Entrepreneurial alternatives

Starting a new venture

Pro(s) and con(s) for setting up a new business

Except for a higher earning potential, starting a new enterprise is usually also considered as a good route for 'living one's pashions' and finding a meaningful job. Entrepreneurs also highly value freedom to direct their career, i.e. 'being their own boss', as well as being able to organize their own work and achieve more flexibility. Potential disadvantages of the entrepreneurial career include: feelings of instability and fear of future, possible failure of the entrepreneurial venture, long working hours and the disturbed work/life balance, as well as problems in growing and developing a business.
Source: Babb, D. (2009): The Accidental Startup, Alpha/Penguin Group, New York
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Practical steps for setting up a new business (I)

Devising a realistic business idea/business model Researching/evaluating the idea: Analysis of the target market/customers Analysis of the existing competitors Other relevant market research Performing financial calculations Planning required office space, equipment, etc., as well as paid employees, required services and other costs Deciding on initial sources of financing Putting together a formal business plan Securing financing
Source: Babb, D. (2009): The Accidental Startup, Alpha/Penguin Group, New York

Practical steps for setting up a new business (II)

Developing a time management plan, which balances the business-related obligations to other plans and duties Developing the plan for transition from the current employment to the full-time employment in the new venture Deciding on the legal form of a new business and registering the venture with the state/regional authorities (doing the 'red tape') Opening the business to the public
Source: Babb, D. (2009): The Accidental Startup, Alpha/Penguin Group, New York

Buying existing businesses and basics of their evaluation

Advantages of buying an existing business

Entrepreneur does not need to do everything by himself/herself the business is already 'operational'. There is no need to spend time and money in experimenting the existing business incorporates a degree of experience of the previous owners, who set up the initial rules, structures and systems. The existing business has a certain amount of goodwill, expressed through its customer base, value of its brands and reputation in the local community. In general, risk for the entrepreneur acquiring the existing business is lower than in the case of a start-up.
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

How to choose the industry/trading activity?

The business to be acquired needs to satisfy both the entrepreneur's interests/entrepreneurial motives and provide adequate financial rewards. Ideally, the entrepreneur should have some previous knowledge of the industry, i.e. the product/type of service provided by the acquired business, its customers, suppliers, competitors and other key stakeholders in its environment.
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

How to find businesses offered for sale?

The classifieds in daily papers listing businesses for sale by owner Financial press, trade shows & trade journals On the internet: Businessesforsale.com Bizquest.com Bizbuysell.com Mergernetwork.com Businessbroker.net Google & other search engines Professional brokers in your area
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

Caveat emptor!

Why does the owner sell his/her business? Is this a 'caveat emptor' (buyer beware!) situation? Talk to the customers, the local business community, etc. Is the success of the business connected tightly to the person of the previous owner (his/her skills, social connections, etc.)? Are there any imminent threats to the business (from the changes introduced by the government, big competitors, changes in the customer base...)? What is the 'financial health' of the business? How much investment is required and what will be its impact to profitability?
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

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Fundamentals of business valuation (I)

Fundamental considerations: What is the fair (market) value of the assets owned by the business? If a business is sold below the fair (market) price of its assets, the owner either quickly needs cash, or senses a problem in its future. How much should the asset value be adjusted for the intangible value of the business (goodwill value of its brands, customer base and loyalty, intellectual property...)? How much should the asset value be adjusted for the earning potential of the business?
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

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Fundamentals of business valuation (II)

Approaches to valuation: The price of a business equals the value of its assets, adjusted for their changed market value, including the intangibles. (OR) The price is established by looking into the Return On Investment (ROI), i.e. predicted net profit/sales price. Look for businesses which will provide at least the average level of ROI in the industry. (OR) The price is established by multiplying the predicted annual net profit by a predetermined number of years.
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

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Franchises

Basic terms

Franchise a 'business system', including the business model, 'howto' produce and market a product/service, name/logo/marketing approach, offered for sale to prospective entrepreneurs (i.e. investors), who wish to replicate the way in which an existing business already functions. Franchise usually includes both training and a systematic plan/consulting for developing a business. Franchisor a company offering the opportunity to buy the 'business system' and apply it in a certain geographical area/market segment. Franchisee an entrepreneur who buys the franchise.
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

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(Dis)advantages of a franchise

The fundamental advantages are comparable to those of buying an existing business, i.e. by acquiring a proven system and training/advice from the franchisor, the entrepreneur's risk might be significantly reduced. At the other hand, the initial price and subsequent franchise fees, esp. for well-known brands, are usually quite high. The franchisee needs to be sure that they justify the benefits received from the franchisor. Franchisor is always in charge over the franchisee: the franchisee has to do the franchisor's way, as he/she is legally bound by the franchising contract.
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken
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How to choose the right franchise? (I)

Research the general conditions of a franchisor. (What kind of investment is expected and is any financing available? What kind of training and advice will be received? What fees will need to be paid?) Talk to other franchisees, to see whether the franchisor's system works for them and where the potential problems are. See what kind of promises can be received in writing from the franchisor. Research the general reputation of the franchisor, including class-actions, lawsuits, government regulation, etc.
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

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How to choose the right franchise? (II)

Determine the investment and all fees (initial fee, annual royalties, marketing fees...) required by the franchisor. What is the degree of flexibility in your operations (or do you have to follow the rules strictly)? Is there any flexibility in the contract and what about its renewal? Take a look into the franchisor's research & development: you don't want to be stuck in a business with obsolete products/services and technology. Talk to your lawyer, both about the 'prospectus' the Uniform Franchise Offering Circular, and your specific contract.
Source: Strauss S. D. (2005): The Small Business Bible, John Wiley & Sons, Hoboken

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Succession of a business

Succession of a family business

Succession is a specific issue, related to family businesses, which requires the transfer of assets and managerial/entrepreneurial responsibilities to the new generation of owners. In practice, businesses have a limited lifespan. This also applies to family businesses, which sometimes retain their success in the second generation, but rarely do so in the third, or even the fourth generation. If a family business is to survive the succession and retain its business performance, the transition needs to be carefully planned.
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Family business succession plan

Succession planning needs to be started well before the retirement of the previous owner/entrepreneur, i.e. the actual transition takes place. The plan needs to be openly discussed and agreed with all the family members. The actual successor(s) need to be agreed both related to the management and ownership of the family business. The other family members should be compensated accordingly. The succesor(s) have to be trained for their new role for an adequate period of time (typically several years) before they assume ownership and responsibility for the family business.

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Stages of family business succession

Stage I
Pre-Business
Child becomes aware of facets of firm and/or industry. Orientation of child by family member is informal.

Stage II
Introductory
Child is exposed to business jargon, employees, and the business environment.

Stage III
Introductory Functional
Child works as part-time employee. Work becomes more difficult. Includes education and work for other firms.

Entry of Successor

Stage IV
Functional
Potential successor begins work as full-time employee. . Includes all nonmanagerial positions.

Stage V
Advanced Functional
Potential successor assumes managerial position. Includes all management positions prior . to becoming president.

Transfer of Leadership

Source: Longenecker, J. G.; Schoen, J. E. (1978): Management Succession in the Family Business, Journal of Small Business Management, Vol. 16, pp. 16.

Stage VI
Early Succession
Successor assumes presidency. Includes period in which the successor becomes dejure head of company.

Stage VII
Mature Succession
Successor becomes defacto head of company.

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