Our Services

Get 15% Discount on your First Order

[rank_math_breadcrumb]

Saudi Electronic University Homework Help

Management Question

Description

please avoid plagiarism as much as possible

Put at least 4 references

‫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: 01/03/2025 @ 23:59
Course Name: Entrepreneurship and small
business
Course Code: MGT402

Student’s Name:

Semester: 2nd Semester

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-

1-1

Chapter 1

1-2

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%

1-3

1-4

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

1-5

Why Entrepreneurs Start Businesses

1-6

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

1-7

More Characteristics of Entrepreneurs:
High level of energy
Competitiveness
Future orientation
Serial entrepreneurs
Skilled at organizing
Value of achievement over money

1-8

Other Characteristics of Entrepreneurs:
High degree of commitment
Tolerance for ambiguity
Flexibility
Tenacity

1-9

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

1-10

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

1-11

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

1-12

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

1-13

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

1-14

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

1-15

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

1-16

Young entrepreneurs

1-17

New Entrepreneurs by Age Group

1-18

Young entrepreneurs
Women entrepreneurs

1-19

Entrepreneurial Activity Index by Gender

1-20

Young entrepreneurs
Women entrepreneurs
Minority enterprises

1-21

Percentage of New Entrepreneurs by Minority Group

1-22

Young entrepreneurs
Women entrepreneurs
Minority enterprises
Immigrant entrepreneurs
Part-time entrepreneurs
Home-based business owners

1-23

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.

1-24

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.

1-25

Young entrepreneurs
Women entrepreneurs
Minority enterprises
Immigrant entrepreneurs
Part-time entrepreneurs
Home-based business owners
Family business owners
Family-owned business

1-26

Copreneurs
Corporate castoffs
Corporate “dropouts”
Retired baby boomers

1-27

Entrepreneurial Activity by Age Group
1996-2012

1-28

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

1-29

Small Businesses by Industry

1-30

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

1-31

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

1-32

Small Business Survival Rate

1-33

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

1-34

1-35

3-1

Chapter 3

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

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

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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

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

3-6

How Creative Are You?

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

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

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

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”
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

3-12

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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

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

3-14

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

3-15

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

3-16

Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
4. Incubation
5. Illumination
6. Verification
7. Implementation

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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

3-18

Creative ideas are the result of seven step
process:
1. Preparation
 Investigation

3-19

Step 2: Investigation
Develop a solid understanding of the problem,
situation, or decision at hand

3-20

Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
 Transformation

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

3-22

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

3-23

Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
 Incubation

3-24

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

3-25

Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
4. Incubation
 Illumination

3-26

Step 5: Illumination
The light bulb goes on
Eureka factor

3-27

Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
4. Incubation
5. Illumination
 Verification

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?

3-29

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?

3-30

Creative ideas are the result of seven step
process:
1. Preparation
2. Investigation
3. Transformation
4. Incubation
5. Illumination
6. Verification
 Implementation

3-31

Step 7: Transformation
Transform the idea into reality
Ready, aim, fire

3-32

3-33

5-1

Chapter 5

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

5-3

Number of Days to Start a Business in the United States

5-4

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

5-5

Forms of Business Ownership

5-6

Sole proprietorship: the simplest and most
popular form of ownership
The sole proprietor is the only owner and ultimate
decision maker for the business

5-7

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

5-8

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

5-9

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

5-10

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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

5-11

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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

5-12

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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

5-13

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

5-14

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

5-15

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

5-16

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.

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

5-18

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

5-19

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

5-20

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

5-21

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

5-22

Advantages of the Corporation
Limited liability of stockholders
Ability to attract capital
Private placement
Public offering
Ability to continue indefinitely
Transferable ownership

5-23

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

5-24

Professional Corporations
Professional corporation: offers professionals such
as lawyers, doctors, dentists, accountants, and
others, the advantages of the corporate form of
ownership

5-25

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

5-26

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

5-27

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

5-28

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

5-29

Resembles an S-Corporation but is not subject to the
same restrictions
Two documents:
Articles of organization
Operating agreement

5-30

An LLC cannot have more than two of these four
corporate characteristics:
Limited liability
Continuity of life
Free transferability of interest
Centralized management

5-31

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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

5-32

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

5-33

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

5-34

The L3C Versus the Traditional LLC and Nonprofit

5-35

5-36

6-1

Chapter 6

6-2

Shoppers can now buy virtually every product
or service imaginable through franchises
More than 757,000 franchise outlets in the
United States
Employ almost 8.2 million people
Generate $802 billion in annual economic
output – adding $460 billion to the country’s
GDP

6-3

Franchised Businesses by Product or Service Line

6-4

Franchising in Global Markets
International Franchise Association survey:
61% percent of members operate in international
markets
74% plan to accelerate global growth
32% of the units of the 200 largest U.S.
franchisors are located outside the U.S.
Hot markets: Brazil, Russia, India, China, and
nations in the Middle East and North Africa

6-5

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
Going into business for yourself, but not by yourself

6-6

Three basic types:
1. Trade-name franchising
2. Product distribution franchising
3. Pure franchising (or comprehensive
franchising or business format
franchising

6-7

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 and
avoid having to learn by trial-and-error
Before buying, ask: “What can a franchise do for
me that I cannot do for myself?”

6-8

The Franchise Relationship

6-9

What do you get when you buy a franchise?
A business system
Management training and support
Brand name appeal
Standardized quality of goods and services
National advertising program
Financial assistance
Proven products and business formats
Centralized buying power
Site selection and territorial protection
Increased chance for success
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

6-10

Franchise Lending Activity

6-11

What are the drawbacks of a franchise?
Franchise fees and ongoing royalties
Strict adherence to standardized operations
Restrictions on purchasing
Limited product line
Market saturation
Limited freedom
No guarantee of success

6-12

A Franchise Evaluation Quiz

6-13

Franchisors are required to file a Franchise
Disclosure Document (FDD)
Key tool for protection
Franchisers must deliver a copy of a FDD
before any offer or sale of a franchise
The FTC requires that FDDs use ‘plain English’

6-14

The FDD contains information on 23 topics,
including:
Franchiser’s business experience
Franchise fees and costs
Lawsuits involving the franchiser
Financial assistance available
Territorial protection granted
Restrictions on purchasing

6-15

6-16

What should you look for?
A unique concept or marketing approach
A profitable business model
A solid brand name and a registered trademark
A business system that works
A solid training program
Affordability
A positive relationship with franchisees

6-17

Preparation, common sense, and patience are vital
ingredients in choosing the right franchise
Evaluate yourself
What do you like and dislike?
Research the market
Consider your franchise options
Get a copy of the FDD and study it
Franchise turnover rate
Talk to existing franchisees
Ask the franchisor some tough questions
Make your choice
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

6-18

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

6-19

New
Franchise

Established
Franchise

Pros

Cons

 Can be new and exciting
 Business concept can be fresh
and different in the market
 Possibility of getting lower fees
as a “pioneer” of the concept
 Potential for a high return on
investment

 Business is not tested or
established in the market
 Unknown brand and trademark
 Possibility that the concept is a fad
with no staying power
 Franchiser may lack the experience
to deliver valuable services to
franchisees

 Business concept likely is well-  High franchise fees and costs that
known to consumers and market
often are non-negotiable
for the products or services is
 Concept may be on the wane in the
already established
market
 Franchiser has experience in
 Franchiser’s brand and trademark
delivering services to
may remind customers of an
franchisees
outdated concept
 Franchiser has had time to work  Franchiser’s “trade dress” may be
the “bugs” out of the business
in need of updating and
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.
6-20
system
redesigning

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
Franchisors usually have the right to renew or
refuse contract renewal
3. Transfer and buybacks
Franchisees are usually not free to sell their
business without approval

6-21

Three major growth waves since the beginning of
franchising
1. Early 1970s – fast food boom
2. Mid-1980s – shift to the service sector
3. Early 1990s – focus on specific market niches

6-22

Changing face of franchisees
Today’s franchisees are:
More diverse
Better educated
More experienced
More financially secure
Multiple unit franchising
Multiple-unit franchising is more efficient
International opportunities
Key to success: Adaptation

6-23

Smaller, nontraditional locations
Intercept marketing
Conversion franchising
Conversion franchising offers instant name
recognition
Refranchising
Refranchising is reducing the number of companyowned stores

6-24

Area development and master franchising
Area development offers exclusive rights to an
area
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

6-25

Entrepreneurs can use franchising as a growth
strategy
To create a successful franchise operation you need:
A unique concept
A replicable concept
An expansion plan
To do due diligence
Legal guidance
Initial cost to launch a franchise business is
$100,000 to $750,000
To provide support for franchisees

6-26

6-27

7-1

Chapter 7

7-2

Buying an existing business can help reduce risk for the
entrepreneur
But, take your time!
Conduct a thorough analysis of the business and the
opportunity it presents
Important questions:
Does the business meet your lifestyle and financial
expectations?
Do you have the ability to operate the business
successfully?

7-3

Advantages of Buying an Existing Business
Business may continue to be successful
Leverage the experience of the previous owner
Owning a business guarantees a job
The turnkey business
Superior location
Employees and suppliers in place
Equipment installed with known production capacity
Inventory in place
Trade credit established
Easier access to financing
High value
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

7-4

Disadvantages of Buying an Existing Business
Cash requirements
Business is losing money
Paying for “ill will”
Unsuitable employees
Unsatisfactory location
Obsolete or inefficient equipment and facilities
Customers may be loyal to previous owner
Change may be challenging to implement
Obsolete inventory
Value of accounts receivable
Business is overpriced
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

7-5

Valuing Accounts Receivable

7-6

Process of Buying a Business

7-7

Four steps to conduct an effective search for the right
business to buy:
1. Conduct a self-inventory
2. Develop a list of the key criteria that define the
“ideal business”
3. Seek help to develop a list of potential candidates
for acquisitions that meet your criteria
4. Investigate the potential acquisition targets that
best meet your criteria

7-8

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

7-9

2. Develop a List of Criteria
Identify the characteristics of the “ideal
business” to focus on the viable candidates

7-10

3. Potential Candidates
Begin the search using:
The Internet
Bankers
Accountants
Attorneys
Investment bankers
Trade associations
Contacting owners
Newspapers and trade journals
Networking
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

7-11

4. Investigation
Research the customer base
Existing and potential customers
Competitor analysis
Direct competitors
Level of competition
Motivation of the seller
Real reason for selling
Review finances
At least three years of performance

7-12

The deal stage includes:
Valuing the business
Formalizing the financing of the purchase
Negotiating details
Letter of intent
Due diligence

7-13

Methods for Determining the Value of a Business
Assessing tangible assets is usually straightforward
Valuing intangible assets is difficult
Goodwill
No single best method for determining value
Consider using several
Deal must work for both parties

7-14

Selling prices of Private Companies

7-15

Three basic techniques to determine value:
1. Balance Sheet Technique
Variation: Adjusted Balance Sheet Technique
2. Earnings Approach
Variation 1: Adjusted Earnings Approach
Variation 2: Excess Earnings Approach
Variation 3: Capitalized Earnings Approach
Variation 4: Discounted Future Earnings
Approach
3. Market Approach

7-16

1. Balance Sheet Technique
Computes the book value of the company’s net worth
or owners equity
Book Value of Net Worth = Total Assets – Total Liabilities
= $266,091 – $114,325
= $151,766
 Variation: Adjusted Balance Sheet Technique
Adjusted Net Worth = $279,738 – $114,325
= $165,413

7-17

2. Earnings approach
Considers future income potential
Variation 1: Adjusted earnings method
Start with EBITDA

7-18

2. Earnings approach
Considers future income potential
Variation 2: Excess earnings method
Estimates goodwill
1. Compute adjusted tangible net worth
2. Calculate the opportunity cost of investing in the
business
3. Project net earnings
4. Compute extra earning power
5. Estimate the value of intangibles
6. Determine the value of the business
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

7-19

2. Earnings approach
Considers future income potential
Variation 3: Capitalized earnings approach
Divides estimated net earnings by the rate of return
that reflects the risk level

7-20

2. Earnings approach
Considers future income potential
Variation 4: Discounted future earnings approach
1. Project earnings for five years into the future
2. Discount these future earnings using the appropriate
present value factor
3. Estimate the growth stream beyond five years
4. Discount the income estimate beyond five years using
the present value factor for the sixth year
5. Computer the total value of the business

7-21

3. Market approach
 Uses the price/earnings ratios of similar businesses to
establish value

7-22

3. Market approach
 Disadvantages:
 Necessary comparisons between publicly traded and
privately owned companies
 Unrepresentative earnings estimates
 Finding similar companies for comparison
 Applying the after-tax earnings of a private company to
determine its value

7-23

 The best method?
 There is no single best method
 The final price will be based on the valuation
used and the negotiating skills of both parties

7-24

 Negotiating the Deal
 The structure of the deal – the terms and
conditions of payment – is more important than
the actual price the seller agrees to
 The ‘art of the deal’
 Both parties need to work to achieve their goals,
while making concessions to keep the
negotiations alive

7-25

Identifying the Bargaining Zone

7-26

 Negotiating tips to help reach a mutually satisfying
deal:
1. Establish the proper mindset
2. Know what you want to have when you walk away
from the table
3. Develop a negotiating strategy
4. Recognize the other party’s needs
5. Be an empathetic listener

7-27

6. Avoid seeing the other side as “the enemy”
7. Educate, don’t intimidate
8. Be creative
9. Keep emotions in check
10. Be patient
11. Don’t become a victim
12. Remember that “no deal” is an option

7-28

 The Buyer’s Goals:
Get the business at the lowest price possible
Negotiate favorable payment terms, preferably over
time
Get assurances that he is buying the business he
thinks it is
Avoid enabling the seller to open a competing
business
Minimize the amount of cash paid up front.

7-29

 The Seller’s Goals:
Get the highest price possible for the company
Sever all responsibility for the company’s liabilities
Avoid unreasonable contract terms that might limit
future opportunities
Maximize the cash from the deal
Minimize the tax burden from the sale
Make sure the buyer will make all future payments

7-30

 The structure of the deal
 Straight business sale
 Often the safest exit for an entrepreneur
 Usually the most expensive option
 Seller must be willing to finance part of the
purchase price
 Use a two-step sale
 Business is purchased in two phases

7-31

 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

7-32

 The Due Diligence Process
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?
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

7-33

1. Confirming valuation
Are the assets really useful, or are they obsolete?
Will the assets require replacement soon?
Do the assets operate efficiently?
Book value is not the same as market value
Other factors:
Accounts receivable
Lease arrangements
Business records
Intangible assets
Location and appearance
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

7-34

2. Legal issues
Liens
Contract assignments
Due-on-sale clauses
Covenants not to compete
Ongoing legal liabilities
Physical premises
Product liability claims
Product liability lawsuits
Labor relations
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

7-35

3. Financial state
 Income statement and balance sheet for at
least three years
 Income tax return for at least three years
 Cash flow
 Be wary if the seller refuses to disclose financial
records!

7-36

 Closing the sale of a business is a complex legal
process
 Closing documents include:
Asset purchase agreement
Bill of sale
Asset list
Buyer’s disclosure statement
Allocation of purchase price
Non-compete agreement
Consulting/Training agreement
Transfer of subsidiaries associated with business
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

7-37

Transfer of utilities
Transfer of Web sites, social media addresses,
and phone numbers
Documentation of new entity that will own the
business and documentation of new bank
account for that business
Transfer of merchant accounts
Notice to creditors
Lease assignments

7-38

Financing documents, security agreement,
promissory note, and UCC Financing Statement
if seller is financing all or part of the sale
Sales tax and payroll tax clearance
Escrow instructions
Closing adjustments/proration
Transfer of any third party contracts
Corporate resolution authorizing sale of the
corporate assets

7-39

To smooth the transition, a buyer should:
Concentrate on communicating with employees
Be honest with employees
Listen to employees
Devote time to selling the vision for the
company to key stakeholders
Consider asking the seller to serve as a
consultant until the transition is complete

7-40

7-41

8-1

Chapter 8

8-2

The easiest part of launching a new business is
coming up with the idea
But, the great idea is just the start
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

8-3

New Business Planning Process

8-4

A feasibility analysis consists of four interrelated
components:
1. An industry and market feasibility analysis
2. A product or service feasibility analysis
3. A financial feasibility analysis
4. An entrepreneur feasibility analysis

8-5

Elements of a Feasibility Analysis

8-6

Industry and 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

8-7

Begin with a broad look at the industry
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

8-8

Porter’s Five Forces Model

8-9

1. Rivalry among companies competing in the industry
Strongest of the five forces
Industry is more attractive when:
Number of competitors is large, or, at the other
extreme, quite small
Competitors are not similar in size or capacity
Industry is growing fast
Opportunity to sell a differentiated product or service
exists

8-10

2. Bargaining power of suppliers to the industry
 The greater the leverage of suppliers, the less
attractive the industry
 Industry is more attractive when:
 Many suppliers sell a commodity product
 Substitutes are available
 Switching costs are low
 Items account for a small portion of the cost of
finished products

8-11

3. Bargaining power of buyers
 Highest when the number of customers is small and
cost of switching to a competitor’s product is low
 Industry is more attractive when:
 Customers’ switching costs are high
 Number of buyers is large
 Customers want differentiated products
 Customers find it difficult to collect information for
comparing suppliers
 Items account for a small portion of customers’
finished products
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

8-12

4. Threat of new entrants to the industry
The larger the pool of potential new entrants, the less
attractive the industry
Industry is more attractive to new entrants when:
Advantages of economies of scale are absent
Capital requirements to enter are low
Cost advantages are not related to company size
Buyers are not loyal to existing brands
Government does not restrict the entrance of new
companies
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

8-13

5. Threat of substitute products or services
 Substitute products or services can turn an industry on
its head
 Industry is more attractive to new entrants when:
 Quality substitutes are not readily available
 Prices of substitute products are not significantly
lower than those of the industry’s products
 Buyers’ switching costs are high

8-14

Five Forces Matrix

8-15

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

8-16

A feasibility analysis consists of four interrelated
components:
1. An industry and market feasibility analysis
A product or service feasibility analysis

8-17

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?

8-18

Primary research: collect data firsthand and
analyze it
Customer surveys and questionnaires
Focus groups
Prototypes
In-home trials
“Windshield” research

8-19

Secondary research: gather data that already
has been compiled and analyze it
Trade associations and business directories
Industry databases
Demographic data
Forecasts
Market research
Articles
Local data
The Internet
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

8-20

A feasibility analysis consists of four interrelated
components:
1. An industry and market feasibility analysis
2. A product or service feasibility analysis
A financial feasibility analysis

8-21

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
Bootstrapping
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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

8-22

8-23

4. Entrepreneur Feasibility: Is This Idea Right for
Me?
Entrepreneurial readiness: knowledge,
experiences, and skills necessary to have any
chance of being successful

8-24

Most entrepreneurs use a visual process such
as whiteboarding when developing their
business models
Develop a business model canvas comprised
of nine segments

8-25

Business Model Canvas

8-26

1. Value Proposition
Products and/or services offered to meet the
needs of the customers
2. Customer Segments
Narrowing the target market focuses resources
on serving a specific group of customers
3. Customer Relationships
How do customers want to interact with the
business?

8-27

4. Channels
Channels refer to both communication channels and
distribution channels
Define how the customers seek out information about
this type of product
5. Key Activities
Build a basic checklist of what needs to be done
6. Key resources
 Human, capital, and intellectual resources needed

8-28

7. Key partners
 Suppliers, outsourcing partners, and so on
8. Revenue streams
 How will the value proposition generate
revenue?
9. Cost structure
 What are the fixed and variable costs
necessary?

8-29

Developing a business model is a four phase process:
1. Create an initial business model canvas
2. Test the problem that the entrepreneur thinks the
business solves for the customer
3. Test the business model in the market
Business prototyping
Lean start-up
Minimum viable product
4. Make changes and adjustments in the business
pivots
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

8-30

Business plan: a written summary of an
entrepreneur’s proposed business venture, its
operational and financial details, its marketing
opportunities and strategy, and its managers’ skills
and abilities
Serves two functions:
1. Guides the company’s growth and development
2. Attracts lenders and investors

8-31

To get external financing, an entrepreneur
needs to pass three tests:
1. Reality test
2. Competitive test
3. Value test

8-32

 Common elements of a business plan
Title page and table of contents
Executive summary
Mission statement
Company history
Business and industry profile
Business strategy
Description of products/services
Business and industry profile
Goals and objectives
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

8-33

Business strategy
Competitor analysis
Marketing strategy
Showing customer interest
Documenting market claims
Target market
Advertising and promotion
Market size and trends
Location
Pricing
Distribution
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

8-34

Description of the management team
Plan of operation
Pro forma (projected) financial statements
Forecasts should be realistic
Include a statement of assumptions
The loan or investment proposal
Funding sources
Repayment schedule
Implementation timetable

8-35

Visualizing a Venture’s Risks and Rewards

8-36

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

8-37

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
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

8-38

The five Cs of credit:
1. Capital
2. Capacity
3. Collateral
4. Character
5. Conditions

8-39

A business plan presentation should cover 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

8-40

8-41

When making the presentation:
1. Prepare
2. Practice your delivery and then practice some more
3. Demonstrate enthusiasm about the business but
don’t be overemotional
4. Focus on communicating the dynamic opportunity
your idea offers and how you plan to capitalize on it
5. Hook investors quickly with an up-front explanation
of the new venture, its opportunities, and the
anticipated benefits to them

8-42

6. Use visual aids
7. Follow Guy Kawasaki’s 10/20/30 rule for PowerPoint
presentations
8. Explain how your company’s products or services solve
some problem and emphasize the factors that make
your company unique
9. Offer proof
10. Hit the highlights
11. Keep the presentation “crisp” just like your
business plan

8-43

12. Avoid the use of technical terms
13. Remember to answer the question “What’s in it for me?”
14. Close by reinforcing the potential of the opportunity
15. Be prepared for questions
16. Anticipate the questions the audience is most likely to
ask and prepare for them in advance
17. Be sensitive to the issues that are most important to
lenders and investors by reading the pattern of their
questions
18. Follow up with each potential investor
Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.

8-44

8-45

Purchase answer to see full
attachment

Share This Post

Order a Similar Paper and get 15% Discount on your First Order

Our Services

Management Question

Description

Share This Post

Related Questions

CT Module 06: Defining Performance and Selecting a Measurement Approach