options?
Answer:
Maxine really has a number of options, but three that are most likely would be the
following:
a. She could leave and start her own firm, probably competing against
Wilma’s Wonderful Winterwear.
b. She might be able to buy-in or buy-out Wilma’s Wonderful Winterwear.
(John could probably use those funds to assist in his movie making and Kay
now has a baby on the way.)
c. She might arrange some sort of franchising operation. Perhaps she could
run a chain of Wilma’s company stores or branch out into Wilma’s
Wonderful Winterwear of Europe?
12. The following entrepreneurs have come to the end of their small business life
cycle. Can you tell how they ended their business?
a. Chiyoko was able to sell her restaurants assets and use these proceeds to
pay off her debts and still have something leftover for retirement.
b. Akeem’s son took over the family business.
c. Howard’s debts far exceeded his assets to the point that he was forced to
close his restaurant.
d. Vivian was tired of running her florist shop and gave it to her assistant.
e. Lupita closed her business, but needed several months more to finally pay
off its debts.
f. Roseanne’s gift shop was absorbed by a chain of gifts shops in the area.
g. Delores’ employees purchased all the stock of her glass manufacturing
company and took over ownership.
h. Melva was able to close the doors of her clothing store after paying off all
its obligations.
31
Answer:
The end of business action that best fits what these entrepreneurs did is:
a. Sell-off
b. Family succession
c. Bankruptcy
d. Pass-off
e. Workout
f. Acquisition
g. ESOP
h. Walkaway
Mini-Case:
Too Hot to Hold
Gwendolyn Bonnefille discovers a business, Caterwauling Coyote, for sale on the

Internet – an opportunity that appears too good to be true. Several items concern her and
she challenges the current owner, Mr. Sylvester Gatos, for more details.
Mini Case Questions
1. What do you think about Sly's explanation of the differences

between his income statement and his 1040 Schedule C?
Students should recognize that it is a common practice for owners

of small businesses to "hide" personal expenses in business
expenses. This accomplishes two things: First, it allows the owner
to take money out of the business without showing it as taxable
income. Second, it reduces the amount of income on which the
business is taxed. Of course, students should also recognize that
while it is a common practice, it is an illegal practice. Avoiding
taxes in this manner can lead to significant fines and penalties,
including imprisonment.
This question provides an excellent entry into discussions of the

ethical conflicts that small business owners commonly experience.
Students also should realize that the depreciation, interest, property

tax and draws of the current owner are irrelevant to any potential
buyer. A new owner's depreciation will depend upon the price
paid for the depreciable assets of the business. Property
assessments will most likely change as a result of the change in
ownership. Any draws made by the new owner will depend on the
future success of the business and on the needs of the new owner.
Thus this information is not relevant to determining the value of a
32
business.
2. Suppose that the income statement is reasonably accurate.

What do you think about the purchase price?
To determine how much you might pay for the business, you must
consider the amount that you have to invest, the amount of cash
flow the business will provide, and the amount of money that you,
as the new owner, must realize from the business.
If the business is producing a profit of $60,000 on sales of

$200,000, the return on sales is 60 / 200, or 30%. This is a very
high return, higher than that made by all but a very few businesses.
You might be suspicious of such an unusually high number. As a
potential buyer, you would want to independently confirm the
material amounts, including revenues and the largest expenses.
If you determine that the $60,000 figure is correct, then an upper

limit to value of the business can be determined by dividing profits
by your cost of capital. A rule of thumb for small businesses is
that one should never assume a cost of capital less than 20%.
Dividing $60,000 by 20% indicates an upper limit of $300,000
which is materially higher than the asking price. Again, this
should raise an alarm. Why are the current owners asking for a
price that is so much less than the highest expected price?
Finally, you should consider what cash flow you must have as the
new owner. Suppose that you must have $50,000 per year to meet
your living expenses. If you accept the sellers' offer to finance
$190,000 at 10% for 15 years, the monthly payment will be
approximately $2,042 per month. (This is a good place to require
students to calculate the payment using a spreadsheet program. It
is also a good exercise for students to prepare an amortization
schedule of monthly payments for interest and principle.) $2,042 x
12 = $24, 504. Debt service plus desired draw exceeds the current
profits by over $14,000. Perhaps the price is actually too high.
3. What information should Gwendolyn obtain before making a

decision to purchase the business?
There are any number of possible answers to this question. Some
things to consider:
• Can she get better financing from a source other than the
owners?
• Are there any contracts with the existing sellers of the hot
sauce?
33
• What is the demand for the product? Are sales growing,

steady, or falling?
• What would it cost for Gwendolyn to purchase similar used
equipment from a restaurant supply?
• Why should she buy the existing business? Couldn't she
simply make a similar sauce (after all, the ingredients are
listed on the label) and make up her own silly, but eye-
catching, brand name?

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Entrepreneurial Small Business 5th

Download full test bank at :

CHAPTER 6: SMALL BUSINESS ENTRY: PATHS TO FULL-

1. Explain he strategies for going into full time business.

9. Identify the choices for exiting a business.

Focus on Small Business:

Many entrepreneurs become serial entrepreneurs, starting more than one

3. If remodeling is such a pleasant and profitable business, why would Tom

Extended Chapter Outline

Objective 1: Explain the strategies for going into business.

• Also important are bootstrapping, bricolage and lean business start-up.

• Lean business practices:

o One may get there by working up to professional management of a frim

▪ Actually, outside help of any kind – SBA, SCORE, this class –

o The advantages of start-ups include:

o On the other hand, disadvantages of a start up include:

Small Business Insight: Surviving a Startup

• Build trust in your "story.” This may be one of the most

Objective 4: Compare the opportunities with the pitfalls of purchasing an existing

• The advantages to buying include:

• Disadvantages to buying include:

o The first problem is finding a business to buy.

Skill Module 6.1: Finding a Business for Sale

o This times the forecasted earnings gives an estimate of the

Objective 5: Explain four methods of purchasing an existing business.

• There are four basic ways of buying a business:

Objective 6: Compare the advantages with the disadvantages of buying a franchise.

• Four elements are essential for an agreement to constitute a franchise:

• There are four basic types of franchising:

In 2016, Jimmy John’s was the number 1 franchise

• The advantages of franchising are:

o A “turn-key” start up with site selection, construction, equipment acquisition

• For this the franchisee must:

Objective 7: Explain the issues of inheriting a family owned business

Objective 8: Describe how hired managers become owners of small businesses.

• Employee managers of small firms are often entrepreneur want-to-be’s.

Objective 8: Identify the choices for exiting a business.

• Harvesting is usually a positive experience:

BASIC: an acronym for Beginner’s All-purpose Symbolic Instruction Code.

Bootstrapping: using low-cost or free techniques to minimize your cost of doing

Business format franchising: an agreement that provides a complete business format,

Buy-in: a purchase of substantially less than 100% of a business.

Buyout: purchasing substantially all of an existing business.

Caveat emptor: Latin: let the buyer beware.

Conversion franchising: An agreement that provides an organization through which

Due diligence: the process of investigating a business to determine its value.

Founder: people who create or start a new business.

Heuristics: a common sense rule; a rule of thumb.

Product distribution franchising: an agreement that provides specific brand named

Replacement value: the cost to acquire an essentially identical asset.

Spin-off: a business that is created by separating part of an operating business into a

Start-up: a new business that is started from scratch.

Strategic partnerships: formal or informal relationships with customers, vendors, or

Termination: an endgame strategy where the owner closes down a business.

relative advantages and disadvantages of each:

You may start a new business.

You may buy an existing business.

You may franchise a business.

• Marketing, product placement, advertising, and promotion is all controlled

You may inherit a business.

You may be hired to be the professional manager of a small business.

Student answers will vary on their preference and why.

1. Consider starting part-time.