Entrepreneurship and small business (MGT 402)

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Chapter 1
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➢In the U.S., entrepreneurs start more than 6.5 million
businesses a year!
➢Global Entrepreneurship Monitor (GEM)
➢Approximately 13% of the U.S. population aged 1864 is actively involved in entrepreneurial activity
➢The global average is also 13%
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Entrepreneur: One who creates a new business
in the face of risk and uncertainty for the purpose
of achieving profit and growth by identifying
opportunities and assembling the necessary
resources to capitalize on them
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Why Entrepreneurs Start Businesses
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➢Characteristics of Entrepreneurs:
➢Desire and willingness to take initiative
➢Preference for moderate risk
➢Confidence in their ability to succeed
➢Self-reliance
➢Perseverance
➢Desire for immediate feedback
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➢More Characteristics of Entrepreneurs:
➢High level of energy
➢Competitiveness
➢Future orientation
➢Serial entrepreneurs
➢Skilled at organizing
➢Value of achievement over money
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➢Other Characteristics of Entrepreneurs:
➢High degree of commitment
➢Tolerance for ambiguity
➢Flexibility
➢Tenacity
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➢Conclusion?
➢Diversity seems to be a central characteristic of
entrepreneurs
➢Anyone – regardless of age, race, gender, color,
national origin, or any other characteristic – can
become an entrepreneur (although not everyone
should)
➢Entrepreneurship is a skill that is learned
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➢Creativity vs. Innovation
➢Creativity – the ability to develop new
ideas and to discover new ways of
looking at problems and opportunities
➢Innovation – the ability to apply creative
solutions to problems and opportunities
to enhance or to enrich people’s lives
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➢Monitor Trends and Exploit Them Early On
➢Independa
➢Travel – and Be Inspired
➢Eileen Fisher
➢Take A Different Approach To An Existing
Market
➢I Do Now I Don’t
➢Put a New Twist on an Old Idea
➢Vitaband
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➢Look for Creative Ways to Use Existing
Resources
➢Dig This
➢Realize That Others Have the Same
Problem That You Do
➢MileWise
➢Take Time to Play
➢Flash Pals
➢Notice What Is Missing
➢Viking Range Corporation
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➢The opportunity to:
➢Gain control over your own destiny
➢Make a difference
➢Social entrepreneurs
➢Reach your full potential
➢Reap impressive profits
➢Contribute to society and be recognized for your
efforts
➢Do what you enjoy doing
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➢Uncertainty of income
➢Risk of losing your entire invested capital
➢Long hours and hard work
➢Lower quality of life until the business gets
established
➢High levels of stress
➢Complete responsibility
➢Discouragement
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➢Entrepreneurs as heroes
➢Entrepreneurial education
➢Demographic and economic factors
➢Shift to a service economy
➢Technological advancements
➢Outsourcing
➢Independent lifestyles
➢E-Commerce, the Internet, and mobile computing
➢International opportunities
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➢Young entrepreneurs
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New Entrepreneurs by Age Group
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➢Young entrepreneurs
➢Women entrepreneurs
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Entrepreneurial Activity Index by Gender
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➢Young entrepreneurs
➢Women entrepreneurs
➢Minority enterprises
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Percentage of New Entrepreneurs by Minority Group
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➢Young entrepreneurs
➢Women entrepreneurs
➢Minority enterprises
➢Immigrant entrepreneurs
➢Part-time entrepreneurs
➢Home-based business owners
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Rules for a Successful Home-Based Business
Rule 1. Do your homework.
Rule 2. Find out what your zoning restrictions are.
Rule 3. Create distinct zones for your family and business dealings.
Rule 4. Focus your home-based business idea.
Rule 5. Discuss your business rules with your family.
Rule 6. Select an appropriate business name.
Rule 7. Buy the right equipment.
Rule 8. Dress appropriately.
Rule 9. Learn to deal with distractions.
Rule 10. Realize that your phone can be your best friend—or your
worst enemy.
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Rules for a Successful Home-Based Business
Rule 11. Be firm with friends and neighbors.
Rule 12. Maximize your productivity.
Rule 13. Create no-work time zones.
Rule 14. Take advantage of tax breaks.
Rule 15. Make sure you have adequate insurance coverage.
Rule 16. Understand the special circumstances under which you can
hire outside employees.
Rule 17. Be prepared if your business requires clients to come to your
home.
Rule 18. Get a post office box.
Rule 19. Network.
Rule 20. Be proud of your home-based business.
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➢Young entrepreneurs
➢Women entrepreneurs
➢Minority enterprises
➢Immigrant entrepreneurs
➢Part-time entrepreneurs
➢Home-based business owners
➢Family business owners
➢Family-owned business
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➢Copreneurs
➢Corporate castoffs
➢Corporate “dropouts”
➢Retired baby boomers
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Entrepreneurial Activity by Age Group
1996-2012
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➢Small business: one that employs fewer than 100
people
➢Small businesses:
➢Comprise 99.7% of the 27.2 million businesses
in the U.S.
➢Employ 49.2% of the nation’s private sector
workforce
➢Pay 43% of the nation’s total private payroll
➢Create more jobs than big businesses
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Small Businesses by Industry
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➢Small businesses:
➢Are leaders in offering training and advancement
opportunities to workers
➢Provide 67% of workers with their first jobs
➢Produce 46% of the nation’s private GDP
➢Account for 47% of business sales
➢Play a key role in innovation:
➢Produce 16.5 times more patents per
employee than large companies
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➢About 52% of new companies fail within 5 years
➢Entrepreneurs are not paralyzed by the prospect of
failure
➢Failure is a natural part of the creative process
➢Successful entrepreneurs learn to fail intelligently
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Small Business Survival Rate
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➢Know your business in depth
➢Prepare a business plan
➢Manage financial resources
➢Understand financial statements
➢Learn to manage people effectively
➢Set your business apart from the competition
➢Maintain a positive attitude
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‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬
Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment 1
Entrepreneurship and small business (MGT 402)
Due Date: 05/10/2024 @ 23:59
Course Name: Entrepreneurship and small
business
Course Code: MGT402
Student’s Name:
Semester: First
CRN:
Student’s ID Number:
Academic Year:2024-25-1st
For Instructor’s Use only
Instructor’s Name:
Students’ Grade: X / 10
Level of Marks: High/Middle/Low
General Instructions – PLEASE READ THEM CAREFULLY
•
•
•
•
•
•
•
•
The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be reduced
for poor presentation. This includes filling your information on the cover page.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
Submissions without this cover page will NOT be accepted.
Learning Outcomes:
1. Describe the place of small business in history and explore the strengths and weaknesses
of small business.
2. Design a solid projected financial plan and conduct a breakeven analysis for a small
company.
3. Demonstrate the ability to deliver and communicate marketing massages in coherent and
professional manner.
4. Illustrate the ability to think independently and systematically on developing a viable
business model.
Assignment Workload:
This assignment is an individual assignment.
Start-up Business Plan
Assume yourself as an entrepreneur of a small startup business in Saudi Arabia.
Write brief notes on the following objectives:
1. Owners, capital structure and company profile (2 Marks)
a. Your Business Name, Address, E‐Mail
b. Form of ownership: What is the legal structure? Sole proprietor, Partnership,
Corporation….
C. Investment capital
2. Company Business Description (300 – 400 words)
A. Scope and type of business (4 Marks)
What business will you be in? What will you do? What market segment will you
choose?
• Business idea: what is your big idea? Is it a product or a service? What makes
your idea different?
• Mission Statement
• Company’s short-term and long-term goals and objectives.
• Target market and demographics: Who will your customers be? Where do they
live? What is your target market passionate about?
B. Business Philosophy (4 Marks)
What is important to you in your business?
• Describe your Industry: Is it a growth industry? What long-term or short-term
changes do you foresee in the industry? How will your company take advantage
of it?
• Describe your most important company strengths and core competencies: What
factors will make the company succeed? What do you think your major
competitive strengths will be? What background experience, skills, and strengths
do you personally bring to this new venture?
• Risk Assessment: Evaluate the strengths and weaknesses of your business using
SWOT.
•Who is your competition and how do you beat them?
Note: Use APA style of referencing
Answers
1. Answer2. Answer-
MGT402 – Summary
Midterm CH 1-3-5-6-7-8
Chapter 1
1. What is an Entrepreneur and its characteristics ?
One who creates a new business in the face of risk and uncertainty for the purpose of
achieving profit & growth by identifying opportunities & assembling necessary resources.
Characteristics of Entrepreneurs:
1. Desire & willingness to take initiative
2. Future orientation
3. Perseverance
4. Preference for moderate risk
5. Serial entrepreneurs
6. Self-reliance
7. Confidence in their ability to succeed
8. Skilled at organizing
9. Flexibility
 Diversity is a central characteristic of entrepreneurs
 Anyone can become an entrepreneur
 Entrepreneurship is a skill that is learned
2. How to spot entrepreneurial opportunities ?
1. Monitor Trends and Exploit Them Early On Independent
2. Take A Different Approach To An Existing Market
3. Put a New Twist on an Old Idea
4. Look for Creative Ways to Use Existing Resources
5. Realize That Others Have the Same Problem That You Do
6. Notice What Is Missing
3. What are the benefits of having a small business? The opportunity to:
1. Gain control over your own destiny
2. Social entrepreneurs
3. Make a difference
4. Reach your full potential
5. Do what you enjoy doing
4. What are the potential drawbacks of entrepreneurship?
1. Uncertainty of income
2. High levels of stress
3. Risk of losing your entire invested capital
4. Complete responsibility
5. Long hours and hard work
7. Lower quality of life until the business gets established
6. Discouragement
5. What can be the fuel to the entrepreneurial fire ?
1. Entrepreneurs as heroes
2. Outsourcing
3. Entrepreneurial education
4. Independent lifestyles
5. Demographic & economic factors
6. E-Commerce, the Internet, and mobile computing
7. Shift to a service economy
9. Technological advancements
8. International opportunities
6. What is Diversity in culture of entrepreneurship ?
1. Young entrepreneurs
5. Immigrant entrepreneurs
2. Women entrepreneurs
6. Part-time entrepreneurs
3. Minority enterprises
7. Home-based business owners
4. Retired baby boomers
8. Corporate “dropouts”
7. What are the Rules for a Successful Home-Based Business ?
Rule 1. Do your homework.
Rule 2. Select an appropriate business name.
Rule 3. Buy the right equipment.
Rule 4. Focus your home-based business idea.
Rule 5. Discuss your business rules with your family.
Rule 6. Find out what your zoning restrictions are.
Rule 7. Create distinct zones for your family & business dealings.
Rule 8. Dress appropriately.
Rule 9. Learn to deal with distractions.
Rule 10. Get a post office box.
 Small business: one that employs fewer than 100 people
8. How to avoid pitfalls ?
1. Know your business in depth
2. Learn to manage people effectively
3. Prepare a business plan
4. Set your business apart from the competition
5. Manage financial resources
7. Understand financial statements
6. Maintain a positive attitude
Chapter 3
1. Distinguish Creativity vs. Innovation.
Creativity
Innovation
the ability to develop new ideas and to
the ability to apply creative solutions to
discover new ways of looking at problems
problems and opportunities to enhance or to
and opportunities. Thinking new things
enrich people‟s lives. Doing new things
 Entrepreneurs succeed by thinking and doing new things or old things in new ways
2. What are the six enablers of small business innovation ?
1. Passion.
2. Customer connection.
5. Experimentation & improvisation.
3. Agility & adaptation. 4. Resource limitations.
6. Information sharing & collaboration
3. What are the conditions of Innovations can be ?
 Reactive in response to customer feedback or changing market conditions
 Proactive in response to new opportunities on which to capitalize
 Revolutionary creating market-changing, disruptive breakthroughs that are the
result of generating something from nothing
 Evolutionary, developing market-sustaining ideas that elaborate on existing products,
processes, and services
 Putting old things together in new ways or from taking something away to create
something simpler or better
4. Can Creativity be Taught?
Creativity is a skill. Anyone can learn to be creative and to get better at it.
It Needs to understand creative thinking.
5. How to develop a creative thinking ?
1) Each hemisphere of the brain processes information differently.
2) One side tends to be dominant.
3) Individuals can learn to control which side of the brain is dominant in a situation.
4) They Can learn to „turn down‟ the dominant left side and „turn up‟ the right side.
5) Successful entrepreneurs need both left and right side thinking:
– The right side generates innovative ideas.
– The left side judges market potential
6. What are the creativity barriers ?
Mental locks that can limit individual creativity:
1. Searching for the one right answer
2. Becoming overly specialized
3. Focusing on “being logical”
4. Avoiding ambiguity
5. Blindly following the rules
6. Fearing looking foolish
7. How to increase creativity?
 Enhancing Organizational Creativity
1. Hire for creativity
2. Embrace diversity
3. Encourage curiosity
4. Expect creativity
5. Expect & learn from failure
6. Establish a fun work environment
 Enhancing Individual Creativity
1. Allow yourself to be creative
6. Notice what is missing
2. Forget the “rules”
7. Always ask yourself, “Am I asking the right question?”
3. Travel – and observe
8. Give your mind fresh input everyday
4. Listen to other people
9. Keep a journal handy to record your thoughts & ideas
5. Be positive
10.
Collaborate with other people
8. What are the Steps of creative process ?
Creative ideas are the result of seven step process:
1. Preparation
-Adopt the attitude of a lifelong student
-Develop listening skills.
-Read a lot not just in your field of expertise
-Eliminate creative distractions
-Take time to discuss your ideas with other people.
2. Investigation
– Develop a solid understanding of the problem, situation, or decision at hand.
3. Transformation
Two types of thinking:
1. Convergent thinking
2. Divergent thinking
the ability to see the similarities & the connections
the ability to see the differences
among various & often diverse data and events
among various data and events
4. Incubation
Ideas may require a gestation period
– Walk away from the situation
– Take the time to daydream
5. Illumination
6. Verification
7. Implementation
Chapter 5
1. How to choose a form of ownership ?
 The best form of ownership depends on an entrepreneur’s particular situation
 The key to choosing a form of ownership is understanding how each form‟s
characteristics affect an entrepreneur‟s business. Factors to consider:
1. Tax considerations
2. Control
5. Liability exposure
6. Managerial ability
3. Business goals
4. Cost of formation
7. Cost of maintaining
2. Define sole proprietorship. What’s the advantages and disadvantages of
sole proprietorship ?
Sole proprietorship is the simplest and most popular form of ownership.
The sole proprietor is the only owner and ultimate decision maker for the business.
Advantages
Disadvantages
1. Simple to create
1. Unlimited personal liability
2. Least costly form to establish
2. Failure can ruin a sole proprietor financially
3. Profit incentive
3. Limited access to capital
3. Define partnership. What’s the advantages and disadvantages of
partnership
Partnership is an association of two or more people who co-own a business for the purpose
of making a profit. Take the time to create a written partnership agreement. Addresses in
advance potential conflicts
Advantages
Disadvantages
1. Easy to establish
1. Unlimited liability of at least one partner
2. Division of profits
2. Difficulty in disposing of partnership interest
3. Larger pool of capital
3. Potential for personality and authority conflicts
4. Flexibility
4. Partners are bound by the law of the agency
4. Define the partnership agreement. What does it contain?
partnership agreement: a document that states all of the terms of operating the
partnership for the protection of each partner involved
A partnership agreement contains:
1. Name of the partnership
2. Purpose of the business
3. Location of the business
4. Duration of the partnership
5. Names of the partners and their legal addresses
5. Distinguish Limited Partnerships from Limited liability partnership.
Limited partnership
Limited liability partnership
 a partnership composed of at least one general
partner and one or more limited partners.
 which all partners in the business
 The general partner in a limited partnership is
are limited partners, having only
treated exactly as in a general partnership.
limited liability for the debts and
 The limited partner has limited liability and is
obligations of the partnership.
treated as an investor in the business
6. Define the corporation. What’s the advantages and disadvantages of a
corporation.
Corporation: an artificial legal entity created by the state that can sue or be sued in its
own name, enter into and enforce contracts, hold the title to and transfer property,
and be found civilly and criminally liable for violations of the law.
Advantages
Disadvantages
1. Limited liability of stockholders
1. Cost and time involved in the incorporation process
2. Ability to attract capital
2. Double taxation
3. Private placement
3. Potential for diminished managerial incentives
4. Public offering
4. Stock option
7. What are the different forms of corporations ?
C-corporations creations of the state.
Domestic corporation:
a corporation doing business in the state in which it is incorporated
Foreign corporation:
a corporation chartered in one state and doing business in another state
Alien corporation:
a corporation formed in another country but doing business in the United States
Publicly held corporation:
a corporation that has a large number of shareholders and whose stock usually is traded
on one of the large stock exchanges
Closely held corporation:
a corporation in which shares are controlled by a relatively small number of people,
often family members, relatives, or friends
8. What are the Requirements for incorporation ?
5. Rules under which corporation will operate
1. The corporation‟s name
2. The corporation‟s statement of purpose
3. The company‟s time horizon
4. Names & addresses of the incorporators
6. Place of business
7. Capital stock authorization
8. Corporate charter: approved articles of
incorporation
9. Define the Professional Corporations.
Professional corporation: offers professionals such as lawyers, doctors, dentists,
accountants, and others, the advantages of the corporate form of ownership.
10. Define the S Corporations.
S corporation: a distinction that is made only for federal income tax purposes
No different from any other corporation from a legal perspective.
11. Define the limited liability corporation. What are its characteristics?
Resembles an S-Corporation but is not subject to the same restrictions
Two documents:
– Articles of organization.
-Operating agreement
An LLC cannot have more than two of these four corporate characteristics:
1. Limited liability
2. Continuity of life
3. Free transferability of interest
4. Centralized management
12. Define social enterprises
Nonprofit organizations.
Uses revenues to pursue social value rather than to create personal value for investors.
To form a non profit organization:
1. File the certificate of incorporation
2. Establish bylaws and board policies
3. Select individuals to serve the board of directors
4. File require forms with the IRS
5. Develop a mission statement
6. Develop a fund-raising plan
For-Profit Social Venture
Primary goal is creating social value, but financial viability is required. Dual focus.
– Double bottom line are subject to market forces.
13. What are the New Forms of Social Ventures?
(L3C) low-profit limited liability company is a cross between a nonprofit & a profit LLC
Builds on the structure of the existing LLC.
it provides the liability protection of a corporation.
Chapter 6
1. What is franchise?
Franchising: semi-independent business owners pay fees and royalties to a parent
company in exchange for the right to sell its products and services under the
franchiser‟s trade name and often to use its business format and system
o Going into business for yourself, but not by yourself
2. What are the types of franchising
There are three types
1. Trade-name franchising
2. Product distribution franchising
3. Pure franchising
( or comprehensive franchising or business format franchising )
3. Describe the benefits of buying a franchise.
Primary reason to buy a franchise is the mutual benefits to the franchisor and franchisee
Franchisees are buying the franchiser‟s experience.
Franchisees get a proven business system + avoid having to learn by trial-and-error.
 Before buying, ask: “What can a franchise do for me that I cannot do for myself?”
The Franchise Relationship
4. What do you get when you buy a franchise?
1. A business system
2. Financial assistance
3. Management training and support
4. Proven products and business formats
5. Brand name appeal
6. Centralized buying power
5. What are the drawbacks of a franchise?
1. Franchise fees and ongoing royalties
2. Limited product line
3. No guarantee of success
4. Market saturation
5. Restrictions on purchasing
6. Limited freedom
6. Before buying a franchise, What should you look for?
1. A unique concept or marketing approach
2. A business system that works
3. A profitable business model
4. A solid training program
5. A positive relationship with franchisee
6. Affordability
7. A solid brand name and a registered trademark
7. What is the right way to buy a franchise?
1. Prepare , use your common sense, and
patience
2. Evaluate yourself, What do you like and
dislike?
3. Research the market
4. Consider your franchise options
5. Get a copy of the FDD and study it
6. Talk to existing franchisees
7. Ask the franchisor some tough questions
8. Make your choice
8. Define the franchise contact.
A franchise contract summarizes the details that will govern the franchisor-franchisee
relationship.
– Outlines the rights and obligations of each party
– Often favors the franchisor
– FTC requires that franchisees receive a complete and revised
contract at least 5 days before signing it
9. What are the advantages and disadvantages of buying a new Vs
established franchise ?
10. What are the Three terms responsible for most disputes?
1. Termination
Franchisees are usually prohibited
from terminating the agreement,
but franchisors can terminate
„with or without cause‟
2. Renewal
3. Transfer and buyback
Franchisors usually have the
Franchisees are usually not
right to renew or refuse
free to sell their business
contract renewal
without approval
11. What do you need To create a successful franchise operation?
1. A unique concept
2. To do due diligence
3. A replicable concept
4. Legal guidance
5. An expansion plan
6. To provide support for franchisees
7. Initial cost to launch a franchise business is $100,000 to $750,000
12. What are the trends in Franchising?

Changing face of franchisees

International opportunities – Key to success: Adaptation

Smaller, nontraditional locations

Conversion franchising – offers instant name recognition

Refranchising – Refranchising is reducing the number of company-owned stores

Master franchises or subfranchises – can be a good option in international markets

Cobranding – Cobranding or combination franchising involves teaming up with
complementary products or services

Serving dual-career couples and aging baby boomers
Chapter 7
1. Talk about Buying an existing business. What are the advantages &
disadvantages of Buying an existing business ?
Buying an existing business can help reduce risk for the entrepreneur.
Conduct a thorough analysis of the business and the opportunity it presents
Important questions to ask:
– Does the business meet your lifestyle and financial expectations?
– Do you have the ability to operate the business successfully?
Advantages
Disadvantages
1. Owning a business guarantees a job
1. Cash requirements
2. Employees and suppliers in place
2. Business is losing money
3. Inventory in place
3. Paying for “ill will”
4. Easier access to financing
4. Unsuitable employees
5. High value
5. Unsatisfactory location
2. What is the Process of Buying a Business?
1) The Search Stage 4 steps to conduct an effective search for the right business to buy:
1. Self-Inventory
Conducting a self-inventory beforehand will help the entrepreneur develop a list of
criteria that a company must meet before it becomes a purchase candidate
2. Develop a List of Criteria
Identify the characteristics of the “ideal business” to focus on the viable candidates
3. Potential Candidates – Begin the search using
Networking
Accountants
The Internet
Attorneys
Bankers
Investment bankers
Contacting owners
Trade associations
Newspapers & trade journals
4. Investigation
1. Research the customer base
2. Motivation of the seller
3. Existing and potential customers
4. Real reason for selling
5. Competitor analysis
6. Review finances
7. Direct competitors
8. At least three years of performance
9. Level of competition
2) The Deal Stage
1. Valuing the business
Three basic techniques to determine value:
1. Balance Sheet Technique
Methods for Determining the Value of a
Business

Assessing tangible assets is usually
straightforward

Valuing intangible assets is difficult

Goodwill

No best method for determining value

Consider using several

Deal must work for both parties
Computes the book value of the company’s net
worth or owners equity
Variation: Adjusted Balance Sheet Technique
2. Earnings Approach
Considers future income potential
Variation 1: Adjusted Earnings Approach
Variation 2: Excess Earnings Approach
Variation 3: Capitalized Earnings Approach
Variation 4: Discounted Future Earnings Approach
3. Market Approach
Uses the price/earnings ratios of similar
businesses to establish value
2. Formalizing the financing of the purchase
3. Negotiating details
Negotiating tips to help reach a mutually satisfying deal:
1.Establish the proper mindset.
2. Be creative.
3.Keep emotions in check.
4.Be patient
5.Don‟t become a victim. 6.Develop a negotiating strategy 7.Be an empathetic listener
The Buyer’s Goals:
The Seller’s Goals:
1. Get the business at lowest price possible
1. Get the highest price possible for company
2. Negotiate favorable payment terms,
2. Sever all responsibility for the company‟s
preferably over time
liabilities
3. Get assurances that he is buying the
business he thinks it is
3. Avoid unreasonable contract terms that
might limit future opportunities
4. Avoid enabling the seller to open a
4. Maximize the cash from the deal
competing business
5. Minimize the tax burden from the sale
5. Minimize the amount of paid cash.
6. Make sure the buyer will make all future.
The structure of the deal To make a negotiation work, the buyer and the seller must
structure the deal in a way that is acceptable to both parties. Several options are available.
– Straight business sale Often the safest exit for an entrepreneur. Usually the
most expensive option. Seller must be willing to finance part of purchase price
– Use a two-step sale Business is purchased in two phases
4. Letter of intent

A firm commitment by both sides that they are ready to move toward closing the sale

Only 25% of deals make it from the letter of intent to the final closing
5. Due diligence
Involves investigating three critical areas of the business and the potential deal beyond those
already evaluated earlier in the search and deal processes:
1. Confirming valuation: What is the real value of the business?
2. Legal issues: What legal aspects of the business are known or hidden risks?
3. Financial state: Is the business financially sound?
3) The Transition Stage
Closing the sale of a business is a complex legal process Closing documents include:
Asset list
Transfer of utilities
Bill of sale
Notice to creditors
Lease assignments
How can the buyer smooth the transition ?
 Concentrate on communicating with employees
 Be honest with employees
 Listen to employees
 Devote time to selling the vision for the company to key stakeholders
3. What are the disadvantages of Market approach ?
1. Necessary comparisons between publicly traded and privately owned companies
2. Unrepresentative earnings estimates
3. Finding similar companies for comparison
4. Applying the after-tax earnings of a private company to determine its value
Chapter
8
1. What are the requirements of planning new business?
The easiest part is coming up with the idea Planning for a new business requires:
1. Feasibility analysis: should we proceed with this idea?
2. Business model: how should we proceed with this idea?
3. Business plan: transforming the idea into a successful business
2. What are the components of A feasibility analysis ?
1. An industry & market feasibility analysis
2. A product or service feasibility analysis
3. A financial feasibility analysis
4. An entrepreneur feasibility analysis
1. An industry & market feasibility analysis
Two areas of focus:
1. Determining how attractive an industry is overall as a “home” for a new business.
2. Identifying possible niches a small business can occupy profitably.
Use Porter’s five forces model
Five forces interact with one another to determine the setting in which companies
compete and, hence, the attractiveness of the industry:
1. Rivalry among competing firms
2. Bargaining power of suppliers
3. Bargaining power of buyers
4. Threat of new entrants
5. Threat of substitute products or services
A niche strategy can be a good way to enter a market, but carries some risks:
Can require adaptability of initial plans
Niches change
Niches can go away
Niches can grow
2. Product or Service Feasibility Analysis: Is There a Market?
Determines the degree to which a product or service idea appeals to potential
customers and identifies the resources necessary to produce it.
Two questions:
Are customers willing to purchase our good or service?
Can we provide the product or service to customers at a profit?
Primary research:
Secondary research:
collect data firsthand & analyze it
gather data already has been compiled & analyze it.
-Customer surveys & questionnaires
-Trade associations and business directories
-Focus groups -In-home trials
-Industry databases -Demographic data -Forecasts
-Prototypes
-Market research -Articles
-“Windshield” research
-Local data -Internet
3. Financial Feasibility Analysis: Is There Enough Margin?
 Capital requirements Must have an estimate of how much start-up capital is required
to launch the business
 Estimated earnings Forecasted income statements
 Time out of cash Surviving at current rate of negative cash flow
 Return on investment: How much investors can expect their investments to return
4. Entrepreneur Feasibility: Is This Idea Right for Me?
Entrepreneurial readiness: knowledge, experiences, and skills necessary to have any
chance of being successful.
3. Business Model Canvas
4. What do an entrepreneur needs to get external financing?
To get external financing, an entrepreneur needs to pass three tests:
1. Reality test.
2. Competitive test.
3. Value test
5. Explain the phases of Developing a business model.
Developing a business model has four phase process:
1. Create an initial business model canvas
2. Test the problem that the entrepreneur thinks business solves for the customer
3. Test the business model in the market
4. Make changes and adjustments in the business pivots
6. What are the benefits of creating a Business plan?
Business plan is a written summary of an entrepreneur‟s proposed business venture, its
operational & financial details, its marketing opportunities and strategy, its managers‟
skills & abilities. Serves two functions:
1. Guides the company‟s growth and development
2. Attracts lenders and investors
7. Give a Common elements of a business plan.
Title page & table of contents
Company history
Description of product/service
Executive summary
Business and industry profile
Business and industry profile
Mission statement
Business strategy
Goals and objectives
8. Visualizing a Venture’s Risks and Rewards
 A working business plan is used to guide the entrepreneur
 A presentation business plan is used to attract capital
9. What should an entrepreneur do to make a successful visualization?
An entrepreneur should:
 Make sure the plan has an attractive cover
 Rid your plan of all spelling and grammatical errors
 Make the plan visually appealing
 Include a table of contents to allow readers to navigate the plan easily
 Make it interesting!
 Use spreadsheets to generate financial forecasts
 Always include cash flow projections
 Keep your plan “crisp” – long enough, but not too long
 Tell the truth – always
10. What are The five Cs of credit ?
1. Capital.
2. Capacity
3. Collateral
4. Character.
5. Conditions
11. What are the areas that a A business plan presentation should cover ?
It should five basic areas:
1) Your company and its product or services
2) The problem to be solved – use a compelling story
3) A description of your solution to the problem
4) Your company‟s business model
5) Your company‟s competitive edge
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5-1
Chapter 5
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5-2
➢There is no one “best” form of ownership
➢The best form of ownership depends on an
entrepreneur’s particular situation
➢The key to choosing a form of ownership is
understanding how each form’s characteristics affect
an entrepreneur’s specific business and personal
circumstances
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5-3
Number of Days to Start a Business in the United States
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➢Factors to consider:
➢Tax considerations
➢Liability exposure
➢Start-up and future capital requirements
➢Control
➢Managerial ability
➢Business goals
➢Management succession plans
➢Cost of formation
➢Cost of maintaining
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Forms of Business Ownership
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➢Sole proprietorship: the simplest and most
popular form of ownership
➢The sole proprietor is the only owner and ultimate
decision maker for the business
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➢Advantages of a Sole Proprietorship
➢Simple to create
➢Least costly form to establish
➢Profit incentive
➢Total decision-making authority
➢No special legal restrictions
➢Easy to discontinue
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➢Disadvantages of the Sole Proprietorship
➢Unlimited personal liability
➢Failure of the business can ruin a sole
proprietor financially
➢Limited access to capital
➢Limited skills and abilities
➢Feelings of isolation
➢Lack of continuity for the business
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Partnership: an association of two or more people
who co-own a business for the purpose of making a
profit
➢Take the time to create a written partnership
agreement: a document that states all of the
terms of operating the partnership for the
protection of each partner involved
➢Addresses in advance potential conflicts
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➢A partnership agreement contains:
1. Name of the partnership
2. Purpose of the business
3. Location of the business
4. Duration of the partnership
5. Names of the partners and their legal addresses
6. Contributions of each partner to the business, at the
creation of the business and later
7. Agreement on how the profits or losses will be
distributed
8. Agreement on salaries or drawing rights against
profits for each partner
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9. Procedure for expansion through the addition of new
partners
10. Distribution of the partnership’s assets if the partners
voluntarily dissolve the partnership
11. Sale of the partnership interest
12. Absence or disability of one of the partners
13. Voting rights
14. Decision-making authority
15. Financial authority
16. Handing tax matters
17. Alterations or modifications of the partnership agreement
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➢The Uniform Partnership Act
➢Uniform Partnership Act: codifies the body of law
dealing with partnerships in the United States
➢Three key elements:
1. Common ownership interest in a business
2. Sharing the business’s profits and losses
3. Right to participate in managing the partnership
➢Partners must abide by:
➢Duty of loyalty
➢Duty of obedience
➢Duty of care
➢Duty to inform
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➢Advantages of the Partnership
➢Easy to establish
➢Complementary skills
➢Division of profits
➢Larger pool of capital
➢Ability to attract limited partners
➢Little government regulation
➢Flexibility
➢Taxation
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➢Disadvantages of the Partnership
➢Unlimited liability of at least one partner
➢Capital accumulation
➢Difficulty in disposing of partnership interest
➢Potential for personality and authority conflicts
➢Partners are bound by the law of the agency
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➢Limited Partnerships
➢Limited partnership: a partnership composed of at
least one general partner and one or more limited
partners
➢The general partner in a limited partnership is
treated exactly as in a general partnership
➢The limited partner has limited liability and is
treated as an investor in the business
➢The limited partner does not take an active role in
managing the business
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➢Limited Liability Partnerships
➢Limited liability partnership: a partnership in
which all partners in the business are limited
partners, having only limited liability for the debts
and obligations of the partnership
➢Usually restricted to professionals – attorneys,
physicians, dentists, accountants, etc.
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5-17
Corporation: an artificial legal entity created by the
state that can sue or be sued in its own name, enter
into and enforce contracts, hold the title to and transfer
property, and be found civilly and criminally liable for
violations of the law
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➢C-corporations: creations of the state
➢Domestic corporation: a corporation doing business
in the state in which it is incorporated
➢Foreign corporation: a corporation chartered in one
state and doing business in another state
➢Alien corporation: a corporation formed in another
country but doing business in the United States
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➢Publicly held corporation: a corporation that has a
large number of shareholders and whose stock
usually is traded on one of the large stock exchanges
➢Closely held corporation: a corporation in which
shares are controlled by a relatively small number of
people, often family members, relatives, or friends
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➢Requirements for incorporation:
1. The corporation’s name
2. The corporation’s statement of purpose
3. The company’s time horizon
4. Names and addresses of the incorporators
5. Place of business
6. Capital stock authorization
7. Capital required at the time of incorporation’
8. Provision for preemptive rights, if any, that are
granted to stockholders
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9. Restrictions on transferring shares
➢Treasury stock
➢Right of first refusal
10. Names and addresses of the officers and directors
of the corporation
11. Rules under which the corporation will operate
➢Bylaws
➢ Corporate charter: approved articles of
incorporation
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➢Advantages of the Corporation
➢Limited liability of stockholders
➢Ability to attract capital
➢Private placement
➢Public offering
➢Ability to continue indefinitely
➢Transferable ownership
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➢Disadvantages of the Corporation
➢Cost and time involved in the incorporation process
➢Double taxation
➢Potential for diminished managerial incentives
➢Stock option
➢Stock ownership plan
➢Legal requirements and regulatory red tape
➢Potential loss of control by the founders
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5-24
➢Professional Corporations
Professional corporation: offers professionals such
as lawyers, doctors, dentists, accountants, and
others, the advantages of the corporate form of
ownership
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➢S corporation: a distinction that is made only for
federal income tax purposes
➢No different from any other corporation from a legal
perspective
➢For tax purposes, however, an S- corporation is taxed
like a partnership, passing all of its profits (or losses)
through to the individual shareholders
➢To elect “S” status, all shareholders must consent,
and the corporation must file with the IRS within the
first 75 days of its tax year
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➢S-corporations must meet the following criteria:
➢Must be a U.S.-based corporation
➢No nonresident alien shareholders
➢Only one class of common stock
➢No more than 100 shareholders (increased from 75)
➢No more than 25% of corporate income from passive
investment sources
➢Corporations and partnerships cannot be
shareholders
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➢Advantages of an S Corporation
➢All of the advantages of a regular corporation
➢Passes all of its profits or losses through to individual
shareholders
➢Income is only taxed once at the individual tax rate
➢Avoids the double taxation disadvantage of the C
corporation
➢Avoids the tax C corporations pay on assets that
have appreciated in value and are sold
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➢Disadvantages of an S Corporation
➢Tax advantages may not be permanent
➢When is an S Corporation a Wise Choice?
➢Beneficial to start-up companies that anticipate net
losses and to highly profitable firms with substantial
dividends to pay to shareholders
➢Also attractive to companies that plan to reinvest
most of their earnings to finance growth
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➢Resembles an S-Corporation but is not subject to the
same restrictions
➢Two documents:
➢Articles of organization
➢Operating agreement
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➢An LLC cannot have more than two of these four
corporate characteristics:
➢Limited liability
➢Continuity of life
➢Free transferability of interest
➢Centralized management
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➢Nonprofit organizations
➢Uses revenues to pursue social value rather than to
create personal value for investors
➢To form a non profit organization:
➢File the certificate of incorporation
➢Purpose clause
➢Select individuals to serve on the board of directors
➢Develop a mission statement
➢Establish bylaws and board policies
➢File require forms with the IRS
➢Develop a fund-raising plan
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➢For-Profit Social Venture
➢Primary goal is creating social value, but
financial viability is required
➢Dual focus
➢Double bottom line
➢Are subject to market forces
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➢New Forms of Social Ventures
➢The low-profit limited liability company (L3C) is a cross
between a nonprofit and a for-profit LLC
➢Builds on the structure of the existing LLC; it provides
the liability protection of a corporation, can sell shares
of ownership, and is not tax exempt
➢Formed to pursue a social mission
➢Meant to integrate the best of both the nonprofit and
the for-profit LLC by creating a market for
investments in financially risky but socially beneficial
activities
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The L3C Versus the Traditional LLC and Nonprofit
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3-1
Chapter 3
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3-2
Creativity: the ability to develop new ideas and to
discover new ways of looking at problems and
opportunities
➢Thinking new things
Innovation: the ability to apply creative solutions to
those problems and opportunities to enhance or to
enrich people’s lives
➢Doing new things
➢Entrepreneurs succeed by thinking and doing new
things or old things in new ways
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3-3
➢Intuit identified six enablers of small business
innovation:
1. Passion
2. Customer connection
3. Agility and adaptation
4. Experimentation and improvisation
5. Resource limitations
6. Information sharing and collaboration
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3-4
➢Innovations can be:
➢Reactive in response to customer feedback or changing
market conditions
➢Proactive in response to new opportunities on which to
capitalize
➢Revolutionary creating market-changing, disruptive
breakthroughs that are the result of generating something
from nothing
➢Evolutionary, developing market-sustaining ideas that
elaborate on existing products, processes, and services
➢Putting old things together in new ways or from taking
something away to create something simpler or better
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3-5
➢Entrepreneurs must go beyond relying in what has worked
in the past
➢Cast off limiting assumptions, beliefs, and behaviors
➢Develop new insights
➢Change perspectives
➢Look at the world in new and different ways
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How Creative Are You?
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3-7
➢Can Creativity be Taught?
➢Creativity is a skill
➢Anyone can learn to be creative and to get
better at it
➢Need to understand creative thinking
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3-8
➢Each hemisphere of the brain processes
information differently
➢One side tends to be dominant
➢The left brain handles language, logic, and
symbols
➢Thinking is narrowly focused and systematic
➢The right brain handles emotional, intuitive, and
spatial functions
➢Thinking is unconventional, unsystematic, and
unstructured
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3-9
➢Right brain, lateral thinking is at the heart of the
creative process
➢Individuals can learn to control which side of the brain
is dominant in a given situation
➢Can learn to ‘turn down’ the dominant left side and
‘turn up’ the right side
➢Successful entrepreneurs need both left and ride side
thinking
➢The right side generates innovative ideas
➢The left side judges market potential
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3-10
➢Mental locks that can limit individual creativity:
1. Searching for the one “right” answer
2. Focusing on “being logical”
3. Blindly following the rules
4. Constantly being practical
5. Viewing laughter and play as frivolous
6. Becoming overly specialized
7. Avoiding ambiguity
8. Fearing looking foolish
9. Fearing mistakes and failure
10. Believing that “I’m not creative”
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3-11
➢Enhancing Organizational Creativity
1. Include creativity as a core company value and
make it an integral part of the company’s culture
2. Hire for creativity
3. Embrace diversity
4. Establish an organizational structure that nourishes
creativity
5. Expect creativity
6. Expect failure and learn from it
7. Incorporate fun into the work environment
8. Encourage curiosity
9. Design a workspace that encourages creativity
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10. View problems as opportunities
11. Provide creativity training
12. Provide support
13. Develop a procedure for capturing ideas
14. Talk with customers – or better yet, interact with them
15. Monitor emerging trends and identify ways your
company can capitalize on them
16. Look for uses for your company’s products or services
in other markets
17. Reward creativity
18. Model creativity
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3-13
➢Enhancing Individual Creativity
1. Allow yourself to be creative
2. Forget the “rules”
3. Give your mind fresh input everyday
4. Travel – and observe
5. Collaborate with other people
6. Observe the products and services of other
companies, especially those in different markets
7. Recognize the creative power of mistakes and
accidents
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8. Be positive
9. Notice what is missing
10. Periodically ask yourself, “Am I asking the right
question?”
11. Keep a journal handy to record your thoughts and
ideas
12. Listen to other people
13. Get adequate sleep
14. Watch a movie
15. Talk to a child
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16. Do something ordinary in an unusual way
17. Keep a toy box in your office
18. Take note of your ‘pain points’: do other people
experience them as well?
19. Do not throw away seemingly ‘bad’ ideas
20. Read books on stimulating creativity or take a class
on creativity
21. Take some time off
22. Be persistent
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➢Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
4. Incubation
5. Illumination
6. Verification
7. Implementation
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3-17
➢Step 1: Preparation
➢Adopt the attitude of a lifelong student
➢Read—a lot—and not just in your field of expertise
➢Clip articles of interest to you and create a file for them
➢Take time to discuss your ideas with other people,
including those who know little about it as well as
experts in the field
➢Join professional or trade associations and attend their
meetings
➢Develop listening skills.
➢Eliminate creative distractions
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3-18
➢Creative ideas are the result of seven step
process:
1. Preparation
➢ Investigation
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➢Step 2: Investigation
➢Develop a solid understanding of the problem,
situation, or decision at hand
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➢Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
➢ Transformation
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3-21
➢Step 3: Transformation
➢Two types of thinking:
1. Convergent thinking: the ability to see the
similarities and the connections among
various and often diverse data and events
2. Divergent thinking: the ability to see the
differences among various data and events
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➢Transforming information into a purposeful idea:
➢Evaluate the parts of the situation several times, trying
to grasp the big picture
➢Rearrange the elements of the situation
➢Try using synectics (a term derived from the Greek
words for “to bring together” and “diversity”),taking two
seemingly nonsensical ideas and combining them
➢Before locking into one particular approach to a
situation, remember that several approaches might be
successful
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➢Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
➢ Incubation
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➢Step 4: Incubation
➢Ideas may require a gestation period
➢Walk away from the situation
➢Take the time to daydream
➢Relax – and play – regularly
➢Dream about the problem or opportunity
➢Work on the problem or opportunity in a
different environment
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3-25
➢Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
4. Incubation
➢ Illumination
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➢Step 5: Illumination
➢The light bulb goes on
➢Eureka factor
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3-27
➢Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
4. Incubation
5. Illumination
➢ Verification
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3-28
➢Step 6: Verification
➢Is it really a better solution to a particular problem
or opportunity?
➢Will it work?
➢Is there a need for it?
➢Is there a need for it?
➢If so, what is the best application of this idea in the
marketplace?
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➢Does this product or service idea fit into our core
competencies?
➢How much will it cost to produce or to provide?
➢Can we sell it at a reasonable price that will
produce adequate sales, profit, and return on
investment for our business?
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➢Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
4. Incubation
5. Illumination
6. Verification
➢ Implementation
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➢Step 7: Transformation
➢Transform the idea into reality
➢Ready, aim, fire
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.
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Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.
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