Lecture 2: STARTING OR BUYING A SMALL BUSINESS 13

 Reasons for starting up a new business

The reasons for entrepreneurs starting up new business are a lot. A research by Birley and Westhead
(1994) reported seven components of new venture motivation:
 The need for approval,
 The need for independence,
 The need for personal development,
 Welfare (philanthropic) considerations,
 Perception of wealth,
 Tax reduction and indirect benefits, and
 Following role models.

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Advantages and Disadvantages of starting your own small business
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 Advantages
• Creation of the owners.
• Control of the owners.
• Satisfaction of the owners.
• Clean Sheet.
• Help from various agencies
• Match between founder and enterprise.
• Less funds required.

 Disadvantages
• Unproven idea.
• High failure rate.
• No market share or good will.
• Hard, lonely work.
• Barriers to entry.
• No track record.
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• Difficult to finance.
Finding a Sound Idea for a Business
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 As revealed in the stories of majority of entrepreneurs across the globe, there are a number of sources of ideas
available. Some of the more useful sources, as summarized by Hisrich and Peters (1991), are highlighted as below
o Consumers
o Existing Companies
o Distribution Channel
o Government Agencies
o Research and Development

 Methods for Generating Ideas

There are several methods that the entrepreneur can use to help generate and test ideas, including;

 Focus groups
• Involve gathering a small group of individuals who represent the target market or customer segment to discuss a product, service, or concept in detail
• The discussion is usually guided by a moderator who prompts the group with questions to elicit in-depth responses and interactions.
• The participants share their thoughts, preferences, and experiences related to the product or service being considered.
• Focus groups help entrepreneurs understand consumer perceptions, attitudes, and reactions to a potential idea.
• By analyzing the group's responses, entrepreneurs can refine their ideas and align them with customer expectations.

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Methods for Generating Ideas cont’d
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 Brainstorming:
• Brainstorming is a creative thinking process where a group of people comes together to generate a wide range of ideas and
solutions.
• Participants are encouraged to think freely and suggest any idea that comes to mind, no matter how unconventional or outlandish it
may seem.
• The goal is to create an open environment that fosters creativity and collaboration, allowing participants to build on each other's
ideas.
• After generating a list of ideas, the group can then evaluate and refine them to identify the most promising options.

 Problem inventory analysis:

• Involves systematically identifying and analyzing existing problems or unmet needs in a particular market or industry.
• The entrepreneur conducts research, surveys, or interviews to understand the challenges faced by customers or businesses within
the target market.
• By compiling a comprehensive inventory of problems, the entrepreneur can identify patterns, trends, and recurring issues.

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NEW BUSINESS ASSESSMENT 16

As ideas develop into new-venture start-ups, the real challenge is for those firms to survive and grow. To achieve this,
there is the need for the entrepreneur to have a clear understanding of the critical factors for selecting ventures; the
reasons for venture failure, and an effective evaluation process for new ventures.

Critical Factors for New-Venture Development

A number of critical factors is important for new-venture assessment. One way to identify and evaluate them is with a checklist, a
general questionnaire approach.

 The Phases of a New Venture

A new venture goes through three phases: pre-start –up, start-up, and post start-up.
 The prestart-up phase begins with an idea for the venture and ends when the doors are opened for the business.
 The start-up phase begins with the initiation of sales activity and the delivery of products and services and ends when the business is firmly
established and beyond short-term threats to survival.
 The post start-up phase lasts until the venture is terminated or the surviving organizational entity is no longer controlled by an entrepreneur.

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Critical Factors of Pre-Start Up and Start-Up Phases
17

The pre-start–up and the start-up phases are the critical segment for the entrepreneur and, therefore, are the major
focus in this section. Five factors are critical during these two phases:
 The relative uniqueness of the venture,
 The relative investment size at start-up,
 The expected growth of sales and /or profits as the venture moves through its start-up phase
 The availability of products during the pre-start-up and start-up phases, and
 The availability of customers during the pre-start-up and start – up phases.

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Reasons For New Venture Failure
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Three main causes for new venture failure are:

 Product/market problems
 Financial difficulties
 Managerial problems.

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OPPORTUNITIES FOR BUYING EXISTING BUSINESS 18

 Options for Small Business Buyers

Some of the options available to the entrepreneur to become involved in the existing business include the following:
 Outright purchase: A prospective entrepreneur might choose to purchase an existing business wholly, as a means
of market entry. An on-going small business owner could also decide to expand by buying another small firm.
 Buy-in: A buyer might not wish to buy an on-going business entirely. Instead, they might buy into an existing firm
and become a new partner, or shareholder, with those that already exist. This is more commonplace in professional
practices such as doctors, solicitors, and accountants. These are often large partnerships where the partnership
agreement does allow for the recruitment of another partner into the practice, should some members leave.
 Buy-out:Commonly refer to the purchase of a business, or a significant part of it, by its current management.
Although buy-outs could occur from small firms and franchises as well as forced sale by the parent company, large
firms are often the sellers.
 Buy-in Management buy-out:The Buy-in Management Buy-out (BIMBO) is a variation of the management buy-
out concept. BIMBO combines outside and inside management in the purchase of a firm. It is the belief that the risk
of buying into a firm from the outside could be minimized if the existing management of the firm are also involved.
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IMPORTANCE OF BUYING EXISTING BUSINESS 19

 Advantages of Buying an Existing Business

Some of the possible advantages include the following:
• Overcomes barriers to market entry
• Buying immediate turnover and income
• Buying market share
• Existing assets of property equipment and staff
• Goodwill with existing customers
• Existing track record
 Disadvantages of Buying an Existing Business
• Potential ill will
• Buying possible liabilities with assets
• Employees inherited with the business may not be suitable.
• Risk in intangible assets
• The location may have become unsatisfactory

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FRANCHISING 19

 Meaning of Franchising
• Franchising is a business agreement in which a company (the franchisor) grants others (the franchisees) the right
and license (the franchise) to sell a product or service and possibly to use the business system developed by the
company.
• It is a system of distribution in which a series of individually owned businesses operate as if they were a part of a
large chain.
• In most instances, the franchisee is granted an exclusive right to distribute the franchisor’s goods/services in a
specific geographical area.

 Types of Franchising
Basically, there are three types of franchising: trade name franchising, product distribution franchising, and pure franchising.
 Trade name franchising
 Here, the franchisee buys the right to become identified with the franchisor’s trade name without distributing particular products
exclusively under the franchisor’s name.
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FRANCHISING cont’d 20

 Product distribution franchising

 With product distribution franchising, the franchisee is licenced to sell specific products under the manufacturer’s
(franchisor’s) brand name and trademark via a selective, limited distribution network.
 This type of franchising is also referred to as dealerships.

 Pure (or comprehensive or Business format) franchising

 In pure franchising, the franchisee is provided with a comprehensive system to operate the business.
 This includes not only the use of the trade name and products but also the entire business operation system,
marketing strategy, and ongoing support.
 Pure franchising is common among fast-food restaurants, car rental agencies, business service firms, lodging
establishments, etc.

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Advantages and Disadvantages for Franchisees 21

 Advantages for Franchisees

• Product acceptance
• Management training and support
• Capital requirements
• Knowledge of the market
• Standardized quality goods/services
 Disadvantages to Franchisees
• Franchise fees and profit sharing
• Lack of independence
• Limited product line
• Less freedom
• Unsatisfactory training programmes

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Advantages and Disadvantages for Franchisors 22

 Advantages for Franchisors

• Expansion risk
• Availability of motivated franchisees
• Cost advantages
 Disadvantages to Franchisors
• Lack of quality franchisees
• Risk of failure
• Increasing pressure of franchisees

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Guidelines for a Successful Franchising Strategy 23

 The success of the franchising strategy generally depends on two basic elements: the commitment from both the
franchisor and the franchisee, and an effective plan and support system.
 Starting a Franchise: What Franchisors Should Look For
To start a franchise, potential franchisors should assess three essential issues (Ibrahim and Ellis, 1992) outlined below:
• The window of opportunity and the business concept
• Transferability of the business concept to different areas
• Adequate resources including financial management resources

 Selecting a Franchise: What Franchisees Should Look For

• Objectives and lifestyle
• Time span of the opportunity
• The soundness of the business concept
• Proven track record and support system including financial, trading and development support as well as local and
national advertising campaign.
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THE FRANCHISE AGREEMENT 24

 The franchise agreement is a legally binding contract between the franchisor and the franchisee that outlines the
terms and conditions of the franchise relationship.
 The franchise agreement contains all of the specific requirements and obligations of the franchise.
 Obligation and relationship of both the franchisor and the franchisee must be clearly defined.
 The potential franchisee should give particular attention to different provisions that may restrict their freedom of
choice or freedom to sell the franchise and/ or buy-back clauses.

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THANK YOU