Starting and Financing a Small Business

The Small Business

Not DominantNot DominantIn Its FieldIn Its Field

Not DominantNot DominantIn Its FieldIn Its Field

Fewer ThanFewer Than500 Employees500 Employees

Fewer ThanFewer Than500 Employees500 Employees

IndependentlyIndependentlyOwned and OperatedOwned and Operated

IndependentlyIndependentlyOwned and OperatedOwned and Operated

Relatively SmallRelatively SmallAnnual SalesAnnual Sales

Relatively SmallRelatively SmallAnnual SalesAnnual Sales

Economic Roles of Small Business

Provide New Jobs

Introduce New Products

Service Large Corporations

Engage in Specialization

Types of Small Business

LifestyleLifestyle High-GrowthHigh-Growth

Run by IndividualsRun by Individuals

Limited Products/ServicesLimited Products/Services

Limited ResourcesLimited Resources

Limited MarketplaceLimited Marketplace

Run by TeamsRun by Teams

Multiple Products/ServicesMultiple Products/Services

Investment CapitalInvestment Capital

Large MarketplaceLarge Marketplace

Innovation in Small Business

Faster DecisionsFaster Decisions

Access to OwnersAccess to Owners

Individual ExpressionIndividual Expression

How Entrepreneurs Spend Their TimeHow Entrepreneurs Spend Their Time

0% 5% 10% 15% 20% 25% 30%

Other Services

Planning Growth/Change

Arranging Financial Matters

Dealing With Suppliers

Maintenance

Production

Direct Selling

Keeping Records

Dealing With Employees

Factors Contributing to Small Business Growth

Technology and the Internet

Women and Minorities

Downsizingand Outsourcing

Women Starting Businesses

0% 10% 20% 30% 40% 50%

Reenter Workforce

Born Entrepreneur

Family Event

Fell Into It

Downsized

Bored in Job

Glass Ceiling

Entrepreneurial Idea

Characteristics of Entrepreneurs

• Highly disciplined

• Like to control their destiny

• Listen to their intuition

• Relate well with others

• Eager to acquire new skills

• Learn from their mistakes

Characteristics of Entrepreneurs

• Stay abreast of market changes

• Willing to exploit new opportunities

• Seldom follow trends

• Driven by ambition

• Think positively

• Prefer risk taking over security

Preparing a Business Plan

Summarize the Business

Communicate Goals

Highlight Plans

Show Customer Benefits

Importance of a Business Plan

Guides CompanyGuides CompanyOperationsOperations

Outlines StrategyOutlines Strategy

Attracts LendersAttracts Lendersand Investorsand Investors

Starting a New Business

+ Control your destiny

+ Reach your potential

+ Unlimited profits

+ Recognition

+ Doing what you enjoy

– Uncertainty of income

– Risk of loss

– Long hours & hard work

– Complete responsibility

– High stress levels

Advantages Disadvantages

Buying an Existing Business

+ Customer base

+ Business systems

+ Product or service

+ Location

+ Financing

– Alienated customers

– Obsolescence

– Location

– Personality clashes

– Outstanding receivables

Advantages Disadvantages

The Franchise Alternative

Franchisee Franchisor

Types

Product Manufacturing Business-Format

How to Evaluate a Franchise

What does the initial franchise fee cover?

How are periodic royalties calculated and when are

they paid?

Are all trademarks and names legally protected?

Who provides and pays for advertising and

promotion?

Who selects the location of the business?

How to Evaluate a Franchise

Is the franchise assigned an exclusive territory?

Does the franchisee have the right of first refusal on

additional nearby franchises?

Is the franchisee required to purchase equipment and

supplies from the franchisor?

How can the franchise agreement be terminated?

Can the franchise be assigned to heirs?

The Pros and Cons of Franchising

Advantages

Get a viable business

Instant name recognition

Built in support group

Marketing & advertising

Disadvantages

No guarantee of success

Expensive to obtain

High monthly royalties

Limited independence

Why New Businesses Fail

Management IncompetenceManagement Incompetence

Lack of Industry ExperienceLack of Industry Experience

Inadequate FinancingInadequate Financing

Poor Business PlanningPoor Business Planning

Unworkable GoalsUnworkable Goals

Diminished Customer BaseDiminished Customer Base

Uncontrolled GrowthUncontrolled Growth

Inappropriate LocationInappropriate Location

Poor System of ControlsPoor System of Controls

Lack of Entrepreneurial SkillsLack of Entrepreneurial Skills

TheTheInternetInternet

IncubatorsIncubatorsSCORESCORE

Sources of Small Business Assistance

Financing A New Business

Length of TermLength of Term

Cost of CapitalCost of Capital

Debt or EquityDebt or Equity

Length of Term

Short-TermShort-Term Long-Term Long-Term

Meet Financial Meet Financial ObligationsObligations

Meet Financial Meet Financial ObligationsObligations

Acquire buildings Acquire buildings and equipmentand equipment

Acquire buildings Acquire buildings and equipmentand equipment

Start-up or ExpandStart-up or ExpandOperationsOperations

Start-up or ExpandStart-up or ExpandOperationsOperations

Maintain LiquidityMaintain LiquidityMaintain LiquidityMaintain Liquidity

The Cost of Capital

Risk FactorsRisk Factors

Interest RatesInterest Rates

Funding VehiclesFunding Vehicles

Obtaining Capital

Debt FinancingDebt Financing Equity Financing Equity Financing

Unsecured LoansUnsecured LoansUnsecured LoansUnsecured Loans

StockStockStockStock

Initial PublicInitial PublicOfferingOffering

Initial PublicInitial PublicOfferingOffering

Secured LoansSecured LoansSecured LoansSecured Loans

Debt Versus Equity

CharacteristicCharacteristic DebtDebt EquityEquity

MaturityMaturity

Claim on IncomeClaim on Income

Claim on AssetsClaim on Assets

Influence OverInfluence OverManagementManagement

SpecificSpecific

Fixed CostFixed Cost

PriorityPriority

LittleLittle

NonspecificNonspecific

Discretionary CostDiscretionary Cost

ResidualResidual

VariesVaries

CorporateCorporateFinancingFinancingCorporateCorporateFinancingFinancing

PersonalPersonalAssetsAssets

PersonalPersonalAssetsAssets

CreditCreditCardsCardsCreditCreditCardsCards

VentureVentureCapitalistsCapitalists

VentureVentureCapitalistsCapitalists

BankBankLoansLoansBankBankLoansLoans

SmallSmallBusinessBusiness

AdministrationAdministration

SmallSmallBusinessBusiness

AdministrationAdministration

Private SourcesPrivate Sourcesof Financingof Financing

Private SourcesPrivate Sourcesof Financingof Financing

FriendsFriendsFriendsFriends

AngelAngelInvestorsInvestors

AngelAngelInvestorsInvestors