Transcript Chapter Becoming the Owner of a Small Business

Chapter
Becoming the
Owner of a Small
Business
Decide to go into business?
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Search for a needed product
Study the market for the product
New business, existing one, or franchise?
Strategic plan (mission, objectives, strategies)
Operational plans (policies, budgets, standards, planning and
marketing the product)
• Financial plans (estimating income and expenses, initial
investment, locating sources of funds)
• Develop detailed business plan
• Implement plan
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Niche Marketing
The process of finding a small but profitable demand for
something, then producing a custom-made product for
that market.
Don’t forget to look at the past for a “new” product
Hobbies, recreation, and working at home can lead to
creation of new products
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Questions to Ask to Help
Eliminate Possible Businesses
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How much capital is required to enter and compete
successfully in this business?
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How long will it take to recoup my investment?
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How will I live until that time?
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Can I make it on my own, or will I need the help of my
family or others?
How long will it take to reach an acceptable level of
income?
What degree of risk is involved? Am I willing to take that
risk?
continued
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Questions to Ask to Help
Eliminate Possible Businesses (cont’d)
 How much work is involved in getting the business going?
In running it? Am I willing to put out that much effort?
 Do I want to acquire a franchise from an established
company, or do I want to start from scratch and go it on my
own?
 What is the potential of this type of business? What are my
chances of achieving that potential?
 Is sufficient information available to permit
reaching a meaningful decision? If so,
what are the sources of information?
 Is it something I would enjoy?
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Places to look for help
SCORE – Service Corps of Retired Executives
A group of retired managers from all walks of life who help people develop their
business ideas. (388 chapters)
SBA
US Department of Commerce
Local colleges
Public libraries
Chambers of commerce
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Market Research
Gathering, recording, and analyzing of data related to
the marketing of goods and services.
Library
US Census (10 yrs) (census.gov)
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Estimating the Size of the
Market
How large is the industry?
Where is the market for the company, and
how large is it?
Are sales to be made to a selected age group,
and, if so, how large is that group?
What are the size and distribution of income
within the population?
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continued
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Estimating the Size of the
Market (continued)
Is the sales volume for this kind of business
growing, remaining stable, or declining?
What are the number and size of competitors?
What is the success rate for competing
businesses?
What are the technical aspects
(state of the art) of the industry?
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Buying an Existing Business
Find – Classified Section, Business Broker, Small Business
Administration, Chamber of Commerce
Advantages –
• Already has customers, suppliers, and procedures
• Seller may train new owner
• Prior records of revenues, expenses and profits
• Financial arrangements can be easier
Disadvantages –
• Not making profit
• Poor reputations with customers, suppliers or poor location
• Irwin/McGrawCapital is required – can’t purchase existing
business
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Hill
Steps to Purchase a Business
Objectives about type of business you want to buy.
Meet with business brokers
Visit during business hours to observe
Ask owner for finances for the last 3 years
Ask for information in written form – suppliers, pending
legal action, copy of lease/mortgage
Determine how you would finance business
Get expert help to determine a price for business (valuator)
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Enter a Family Business
Advantages?
Disadvantages?
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Franchise
A legal agreement that give an individual the right to
market a company’s products or services in a
particular area.
Franchisee – the person who purchases a franchise
agreement
Franchisor – person or company who offers a franchise
for purchase
UFOC – Uniform Franchise Offering Circular
More than 500,000 people in US own franchises
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Operating Costs
Initial franchise fee – payment in return for the right to
run the franchise (few thousand to few hundred
thousand) Nonrefundable
Start-up costs – renting, purchasing inventory etc.
Royalty fees – weekly or monthly payments made by
the owner to the seller of franchise (% of income)
Advertising fees – TV, Mag., etc.
Ex. Marry Maids – 14,000 – 22,000 Franchise Fee,
12-20,000 start-up Costs, 7% Royalty Fee
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Business Math
You have purchased a car wash franchise. The franchise fee was
$25,000. You must return 6% of your earnings in royalty fees.
During your first year, you spent $10,000 on equipment, $4,300
on operating costs (water and electricity), and $10,700 on your
part-time employee. Your first year total revenues were
$120,000. Calculate the total expenditures for the first year.
What was your profit?
120,000 x 6% = $7200
25,000 + 10,000 + 4,300 + 10,700 + 7,200 = 57,200
120,000 – 57,200 = 62,800
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Advantages
Established product or service
Franchisors offer management, technical, and other
assistance
Equipment and supplies can be less expensive
A guarantee of consistency attracts customers
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Disadvantages
Franchises cost lots of money and cut down on profits
Owners have less freedom to make decisions
Franchisees are dependent of the performance of
other franchises in chain
The franchisor can terminate the franchise agreement
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Myths of Franchising
Franchising is the safest way to go into business
because franchises never fail.
The bigger the franchise the more successful I’ll be.
All franchises are the same.
The franchiser will solve my business problems for me;
after all, that’s why I pay an ongoing royalty fee.
Once I open my franchise, I’ll be able to run things the
way I want to
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Expected Areas of Growth in
Franchising
RESTAURANTS
Examples: McDonald’s, Burger King, Wendy’s, Chili’s,
The Olive Garden, Howard Johnson’s
MOTELS
Examples: Motel 6, Holiday Inn
CONVENIENCE STORES
Examples: Bread Basket, T-Shirts Plus, Health Mart
TECHNOLOGY
Examples: Radio Shack, Circuit City, Babbage’s, Muzak
continued
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Expected Areas of Growth in
Franchising (continued)
TM
4-13B
AUTOMOTIVE PARTS, ACCESSORIES, SERVICE
Examples: General Tire, Midas International, Precision Tune, Jiffy
Lube, Valvoline Instant Oil Change
COMBINATION FRANCHISING
Examples: KFC/Taco Bell; Exxon and Subway Sandwiches
GLOBAL FRANCHISING
Examples: KFC (Kentucky Fried Chicken), McDonald’s, Pizza
Hut, Pepsi, Chick-fil-A, Mail Boxes Etc.
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Teaming Up
Synergy: Concept that two or more people, working together in a
coordinated way can accomplish more than the sum of their independent
efforts.
Some franchisers currently using the DUAL-BRAND CONCEPT include:
Arby's + Sbarro
Baskin-Robbins + Dunkin' Donuts
Carl’s Jr.. + Long John Silver's
Denny's + Baskin-Robbins
KFC + Taco Bell
Taco Bell + T. J. Cinnamons
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