Chapter III:

Selecting a method to start a business

Lecturer: Do Duy Kien, PhD

I. Before starting a business

Opportunities

Organization Entrepreneur

Environment Resources
 I. Before starting a business
1. Entrepreneur/ sole trader
•Self awareness of Strengths and Weaknesses
•Clear objective
•Knowledge and desire to embark in a specific field of a
business
•(Experience)
 I. Before starting a business
1. Entrepreneur/ sole trader
•Reason to become an entrepreneur?
– A certain level of annual income
– Rate of return on investment
– The level of personal freedom (self-employed)
– Creating job opportunities for other family members
– Developing businesses to become big businesses in a particular
period
– Level of risk: risk aversion, risk neutral, risk taker.
 I. Before starting a business
2. Resources
•Finance -> Low entry costs and exit costs.
•Human Resources
• Time
•Information
•Technology
 I. Before starting a business
3. Opportunities
• Barriers to entry
Egg: McDonald
A new taste
product that is
new to the
market?
 II. Starting a new business
1. Advantages
• Self-directed business
• Flexible
• Reducing costs
• New lifestyle
 II. Starting a new business
2. Difficulties
• Raising capital
• Customer base
• Cash flow
• The cost of the learning curve
 II. Starting a new business
3. Cost of starting a business
No matter what type of a business is, there is some kinds of
common costs:
- Permits and business registration
- Capital
- The media and communications
- Buildings and equipment
- Recruitment costs
- Insurance
- Materials
- Office rental (if not at home business)
- Stationery
 III. Buying an operated business
• Advantages:
- Allow owners to start the business immediately
- Clear financial requirement
- Company Profile activity -> Experience and lessons
 III. Buying an operated business
Methods of buying/selling business:
•Through agency
•Notice in the newspaper or online advertisement items
•Through the accounting firms
•Through the sale of the trust company to buy bankrupt or
insolvent businesses
 III. Buying an operated business
Compared with the establishment of a new business,
purchasing an active one is much more complex:
•Accurate market research
• Accurately assess business opportunities
•Calculate the true price
•Take into account the relevant information
1. Purchasing price
1. Valuation based on market price
•The method of current market price: the price reference
for companies in the same industry and similar size
Price = Price of selling the same business
This technique does not fully reflect the strengths and
weaknesses of individual business, but is a good starting
point for reference before going to the final price
agreement.
This price may be notified through online business selling
newspapers or broker.
1. The purchasing price
1.Valuation based on market price
Revenue multiplier method:
Purchasing price = Revenue x Ratio
of the industry
Apply for professional practicing business: medical services,
accounting ...
1. The purchasing price
1. Valuation based on market price
These methods are simple and easy to use but there are
many disadvantages:
- Depend on trend to sell, do not fully take into account
the special factors of the business that is now buying.
- Regardless of the potential profits or assets of the
enterprises.
- Difficult to collect market information
1. Purchasing price
1.2. Asset based valuation method
• Net book Value
Price = Tangible assets + Intangible assets - creditors
Adjusted book value (net assets): the current value
The value of liquidity: the lowest price
Replacement value: price alternative
1. Purchasing price
1.3. Profit based valuation method
- ROI
- NPV
2. Questions to raise:
•Why owners want to sell this company?
•Are the current staffs will continue to stay if business sold?
•Is there any creditors amount that the business need to pay?
•Does business still owe any tax payments?
•Is the enterprises now are facing any litigation or dispute
issue?
•Will all the license and business registration can continue to
be used if the business is operated under new owner?
•The level of accuracy that accounting and finance
information reflexes.
•The accrual of employees wages
2. Questions to raise:
• Condition of the industry in the future? (increase or
decrease demand)
• The premises renting contract, is it stable ? Will it be
approved if the business is sold to a new owner? The
contract lasts until when?
• Will the supplier continue to provide raw materials and
goods to our business? If yes, will they provide at the same
price as before?
• Status of the physical assets like? Are there any assets that
need to be replaced in the foreseeable future?
• Will customers still be loyal to the business when the
current owners leave?
 IV. Franchising
• Franchising is a special method of operating a business,
whereas brand owners (owner of 1 product or owner of 1
operating system) allows another business owners to sell
goods and / or using system operates on behalf of the
trademark owners.
 IV. Franchising

2 types of franchises:
Franchise brands: allow 1 small business owner may sell
one product or service certain => Act like distributors
Franchise business system: the brand owner franchise
offers both products and the operating instructions for
those products business.
 IV. Franchising
1. Advantages
Do not have to develop operating systems.
Low failure rate
Customer base
Being able to receive training and supporting in market
research and customer
Material cost is lower
Raising capital is easier
 IV. Franchising
2. Difficulties
The cost to buy brand is high
Part of profit need to pay the franchisor
Only allow franchising in certain markets
Difficult to conduct reforms and adjustments in business
The life cycle of the franchise agreement is limited
 VI. Steps to start a business
• Research market
• Research legal issue
• Stating main resources
• Evaluate the method to start a business
• Financially prepared
• Designing a business plan
References
Copyright (ppt slides): Tran Minh Thu, PhD
Foreign Trade University