Chapter TwoSmall Business Opportunities:

Exploring the Options

Starting a New BusinessIdentifying the Opportunity

New-New approach: create a unique product or service

New-Old approach: adapt an existing conceptIf new-new or new-old need to conduct a

market analysis

2-2

New-New Approach

2-2

New-Old Approach

2-2

Market AnalysisA market analysis is the key to a

successful venture.A market analysis is simply the

application of the scientific method to business problems.

There are 4 basic Steps:Gathering the factsOrganizing the factsAnalyzing the factsImplementing an action plan

2-5

Analyzing DataIn the analysis stage, the prospective

owner-manager answers the question, “What does it all mean?”

There are many ways to analyze data. A few ways include:Analysis of sales and cost dataDetermine the number of competing firms in

the area and the total number of customersConsumer surveys

2-6

The Action PlanThe action plan attempts to answer what

will be done, and how it will be done. The plan should cover three areas:The owner as a personThe financial pictureOther key factors

2-7

Buying an Existing BusinessOf the numerous advantages to buying an ongoing business, three of the most importantare:• Because the enterprise is already in

operation, its future successful operation is likely.

• The time and effort associated with starting a new enterprise are eliminated.

• It sometimes is possible to buy an ongoing business at a bargain price.

2-8

2-9

2-10

Key Questions

Why is the business being sold?What is the Current Physical Condition of the

Business?What is the Condition of the Inventory?What is the State of the Company’s Other

Assets?How Many of the Personnel Will Remain?What Type of Competition Does the Business

Face?How Does the Firm’s Financial Picture Look?

2-11

http://smallbusiness.dnb.com/legal/banking-law-banking-finance-regulation/12330481-

1.html

Determining the Price

“How much are you willing to pay for the business?”

A number of measures estimate a small business’s value. The following considers the most important measures:Book valueReplacement valueLiquidation valuePast earningsCash flow

2-13

Asset Pricing

2-14

The prospective buyer needs to look at what the

owner is selling. Some common assets are:– Building– Inventory– Equipment– Prepaid Expenses– Supplies– Accounts receivable– Goodwill

Negotiating the Deal

Four critical elements include:InformationTimePressureAlternatives

2-15

Franchising

A franchise is a system of distribution that enables a supplier (the franchisor) to arrange for a dealer (the franchisee) to handle a specific product or service under certain mutually agreed on conditions.

When the term “franchise” is used today, however, it typically refers to the franchising of an entire business enterprise.

2-16

Top Franchises & Franchises by Industry*

2-17

* From Entrepreneur magazine

Franchising

More than 42 percent of all U.S. retail sales come from franchised businesses.

More than half a million franchise businesses exist in the United States alone, employing 8 million people.

Conversion franchising refers to the conversion of independent, ongoing concerns into franchise-system members.

2-18

Franchising Advantages

2-19

Major advantages of purchasing a franchise include:• Training and guidance• Brand-name appeal• Financial assistance• A proven track record

Franchise Track Records

Source: http://money.cnn.com/galleries/2010/smallbusiness/1004/gallery.Franchise_failure_rates/index.html

2-20

Lowest failure rates:o Super 8 – 4%o Days Inn – 6%o Subway – 7%o Dairy Queen – 8%o Dunkin Donuts –

8%

Highest failure rates:o Matco Tools – 36%o Cold Stone

Creamery – 31%

o Quizno’s – 25%o Curves – 16%o UPS Store – 16%

Franchising Disadvantages

There are also some disadvantages associated with franchises. Some of the most significant disadvantages are:

Franchise feesUnfilled promises and other restrictionsFranchisor control

2-21

2-22

Franchise Fees & Requirements

Franchisor Control

2-23

Home-Based Businesses

Although there are many reasons forthe growth of home-based businesses,the following three are among the mostsignificant:Economic restructuringChanging valuesEmerging information technology

2-24

Top Franchised Home-Based Businesses*

2-25

* From Entrepreneur magazine

Advantages and Disadvantages

Advantages include:Financial benefitsFlexibility and freedom

Disadvantages include:Vague boundariesResources

2-26

Special Considerations

2-27

General Location Factors

Regardless of the type of business, some generalfactors will influence where the operation is

located.Some of the most important general factors aresummarized as follows:Personal factorsEconomicsGeographicState and local laws and regulationsCompetition

2-28

When Competition is Beneficial

2-29

“You’ll love it. They'll do all

of your marketing for you, and your

sales will soar."

- Jim Stewart,Founder of

Seattle’s Best Coffee

When Competition is Beneficial

2-30

“Their infomercial is

raising general

awareness about the product.”

- Gary Clegg,Inventor of the Slanket

Industry Specific Location Factors

RetailSmall towns, business districts, rent-paying

capacity, terms of lease, type of mdse to be sold, proximity to other businesses

WholesaleSimilar to retailers, but also must consider the

economic conditions of the local marketServiceSimilar to retailers. The type of service offered

is most important factor in determining locationManufacturingProhibitive moving costs

2-31

Business Incubators

2-32

Facility Considerations

ProcurementShould I lease, build or buy?

AdaptationConstruction: What is the condition? What changes

need to be made?Function: How well is it designed to fit the business’s

needs?Appearance: Does it suit the business?

LayoutIs arrangement of equipment and/or merchandise

optimal?Is there a clear view of facilities for managers to

observe?

2-33