ENTREPRENEURSHIP AND

SMALL BUSINESS
MANAGEMENT (BME-212)

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 Course Introduction
* Entrepreneurship and Small Business education
stimulates people to think about entrepreneurship and
the role of the business community in economic and
social development.
* Starting your own business gives you independence,
more income and job satisfaction. Life would have been
unthinkable without the existence of these small
businesses.
* Hence, this course intends to acquaint you these vital
segments of the economy.

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 CHAPTER ONE
ENTREPRENEURSHIP AND FREE
ENTERPRISES
Introduction
 Entrepreneurship today is the driving force behind
economic growth all across the globe; and increasing
number of people are choosing to become
entrepreneurs,
 starting business that springs from their dreams of :
freedom,
independence and
their hopes for meaningful careers. 4
 There is right way and wrong way to launch a
business.
₪ This course as a whole teaches entrepreneurs
to use the right way of launching their
business so that they can maximize their
probability of success.

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 1.1. Definition and philosophy
 The word entrepreneur originates from the
French word, enteprendre, which means “to
undertake”.
 In a business context, it means to start a business.
 Webster Dictionary presents the definition of an
entrepreneur as one who organizes, manages, and
assumes the risks of a business or enterprise.

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 An Austrian economist Joseph Schumpeter’s
definition of entrepreneurship placed an
emphasis on:
• new production methods
• new markets
• new forms of organization
 Wealth is created when such innovation results
in new demand.
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 From this viewpoint, one can define the function
of the entrepreneur as one of:
combining various input factors in an innovative
manner to generate value to the customer
with the hope that this value will exceed the cost
of the input factors,
thus generating superior returns that result in
the creation of wealth.

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Fundamentally, entrepreneurship is a human
creative act.
• Entrepreneurship usually requires a vision,
passion ), commitment, and motivation to
(strong desire

transmit this vision to other stakeholders, such

as partners, customers, suppliers, employees,
and financial backers.
• It also requires willingness to take calculated
risk-both personal and financial—and then
doing everything possible to influence the odds.
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₰ Entrepreneurship is the process of creating and
building something of value from practically
nothing.
₪ That is, entrepreneurship is the process of creating or
seizing (exploiting) an opportunity and pursuing it
regardless of the resources currently controlled.
₪ Entrepreneurship is the process of creating something
different with value by devoting the necessary time
and effort, assuming the accompanying financial,
psychic, and social risks, and receiving the resulting
rewards of monetary and personal satisfaction and
independence.
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Personal traits and characteristics of entrepreneurs.

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 1.2. History
• The term entrepreneur means “between-
taker” or “go-between”.
• In the middle ages, the term entrepreneur
was used to describe a person managing
large production projects.
• In this case, the person would not take
any risk, but merely manages the project
using the resources provided.
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 cont
1.Middle-age-a person manages large production but
doesn’t take risk
2. 17thc –concept of risk developed by Richard Cantillon
 a person who entered in contratual agreement with
gov’t to provide service /supply stipulated products
3. 18thc a person with capital differentiated from who
need a capital
 Entrepreneurial role distinguished from capital
providing role

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 cont
4.Late 19th & early 20th ,entrepreneurs were not
distinguished from manager &
 mainly Viewed from economic perspective
 Entrepreneurs organize and operates an
enterprise for personal gain
5.Middle of 20th c the notion of entrepreneurship
as an innovator was established which is an
integral part of definition

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 The concept of risk in the notion of entrepreneurship
was developed in the 17th century, with an
entrepreneur being viewed as a person who entered into
a contractual arrangement with the government to
perform a service or supply of stipulated products.
• Richard Cantillon is regard by some as the founder of
the term.
• Cantillon viewed the entrepreneur as a risk-taker,
seeing the merchants, farmers, craftsmen, and other
sole proprietors who buy an item at a certain price
and sell at an uncertain price, therefore operating at a
risk.

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• In the 18th century, the person with capital
was differentiated from one needing capital.
• In other words, the entrepreneurial role was
distinguished from the capital-providing role.
• The latter role is the basis for the present-
day venture capitalist.
• In the middle of the 20th century, the notion of
an entrepreneur as an innovator was
established.

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1.3. Role of Entrepreneurship within the Economy:
– The role of entrepreneurship in economic
development involves more than just
increasing per capita output and income;
– it involves initiating and constituting change
in the structure of business and society.
– This change is accompanied by growth and
increased out put, which allows more wealth
to be divided by the various participants.

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In other words, small businesses do have the
following important roles:
– Job Creation
– Innovation
– Productivity and economic efficiency
– A means for minority groups and women
– Serving as an agent of socio-cultural
interaction
– Serving as a source of revenue

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1.3.1. Other Benefits of Entrepreneurship
A. Opportunity of Gaining Control over
your Own Destiny/ futre,
B. Opportunity to Reach Your Full
Potential,
C. Opportunity to Reap Unlimited Profits,
D. Opportunity to Contribute to Society
and to Recognize for Your Effort,

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 1.4. Entrepreneurship, creativity and
innovation
• Innovation is the process by which
entrepreneurs convert opportunities into
marketable ideas.
• Innovation is about executing the idea —
converting the idea into a successful
business.
• “Innovation is not a single action but a
total process of interrelated sub processes.
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 It is not just the conception of a new idea, nor
the invention of a new device, nor the
development of a new market.
• The process is all these things acting in an
integrated fashion.”
Creativity is the process of bringing something
new into being.
Creativity requires passion and commitment.

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 Types of Innovation
Four basic types of innovation exist.
 These extend from the totally new to modifications of
existing products or services.
 In order of originality, they can be put as follows:
Invention: the creation of a new product, service or
process, that is novel or untried. Such concepts tend to
be “revolutionary” (radical).
Extension: the expansion of a product, service or
process already in existence. Such concepts make a
different application of a current idea.
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Duplication: the replication of an already
existing product, service or process.
 The duplication effort, however, is not simply
copying but adding the entrepreneur’s own
creative touch to enhance or improve the
concept to beat competition.
Synthesis: the combination of existing
concepts and factors into a new formulation.

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Developing Your Creativity
The following points are designed to improve
your awareness on some of the thought habits
that limit your creativity and to assist you in
developing a personalized creativity
improvement program.
A. Increasing awareness of one’s environment
B. Recognizing Relationships: many innovations are
results of the inventor’s seeing new and different
relationships among objects, processes,
materials, technologies, and people.
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C. Developing a Functional Perspective: if
expanded the principle of perceiving in a
relational mode helps develop a functional
perspective toward things and people. A
creative person tends to view things and
people in terms of how they can satisfy
his/her needs and help complete a project.
D. Eliminating Muddling Mind-sets: a number
of mental habits block or impede creative
thinking.

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 exercises
In the United States, it typically takes four days
and $210 to establish a business as a legal
entity.
The steps include registering the name of the
business, applying for tax IDs, and setting up
unemployment and workers’ compensation
insurance.

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In Japan, however, a typical entrepreneur spends
more than $3,500 and 31 days to follow 11
different procedures.
Compare this with your experience in our
country (town) including the steps to full fill
the requirements, the time and money it takes ,
its impact on the expansion of SBE in general.
 Then present your work to the class.

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CHAPTER TWO
SMALL
BUSINESSES

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2.1 Definition and Importance
 It is hard to define, and draw a precise line
which separates small businesses from large
firms.
 According to J E Bolton; ‘Small firms are
present in virtually every industry and the
characteristics they share as small firms are
sometimes not as apparent(clear) because of
the differences arising from the contrasting
conditions of the different industries.
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SBA defines a small business as “one which is
independently owned and operated for profit and is
not dominant in its field.”
 How small must a firm be not to dominate its field?
That depends on the particular industry it is in. The
SBA has developed the following specific “smallness”
guidelines for the various industries, as shown below.
 Small-business size standards are usually stated in
number of employees, or average annual sales. In
the United States, 99.7% of all businesses are
considered small.

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2.2. Economic, Social, and political aspects of
small business Enterprises
 Small businesses have to play a vital role in
Ethiopian economy.
 They need a strong support on socio-
economic and political grounds.
Socialistic idea:
 Our objectives are equitable distribution of
wealth and decentralization of economic
power.
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 The benefits of industrial growth should be shared
by as many people as possible and should
improve the general standard of living.
Less Capital and More Labor:
 The main problem is that we have vast man power
but inadequate capital, which has resulted in an
increasing unemployment.
 Planners have realized the necessity of
encouraging small industries because they require
less capital but generate more employment.

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 The small scale sector has the capacity to generate a
much higher degree of employment than the large
scale sector.
 They will stand in a good position because they are
less capital intensive and more employment oriented.
Removing Regional Imbalance:
 Another problem is the continuous shifting of people
from rural to urban areas which causes over-crowding
in cities.
 This problem can be solved by inducing people to
setup small industries in rural areas. The specific
setting up of agro-based industries will go a long way in
creating a balance in our economy.
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Creating self employment opportunities
Ancillary Function
Many small scale industry units supply parts and
accessories to bigger industries.
 This ancillary function involves specialization in
specific areas and results in greater profitability.
Export promotion:
 Small scale industries are now a days opening up
fresh avenues in the export market in our world.

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Supply of Critical Raw Materials:
2.3. Small Business Failure Factors
 Every year many small business firms cease to operate.
 The most frequent cause is failure to pay debts, in
which case it is common for the owners to declare
bankruptcy and to seek to accommodate the creditors.
 In other instances, businesses go out of existence
because the owners realize that, although currently
they are solvent, if they continue operations they will
incur debts they can not meet.

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Some Specific Causes of Failures
 The major reason that business fail is incompetence (lack of skill, Ability,
ineffectiveness).

 The owners simply do not know how to run the enterprise.

 The second most common reason businesses fail is unbalanced
experience.
 This means owners do not have all-rounded experience in the
major activities of the business, such as finance, purchasing,
selling, and production.
 A third common cause of business failure is lack of managerial
experience.
 A fourth common reason is lack of experience in the line; that is
the owner has entered a business field in which he or she has
very little knowledge.

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Other common causes of business failure include
neglect, fraud, and disaster.
 Neglect occurs when ever an owner does not pay
sufficient attention to the enterprise.
 Fraud involves intentional misrepresentation or
deception.
 Disaster refers to- some unforeseen happening or
‘act of god’.
 If hurricane (storm, sever storm ) hits the area and destroy
materials sitting in the company’s yard, the loss
may require the firm to declare bankruptcy.
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Eight reasons why many small businesses fail.

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2.4. Problems in Ethiopian Small Business:
 Small scale industries have not been able to
contribute substantially as needed to the
economic development particularly because
of financial, production and marketing
problems.
 They do not have access to sources of fiancé
partly because of their size and partly because
of the fact that their surpluses which can be
utilized to repay loans are negligible.
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 Small scale enterprises find it difficult to get raw
materials of good quality and at cheaper rates in the
field of production.
 Because of their poor financial position they are not
able to buy new equipments.
 Consequently their productivity suffers.
 Besides, many small business enterprises are suffering
with the problems of marketing their products.
• It is only by overcoming all these constraints that
small enterprise can hope to make their enterprises
successful.

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2.5. Setting Small Business
2.5.1. What is Basic Business Idea?
 A good business idea is essential for starting a successful
venture and for staying competitive afterwards.
 It is logical, therefore to think of a goal for the unit in the
long run rather than to look for the immediate
tomorrow.
 This long-term thinking is called Basic Business Idea.
 A business idea is the response of a person, or an
organization to solving an identified problem or to
meeting perceived needs in the environment.

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 Finding a good idea is the first step in
transforming the entrepreneur’s desire and
creativity into a business opportunity.
 Business should think of a long term goal and
the profit when they start a business.
 The basic business idea, which is at the top of
the hierarchy, is to meet the broadest needs
of the customers, and has a long life perhaps
from 5-50 years.
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Generating a Business Idea
 Two things should be noted:
• Although it is a prerequisite, a business idea is only a tool;
• An idea by itself, however good, is not sufficient for
success.
A. Sources of Business Ideas
• Hobbies/Interests: A hobby is a favorite leisure-time
activity or occupation.
• Many people, in pursuit of their hobbies or interests, have
founded businesses.

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B- Personal Skills and Experience: Over half of the
ideas for successful businesses come from
experiences in the work place.
 For example, a mechanic with experience in
working for a large garage who eventually sets up
his/her own car repair or used car business.
 Thus, the background of potential entrepreneurs
can play a crucial role in the decision to go into
business as well as the type of venture to be
created.
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C- Franchises: A franchise is an arrangement whereby
the manufacturer or sole distributor of a trademark,
product or service gives exclusive rights for local
distribution to independent retailers in return for
their payment of royalties and their willingness to
conform to standardized operating procedures.
D- Mass Media: The mass media is a great source of
information, ideas and often opportunity.
Newspapers, magazines, television, and the Internet
are all examples of mass media.

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E- Exhibitions: Another way to find ideas for a
business is to attend exhibitions and trade fairs.
 These are usually advertised on the radio or in
newspapers.
 By visiting such events regularly, you will not
only discover new products and services, but
you will also meet sales representatives,
manufacturers, wholesalers, distributors and
franchisers.

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B. How Do I Find a Good Business Idea?
a) Surveys: The needs and wants of the customer,
which provide the rationale for a new product or
service, can be ascertained through a survey.
 Such a survey might be conducted informally or
formally by talking to people.
 Surveys may be conducted using a questionnaire,
through interviews or through observation.

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b) Complaints:
Complaints and frustrations on the part of customers
have led to many a new product or service.
c) Change:
 The world is constantly changing.
 Change can be a threat; however, most entrepreneurs
consider change as a challenge and opportunity to
trigger new needs for products and services.
 An innovative entrepreneur always responds to
changes in a positive manner.

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d) Brainstorming
 Brainstorming is a technique for creative problem-solving as
well as for generating ideas.
 The objective is to come up with as many ideas as possible.
 When using this method, the following four overall rules need
to be followed:
a. No criticism is allowed by any one in the group, no negative
comment.
b. Freewheeling [Unrestrictive] is encouraged; the wilder the idea
the better.
c. Quantity of ideas is desired; the greater the number of ideas,
the more the likelihood of useful ideas emerging.

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C. The Most Common Idea Stoppers
Many people incorrectly believe only a genius can be creative.
The real barriers to creative thinking are sometimes the
inadvertent /unintentional/ “Killer Phrases” that we use in our
communication.
The following are the most common idea stoppers
• We can’t (said with a shake/ viberte / of the head.)
• That’s the dumbest thing /unintelligent , offensive term, deliberately not speeking/ I’ve
ever heard.
• Yeah, but if you did that…
• We already tried that years ago.

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• We have done all right so far; why do we need that?
• I don’t see anything wrong with the way we’re doing it now.
• That doesn’t sound too practical, & etc.
D. Key Success Factors in Setting up a Small Business
 The entrepreneur takes the initiative and also bears the risk in creating
and/or organizing an attractive offer of value to potential customers.
 The entrepreneur’s ability to do this successfully depends on 4 factors,
namely:
 Motivation,
 Ability,
 Idea and
 Resources.
 The acronym –MAIR – may help you remember these factors more
easily. These are explained in turn.

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1. Idea and Market
 The important issue to be determined here is the
viability/feasibility/ of the idea, project, product
or service to be offered.
 In other words, does the idea, product or service
meet a need or want for which there are
customers who can afford it and are willing to
use/purchase/ it in sufficient quantities to make
the whole project worthwhile (i.e. return a profit,
in a business context)?
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2. Motivation and Determination
 It is widely acknowledged that, to be successful, the
individual or group needs to be highly motivated and
determined to set up the business to make it succeed.
3. Ability: Another important question is whether the
individual or others involved have particular abilities –
these may be knowledge, technical or managerial skills,
relevant to the business or project.
4. Resources: Finally, the extent to which the person(s)
involved can acquire or organize resources in adequate
measure will not only influence performance but also, in
some cases, whether they start at all.
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 In order to turn the above 4 components into reality, a
plan would be required.
 In business, this is normally referred to as a Business
Plan.
 On the whole a business plan should show four main
things, namely:
 where you currently are with your idea, project or
business;
• what you wish to do?
• how you propose to go about it?
• And that the project is worthwhile.
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Organization and Management
 The business then needs to actually start operating
and, once this is done, it would need to be managed.
 In setting up the business, or before starting to
operate, there may be legal or other statutory (legislative)
requirements to be met.
 There may be a need to consult professionals such as
lawyers, accountants and/or staff from small
business support agencies for advice. Figure 2.1; below summarizes the
key success factors in setting a small business

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60
exercises
Discuss the major causes of small businesses
failures in our country with specific reference to
Batu/Ziway? Discuss also the possible solutions to
alleviate these problems so that they can
contribute their expected roles.

Then present the output of your discussion

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2.5.2. What project an Entrepreneur Should Have?
One can define a project as a complex of
economic activities in which the key players
commit scarce resources in the expectations
that the benefits gained will exceed these
resources.
• The project should have to consider the SWOT
and should be designed accordingly.
• SWOT is a series of steps one has to consider in
evaluating a business opportunity and arriving
at a decision on starting a business or not.
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The SWOT approach compels individuals to think or
reason out systematically and analytically the important
factors:
strengths, and weaknesses,
opportunities and threats.
Choosing an Idea
To select the best business idea, the following steps
needs to be pursued.
1)Identify your project
2)Define your objective
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3) Identify, develop and analyze the possible
alternatives
4)Select the best alternative in light of the specific
criteria set to the better fulfillment of the objective

The important dimensions/aspects/ of choice can be
mentioned as:
•Market
•Product/ service
•Equipment
•Technology

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 • Scale of production
• Location
• Incentives
• Duration (life)
How does one start a new venture?
 Important issues in new venture creation:
– Does the entrepreneur have good ideas and the
courage to give them a chance?

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– Is the entrepreneur prepared to meet and master
the test of strategy and competitive advantage?
– Can the entrepreneur identify a market niche that
is being missed by other established firms?
– Can the entrepreneur identify a new market that
has not yet been discovered by existing firms?
– Can the entrepreneur generate first-mover
advantage by exploiting a niche or entering a
market before competitors?

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 Questions that keep a new venture focused on its customers
– Who is your customer?
– How will you reach key customer market segments?
– What determines customer choices to buy or not buy your
product/service?
– Why is your product/service a compelling choice for the
customer?
– How will you price your product/service for the customer?
– How much does it cost to make and deliver your
product/service?
– How much does it cost to attract a customer?
– How much does it cost to support and retain a customer?
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 Life cycle of entrepreneurial firms
– Birth stage
– Breakthrough stage
– Maturity stage
 Each stage poses different managerial
challenges and requires different managerial
competencies.

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Stages in the life cycle of an entrepreneurial firm.

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2.5.3. Definition of Industry and Small Scale Industry
 An industry is an institution where raw material is
purchased from suppliers, converted into a
finished product using machinery and labor, and
sold to buyers.
 Conversion of raw materials means changing the
size, the shape, chemical properties, and
assembling different parts etc.
 Industries differ widely and can be classified in
different ways as illustrated below.
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a) Extractive Industries: They are those industries
which raise products from above or beneath the
surface of the earth, such as fishing, hunting and
mining.
b) Generic Industries: They refer to industries under
which plants and animals are grown for the
purpose of sale to the ultimate consumers.
Agriculture, forestry and cattle breading, fish
hatcheries, etc., are examples of such industries.
c) Manufacturing Industries: These refer to
industries
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 which convert the raw materials or semi-
manufactured goods into finished products,
such as iron and steel industry which convert
iron ore or steel,
 cotton textile which convert cotton into
clothes and sugar from sugarcane, etc.
A manufacturing industry may be classified
into four categories:

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i) Analytical Industry: Here, one product is analyzed
and many products are received as final products. In
the processing of crude oil, eg., we get kerosene,
petrol, gas and diesel, etc.
ii) Processing industry: In this industry, a product
passes through various processes to become a final
product. The finished product of one process
becomes the raw material of the receiving process
and the final process produces the finished goods.
iii) Synthetic Industry: many raw materials are brought
together in manufacturing process to make final
products.
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iv) Assembly Process: creating products by
joining together some component parts
without changing their shape or composition.
d) Construction Industry: Such industries are
engaged in the creation of infrastructure for
smooth and rapid development of an economy.
e) Service Industry: - These types of industries do
not produce any tangible goods.

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Rather, they are engaged in the creation of
intangible products which cannot be touched
or seen. Rendering services of professional
nature such as lawyers, doctors, teachers, etc;
are examples of service industry.

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 exercises
There is a saying that a rabbit which runs faster
than a tiger without knowing where it is heading
might end up in the hands of the lion. what does
this imply and how do you relate it to the concept
of planning?
Define Business plan?
What are the benefits of having clear business
plan for an entrepreneur?
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Visionary

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 Focus areas In BP
 Basic items that should be included in a
business plan:
– Executive summary
– Industry analysis
– Company description
– Product and services description
– Market description

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– Marketing strategy
– Operations description
– Staffing description
– Financial projection
– Capital needs
– Milestones

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 Forms of legal ownership
– Sole proprietorship
– Partnership
• General partnership
• Limited partnership
• Limited liability partnership
– Corporation
– Limited liability corporation (LLC)
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 Financing the new venture
– Sources of outside financing
• Debt financing
• Equity financing
– Equity financing alternatives
• Venture capitalists
• Initial public offerings
• Angel investors

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 CHAPTER THREE
3. BUSINESS PLANNING
3.1. Concept of Business Planning
INTRODUCTION
 When developing any business plan it is
necessary to be convinced that planning is a key
aspect in the business development process.
 Planning assists businessmen or women to
articulate both their long-term and short-term
goals for the proposed new business.
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• Lack of planning can be as deadly as lack of money to a
new small business.
• Planning is important to any business, large or small, and
never should be overlooked or, taken lightly.
 A business plan is a carefully constructed guide for the
person starting a business.
 It as a tool with three basic purposes:
 communication,
 management, and
 planning.
 As a communication tool- a business plan serves as a
concise document that potential investors can examine
to see ,if they would like to invest or assist in financing a
new venture. 83
 It shows whether a business has the potential to make a profit.
As a management tool, the business plan helps to -track, monitor,
and evaluate the progress.
 The business plan is a living document;
 it is modified as the entrepreneur gains , knowledge and experience.
 It also serves to establish timelines and milestones (landmark, objectives,
goals) and allows comparison of growth projections against actual
accomplishments.
Finally, as a planning tool, the business plan guides a business
person through the various phases of business.
 For example, the plan helps to identify obstacles to avoid and to
establish alternatives. According to Robert Krummer, Jr., chairman of
First Business Bank in Los Angeles, “The business plan is a necessity.
 If the person who wants to start a small business can’t put a
business plan together, he or she is in trouble.”
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3.1.1. Definition of the Business Plan:
 The Business plan is a written summary of an
entrepreneur’s proposed business venture, its operational
and financial details, its marketing opportunities and strategy,
and its managers’ skill and abilities.
 The business plan serves as the entrepreneur’s road map on
the journey forward in building a successful business.
3.1.2. Significances of the Business Plan
 The business plan allows the entrepreneur to exploit the
opportunities that arise in the life of a business from start
up to maturity.

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 A written business plan becomes your company
representative, much as a salesperson or executive serves
his/her organization during sales and conference
presentations and meetings.
ways in which a business plan can serve your business:
A. Obtaining bank financing
B. Seeking investment funds: Venture capitalists and
others investors require a business plan from any
company that wants to be taken seriously for funding.
C. Arranging strategic alliances
D. Obtaining large contracts
E. Attracting key employees
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3.1.3. Overview of the Business Planning Process
1. Concept Development:
 The concept development stage of the business
planning process begins with a business idea.
 A business idea is a way to generate profits by
satisfying a currently unsatisfied customer
need.
 Once you have a business idea you need to
develop it by making it more specific.

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2. Concept Testing=
 Once you have developed your business concept,
you need to conduct further research to determine
whether or not it is viable.
 This research includes:
industry research,
research on competitors,
suppliers, distributors, government regulations,
special interest groups, economic conditions,
political conditions, and any other factors that are
relevant to your specific business.
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3. Strategy Formulation=
 If your concept testing reveals a potential profit
level acceptable to you, then you will need to
develop a strategy to turn that potential profit
into actual profit.
 An effective business strategy begins with an
analysis of the internal and external factors
affecting your company-SWOT.
4. Business Plan Writing
5. Strategy Review and Implementation
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 3.2. The Business Plan
 Once you have developed a business strategy based on a well-
researched business concept and a detailed SWOT analysis,
 the next step is to translate your strategy into a written
business plan.
 Business plans are the difference between a business that
succeeds and one that does not.

3.3. Developing a Business Plan

3.3.1. General Guidelines in Preparing the Business Plan

90
Business plan should use simple direct language. It is advisable
to place all paragraph “topic sentences” at the beginning of
each paragraph. All major headings should be clear and
followed by “topic paragraphs” which highlight the key points
of the section. Business plans should, address the following
major areas and elements:
1. Introductory contents
2.Business description
3.Development & production description
4.Market analysis
5.Organization and management
6.Financial documents
7.Appendix
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1. Introductory Contents
The cover page, executive summary, and table of contents
will determine what kind of first impression one makes
on readers. In many cases, the introductory elements,
especially the executive summary, will influence whether
readers read the rest of the plan at all.
a. The Cover
The cover of the document is often the “First Impression”
of a business for any interested parties or investors. The
purpose of a cover is to tell the reader what the
document is about.

92
Your cover should say the words “Business Plan,” and
should include:
• Name and business name
• Company logo [Logo bears the brand value of a company and its main objective is to create a
long lasting impression on the mind of the viewers. Symbols, text and other graphical elements form the core
of a logo. However, they should be tightly integrated, otherwise it would fail to generate the desired
impression.]

• Address
• Telephone number
• Fax number
• E-mail address
• Other contact information
The cover should be attractive and professional looking.
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b. Executive Summary
 The executive summary is what most readers will
read first. This section tells your reader where your
company is and where you want to take it.
 Lenders in particular read executive summaries
before looking at the rest of a plan.
 After you have worked out all the details of your
business plan, you will be in a better position to
summarize it and it should be a summary (i.e. no
more than 2-3 pages). It is an abstract of the
pertinent essentials of your business plan.
94
Contents of the Executive Summary
• The Mission Statement.
• Date on which business began
• Names of founders and the functions they
perform
• Number of employees
• Location of business and any branches or
subsidiaries
• Description of plant or facilities
• Products manufactured/services rendered
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• Banking relationship and information
regarding current investors
• Summary of company growth
• Summary of management’s future plans
C. Table of Contents
To assist the reader in locating specific sections
in your business plan, include a table of
contents directly following the Executive
Summary.

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2. Business Description
The business description is the “Business Vision”, and
includes: who the company is, what it will offer, what
market needs it will address, and why the idea will work.
A business without vision is a business that will not
know what it is doing! The description should include:
• An overview of the industry the business will be in.
• A description of the company
• The company’s positioning.
• Descriptions of the company’s products or services.
• The company’s pricing strategy.

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3. Development and Production
 Describes the current state of the company’s product or service
and the plan for completing the development.
 This is also where one familiarizes the reader with how their
product is created or services sold.

 Under this section the following points should be indicated:

• Development Status
• Production Process
• Cost of Development
• Labour Requirements
• Expenses and Capital Requirements

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Market Analysis
 The Market Analysis section should illustrate your
knowledge about the particular industry your business is in.
 It should also present general highlights and conclusions of
any marketing research data you have collected.
 This section should include:
• An industry description and outlook;
• Target market information;
• Market test results;
• Lead times; and
• An evaluation of your competitors.

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5. Organization and Managements
 This section should include: your company’s
organizational structure,
 details about the ownership of your company,
 profiles of your management team and
 the qualifications of your boards of directors.
• Who does what in your business?
• What is their background and why are you bringing them
into the business as board members or employees?
• What are they responsible for?

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A. Organizational Structure
 A simple, but effective, way to lay out the structure
of your company is to create an organizational chart
along with a narrative description of what the chart
means.
 This will prove that you’re leaving nothing to chance.
 You’ve thought out exactly who is doing what.
 Where is someone in charge of every function of
your company?

101
B. Ownership Information
 This section should also include the legal
structure of your business along with the
subsequent ownership information it relates to.
 Have you incorporated your business? Or perhaps
you have formed a partnership with someone.
 If so, is it a general or limited partnership? Or may
be you are a sole proprietor.

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Important ownership information that should be
incorporated into your business plan includes:
• Names of owners
• Percentage ownership
• Extent of involvement
• Forms of ownership (i.e. common stock, preferred stock,
general partner, limited partner)
• Outstanding equity equivalents (i.e. options, warrants,
convertible debt)
• Common stock (i.e., authorized or issued).
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C. Management profiles
 Experts agree that one of the strongest factors for success in any
growth company is the ability and track record of its
owner/management.
 Provide resumes that include the following information:
• Name
• Position (include brief position description along with primary
duties)
• Primary responsibilities and authority
• Education
• Unique experience and skills
• Prior employment
• Special skills

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• Past track record
• Industry recognition
• Number of years with company
• Compensation basis and levels (make sure these are
reasonable – not too high or too low)
D. Board of Directors’ Qualifications
• A list of well-known, successful business owners/managers
can go a long way toward enhancing your company’s
credibility and perception of management expertise.
• If you have a board of directors, be sure to gather the
following information when developing the outline for your
business plan:

105
• Names
• Positions on the board
• Extent of involvement with company
• Background
• Historical and future contribution to the company’s success
E. Support Services
 Strong support services, including consultants, attorneys,
accountants, advertising agencies, as well as industry-
specific services also help to indicate other’s faith in the
business.
 This also shows the ability to attract needed talent to the
company.

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6. Financial Documents
 This is the section in which one makes the case in words, and backs
up what one says with financial statements and forms document
of the viability of the business and its soundness as an investment.
 If one is writing a plan for investors, be sure to include the
following sections:
• Risks
• Cash Flow Statement
• Balance Sheet
• Income Statement
• Funding Request and Return

107
8. The Appendix
 The appendix is where related documents and support materials
are included.
 This section should be provided to readers on an as-needed basis.
 In other words, it should not be included with the main body of
your business plan.
 Your business plan is your communication tool.
 As such, it will not want everyone to see. However, specific
individuals (such as creditors) may want access to this
information in order to make lending decisions.
 Therefore, it is important to have the appendix within easy reach.

108
The appendix would
include: • Patents
• Credit history (personal • Legal documents
and business)
• Copies of leases
• Resumes of key • Building permits
managers
• Contracts
• Product pictures
• List of business
• Letters of reference consultants, including
• Details of market studies attorney and accountant
• Relevant magazine
article or book
references
• Licenses, permits, or 109
exercises
1. Discuss an overview of the basic structure and
sections of a business plan, and describe how
entrepreneurs, investors and lenders use business
plans.
2. Write a brief mission statement for a local business
with which you are familiar and explain how having
a clearly written mission statement might benefit a
small organization?
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3- A business plan works for an entrepreneur in the same
way that a building blueprint works for an architect. No
architect would think of starting construction without
first feeling confident that the blueprint shows a good
design. Explain how similarly a detailed business plan
contributes to the success of small businesses.
4- How do you think planning in today’s organizations
compares to planning 25 years ago? Do you think
planning becomes more important or less important in a
world where everything is changing fast and crises are a
regular part of organizational life? Why?

111
 CHAPTER FOUR
PRODUCT AND SERVICE CONCEPT

112
 We define a product as any thing that can be offered to market
for attention, acquisition, use, or consumption and that might
satisfy a want or need.
 Products include more than just tangible goods
 A good, idea, method, information, object, or service that is the 
end result of a process and serves as a need or want satisfier.
 usually  bundle of tangible and intangible attributes (benefits, 
features, functions, uses) that a seller offers to a buyer for 
purchase.
 Because of their importance in the world economy, we give
special attention to services.
 Services are a form of product that consists activities, benefits,
or satisfactions offered for sale that are essentially intangible
and do not result in the ownership of anything.

113
4.1. Product Technology
Technology for Small Enterprises
 Technology is constantly changing the
demands of consumers.
 Businesses use new technologies to produce
new products and services.
 Entrepreneurs should realize that new
technological developments such as the
internet and cell phones increase the
exchange of information and may have an
effect on the operations of their business.
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 Through planning and forecasting, it may be
possible to predict some technological
changes that might affect sales of current
products and the potential for developing
new products
 Technological change influence market
situation-market change
 Therefore:-change in tech.-change in demand
 Impact on the business-entr/rs must realize
innovative technology

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Characteristics of Appropriate Technologies
 The appropriateness of technology for use in a small
business is determined by a number of
characteristics. Some of these characteristics are:
– SIMPLE: For technology to be considered
appropriate, it must be simple to operate. The
user of such technology must be able to apply it
without encountering problems.
– EFFECTIVENESS: Effectiveness of technology is
judged by- how well it fits in with the objectives
of the user.

116
– AVAILABILITY: Some technology may be appropriate for
certain purposes but not available locally. Information
technology, for example, may be the most appropriate
for certain tasks, but it may not be readily available
locally.
– FLEXIBILITY: As time changes so do the requirements of
technology. Appropriate technology must be flexible
enough to adapt to changing times in the future.
– DURABLE: Technology that is durable requires less
maintenance and repairs.
– EFFICIENT: Technology should be efficient in its utilization
of local resources.
– COST EFFECTIVE: The cost of technology should be
justified by the benefits achieved. The overall benefits
should be greater than the cost of the technology.
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 4.2. Product Development Process
 In business and engineering, new product development
(NPD) is the term used to describe the complete process of
bringing a new product or service to market.
 There are two parallel paths involved in the NPD process:
one involves the idea generation, product design and
detail engineering;
the other involves market research and marketing analysis.
Companies typically see new product development as the
first stage in generating and commercializing new products
within the overall strategic process of
product life cycle management used to maintain or grow
their market share.
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 4.2.1. The process
1. Idea Generation is often called the "fuzzy (hairy)
front end" of the NPD process
– Ideas for new products can be obtained from:-
o basic research using a SWOT analysis
o Market and consumer trends,
o company's R&D department,
o competitors,

119
 o focus groups,
o employees,
o salespeople,
o corporate spies,
o trade shows, may so be used to get an insight
into new product lines or product features.
 Idea Generation or Brainstorming techniques can
begin when you have done your OPPORTUNITY
ANALYSIS to support your ideas In the Idea
Screening Phase (shown in the next development
step).

120
2. Idea Screening
 The objective is to eliminate unsound concepts prior
to devoting resources to them.
 The screeners should ask several questions:
• Will the customer in the target market benefit from the
product?
• What is the size and growth forecasts of the market
segment/target market?
• What is the current or expected competitive pressure for the
product idea?
• What are the industry sales and market trends the product idea
is based on?
• Is it technically feasible to manufacture the product?
• Will the product be profitable when manufactured and
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delivered to the customer at the target price?
3. Concept Development and Testing
Develop the marketing and engineering details
• Investigate intellectual property issues and search patent data
bases
• Who is the target market and who is the decision maker in the
purchasing process? Consider marketing philosophy
• What product features must the product incorporate?
• What benefits will the product provide?
• How will consumers react to the product?
• How will the product be produced most cost effectively?
• Prove feasibility through virtual computer aided rendering, and
rapid prototyping
• What will it cost to produce it?
Testing the Concept by asking a sample of prospective
customers what they think of the idea.
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4. Business Analysis
Estimate likely selling price based upon competition and
customer feedback
Estimate sales volume based upon size of market
Estimate profitability and breakeven point
5. Beta (measure of price sensitivity) Testing and Market Testing
1.Produce a physical prototype(trial product) or mock-up
(create)
2.Produce an initial run of the product and sell it in a test
market area to determine customer acceptance
3.Test the product (and its packaging) in typical usage situations
4.Conduct focus group customer interviews or introduce at
trade show
5.Make adjustments where necessary
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6. Technical Implementation
– New program initiation
– Finalize Quality management system
– Resource estimation
– Requirement publication
– Publish technical communications such as data sheets
– Engineering operations planning
– Department scheduling
– Supplier collaboration
– Logistics plan
– Resource plan publication
– Program review and monitoring
– Contingencies - what-if planning
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7. Commercialization (often considered post-NPD)
– Launch the product
– Produce and place advertisements and other
promotions
– Fill the distribution pipeline with product
– Critical path analysis is most useful at this stage
8. New Product Pricing
– Impact of new product on the entire product portfolio
– Value Analysis (internal & external)
– Competition and alternative competitive technologies
– Differing value segments (price, value, and need)
– Product Costs (fixed & variable)
– Forecast of unit volumes, revenue, and profit
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 4.2.2. Product Distribution, Advertising and
Promotion, Sales and Service
There are several major methods you can use to get
your products or services to your customers or
clients.
• Advertising and promotion of products and services
are often some of the most under-rated activities by
new business owners.
• In this increasingly expanding and competitive
marketplace, you must ensure your products and
services are prominently in the minds of your
customers and clients.
• This requires ongoing advertising and promotion
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Advertising and Promotion: Even if your products
and services are prominently in the minds of your
customers and clients, you need to facilitate the
process of their buying (or, sometimes in the case
of nonprofits, using) your products and services.
• This often requires cultivating an ongoing
relationship with customers and clients to
understand their needs, explain how your products
and services can meet those needs, and facilitate
the "closing" of the sale, that is, where they sign
"on the dotted line".

127
• Sales: Customers are increasingly knowledgeable and
intelligent in their buying habits. Depending on the
nature of the product or service, a warranty (or promise
of ongoing repair and/or support for some period of
time) can greatly reassure customers when considering
the purchase of your products.
• Warranties: Not only can high-quality customer service
earn a strong reputation for your business and
products, it can also support continued purchases and
revenue (and even new ideas for new products and
services) from current customers.
• Customer Service: All of the product management
activities so far come down to achieving one, ongoing
major outcome: Customer Satisfaction
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 4.2.3. product life cycle
 We define a product as "anything that is
capable of satisfying customer needs. This
definition includes both physical products
(e.g. cars, washing machines, DVD players) as
well as services (e.g. insurance, banking,
private health care).
 Businesses should manage their products carefully
over time to ensure that they deliver products that
continue to meet customer wants.
• The process of managing groups of brands and
product lines is called portfolio planning.
 The stages through which individual products
develop over time are called commonly
known as the "Product Life Cycle".
 The classic product life cycle has four stages:
introduction; growth; maturity and decline

130
1. Introduction Stage
• At the Introduction (or development)
 Stage market size and growth is slight.
 It is possible that substantial research and development
costs have been incurred in getting the product to this
stage.
 In addition, marketing costs may be high in order to
test the market, undergo launch promotion and set up
distribution channels.
 It is highly unlikely that companies will make profits on
products at the Introduction Stage.
 Products at this stage have to be carefully monitored to
ensure that they start to grow. Otherwise, the best
option may be to withdraw or end the product.
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2. Growth Stage
The Growth Stage is characterized by
 rapid growth in sales and profits.
 Profits arise due to an increase in output
(economies of scale) and possibly better prices.
 At this stage, it is cheaper for businesses to
invest in increasing their market share as well
as enjoying the overall growth of the market.
Accordingly, significant promotional resources
are traditionally invested in products that are
firmly in the Growth Stage.
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3. Maturity Stage
 The Maturity Stage is, the most common stage for all
markets.
 it is in this stage that competition is most intense as
companies fight to maintain their market share.
 Here, both marketing and finance become key activities.
 Marketing spend has to be monitored carefully, since any
significant moves are likely to be copied by competitors.
 The Maturity Stage is the time when most profit is earned
by the market as a whole.
 Any expenditure on research and development is likely to
be restricted to product modification and improvement
and perhaps to improve production efficiency and quality.

133
4. Decline Stage
In the Decline Stage, the market is shrinking, reducing
the overall amount of profit that can be shared
amongst the remaining competitors.
Great care has to be taken to manage the product
carefully.
 It may be possible to take out some production cost, to
transfer production to a cheaper facility, sell the
product into other, cheaper markets.
 Care should be taken to control the amount of stocks
of the product.
 Ultimately, depending on whether the product remains
profitable, a company may decide to end the product.
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135
 4.3. Product Protection
Entrepreneurs can not have the legal expertise or
background of lawyer, of course, but they should
be sufficiently knowledgeable about certain legal
concepts that have implications for the business
venture. The major legal concepts that affect
entrepreneurial ventures can be divided into three
groups:
i. Those that relate to the inception of the venture,
ii. Those that relate to the ongoing venture, and
iii. Those that relate to the growth and continuity of
the venture.
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Next our focus will be on the legal concepts that relate to
the first group, particularly laws governing intellectual
property; copy rights trade marks and patents,.
A copyright is protection for a "creative work" - a
painting, book, photo, piece of music etc. It prohibits
anyone but the holder from publishing or distributing it
without his consent.
A trademark is a symbol used as a sign or logo under
which a company does business. When registered, no
other business can use it. (McDonald's "Golden Arches",
for example, are a registered trademark)

137
 A patent protects your rights in an invention - a
new mousetrap for example. Once you have
obtained a patent, no-one can make something
you invented without your permission.
In general; Copyrights, trademarks, and patents
are all forms of legal protection provided by a
governmental entity to inventors, musicians,
businesses, and many others

138
 Each offer a unique set of rights and
protections but differ in what they cover, as
well as how long those protections last.
 In general, a copyright protects written or
artistic works, like books, plays, musical
compositions, and paintings;
 trademarks protect brand names and
symbols, like logos; and
 patents protect inventions, including
processes, devices, designs, and even plants.

139
 Assignment -2 (15%)
1) Discuss the product life-cycle and how it leads to
new-product development. (6 points)
2) What are the stages in the new product
development? (3 points)
3) What factors might determine how long a product
remains in each stage of the product life-cycle?
What can a firm do to prolong each stage? (6
points)

140
 CHAPTER FIVE
5. MARKETING AND NEW
VENTURE DEVELOPMENT

141
 Overview
Marketing is an economic activity of vital importance to any business.
 It is also one of the functional areas of business management.
 In fact, marketing function is closely related to the very existence of business.
 A business may have many objectives, including making profits.
 A business may have many objectives, including making profits.
But on a deeper analysis, it can be said that the most sensible
objective of the business must be consumers' satisfaction of
needs and wants.

Then it follows that consumer satisfaction should be the motive force

behind the business organization and the marketing organization as well.
This does not mean that profit motive is to be scarified at the expense of
consumer satisfaction
but it means that profits are made by satisfying the respect consumers.

142
 Marketing
• Today, marketing must be understood not in the old
sense of making a sale-- “telling and selling”—but in
the new sense of satisfying customer needs.
• If marketer does good job of understanding
consumer needs; develops products that provide
superior value; and prices, distributes, and promotes
them effectively, these products will sell very easily.
• Thus selling and advertising are only part of a larger
“marketing mix”—a set of marketing tools that
work together to satisfy customer needs and build a
customer relationships.
143
 cont
• Broadly defined, marketing is a social and
managerial process by which individuals and
groups obtain what they need and want
through creating and exchanging value with
others.
• In a narrower business context, marketing
involves building profitable, value-laden
exchange relationship with customers.

144
 Hence, we define marketing as the process
by which companies create value for
customers and
 strong customer relationship in order to
capture value from customers.
 Similarly a market can be defined as a set of
actual and potential buyers of a product
these buyers share a particular need or
want that can be satisfied through exchange
relationship.

145
5.1.1. The marketing Process
five –step model of the marketing process described .
 In the first four steps, companies work to: -
 understand consumers,
 create consumer value, and
 build strong customer relationships.
 In the final step, companies reap the rewards of
creating superior customer value.
 By creating value for consumers, they in turn
capture value from consumers in the form of sales,
profits, and long term customer equity.

146
147
 5.1.2. Concepts and Definition of Marketing
Research
 Marketing research is the systematic design,
collection, analysis, and reporting of data
relevant to a specific marketing situation facing
an organization.
 Companies use marketing research in a wide
variety of situations.
 Some large companies have their own research
department that work with marketing
managers on marketing research projects.

148
As can bee seen on the next figure, the
marketing research process has four steps
 defining the problem and research objectives,
 developing the research plan,
 implementing the research plan, and
 interpreting and reporting the findings.

149
150
 5.2. Marketing Intelligence
 Marketing intelligence is a systematic
collection and analysis of publicly available
information about competitors’ and
developments in the market place.
 The goal of marketing intelligence is to
 improve strategic decision making,
assess and track competitors’ actions, and
 provides early warning of opportunities and
threats.

151
 5.3. Competitive analysis
 A good competitive analysis in the industry is vital
to the ultimate success of any new venture.
 Both the quality and quantity of the competition
must be carefully scrutinized.
 This competitive analysis involves consideration of
the number of competitors as well as the
strengths of each.
 Competition can be analyzed from the stand point
of:
a) What drives the competition and
b) What the competition can do.
152
 An analysis of the number, relative size, traditions, and cost
structures of direct competitors in the industry can help
establish the nature of the competition.
 Will competition become more or less intense as the number
and characteristics of competitors change over time?
 This question also can be answered through detailed analysis.
 For instance, what will happen to the degree of competition if
 (a) a market growth increases rapidly,
 (b) direct competitors equalize in size,
 (c) one or two direct competitors become substantially larger
in size, or
 (d) product/service differentiation slows down?

153
 Instructions: Place x to denote any competitive factor that a
competitor has or can provide/perform better than you.
Competitive Competitive Firms
Factor
Company A Company B Company C Your Company
Relative Product
quality

Price
Availability

Image

Location
Product design
Raw material
cost

Financial
condition &etc.

154
5.4. Marketing Strategies for Small Business
5.4.1. Competitive Advantage
 In order to succeed in business a firm has to
have some advantage over its competitors.
Competitive advantage can be defined as an
advantage over competitors gained by offering
consumers greater value, either through lower
prices or by providing more benefits that
justify higher prices.
 Porter claims that five forces determine
competitiveness.
155
 The power of Buyers-this is determined by
buyer, firm size and concentration, the volume
purchased, buyer information and switching
costs, and their ability to backward integrate.
 Thus a small firm selling what is for it, large
volumes to a big company buyer, but where
these volumes represent small volumes to
them, a prior, is in a weak competitive position.
 The power of the marketing mix and its ability
to differentiate the product and
insulate(protect) it from price sensitivity will
also have an effect.
156
2. The power of suppliers-this is also determined by
the relative size of firms and the other factors
mentioned above. Thus the small firm buying from a
large company is relatively disadvantaged.
3. The threat of new entrants-barriers to entry keeps
out new entrants to an industry. These can arise
because of legal protection (patents etc,),
economies of scale, proprietary product differences,
brand identity, access to distribution, government
policy, switching costs, capital costs, etc. For
example, a firm whose product is protected by
patent or copyright may feel that it is relatively safer
from competition.
157
4. The threat of substitutes-the threat of substitutes
revolves around their relative price, performance,
switching costs and the propensity of the customer
to switch. Thus, for example, a small firm selling a
poorly differentiated product in a low –price,
fashion market should find it difficult to compete.
5. The intensity of rivalry-the rivalry(challenge) of an
industry will depend on its newness and growth, its
attractiveness in terms of profit and value added,
intermittent over capacity, product differentiation,
brand identity, switching costs, concentration,
diversity of competition and exit costs.

158
The five forces determine industry profitability and in
turn are a function of industry structure- the
underlying economic and technical characteristics of
the industry. These can change overtime but the
analysis does emphasize the need to select industries
carefully in the first place.
It also provides a framework for predicting, a prior, the
process or otherwise of the small firm.
For example a small firm competing with many other
small firms to sell relatively undifferentiated product
to a few large customers in an industry with few
barriers to entry is unlikely to do well without some
radical shifts in its marketing strategies.
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 5.4.2. Economies of Scale
 Is that how the total cost per unit produced changes
as more units are produced?
Generally, this can be expected to decline up to some
point: for example, as an expensive piece of
machinery is used more fully.
However, beyond this point unit costs may start to
increase: for example, as the economies of scale or
production become increasingly offset by increasing
distribution costs. Thus the potential for economies of
scale in a high capital intensity industry like chemicals
is great, where as in retailing the potential savings are
much smaller.
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 5.4.3. Niche Marketing
 Concentrating all marketing efforts on a small but
specific and well defined segment of the population.
 Niches do not 'exist' but are 'created' by identifying 
needs, wants, and requirements that are being
addressed poorly or not at all by other firms, and 
developing and delivering goods or services to satisfy
them.
 As a strategy, niche marketing is aimed at being a
big fish in a small pond instead of being a small fish
in a big pond. Also called micromarketing.

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5.5. International markets
 The world is shrinking rapidly with the advent of faster
communication, transportation, and financial flows.
 Products developed in one country are finding
enthusiastic acceptance in other countries.
International trade is booming.
 Today global competition is intensifying.
 Foreign firms are expanding aggressively into new
international markets, and home markets are no
longer as rich in opportunity.
 Few industries are now safe from foreign competition.

162
 If companies delay taking steps toward
internationalizing, they risk being shut out of
growing markets.
 Firms that stay at home to play safe not only
might lose their chances to enter other
markets but also risk loosing their home
markets.
 Domestic companies that never thought about
foreign competitors suddenly find these
competitors in their own backyards.

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 5.5.1. Looking at the Global Marketing Environment
 Before deciding whether to operate
internationally, a company must understand
the international marketing environment.
 That environment has changed a great deal in
the last two decades:-
 creating both new opportunities and
 new problems.

164
 5.5.2. The International Trade System
 Companies looking abroad must start by understanding the
international trade system.
 When selling to another country a firm faces various trade
restrictions.
 The most common is the tariff, a tax levied by a foreign
government against certain imported products.
 The tariff may be designed either to raise revenue or to protect
domestic firms.
 The exporter also may face a quota, which sets limits on the
amount of goods the importing country will accepting certain
product categories.
 The purpose of the quota is to conserve on foreign exchange and
to protect local industry and employment. An embargo, or
boycott, which totally bans some kinds of imports, is the strongest
form of quota.
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• The World Trade Organizations and GATT
 The General Agreement on Tariffs and Trade
(GATT) is an over 60 years old treaty designed to
promote world trade by reducing tariffs and other
international trade barriers.
 Since the treaty’s inception in 1948, member nations
(currently numbering about 150) have met in eight
rounds of GATT negotiations to reassess trade
barriers and set new rules for international trade.
 The first seven rounds of negotiations reduced the
average worldwide tariffs on manufactured goods
from 45 percent to just 5 percent.

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 CHAPTER SIX
6. ORGANIZING AND FINANCING THE NEW
VENTURE
6.1. Entrepreneurial Team and Business
Formation

167
• Recruitment and hiring new employees may occur at both the
entry and senior management level. Strategy and procedures
may differ somewhat depending on the level for which the
individual is being hired. The entrepreneur will generally need
to establish procedures for hiring any new employees. Many of
these hiring decisions will be important, and thus, the
entrepreneur should establish some criteria as to what
characteristics will be considered in evaluating potential
employees.

• Acquiring senior talent can be critical to the ability of the new

venture to successfully meet growth goals. New evidence
indicates that start-up companies are not having as much
difficulty filling senior management positions as was once
believed.

168
There are a number of behaviors listed below that can exhibit the
leadership quality necessary for the new venture.
• Set an example within an ethical set of values for other managers
and employees
• Show respect and concern for the personal well-being of
employees
• Don’t try to do everything for yourself
• Recognize the diversity of employees and how they should be
treated
• Encourage and praise others in the organization when deserved
• Recognize the importance of employees having fun at their jobs
• Provide incentives and awards for quality works effort and new
ideas
• Be aware of the need for future strategic planning by
encouraging every one to participate

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6.2. Sources of Financing
• Introduction
 One of the reasons for the failure of small businesses is
lack of adequate capital.
 Every entrepreneur planning a new venture confronts the
dilemma of where to find startup capital.
 Entrepreneurs usually are not aware that numerous
possibilities and combinations of financial packages may be
appropriate for new venture.
 It is important, therefore, to understand not only the
various sources of capital but also the expectations and
requirements of these sources.
 Without this understanding, an entrepreneur may be
frustrated with attempts to find appropriate start-up capital
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6.2.1. Asset management
The purchase of tangible assets is usually financed on a longer term basis,
from 3 to 10 years, or more depending on the useful life of the asset.
Plant machinery, equipment, fixture, and fittings, company vehicles and
buildings may all be financed by medium or long term loans from a variety of
lending bodies.
Equipment suppliers: most equipment vendors encourage business owners
to purchase their equipment by offering to finance the purchase.
This method of financing is similar to trade credit but with slightly different
terms.

Usually, equipment lenders offer reasonable credit terms with only a modest
down payment with the balance financed over the life of the equipment
(usually several years).
In some cases, the vendors will repurchase equipment for salvage value at the
end of its useful life and offer the business owner another credit agreement on
new equipment.

171
6.2.2. Equity Financing
 Equity financing is the money invested in the venture
with no legal obligation for entrepreneurs to pay the
principal amount or pay interest on it.
 It is the personal investment of the owner (or
owners) in a business, and it is some times called
risky capital because the investors assume the
primary risk of losing their funds if the business fails.
 The use of equity funding thus requires no
repayment in the form of debt.
 It does, however, require sharing the ownership and
profits with the funding source.
 Since no repayment is required, equity capital can be
much safer for new ventures than debt financing.
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Source of Equity Capital
A. Personal Savings
 The first place entrepreneurs should look for start up
money is their won pockets.
 It is the least expensive source of funds available.
 The sooner you take outside money, the more ownership
in your company you will have to surrender;
entrepreneurs apparently see the benefits of self-
sufficiency; the most common source of equity funds used
to start a small business is the entrepreneur’s pool of
personal savings.
 As a general rule, entrepreneurs should expect to provide
at least half of the start up funds in the form of equity
capital.
173
 If the entrepreneur is not willing to risk his own money,
potential investors are not likely to risk their money in the
business either.
 Furthermore, if an owner contributes any less than half of the
initial capital requirement, he must borrow an excessive
amount of capital to fund the business properly, and the high
repayment schedule put intense pressure on cash flow.
B. Friends and Relatives
• After emptying their own pockets, entrepreneurs should turn
to friends and relatives who might be willing to invest in the
business venture. Because of their relationships with the
founder, these people are most likely to invest.
• But having them invest can lead to controversy if their
participation is not clear to everyone.
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• Inherent dangers lurk in family business investments, however.
Unrealistic expectations or misunderstood risks have destroyed many
friendships and have ruined many family reunions. To avoid such
problems, an entrepreneur must honestly present the investment
opportunity and the nature of the risks involved to avoid alienating
friends and family members if the business fails.
C) Partners
• An entrepreneur can choose to take on a partner to expand the
capital foundation of the proposed business. Before entering into any
partnership arrangement, however, the owner must consider the
impact of giving up some personal control over operations and of
sharing profits with one or more partners.
• Whenever an entrepreneur gives up equity in his/her business
(through what ever mechanisms), he/she runs the risk of losing
control over it.
• As the founder’s ownership in a company become increasingly
diluted, the probability of losing control of its future direction and
the entire decision-making process increases.
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• D) Public Stock Sale (“going public”)
 In some cases, entrepreneurs can “go public” by selling
shares of stock in their corporation to outside investor.
 This is an effective method of raising large amounts of
capital, but it can be an expensive and time consuming
process filled with regulatory nightmares.
 Going public is not for every business.
 In fact, most small companies do not meet the criteria
for making a successful public stock offering.
 It is almost impossible for a start up company with no
track record of success to raise money with a public
offering.

176
6.2.3. Venture Capital
• Venture capital companies are private, for
profit organizations that purchase equity
positions in young businesses they believe
have high growth and high profit potential.
They provide start up (seed-money) capital to
new ventures, development funds to
businesses in their early growth stage, and
expansion funds to rapidly growing ventures
that have the potential to “go public” or that
need capital for acquisitions.
177
 Small business owners must realize that it is
very difficult for any small business, especially
fledging or struggling firms, to pass the intense
screening process of a venture capital company
and quality for an investment.
 Two factors make a deal attractive to venture
capitalists:
high returns and
a convenient (and profitable) exit strategy.
 When evaluating potential investments, venture
capitalists look for the following feature:
178
 Competent management; the most important ingredient in the success of any
business is the ability of the manger or the management team, and venture
capitalists recognize this. Venture capitalists are really buying into the
management of your company. If the light is not on at the top, it is dim all the
way down.
 Competitive edge(boarder): Investors are searching for some factor that will
enable a small business to set it self-apart from its competitors.
 This distinctive competence may range from an innovative product or service
to a unique marketing or research and development approach. It must be
something with the potential to make the business a leader in its field.
 Growth of industry: Hot industries attract profits and venture capital. Most
venture capitalists focus their searches for prospects in rapidly expanding fields
because they believe the profit potential is greater in these areas.
 Intangible factors: some other important factors considered in the screening
process are not easily measured; they are intuitive, intangible factors the
venture capitalists detect by gut feeling. This feeling might be the result of the
small firm’s solid sense of direction, its strategic planning process, the
chemistry of its management team, of a number of other factors. 

179
• Debt Financing
 Debt capital is the financing that a small business owner has
borrowed and must be repaid with interest.
 Small enterprises have fewer choices than large firms for
obtaining debt financing for they are excluded from financial
sources such as money raised through the sale of bonds,
debentures and commercial papers.
 This is because:
 Many small businesses are limited by size, with small inventories
or markets that provide few assets for collateral loans.
 Lenders require higher interest rates on loans to small
companies and short-term borrowing (one year or less) because
lenders consider small businesses to be greater risks than bigger
corporate customers.

180
 Debt financing has the following two
advantages over equity financing. These are:
1. The cost of debt financing is often lower than
that of equity financing.
 This is because, the higher risks associated with
providing equity capital to small companies
forces investors to demand greater returns than
lenders.
2. Unlike equity financing, debt financing does not
require an entrepreneur to dilute her/his
ownership interest in the company.
181
Sources of Debt Capital
Sources of debt capital could be categorized into two;
a)Banks and
b) Non-banks sources.
 Bank Sources of Debt Capital
Commercial banks are by far the most frequently used
source of short-term funds by the entrepreneur.
 Banks tend to be conservative in their lending practices
and prefer to make loans to established small businesses
rather than to high-risk start-ups.
 Bankers want to see evidence of a company’s successful
track record before committing to a loan. They are
concerned with a firm’s operating past and will scrutinize
its records to project its position in the immediate future.
182
 They also want proof of the stability of the firm’s
sales and about the ability of the product or service
to generate adequate cash flows to ensure
repayment of the loan.
 Banks will refuse loan requests when, in their
opinion, there is not an excellent chance for
repayment of the loan proceeds with interest.
 Banks view themselves as stewards of the
depositors’ money and under law have a fiduciary
responsibility to depositors.
 A banker’s commodity is money, and once it has left
bank, the banker’s control is virtually nonexistent
183
Major Reasons why Banks Deny Loans
• Lack of equity: Bankers want to see that you have a stake in
the deal that at least as great as the bank’s risk. A banker’s
goal in making the loan is to recover the bank’s principal
plus interest
• Lack of cogent (convincing, sound, coherent) business plan
• Lack of management experience
• Lack of financial information: bankers like to look at
numbers, analyze them, and manipulate them to determine
trends. They use these numbers to determine repayment
ability. Note: the financial information you provide a banker
should include projections of how money will be used and
how it will be repaid. If the financial statement is poorly
done or nonexistent, there is little chance of obtaining a
loan.
184
• Industry type
• Bank aggressiveness: You will obviously have a better chance
with an aggressive bank. Banks react to their own portfolio needs
or problems. Research the bank you are interested in before
submitting a request.
• Type of loan: as in the case of industry type, some banks will not
entertain certain types of loans.
Commercial banks provide unsecured and secured loans.
• An unsecured loan is one in which collateral is neither requested
nor given, i.e., it is a personal or signature loan. This type of loan
is generally short term in nature, that is, less than one year, and is
granted to only the most credit worthy customers.
 Entrepreneur is granted the loan on the strength of his/her
reputation.
 Unsecured signature loan will have high interest charges.
185
 Secured loans are those with security pledged to
the bank as assurance that the loan will be paid.
 There are many types of security a bank will
consider, such as a guarantor another credit
worthy person or company that agrees to pay the
loan in the event the borrower default but most
security is in the form of tangible assets pledged as
collateral.
 Hence, if they do make loans to a start up venture,
banks like to see sufficient cash flows to repay the
loan, ample collateral to secure it.
 Repayment of the principal is over the term
established and comes chiefly from cash.
186
• Banks also focus on a company’s capacity to create
positive cash flow because they know that is where the
money to repay their loans will come from.
• The first question in most bankers’ minds when
reviewing an entrepreneur’s business plan is “can this
business generate sufficient cash to repay the loan?”
Even though they rely on collateral to secure their loans,
the last thing banks want is for a borrower to default,
forcing them to sell the collateral (often at “fire sale”
prices) and use the proceeds to pay off the loan. That’s
why bankers stress cash flow when analyzing a loan
request, especially for a business start up. “Cash is more
important than your mother”, jokes one experienced
borrower.
.
187
Bank Lending Decisions
• Commercial loan decisions are made only after
the loan officer and loan committee do a careful
review of the borrower and the financial track
record of the business. For this reason, the
small business owner needs to be aware of the
criteria bankers use in evaluating the credit
worthiness of loan applicants. Most bankers
refer to these criteria as the five Cs of credit:
Capital, Capacity, Collateral, Character and
Conditions
188
• Capital: a small business must have a stable capital base before a
bank will grant a loan. Otherwise, the bank would be making, in
effect, a capital investment in the business. Most banks refuse to
make loans that are capital investments because the potential for
return on the investment is limited strictly to the interest on the
loan, and the potential loss would probably exceed the reward.
• Capacity: a synonym for capacity is cash flow. The bank must be
convinced of the firm’s ability to meet its regular financial
obligations and to repay the bank loan, and that takes cash. More
small businesses fail from lack of cash than from lack of profit. It is
possible for a company to be showing a profit and still have no cash
that is, to be technically bankrupt.
• Collateral: collateral includes any assets the owner pledges to the
bank as security for repayment of the loan. Of the company default
on the loan, the bank has the right to sell the collateral and use the
proceeds to satisfy the loan. Bankers view the owner’s willingness
to pledge collateral (personal or business assets) as an indication of
dedication to making the venture a success. A sound business plan
can improve a banker’s attitude toward a venture. 189
Character: before approving a loan to a small business, the banker must be
satisfied with the owner’s character. The evaluation of character frequently is
based on intangible factors such as honesty, competence, polish,
determination, intelligence and ability. Although the qualities judged are
abstract, this evaluation plays a critical role in the banker’s decision. Loan
officers know that most small businesses fail because of incompetent
management, and so they try to avoid extending loans to high-risk managers.
The business plan and polished presentation by the entrepreneur can go far
in convincing the banker of the owner’s capability.
• Conditions: the conditions surrounding a loan request also affect the owner’s
chance of receiving funds. Banks consider factors relating to the business
operation such as potential growth in the market, competition, location, form
of ownership, and loan purpose. Again, the owner should provide this
relevant information in an organized format in the business plan. Another
important condition influencing the banker’s decision is the shape of the
overall economy including interest rate levels, inflation rate, and demand for
money.
• The higher a small business scores on these five Cs, the greater its chance will
be of receiving a loan. The wise entrepreneur keeps this in mind when
preparing a business plan and presentation.
190
Non-Bank Source of Debt Capital
Banks are not the only source of debt financing. There are some
reasons that forces entrepreneurs to look beyond the bank:
• To acquire more money
• To overcome banks’ conservation
• To accommodate the diversity of the small business sector
• To nourish success
• To forestall failure
• To reduce dependence on leverage
• To support innovation
• To improve networking and community visibility
• To finance substantive growth

191
Trade credit: it is credit given by suppliers who sell goods
on account. This credit is reflected on the entrepreneur’s
balance sheet as account payable and in most cases it
must be paid in 30 to 90 or more day’s, interest free.
 Because of its ready availability, trade credit is an
extremely important source of financing to most
entrepreneurs.
 When banks refuse to lend money to a start up business
because they see it as a bad credit risk, the owner
usually is able to turn to trade credit as a viable source of
capital.
 Getting suppliers to extend credit in the form of delayed
payments usually is much easier for a small business
than obtaining bank financing.
192
Commercial Finance Companies: when denied a bank loan, a small
business owner often looks to a commercial finance company for the
same type of loan. Unlike their conservative counterparts, commercial
finance companies are usually willing to tolerate more risk in their loan
portfolio. Because commercial finance companies depend on collateral
(receivables, inventory and equipment) to recover most of their losses,
they do not require the complete financial projections of future
operations that most banks do. However, this does not mean that they
do not carefully evaluate a company’s financial position before making
a loan. Their most common methods of providing credit to small
businesses are account receivable financing and inventory loans, and
they operate exactly as commercial banks do. In fact, commercial
finance companies usually offer many of the same credit options as
commercial banks do. However, because their loans are subject to more
risks, finance companies charge a higher interest rate than
commercial banks. In addition to short-term financing for small
businesses, commercial finance companies also extend intermediate
and long-term loans for real estate and fixed assets.
193
• Accounts Receivable Financing: it is short term financing that involves
either the pledge of receivable loan or the sale of receivables (factoring).
Accounts receivable loans are made by commercial banks, where as
factoring is done primary commercial finance companies and factoring
concerns. Account receivable bank loans are made on a discounted value
of the receivables pledged. A bank my make receivable loans on a
notification or non-notification plan. Under the notification plan,
purchasers of goods are informed that their accounts have been assigned
to the bank. They then make payments directly to the bank, which credits
them to the borrower’s account. Under the non-notification plan,
borrowers collect their accounts as usual and then pay off the bank loan. 
• Factoring is the sale of accounts receivable. Under this arrangement, the
receivables are sold, at a discounted value, to a factoring company. Some
commercial finance companies also do factoring. Under a standard
arrangement the factor will buy the client’s receivables out right, without
recourse, as soon as the client creates them by its shipment of goods to
customer.

194
• Credit Unions: credit unions are non-profit financial cooperatives that
promote savings and provide credit to their members, are best known for
extending loans. But credit unions do not make loans to just anyone; to
qualify for a loan an entrepreneur must be a member. Lending practices
at credit unions are very much like those at banks, but they usually are
willing to make smaller loans.
• Insurance Companies: For many small businesses, life insurance companies
can be an important source of business capita. Insurance companies offer
two basic types of loans: policy loans and mortgage loans.
• Bonds (also known as debt securities): A bond is a long-term contract in
which the issuer, who is the borrower, agrees to make principal and
interest payments on specific dates to the holder of the bond. Bonds have
always been a popular source of debt financing for large companies. Few
small business owners realize that they can also tap this valuable source of
capital. Although they can help small companies raise much needed
capital, bonds have certain disadvantages. The issuing company must
follow the same regulations that govern business-selling stock to public
investors.

195
• 6.2.5. Government Programs
• A. Government: the government contributes by providing the
infrastructure to support a new venture. It is no wonder that more
companies are formed in the United States of America given the roads,
communication and transportation systems, utilities and economic
stability available versus that are available in other countries. Even the tax
rates for companies facilitate or hinder entrepreneurship. Countries
having a regressive tax rate, particularly on individuals, can suppress
company formation since a significant monetary gain cannot be achieved
even though the social, psychological, and financial risks are still present.
• Government has a series of development programs that are designed to
help entrepreneurs and small business enterprises. These programs
include support for government contractors, access to capital,
management and technical assistance, and even export assistance. The
prime objective is to build community –based small firms that in turn, will
revitalize neighborhoods, create jobs, and stimulate economic growth.

196
 Individual Assignment I
Mark:15%
1.Discuss briefly the differences of Merger,
Acquisition, Licensing And Franchising with
their respective Advantage and disadvantages

197
 CHAPTER SEVEN
MAMNAGING GROWTH AND TRANSACTION

7.1 Preparing For Launch of the Venture

This chapter deals with the key managerial areas of
expertise that will be required to keep the business
going in the early months and growth phases of the
start-up. These areas-such as financial analysis,
marketing and sales analysis, and advertising-may
necessitate the hiring of outside experts if the
entrepreneur can not fulfill these managerial needs.

198
Financial skills are necessary for the entrepreneur to manage
the venture during early years. Cash flows, the income
statement, and the balance sheet are the key financial
areas that will need careful management and control. In
the area of financial analysis, the entrepreneur must be
concerned with managing cash, assets, debts, and profits.
Cash flow must be monitored on a regular basis (usually
monthly). Budgeted and actual cash flows should be
evaluated when they vary significantly. Providing
sensitivity analysis to monthly cash flow projections can be
accomplished by calculating pessimistic and optimistic
amounts for all receipts and disbursements using an
amount that is +/- 5percent from the expected amount.

199
• For example XYZ Plc might have projected in the prior
months sales receipts of $24,000 and, using the: +/- of 5%,
would have a pessimistic amount of $22,800: 24,000-
(24,000X5%) and optimistic amount of $25,200: 24,000+
(24,000X5%) .
This sensitivity analysis would then be computed for all
disbursement as well. In this manner the entrepreneur
would be able to ascertain the maximum cash needs given
a pessimistic outcome and could prepare for any cash
needs.
• For some very small ventures such as a restaurant, retail
store, or service it may be helpful to compute a daily cash
activity table to determine where errors or problems
occurred.
200
Assets can be managed by using the balance sheet. Besides cash,
the entrepreneur will need to control accounts receivable and
inventory. If accounts receivable are late to delinquent, the
entrepreneur will need to tighten collection procedures.
Increases in accounts receivable because of increased credit
sales may require short term financing of receivable to meet
short term cash needs.
Expenses need to be controlled in two ways. First, it is important
to understand the expenses should be allocated by product,
region, department, and so on. Otherwise, the entrepreneur
may inaccurately evaluate the profitability of any product or
service. Accuracy can improve the ability of the entrepreneur to
understand which service or a product are a problem, and
perhaps to even explain which department, region, or merger is
responsible.
201
• Inventory must also be controlled. From an accounting
point of view, the entrepreneur will need to determine
the value of inventory and how it affects the cost of
goods sold (income statement). Too much inventory can
be costly to the venture; too little can result in fewer
sales because delivery dates can not be met. First in first
out (FIFO-inventory costing method whereby first items
into inventory are first items out) or last in first out (LIFO-
inventory costing method whereby last items into
inventory are first items out) accounting may be used to
cost inventory (cost of goods). FIFO will generally provide
a more realistic value of cost of goods old, unless the
cost of inventory is increasing by an abnormal rate or the
economy is in a cycle of inflation.
202
• Fixed assets such as equipment may require long-term
debt. Long –term debt can be obtained from bank
loans, loans from friends or relatives, or, in the case of
a corporation, the sale of stock. The sale of stock may
require the entrepreneur to give up some equity in the
business in the business and hence must be weighted
carefully.
• Comparing actual cost from the income statement with
standard percentages (percentages related to net
sales) will be useful in managing the cost and profits of
the new venture. Higher costs than anticipated should
be carefully evaluated so that they don’t surprise the
entrepreneur later.
203
One method to help interpret and analyze the
financial statement of the new venture is ratio
analysis. There are many different ratios that can
be calculated to help understand the financial
picture of the new venture. The most important
rations to start-up venture would involve
liquidity, asset management, and performance.
Ratios should, however, be used with other
measures and pro formas in order to have a
complete and accurate picture of the financial
wellbeing of the venture.
204
• Marketing and sales controls require careful monitoring of key market
information as well as an effective reporting system by sales personnel.
Key variables such as market share, sales, distribution, promotion, and
customer satisfaction requires monitoring to ensure that marketing plan
goals and objectives are being achieved. If problems are identified, the
corrective action can be taken before the problem becomes too serious.
• One of the most important problems an entrepreneur faces during the
early stages of start-up is creating awareness of the venture and its
products and services. Creating a quality websites can be an effective
method to reaching the target market. Finding creative ways to take
advantage of free advertising or publicity, the entrepreneur may need to
consider some traditional media advertising. Tradeshows can also be an
effective means to conduct marketing research, create awareness, and
identify and collect names of potential customers. Generally, the
decision to advertise will require the hiring of an agency unless the
entrepreneur has expertise in this area.

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 7.2 Managing Early Growth of Venture
• 7.2.1 To grow or not to grow
• The entrepreneur through efficient planning and control
can have an important effect on the direction a venture
takes. To grow or not to grow should be an important
part of the entrepreneur’s strategic plan, which is
discussed as follows. The plan will reflect the future
goals and the strategies needed to meet these goals. For
those who choose to grow their venture, it is necessary
to be prepared for growth and to understand its
implications. In many cases growth may not be entirely
voluntary. Customers may demand more volume, better
service, and even better prices.
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Figure 7.1.illustrates the typical growth cycle of a new venture. It can be seen
that in the first few years of a new venture’s existence revenues are
relatively small with little growth. In the next phase, revenues begin to
grow at an increasing rate. Then the revenue reaches a more stable phase
when revenue and growth stabilizes. What occurs after this stage would
depend on the firm’s ability to rejuvenate sales and begin another growth
cycle. At this stage a decision in a highly competitive market may be to
maintain and protect market share with little or no growth. It is also
possible that revenues may even decrease during this stage as the demand
for product declines due to substitute product or change in consumer’s
need. The firm may choose to control costs and harvest the business or
look for new products or new strategies to revitalize the growth of the
enterprise. Not all new ventures will enter into the rapid growth phase.
Many will continue to exist at some satisfying level of sales with little or no
growth. These enterprises would typically be proprietorships that are
home-based, family owned service (particularly personal service) or craft
business.

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Figure 7.1 The product/Industry Growth Cycle

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• Financial strengths to support Growth
• Managing cash flow is more critical since it is often difficult
to maintain close scrutiny of where cash is going. In
particular the entrepreneur will need to determine how
much cash will be needed to accommodate the rapid sales
growth. Sales projections are important functions in the
planning process. One of the critical decisions that must
be made by the entrepreneur each year is the forecast of
sales. In the rapid growth company the forecasts of sales
may be even more important because of its drain on cash.
Sales growth costs money, and therefore the entrepreneur
needs to assess how much additional cash will be needed
to support the new sales in the next period.

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• Organizational changes during Growth
• Many entrepreneurs find that as the ventures reaches
the growth stage; they need to change the organization
culture. Management decision making in the hands of
only the entrepreneur can be dangerous to the success
of the venture during this stage. This is some times
difficult for the entrepreneur to realize since he or she
has been so involved in all important decisions.
However, in order to survive, the entrepreneur will need
to consider some organizational changes.
• Some of the important guidelines to cultural change
during growth involve the following:

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• Communicate all matters to key employees. Trust and understanding by
employees are important so that their roles and responsibilities during this stage
of business are clear
• Be a good listener. Learn what is on the minds of your employees and what they
would do if they ran the company. Be willing to delegate responsibility. The
entrepreneur can not always be available to assess every management decision.
Give key employees the flexibility to make decisions without the fear of failure.
Provide feedback consistently and regularly. Provide continuous training of key
employees. They in turn will be able to train others in the organization.
Emphasize results to key managers with incentives built into encourage them to
train and delegate within their roles. Maintain a focus by establishing a mission
with goals and using consensus in management decision making. Establish a
“we” sprit –not a “me” sprit in meeting and memoranda to employees.
Creating a positive culture in the venture can enhance the opportunity to achieve
success during difficult times as the venture begins to grow. The entrepreneur
with well developed working organization can devote more time to longer-term
strategic issues. Creating the efficient organization can be enhanced with a
strong board of directors and board of advisors

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7.2.3. Entrepreneurial Skills and Strategies
• During the growth stage of a venture the entrepreneur will need to consider some
important management skills that often contribute to venture failures. Studies have
shown that during the growth of a new venture, management skills, and strategies in such
areas as record keeping and financial control, inventory control, human resources,
marketing, and planning are critical to achieving long-term success.
7.3 New venture expansion strategies and issues (Mergers, Acquisitions, Licensing, and
Franchising)
• There are a various skills needed to expand a venture through joint ventures, acquisitions,
mergers, licensing and franchising. Joint ventures are separate entities formed by two or
more partners with the objectives of sharing technology, cutting costs, and entering new
markets. An acquisition is the purchase of a company so that it is completely absorbed by
the acquiring company. Another means for expansion is through merger. This transaction
involves two or more companies, with only one company surviving. Motivation to engage
in a merger includes survival, protection, diversification, and growth. Licensing may be
defined as an arrangement between two parties, where one party has proprietary rights
over some information, process, or technology protected by a patent, trade mark or copy
right. In the process of franchising, the entrepreneur has access to the franchisor’s
knowledge and experience, which can serve as a guide post in establishing the business. A
trusted name, advertising strength, and management advice all help to reduce the risk
inherent to a new venture.

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• 7.3.1. Mergers
• A merger or a transaction involving two, or possibly more, companies in which
only one company survives-is one method of expanding a venture. It is so
similar to acquisitions that at times the two terms are used interchangeably. A
key concern in any merger is (or acquisition) is the legality of the purchase. The
Department of Justice frequently issues guidelines for horizontal, vertical, and
conglomerate mergers. Since the guidelines are extensive and technical, the
entrepreneur should secure adequate legal advice when any issues arise.
• There are both defensive and offensive strategies for a merger, as indicated in
the figure below. Merger motivates range from survival to protection to
diversification to growth. When some technical obsolescence, market or raw
material losses, or deterioration of the capital structure has occurred in the
entrepreneur’s venture, a merger may be the only means for survival. The
merger can also protect against market encroachment, product innovation, or
an unwarranted takeover. A merger can provide a great a deal of diversification
as well as growth in the market, technology, and financial and managerial
strength.

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• Merger requires a sound planning by an entrepreneur. The merger objectives,
particularly those dealing with earnings, must be spelled out with the resulting
gains for the owners of both companies delineated. Also, the entrepreneur must
carefully evaluate the other company’s management to ensure that, if retained, it
would be competent in developing the growth and future of the combined entity.
The value and appropriateness of the existing resources should also be
determined. In essence, this involves a careful analysis of both companies to
ensure that the weaknesses of one do not compound those of the other. Finally,
the entrepreneur should work toward establishing a climate of mutual trust to
help minimize any possible management threat or turbulence.
• The same method for valuing an acquisition candidate can be used to determine
the value of merger candidate. The process involves the entrepreneur looking at
the synergistic/product market position, the new domestic or international
market position, any under exploited company asset. A common procedure for
determining value is to estimate the present valued of discounted cash flows and
the expected after tax earnings attributed to the merger. This should be done on
optimistic, pessimistic, and probable scenarios of cash flows and earnings using
various acceptable rates of return.

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• 7.3.2. Acquisition
• A business can be started from the scratch using the entrepreneurial skills of
the entrepreneur. Starting a business from the scratch is not the only way of
having your own venture. You can also have your own business using the
method of acquisition
• Definition of Acquisition
• Acquisition is the purchase of a company or a part of it so that the acquired
company is completely absorbed and no longer exists as a business entity.
Although acquisition does not occur as frequently as the development of an
individual idea, it can provide the entrepreneur with an excellent way to get
into a business. An acquisition can take many forms depending on such
factors as the goals and position of the parties involved in the transaction,
the amount of money involved and the type of company.
• Buying a business is not (and probably should not be) something to be done
quickly or easily, however. In almost every situation, it takes weeks or months
to analyze and evaluate the positive and negative aspects of a potential
purchase candidate. It may take longer to complete the final negotiations.

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• Advantages and Disadvantages of Acquisition
• Advantages
• Buying an existing business can have the following benefits to the buyer:
• A successful existing business may continue to be successful. Purchasing a thriving business at an acceptable
price increases the likelihood of success. The previous management already has established a customer base,
built supplier relationship, and set up a business system. The new owner’s objective should be to make those
modifications that will attract new customer while retaining the firm’s existing customer. Maintaining the
proper balance of old and new is not an easy task, however. The customer base that you inherit through
purchasing an established business can carry you while you study how the business has become successful
and why customers want to buy from you. The time you spend learning about the business and its customer
before introducing changes will increase the probability that the changes you do make will be successful.
• An existing business may already have the best location. When the location of the business is critical to its
success, it may be wise to purchase a business that is already in the right place. Opening in a second-choice
location and hoping to draw customer may prove fruitless. In fact, the existing business’s biggest asset may
be its location. If this advantage cannot be matched by other locations, an entrepreneur may have little
choice but to buy instead of building.
• Employees and suppliers are established. An existing business already has experienced employees, so there
are fewer problems associated with the shakedown phase of getting started. Experienced employees can
help the company earn money while a new owner learns the business. In addition, an existing business has
an established set of suppliers with a history of business dealings. Those vendors can continue to supply the
business while the new owner investigates the product and services of other suppliers. Thus, the new owner
is not pressured to choose the supplier quickly without thorough investigation.
• Equipment is installed and productive capacity is known. Acquiring and installing new equipment exerts a
tremendous strain on fledging company’s

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• financial resources. In an existing business, a potential buyer can determine the condition of the plant and
the equipment and its capacity before buying. The previous owner may have established an efficient
production operation through trial and error although the new owner may need to make modification to
improve it. In many cases, the entrepreneur can purchase physical facilities and equipment at prices
significantly lower than replacement costs.
• E. Inventory is in place and trade credit is established. The proper amount of inventory is essential to both
cost control and sales volume. If a business has too little inventory, it will not have the quantity and variety
of products to satisfy customer demand. But if the business has too much inventory, it is tying up
excessive capital, thereby increasing costs and reducing profitability. Owners of successful, established
business have learned to balance these extremes. Previous owners have established trade credit
relationships of which the new owner can take advantages. The business’s proven track record gives the
new owner leverage in negotiating for trade credit concessions. No supplier wants to lose a good
customer.
• F. The new owner can use the experience of the previous owner. Even if the previous owner is not around
after the sale, the new owner will have access to all of the business’s records, which can be a guide until
he/she becomes familiar with the business and the local market. The new owner can trace the impact on
costs and revenue of the major decisions that the previous owner made and can learn from those
mistakes and profit from those achievements. In many cases, the previous owner spends time in an
orientation period with the new owner, which gives the new manager the opportunity to question the
previous owner about the policies and procedures she/he developed and the reason for them. Previous
owners also can be extremely helpful in unmasking the unwritten rule of business in the area what types
of behavior are acceptable, whom to trust or not, and other important intangibles. After all, most owners,
who sell out, want to see the buyer succeed in carrying on their businesses.

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• Disadvantages
• Buying an existing business can be disadvantageous to the person buying it. Some of the disadvantages
are:
• “It’s a dog.” A business may be for sale because it has never been profitable. Owners can employ various
creative accounting techniques that make the firm’s financial picture appear much brighter than it really
is. The reason that a business is for sale will seldom be stated honestly as “it’s losing money.” Any buyer
unprepared to do a complete and thorough analysis of the business may be stuck with a real dog.
• The previous owner may have created ill will. Just as ethical, socially responsible business dealings create
goodwill for a company, improper business behavior creates ill will. The business may look great on the
surface, but customers, supplier, creditors or employees may have extremely negative feeling about it.
Business relations may have begun to deteriorate but their long-term effects may not yet be reflected in
the business’s financial statement. Ill will can permeate a business for years.
• Employees inherited with the business may not be suitable. If the new owner plans to make changes in
the business, the present employees may not suit his/her needs. Others may not be able to adapt to the
new owner’s management style. Previous managers may have kept marginal employees because they
were close friends or because they started off with the company. The new owner, therefore, may have to
make some very unpopular termination decisions. For this reason, employees often do not welcome a
new owner because they feel threatened. Furthermore, employees who may have wanted to buy the
business themselves but could not afford it are likely to see new owner as the person who stole their
opportunity. Bitter employees are not likely to be productive workers.
• The business location may have become unsatisfactory. What was once or is currently an ideal location
may become obsolete as market and demographic trends change. Large shopping malls, new competitors
or highly rerouting can spell disaster for a small retail shop. Prospective buyers should always evaluate the
existing market in the areas surrounding an existing business as well as its potential for expansion.

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• Equipment and facilities may be obsolete or inefficient. Potential buyers sometimes
neglect to have an expert evaluate a firm’s facilities and equipment before they purchase it.
Only later do they discover that the equipment is obsolete and inefficient, and the business
may suffer losses from excessive high costs. The equipment may have been well suited to
the business they purchased, but not to the business they want to build. Modernizing
equipment and facilities is seldom inexpensive.
• Inventory may be outdated or obsolete. Inventory is valuable only if it is saleable or if it
can be converted into saleable products. Never trust the firm’s balance sheet evaluation of
inventory. Some of it may actually appreciate in value in periods of rapid inflation, but more
likely it has depreciated. A prospective buyer must judge inventory on the basis of its
market value, not its book value. Potential buyers should check the status of company’s
inventory to see whether or not it is outdated and obsolete. They should make sure it is still
saleable and, if so, at what price. 
• Account receivable may be worth less than face value. Like inventory, account receivables
rarely are worth their face value. The prospective buyer should age the account receivable
to determine their collectibles. The older the receivables are, the less likely are to be
collected, and, consequently the lower their value is.

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• The Steps in Acquiring a Business
• As previously stated, prospective entrepreneur may seek to purchase a business venture rather
than start up an enterprise. This can be a successful method of getting into a business, but an
existing business can be risky if approached haphazardly. Patience is the key that must have in
your search for the right business. Too many individuals make a bad choice because they are in a
rush to buy a business. Take your time and investigate each opportunity as it comes along.
• The major steps that you, as an entrepreneur, should follow in acquiring a business are:
I. Analyze your skills, abilities and interests to determine what kind of business you should
acquire.
• The first step in buying a business is conducting a self-audit to determine the ideal business for
you. At this point, you should not be concerned about what kinds of businesses are available to
buy. Your primary focus is to identify the type of business you will be happiest and most
successful owning.
II. Prepare a List of Potential Candidates
• Once you know what your goals are for acquiring a business, you can begin your search for
“potential candidates” of a business that are advertised as being “for sale.” In fact, the hidden
market of companies that might be for sale but are not advertised as such is one of the richest
sources of top-quality businesses. Major opportunities might be tucked away with in the
unadvertised hidden market. Although they maintain a low profile, these hidden businesses
represent some of the most attractive purchase targets a prospective buyer may find.

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III. Evaluating an Existing Business
• When evaluating an existing business, a lone buyer quickly feels overwhelmed by the
tremendous number and complexity of businesses involved. Therefore, a clever buyer
will assemble a team of specialists to help in investigating the potential business
opportunity. This team is usually composed of a banker, an accountant familiar with
the particular industry, an attorney and perhaps a small business consultant or a
business brokers. You have to know that such a team cost money, but most buyers
agree that using a team significantly lowers the likelihood of making a bad buy.
Because making a bad purchase will cost many times the cost of a team of experts,
most buyers see it as a wise investment. It is important for a buyer to trust the
members of the business evaluation team. With this team assembled, the potential
buyer is ready to explore the business opportunity by examining five critical areas.
– Why does the owner want to sell?
– What is the physical condition of the business?
– What is the potential for the company’s product or service?
– What legal aspects should you consider?
– Is the business financially sound?
•  

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• IV. Explore Financing Options
• Placing a value on an existing business represents a major hurdle for
many would- be entrepreneurs. The next challenging task in closing a
successful deal is financing the purchase. Although financing the purchase
of an existing business usually is easier than financing a new one, some
traditional lenders shy away from deals involving the purchase of an
existing business. Those that are willing to finance business purchases
normally lend only a portion of the value of the assets, so buyers often
find themselves searching for alternative sources of funds. Fortunately,
most business buyers have access to a ready source of financing: the
seller. Once a seller finds a suitable buyer, she/he typically will agree to
finance anywhere from 30 percent to 80 percent of the purchase price.
Usually a deal is structured so that the buyer makes a down payment to
the seller, who then finances a note for the balance. The buyer makes
regular principal and interest payments overtime, perhaps with a large
balloon payment at the end until the note is paid off. The term and
conditions of such a loan are a vital concern to both buyer and seller.

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• They cannot be so burdensome that they threaten the company’s
continued existence; that is, the buyer must be able to make the
payments to the seller out of the company’s cash flow. At the same
time, the deal must give the seller financial security she/he is
seeking from the sale. Defining reasonable terms is the result of the
negotiation process between the buyer and the seller.
• V. Ensure a Smooth Transition
• Once the parties strike a deal, the challenges of making a smooth
transition immediately arises. No matter how well planned the sale
is, there are always surprises. For instance, the new owner may have
ideas for changing the business sometimes radically that cause a
great deal of stress and anxiety among employees and the previous
owner. Charged with such emotion and uncertainty, the transition
phase is always difficult and frustrating and some times painful.

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 7.3.3. Licensing
• Licensing may be defined as an arrangement between two
parties, where one party has proprietary rights over some
information, process, or technology protected by a patent, trade
mark, or copy right. This arrangement, specified in a contract
requires the licensee to pay a royalty or some other specified
sum to the holder of the proprietary rights (licensor) in return
for permission to copy the patent, trade mark, or copy right.
• Thus, licensing has significant value as a marketing strategy to
holders of patents, trade marks, or copy rights to grow their
business in new markets when they lack resources or experience
in those markets. It is also an important marketing strategy for
entrepreneurs who wish to start a new venture but need
permission to copy or incorporate the patent, trade mark, or
copy right with their ideas.

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• A patent license agreement specifies how the licensee would have
access to the patent. For example, the licensor may still
manufacture the product but give the licensee the rights to market
it under their label in a non competitive market (i.e. foreign market).
In other instances, the licensee may actually manufacture and
market the patented product under its own label. This agreement
must be carefully worded and should involve a lawyer, to ensure the
protection of all parties.
• Licensing a trade mark generally involves a franchising agreement.
The entrepreneur operates a business using the trade mark and
agrees to pay a fixed sum for use of the trade mark, pay a royalty
based on sales volume, buy supplies from the franchisor or some
combination of these.

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• Licensing can be particularly valuable for a high-technology firm lacking the
resources to conduct R&D to develop a product. Technology licensing
usually entails a contractual agreement by which a firm (licensee) acquires
the rights to a product, process, and /or management technology from
another firm (licensor) for a lump sum payment and/or royalties. According
to recent research, technology licensing is becoming extremely popular
among small ventures as a means to develop new products. This research
indicated that the two most important reasons for licensing were to gain
competitive advantage and to improve the venture’s technical skills.
• Before embarking in a license agreement, the entrepreneur should ask the
following questions:
• Will the customer recognize the licensed property?
• How well does the licensed property complement my products or services?
• How much experience do I have with the licensed property?
• What is the long-term outlook for the licensed property?
• What kind of protection does the licensing agreement provide?
• What commitment do I have in payment of royalties, sales quotas, and so on?
• Are renewal options possible and under what terms?

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• Licensing is an excellent option for the entrepreneur to increase
revenues, without the risk and costly start-up investment. Tb able
to license requires the entrepreneur to have some thing to license,
which is why it is so important to seek protection for any product,
information, name, and so on, with a patent , trade mark, or copy
right. On the other hand, licensing can also be a way to start a new
venture when the idea may infringe on someone else’s patent,
trademark or copy right. In this instance, the entrepreneur has
nothing to loose by trying to seek a license agreement from the
holder of the property.
• Licensing continues to be a powerful marketing tool. With the
advice of a lawyer, entrepreneurs may find that licensing
opportunities are a way to minimize risk, expand a business, or
complement an existing product line.

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• 7.3.4 Franchising
• Franchising also represents an opportunity for an entrepreneur to expand
the business. In the context of franchising, the entrepreneurs will be
trained and supported in the marketing by the franchiser and will be using
a name that has an established image. Franchising is also an alternative
means by which an entrepreneur may expand hi or her business by having
others pay for the use of the name, process, product, service, and so on.

Definition of Franchising
• Franchising may be defined as “an arrangement where by the
manufacturer or sole distributer of a trademarked product or service or
product gives exclusive rights of local distribution to independent retailers
in return for their payment of royalties and conformance to standardized
operating procedures. The person offering the franchise is known as the
franchiser. The franchisee is the person who purchases the franchise and is
given the opportunity to enter a new business with a better chance to
succeed than if he or she were to start a new business from scratch.

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• In other words, in franchising, semi-independent business owners (franchisees) pay
fees and royalties to a parent company (franchiser) in return for the right to sell its
products or services and often to use its business format and system. Franchisees
do not establish their own autonomous business; instead, they buy a “success
package” from the franchiser, who shows them how to use it. Franchisees, unlike
independent business owners, don’t have the freedom to change the way they run
their business, for example, shifting advertising strategies of adjusting product line;
but they do have a formula that the franchiser has worked out. The secret to
success in franchising is following the formula precisely. Successful franchisers claim
that neglecting to follow the formula is one of the chief reasons that franchisees
fail.
• Franchising is based on a continuing relationship between a franchiser and a
franchisee. The franchiser provides valuable services such as market research, a
proven business system, name recognition and many others; in return, the
franchisee pays a percentage of sales to the franchiser as royalties and agrees to
operate the outlet according to the franchiser’s system. Because franchisers
develop the business systems their franchisees use and direct their distribution
methods, they maintain substantial control over their franchisees. Yet, this
standardization lies at the core of franchising success as a method of distribution.

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• The Benefits and Drawbacks of Buying a Franchise
• Benefits Franchise
• A franchisee gets the opportunity to own a small business relatively quickly, and, because of the identification
with established product and brand name, a franchise often reaches the breakeven point faster than an
independent business would.
• Franchisees also benefit from buying a franchiser. Many entrepreneurs go into business by themselves and
make many costly mistakes. Given the thin margin for error in the typical startup, a new business owner
cannot afford to make many mistakes, in a franchising arrangement. In the franchising arrangement, if the
franchiser already has worked out the kinks in the system by trial and error, and franchisees benefit from that
experience. That is, franchisers have the experience, they know what works and what doesn’t, and they know
what’s happening in the market.
• Before jumping into a franchise opportunity, an entrepreneur should consider carefully the question “what
can a franchise do for me that I cannot do for myself?” The answer to the question will depend on the
particular situation and is just as important as the systematic evaluation of an individual franchise
opportunity. After careful deliberation, a franchisee may conclude that the franchise offers nothing that could
not do independently; on the other hand, it may turn out that franchise is the key to success as a business
owner. Franchisees often cite the following advantages of buying a franchise.
• Management Training and Support: recall from module 1 that the leading cause of the business failure is
incompetent management. Franchisers are well aware of this and, in an attempt to reduce the number of
franchise causalities, offer managerial training program to franchisees prior to opening a new outlet. Many
franchisers, especially the well-established ones, also provide follow-up training and counseling services. This
service is vital since most franchisers do not require a franchisee to have experience in the business. These
programs teach franchisees the details they need to know for day-to-day operations as well as the nuances of
running their business successfully. Training programs often involved both classroom and on-site instruction
to teach franchisees the basic operation of the business.

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• Brand Name Appeal: a licensed franchisee purchases the right to use a nationally known and
advertised brand name for a product or service. Thus, the franchisee has the advantage of
identifying his/her business with a widely recognized name, which usually provides a great deal
of drawing power. Customers recognize the identifying trademark, the standard symbol, the
store design and the products of an established franchise. Indeed, one of the franchising basic
tenets is cloning the franchiser’s success.
• Standardized Quality of Goods and Services: because a franchisee purchases a license to sell the
franchiser’s product or service and the privilege of using the associated brand name, the quality
of the goods or services sold determine the franchiser’s reputation. Building a sound reputation
in business is not achieved quickly although destroying a good reputation takes no time at all. If
some franchisees were allowed to operate at substandard levels, the entire chains’ image would
suffer irreparable damage; therefore, franchisers normally demand compliance with uniform
standards of quality and service throughout the entire chain. In many case, the franchiser
conducts periodic inspections of local facilities to assist in maintaining acceptable level of
performance. Maintaining quality is so important that most franchisers retain the right to
terminate the franchise contract and to repurchase the outlet if the franchisee fails to comply
with established standards.
• National Advertising Programs: an effective advertising program is essential to the success of
virtually all franchise operations. Marketing a brand-name product or service over a wide
geographic area requires a far-reaching advertising campaign. A regional or national advertising
program benefits all the franchisees. Normally, such an advertising campaign is organized and
controlled by the franchiser. Many franchisers also require franchisees to spend a minimum
amount on local advertising.

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• Financial Assistance: because they rely on their franchisees’ money to grow their
businesses, franchisers typically do not provide any extensive financial help for franchisees.
Franchisers rarely make loans to enable the franchisees to pay the initial franchisee fee.
However, once franchisers locate a suitable prospective franchisee, they may offer the
qualified candidate direct financial assistance in specific areas, such as purchasing
equipment, inventory or even the financial fees. Since startup costs of some franchises are
already at breathtaking levels, some franchisers find that they must offer direct financial
assistance. Franchisers usually are willing to assist the qualified franchisee in establishing
relationships with banks, private investors and other sources of funds. Such relationships
can be critical since the market for franchise financing is capital starved.
• Proven Product and Business Formats: what a franchisee essentially is purchasing is the
franchiser’s experience, expertise, and products. A franchise owner does not have to build
the business from scratch. Instead of being forced to rely solely on personal ability to
establish a business and attract a clientele, the franchisee can depend on the methods and
techniques of an established business. These standardized procedures and operations
greatly enhance the franchisee’s chances of success and avoid the most inefficient type of
learning-trail and error. With a franchise, a franchisee does not have to struggle for
recognition in the local marketplace as mush as an independent owner might. 

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• The Drawbacks of Buying a Franchise
• Obviously, the benefits of franchising can mean the difference between success and
failure for a small business. However, the franchisee must sacrifice some freedom. The
prospective franchisee must explore other limitations of franchising before
undertaking this form of ownership. Therefore, this prospective franchisee must weigh
the advantage against the accompanying disadvantages. Some of the most important
drawbacks are:
• Franchise Fee and Profit Sharing: In business, no one gets something for nothing.
Virtually all franchisers impose some type of fee and demand a share of the
franchisee’s sales revenues in return for the use of the franchiser’s name. The fee and
the initial capital requirements vary among different franchisers. The larger and more
successful the franchiser, the greater the franchise fee will be. Franchisers also impose
continuing royalty usually involving a percentage of gross sales with a required
minimum, or a flat fee levied on the franchisee. Royalty fees typically range from1
percent to 11 percent and can increase the franchisee’s overhead expenses
significantly. Because the franchiser’s royalties and fees are calculated as a percentage
of a franchisee’s sales, they get paid even if the franchisee fails to earn a profit.

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• Strict Adherence to Standardized Operations: although the franchisee owns the
business, she/he does not have the autonomy of an independent owner. To protect its
public image, the franchiser requires that the franchisee maintain certain operating
standards. If a franchisee constantly fails to meet the minimum standards established
for the business, the franchiser may terminate its license. Determining compliance with
standards is usually accomplished by periodic inspections. At times, strict adherence to
franchise standards may become a burden to the franchisee. The owner may believe
that written reports the franchiser demand requires an excessive amount of time. In
other instances, the owner may be required to enforce specific rules she/he believes
are inappropriate or unfair.
• Restrictions on Purchasing: in the interest of maintaining quality standards, franchisees
may be required to purchase products, special equipment, or other items from the
franchiser or from an approved supplier because a poor image could result from
franchisees using inferior products to cut costs. Under some conditions, such purchase
arrangements may be challenged in court as violation of antitrust laws, but generally
the franchiser has a legal right to see that franchisees maintain acceptable quality
standards. Franchisees at several chains have filed antitrust suits alleging that
franchisers overcharge their outlets for supplies and equipment and eliminate
competition by failing to approve alternative suppliers. Generally, a franchiser may be
charged on products sold by the franchisee. A franchiser legally can suggest retail prices
but cannot force the franchisee to abide by them.

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• Limited Product Line: in most cases, the franchise agreement
stipulates that the franchisee can sell only those products
approved by the franchiser. Unless willing to take risk of license
cancellation, a franchisee must avoid selling any unapproved
products through the franchise. A franchisee’s freedom to adapt a
product line to local market conditions is restricted. But some
franchisers solicit product suggestion from their franchisees.
• Market Saturation: Although some franchisers offer franchisees
territorial protection, others do not. Territorial encroachment has
become a hotly contested issue in franchising as growth-seeking
franchisers have exhausted most of the prime locations and are
now geeing up new franchises in close proximity to existing ones.
In most cases, franchisees are upset, claiming that their markets
are over saturated and their sales are suffering.

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How to Buy a Franchise
• Not every franchise “horrors story” is the result of dishonest franchisers. More often
than not, the problems that arise in franchising have more to do with franchisees
that buy legitimate franchises without proper research and analysis. They end up in
businesses they don’t enjoy and that they are not well suited to operate. How can
you avoid this mistake? The following steps will help you make the right choice.
• Evaluate Yourself: before looking at any franchise, an entrepreneur should study
her/his own traits, goals, experience, likes, dislikes, risk orientation, income
requirements, time and family commitments and other characteristics. Will you be
comfortable working in a structured environment? What kinds of franchises fit your
desired lifestyle? Knowing what you enjoy doing (and what you don’t want to do) will
help you narrow your search. The goal is to find the franchise that is right for you!
• Research your Market: before shopping for a franchise, research the market in the
area you plan to serve. How fast is the overall area growing? In which areas is that
growth occurring fastest? Investing some time at the library developing a profile of
the customers in your target area is essential; otherwise, you will be flying blind.
Who are your potential customers? What are their characteristics? Their income and
education levels? What kinds of products and services do they buy? What gaps exist
in the market? These gaps represent potential franchise opportunities for you.

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• Talk to Existing Franchisees: one of the best way to evaluate the reputation of a franchiser is
to interview (in person) several franchise owners who have been in business at least one
year about the positive and the negative features of the agreement and whether or not the
franchiser delivered what was promised. Knowing what they know now, would they buy the
franchiser again? It is also helpful to interview past franchisees to get their perspectives on
the franchiser-franchisee relationships. Why did they leave? Franchisees of some companies
have formed associations, which might provide prospective franchisees with valuable
information.
• Ask the Franchiser Some Tough Questions: take the time to ask the franchiser questions
about the company and its relationship with its franchisees. You need to know as much
about it as you possibly can beforehand. What is the philosophy concerning the
relationship? What is the company culture look like? How much input do franchisees have
into the system? What is the franchise’s future expansion plans? How will they affect your
franchise? What kind of profits can you expect? Does the franchiser have a well-formulated
strategic plan?
• Make Your Choice: the first principle in franchising is “do your home work before you get
out your checkbook.” Once you have done your research, you can make an informed choice
about which franchise is right for you. Then it is time to put together a solid business plan
that will serve as your road map to success in the franchise you have selected. The plan is
also a valuable tool to use as you arrange the financing for your franchise.

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 Concluding Remark
“It’s not critic that counts, nor the observer who watches from a safe distance.
Wealth is created only by doers in the arena who are marred with dirt, dust,
blood and sweat.” These are producers who strike out on their own, who know
highs and lows, great devotions, and who overextend themselves for worthwhile
causes. Without exception, they fail more than they succeed and appreciate this
reality even before venturing out on their own. But when these producers of
wealth fail, they at least fail with style and grace, and their gut soon recognizes
that failure is only a resting place, not a place in which to spend a life time. Their
places will never be with those nameless souls who know neither defeat nor
victory, who receives weekly paychecks regardless of their week’s performance,
who are hired hands in the labor in someone else’s garden. These doers are
producers and no matter what their lot is at any given moment, they will never
take a place beside the takers, for theirs is a unique place, alone, under the sun.
They are entrepreneurs!”
Joseph R.Mancuso

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exercises-final say
starting your own business realizes dreams of
freedom, independence and hopes for
meaningful careers.
• Do you think that this course has contributed
toward this end?
• Are you ready to become your own boss,
independent and to enjoy a meaning full
career?

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