Topic 5 - Overview

Introducing Business Entrepreneurship

Topic’s Learning Objectives

1. Understand the pros and cons of partnership.

2. Analyse in depth the financial needs of the business.
3. Evaluate the feasibility of the business.

4. Determine the need for external financing and how to present the
business plan in a convincing manner to interested parties.

Introduction

This topic will help us understand the importance of presenting a business plan in
a convincing manner to interesting parties in order to make them “buy” the idea
and invest in its implementation. Of course, investors do not just buy an idea,
they also “buy” the people and the management of the business. The investors
analyze the ability of a business to produce results through effective and efficient
deployment of the business resources. The Entrepreneur should evaluate the
potential sources for gathering the necessary capital. The financial resource
comes first in priority for the business start-up and operation. The financial
resources can give the ability to the business to obtain all the remaining
necessary resources, as covered in the previous topic.

The Entrepreneur must ensure that the business will be able to apply an effective
and efficient resource management in order to produce results that can keep all
stakeholders content. Think for example, that the Entrepreneur is like the
Maestro of an orchestra, who needs to ensure that all the elements of the
business are working in harmony, just like the maestro in an orchestra where
musicians, musical instruments and other equipment all work together to make
the audience happy.

The interested parties for investment can include financial institutions, investors
(potential shareholders), governmental institutions such as the Ministry of
Economy or Commerce that give grants to new small businesses.

The first successful sale of the Entrepreneur is to make financial institutions

and/or shareholders buy in the idea aiming for return on their investment.
 Think Theory 1

Can you list the stakeholders of a business and what the

Entrepreneur should bare in mind for each stakeholder?

(Take a pen and write down your answer. As soon as you

finish thinking and writing, check the end of the topic overview
for feedback)

Main Analysis

Understand the pros and cons of partnership

Partnership provides an alternative allowing the sharing of the cost of starting up

a new business. A partner can contribute to the capital of the company and have
an active or silent role in the business. Active role means that the partner can
share management and operational responsibilities. On the other hand, silent
role, entails the partner remaining outside the business simply receiving
feedback.

Please, read the following interesting article “Forming a partnership – pros

and cons”.

“Why collaborate?

These are the advantages of collaboration given by almost all of the 106 co-
owners in the East Anglian study:
 Being able to share the burden. Partnerships give mutual support,
companionship, and someone to share the problems

 It can be stressful, lonely and frightening running a business alone.

With someone else, you can feel like you are in it together

 Having access to more skills, knowledge and experience. Partnerships

provide for a wider skill base, complementary experience and know ho.
For example, him technical – me financial

 Very few individuals have all the skills and knowledge needed to run
a business successfully. Another person brings another set of skills,
knowledge and experience.

 Better, more effective decision-making. A partner will bring different

perspectives on problems. If often helps being able to see different points
of view

 Being able to look at problems from many angles can help to achieve
better often more creative solutions: more people means more
perspectives

Why shouldn't you collaborate?

These were the most important disadvantages of collaboration seen

by the co-owners:

 Less autonomy

 That is, not being able to do your own thing and not always getting your
own way

 Sharing ownership does mean that you can't always do what you want
 Differences in personal aims and objectives for the firm
 Different views on personal rewards versus investment in the business
 People have different views about their own future which may not be
compatible
  People differ in how they see the future of the firm; some are ambitious
for their firm and want to build an empire, some want a quieter life.
 Decision making can be slower
 Having to win consensus often slows decision making.
 Collaboration often means that the cost of a wider perspective
on problems is a loss of spontaneity

Other disadvantages mentioned included:

 The distraction and cost of handling conflict between co-owners

 Resentment when reward is not seen as fairly matched by effort

Source: http://www.startups.co.uk/pros-and-cons.html

Analyse the financial needs of the business

When should an Entrepreneur start implementing the business

plan?
The Entrepreneur should follow a process in order to identify and analyse the
financial resources the business needs to pursue its objectives.

A suggested process is following:

Step 1 - Identify the Assets.

Step 2 – Identify the Administrative and Operating Expenses.

Step 3 - Identify the Selling Expenses.

Step 4 - Identify the Financial Expenses.

Step 5 - Identify the Cost of Sales.

Step 6 - Identify the Break-Even Point.

Step 7 - Make the necessary changes in steps 1 to 5 according to the Break-

Even Point Analysis and the profit objective.

At this point, please read the following interesting article in order to learn
about the 5 most common mistakes new business owners make when
budgeting, and how to avoid them.

“Q: What are the most common mistakes new business owners make when budgeting,
and how can I avoid them?
A: If the past five years have taught us anything, it's that flashy business and marketing
plans mean nothing if they are unaccompanied by a sensible long-term financial
strategy. Numbers can lie in the short-term, but the truth almost always comes out in the
end. So as we prepare for the real New Economy, how can entrepreneurs learn from the
mistakes of their predecessors? Avoiding these five common mistakes will help keep
your million-dollar idea from becoming a million-dollar nightmare:
1. Overstating projections. Enron was not the first company to over-promise and
under-deliver, and, unfortunately, it won't be the last. Investors are occasionally fooled
by numbers in the short term, but in the end the funded company almost always gets
hurt. Realistic budgets and projections may lengthen your search for funding, but when
the money does arrive, it will be honest money, and you should then have a profitable
plan to follow for several years to come.
2. Ignoring your immediate budgetary needs. On the other hand, if your plan shows
that you need $50,000 to take a product to market, don't ask for only $30,000. Potential
investors and bankers will only wonder why they should give you money for a project
that will fail without additional funding. This was the sad lesson of the dotcom bubble.
Companies burned through their initial seed money without coming close to profitability
and then gave up. Investors have become more savvy and would rather spend $50,000
in a smart fashion than throw $30,000 out the window.
3. Assuming that the existence of revenue is indicative of being cash-flow
positive. In virtually every transaction, there is a lag time between the finalization of the
deal and the completed cash collection. This is a fact of business and should not be a
problem, assuming you are prepared. Unfortunately, many businesses aren't and run
into serious cash-flow problems because they spend money they don't yet have.
Perhaps what's most troubling is many of these purchases could easily have been
delayed for 30 days, when the available money is finally in the bank. A little wisdom,
discretion and foresight can go a long way toward corporate survival.
Need to brush up on your financial management know-how? Read Fundamentals
of Financial Management by Eugene F. Brigham and Joel F. Houston.
4. Forgetting about Uncle Sam. End-of-the-day balances can often appear larger than
they really are. Sales tax on revenues and employee withholdings may sit in your
account temporarily but will ultimately be owed to the government. Your balance sheets
should not count these finances as holdings, otherwise you run the risk of budgeting for
future projects and costs that you will not be able to afford.
5. Mismanaging the advertising timeline. It seems so elementary: Advertising leads to
sales. However, many budgets show advertising costs as a percentage of sales in the
same period. To be truly effective, an advertising/marketing campaign will have to be
initiated at least one period before sales can be expected. When the additional out-of-
pocket costs are taken into account, a healthy advertising budget is needed before any
revenue can be assumed. Failure to budget the appropriate items in a strategic time
frame will under-utilize finances needed to achieve these sales goals and can lead to
overspending in later months.
Formulating a vision is the hard part. Crunching the numbers is far more simple, yet it is
where many dreams are shattered. Entrepreneurs who treat their budgets with the same
meticulous care as their other components are the ones who survive.”

Source: http://www.entrepreneur.com/article/49360

Evaluate the feasibility of the business

At this point, please read the following feasibility checklist for starting a
small business before capital investment.
Feasibility Checklist for Starting a Small Business

“This publication is a checklist for the owner-manager of a small business

enterprise or for one contemplating going into business for the first time. The
questions concentrate on areas you must seriously consider to determine if your
idea represents a real business opportunity and if you really know what you are
getting into. You can use the checklist to evaluate a completely new venture
proposal or an apparent opportunity in your existing business.

Perhaps the most crucial problem you will face after expressing an interest in
starting a new business or capitalizing on an apparent opportunity in your
existing business will be determining the feasibility of your idea. Getting into the
right business at the right time is simple advice, but advice that is extremely
difficult to implement. The high failure rate of new businesses and products
indicates that very few ideas result in successful business ventures, even when
introduced by well established firms. Too many entrepreneurs strike out on a
business venture so convinced of its merits that they fail to thoroughly evaluate
its potential.

Here are some questions and worksheets to help you think through what you
need to know and do. Answer each question with a YES or NO. Where the
answer is NO, you have some work to do.

Preliminary Analysis

A feasibility study involves gathering, analyzing and evaluating information with

the purpose of answering the question: "Should I go into this business?"
Answering this question involves a preliminary assessment of both personal and
project considerations.

General Personal Considerations

The first questions ask you to do a little introspection. Are your personality
characteristics such that you can both adapt to and enjoy small business
ownership/management?

Yes No

 Do you like to make your own decisions?

 Do you enjoy competition?
 Do you have will power and self-discipline?
 Do you plan ahead?
  Do you get things done on time?
 Can you take advice from others?
 Can you get a business started and make it run efficiently?
 Are you adaptable to changing conditions?
 Have you worked for someone else as a supervisor or Manager?
 Have you had any business training in school?
 Have you saved any money?

The next series of questions stress the physical, emotional and financial strains
of a new business.

Yes No

 Do you understand that owning your own business may entail working 12
to 16 hours a day, probably six days a week, and maybe on holidays?

 Do you have the physical stamina to handle a business?

 Do you have the emotional strength to withstand the strain?
 Are you prepared to lower your standard of living for several months or
years?
 Are you prepared to lose your savings?
 Are you willing to re-invest your salary/business profits to help your
business grow?

Specific Personal Considerations

Yes No

 Do you know which skills and areas of expertise are critical to the success
of your project?
 Do you have these skills?
 Does your idea effectively utilize your own skills and abilities?
 Can you find personnel that have the expertise you lack?
 Do you know why you are considering this project?
 Will your project effectively meet your career aspirations?

The next questions emphasize the point that very few people can claim expertise
in all phases of a feasibility study. You should realize your personal limitations
and seek appropriate assistance where necessary (i.e. marketing, legal,
financial).

Yes No

 Do you have the ability to perform the feasibility study?

 Do you have the time to perform the feasibility study?
 Do you have the money needed to have the feasibility study done?

General Project Description

Briefly describe the business you want to enter.

 List the products and/or services you want to sell.

 Do you know how much or how many of each you will buy to open your
store with?
 Have you compared the prices and credit terms of different suppliers?
 Will your plan for keeping track of your inventory tell you when it is time to
order more and how much to order?
 Describe who will use your products/services.
 Do you know what kind of people will want to buy what you plan to sell?
 Do people like to live in the area where you want to open your business?
 Do they need a business like yours?
 If not, have you thought about opening a different kind of business or
going to another location?
 Why would someone buy your product/service?
 Do you have a plan for finding out what your customers want?
 What kind of location do you need in terms of type of neighbourhood,
traffic count, nearby firms, etc.
 Have you found a good building for you business?
 Will you have sufficient room to expand when necessary?
 Can people access your business easily from parking spaces, bus stops,
or their homes?
 Have you had a lawyer check the lease and zoning requirements?
 List your products/services suppliers.
 Do you plan to buy most of your stock from a few suppliers or several?
 Do you know the advantages and disadvantages of each supply method?
 List your major competitors - those who sell or provide similar
products/services.
 List the labour and staff you require to provide your products/services.
  If you need to hire someone to help you, do you know where to look?
 Do you know what kind of employees you need?
 Do you have a plan for training your employees?
 Do you know how to determine what you should charge for each item you
sell?
 Do you know what your competitors charge?
 Have you decided whether of not to let your customers buy on credit?
 Do you know the good and bad points about joining a credit-card plan?
 Have you planned a system of records that will keep track of your income
and expenses, what you owe people, and what other people owe you?
 Have you figured out how to keep your payroll records and take care of
tax reports and payments?
 Do you know what financial statements you should prepare?
 Do you know an accountant who will help you with your records and
financial statements?

Requirements for Success

To determine whether your idea meets the basic requirements for a successful
new project, you must be able to answer at least one of the following questions
with a "yes."

Yes No

 Does the product/service/business serve a presently unserved need?

 Does the product/service/business serve an existing market in which
demand exceeds supply?
 Can the product/service/business successfully compete with existing
competition because of an "advantageous situation", such as better price,
location, etc.?

Major Flaws

A "Yes" response to questions such as the following would indicate that the idea
has little chance for success.

Yes No

 Are there any causes (i.e. restrictions, monopolies, shortages) that make
any of the required factors of production unavailable (i.e. unreasonable
 cost, scarce skills, energy, material, equipment, processes, technology, or
personnel)?
 Are capital requirements for entry or continuing operations excessive?

 Is adequate financing hard to obtain?

 Are there potential detrimental environmental effects?
 Are there factors that prevent effective marketing?
 Desired Income

The following questions should remind you that you must seek both a return on
your investment in your own business as well as a reasonable salary for the time
you spend in operating that business.

 How much income do you desire?

 Are you prepared to earn less income in the 1st - 3rd years?
 What minimum income do you require?
 What financial investment will be required for your business?
 Do you know how much credit you can get from your suppliers - the
people you will buy from?
 Do you know where you can borrow the rest of the money you need to
start your business?
 Have you figured out what net/loss income per year you expect to get from
the business?
 How much could you earn by investing this money? (A)
 How much could you earn by working for someone else? (B)

Add the amounts in (A) and (B). If this income is greater than what you can
realistically expect from your business, are you prepared to forego this additional
income to be your own boss with the prospects of more substantial profit/income
in future years?

Equipment and Supplies

Yes No

 Can you make a list of every item of inventory and operating supplies
needed?
  Do you know the quantity, quality, technical specifications, and price
ranges desired?
 Do you know the name and location of each potential source of supply?
 Do you know the price ranges available for each product from each
supplier?
 Do you know about the delivery schedules for each supplier?
 Do you know the sales terms of each supplier?
 Do you know the credit terms of each supplier?
 Do you know the financial condition of each supplier?
 Is there a risk of shortage for any critical materials or merchandise?
 Are you aware of which suppliers have an advantage relative to
transportation costs?
 Will the price available allow you to achieve an adequate markup?

Expenses

Yes No

 Do you know what your expenses will be for: rent, wages, insurance,
utilities, advertising, interest, etc.?
 Do you need to know which expenses are direct, indirect, or fixed?
 Do you know how much your overhead will be?
 Do you know how much your selling expenses will be?

Miscellaneous

Yes No

 Are you aware of any major risks associated with your product, service
and/or business?
 Can you minimize any of these major risks?
 Are there major risks beyond your control?
 Can these risks bankrupt you?

Venture Feasibility

Yes No

 Are there any major questions remaining about your proposed venture?
 Do the above questions arise because of a lack of data?
  Do the above questions arise because of a lack of management skills?
 Do the above questions arise because of a "fatal flaw" in your idea?
 Can you obtain the additional data needed?
 Can you obtain the additional managerial skills needed?
 Are you aware that there is less than a 50-50 chance that you will be in
business two years from now?”

Originally prepared by the Government of Saskatchewan

Source: http://www.canadabusiness.ab.ca/index.php/component/content/article/8-
start- up/429-feasibility-checklist-for-starting-a-small-business

Determine the need of external financing and how to present the

business plan in a convincing manner to interested parties.

At this point, I would like to refer to the BBC’s programme “Dragon’ Den’’. Do you
know the motto of Peter Jones who is one of the presenters?

“For a dream to become reality, make it

real enough to believe in.”

Peter Jones

Entrepreneurs usually do not have all the necessary capital to start up and
operate their business, as well as to face unforeseen incidents that need financial
backup to cope with.

In cases where the Entrepreneur needs capital from external parties they need to
present the business plan in a convincing manner to them in order to make them
“buy” the idea and invest. The interested parties for investment can be financial
institutions, investors (potential shareholders), governmental institutions i.e. the
Ministry of Economy or Commerce that give grants to new small businesses.
Also, the TV programme “Dragon’s Den” could be a possible alternative.

At this point, please read the following interesting article about presenting
your idea successfully to potential investors.

“How to Survive the Dragons’ Den, by ALAN GLEESON

The Dragons’ Den on BBC 2 pits entrepreneurs seeking funding for their
businesses against a panel of celebrity investors. Aside from the entertainment,
there are a number of valuable lessons that can be taken from the programme.
Below are the Top Five Lessons to be learned from previous participants’
pitches.

1. Prepare a thorough business plan

An essential component of starting up a business is the creation of a business
plan. To stimulate interest from the reader/investor, you must ensure that the
plan is researched thoroughly, explained clearly, and is financially robust. Many
of the entrepreneurs on the previous series’ shows were excessively ‘product
focused’, and when they were asked a broader set of questions relating to the
competitive environment or the predicted demand, they struggled. A well-
prepared business plan addresses a broad range of issues that investors will be
interested in and will not focus on just ‘the product’. For further information on the
main components of a business plan, visit www.bplans.co.uk.

2. Perfect that pitch

Once a business plan has been formulated, it must then be communicated
effectively. Many entrepreneurs fail to clearly articulate the key customer benefits
of their new venture.

In response to the opaque language used by many Internet-era entrepreneurs,

business planners introduced the concept of the ‘elevator pitch’. An elevator pitch
is your idea, supported by your business model, company solution and marketing
strategy, all articulated concisely and clearly in the length of time it takes for a
short elevator ride. This simple idea reinforces how important it is for
entrepreneurs to think carefully about the language they use when describing
their new venture (particularly technology-based ones).
The elevator pitch is a reminder to remain customer-focused and concentrate on
describing the customer benefits, as distinct from focusing on just the product
features. There must also be something unique about the business plan, and it
must be pitched with conviction, so as to grab the attention of investors who deal
with hundreds of plans every week. This was neatly summed up by Simon
Woodroffe in a recent show, when he said,
“You gotta make me feel like I’m going to miss out”.

3. Secure a route to market

In an increasingly competitive landscape, it is vital that the entrepreneur has
researched their ‘route to market’ or how they intend to access the customer
base. Most new businesses will consider a multi-channel route–-however, this is
significantly more expensive than single-channel routes, particularly so for non-
established brands. Similarly, many resellers and retailers are increasingly
reluctant to take on new products without some sort of upfront marketing
commitment or ‘hello money’.

Internet marketing is one attractive route, as marketing spend can be tracked

with greater transparency. Once there is evidence of demand through online
sales, it is easier to expand into more traditional routes with confidence.

Alternatively, identifying current suppliers who service a similar market niche can
give some indication as to which marketing activities are most effective. Of
course, this assumes the incumbent has got it right!

The prospective investor will be keen to understand how exactly you intend to
reach your market. You will also need to articulate the following:

 Is it a retail or Business-to-Business (B2B) sale?

 How will you secure direct sales?

 How much will it cost to secure reseller distribution?

 Are there downstream revenues, or is it a one-off transaction?

4. Establish value when seeking equity investment

If you are seeking investment in your business, it is important to clearly describe
the investment opportunity.

 Why would the investor be better off investing in your business rather than
leaving their money in a bank account, or investing in another business?

 What is the Unique Selling Proposition (USP) for the business?

 Why will people part with their cash to buy your product or service?

Beforehand, work out the following:

 The value of the business.

 The percentage of the business you are prepared to sell and its value.

 The predicted level of future cash flows.

Use a multiple to estimate the value of the business and then decide what is an
acceptable level of equity you are prepared to offer in return for a cash
investment. Most investors you will meet are pretty sophisticated when it comes
to financing, and hence, you will be at a disadvantage. After all, it is not called the
Dragons’ Den for nothing!

This is their area of expertise; they are seeking an appropriate risk/return for their
investment. Their primary interest will be to assess the ability of the company
(including management) to generate free cash flows to enable the business to
grow while also returning cash to them. Professional advice is highly
recommended if you do decide to go down the equity investment route and it is
important that you have the above points worked out prior to being put on the
spot.
5. Negotiate confidently
If you have succeeded in generating sufficient interest after your original pitch,
the level of questioning is likely to become more in-depth, as the prospective
investors assess whether or not there is a potential opportunity for them. In these
instances, the presenter is on trial as much as the business plan, especially if the
entrepreneur is seeking large amounts of funding and intends to continue to run
the company themselves.

It is worth remembering that the negotiation is not like haggling for a souvenir at
a market, where the transaction is a one–off and neither party is likely to engage
with each other again. It is not about small victories and getting the better of your
opponent. The negotiation takes place in the context of a relationship and hence
must be approached differently.
The negotiation process consists of five main steps:
I. Preparation
Before you begin to negotiate, you must have a clear idea of the issues at hand,
your objectives and your options, from what is the best deal you can get, to the
best alternative to a negotiated agreement (your walk-away position).
In relation to the Dragons’ Den, you need to be clear on:
a. How much you are seeking to raise?
b. What percentage of the company you are offering in return?

c. What type of investor are you seeking: a sleeping partner, or a ‘Dragon’ who
will actively play a role in the company?
II. Discussion
Given the relationship nature of such investments, you need to ensure that the
focus is not solely on ‘the cash’. You need to establish rapport and assess what
exactly the investor requires from the deal. As Stephen R. Covey declares in The
7 Habits of Highly Effective People, “seek first to understand and then to be
understood”. Ask plenty of questions to ensure that the conversation is balanced.
Finally, you must also be transparent with key facts, so as to avoid introducing
‘surprises’ into the negotiation at a later stage; for example, if you have existing
investors on board, this should be disclosed at the outset.
III. Proposals
After you have had a broad discussion and have ascertained their interest, you
can ask them to make you an offer. This offer needs to be specific: they are
offering X in return for Y. After thanking them for their offer, assess it in the
context of your objectives at the start. There is no need to rush to a decision and
it is perfectly acceptable to mull over it or to seek clarification before responding.
IV. Negotiation
Once they have made an offer, you then need to decide (a) how close it is to
what you originally wanted and (b) the bases for negotiation. It is highly
improbable that the proposed terms (i.e. cash, stake, and their role in the
business) will match your objectives exactly. You then need to understand their
position in more detail, including whether there is scope to negotiate, and finally,
seek to reach an agreement that meets both parties’ objectives.
V. Agreement
Once you reach an agreement and have shaken on the deal, it is important to
ensure that both parties feel that they have got a good deal. The last thing the
Dragon wants to hear is you telling the TV Interviewer that you got a much better
deal than you expected. After all, the real value only accrues after the investment
has been put to work on the business idea. The last thing you want is to have
issues with the investor, as a result of them feeling facts were misrepresented or
they were ‘had’.

In summary, to boost your chances of surviving the Dragons’ Den, do not focus
myopically on the product features, but instead ensure that you can clearly
articulate the customer benefits of your idea and how you intend to reach these
customers. It is also important to have a good holistic understanding of the wider
dynamics at play, ranging from the size of the opportunity to the requirements of
the potential investors.”

Source: http://articles.bplans.co.uk/starting-a-business/how-to-survive-
the- dragons-den-2/362

Summary

In this topic we have considered that the Entrepreneur needs to evaluate the
alternative of partnership and in order to make the right decision, they must
understand the pros and cons of partnership. We then proceeded with the
analysis of the financial needs a business must deploy in order to identify the
resources needed to pursue its objectives. We next evaluated the feasibility of
the business described in a business plan. The evaluation involves a process
after the business plan is completed and before presenting it to interested
parties. Finally, we determined the need of external financing, in case the
Entrepreneur does not have all the necessary capital, and how to present the
business plan in a convincing manner to interested parties in order to make them
buy the idea and invest their money.

Further Reading

Feedback to think theory boxes:

Think theory 1

The business stakeholders are the following:

 Customers are happy if they enjoy value for money

 Employees are happy if they enjoy a good working environment and fair
compensation

 Investors

o Financial institutions are happy if they enjoy interest and loan

repayment

o Shareholders are happy if they enjoy a reasonable return on

investment

 Suppliers are happy if they are paid according to the payment terms i.e.
prices and credit period

 Partners/Associates - business service providers i.e. accountants,

consultants – are happy if they are paid according to the payment terms
i.e. prices and credit period and the cooperation is mutually productive
 Government wants compliance with the law and tax payment (wants
profitable businesses)

 Community expects and demands a business to behave as a responsible

citizen and to add value to the society

 Company must enjoy profits at levels that can keep happy the
stakeholders mentioned above and in addition maintains reserves at a
level can assure future growth and renew depreciable assets