Part II

Initiating Entrepreneurial
Ventures

Chapter 7
Pathways to
Entrepreneurial
Ventures

PowerPoint Presentation by Charlie Cook

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a

publicly accessible website, in whole or in part.
 Learning Objectives
1. To describe the major pathways and structures for
entrepreneurial ventures.
2. To present the factors involved in creating a new
venture
3. To identify and discuss the elements involved in
acquiring an established venture
4. To outline ten key questions to ask when buying an
ongoing venture
5. To examine the underlying issues involved in the
acquisition process
6. To define a franchise and outline its structure
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 Learning Objectives (cont’d)
7. To examine the benefits and drawbacks of
franchising
8. To present the franchise disclosure document
(FDD) as a key item in franchises

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 The Pathways to New Ventures
for Entrepreneurs

Creating the Acquiring an

New Venture Existing Venture

Pathways to New
Ventures

Obtaining a
Franchise

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 Creating New Ventures

Approaches to
New-New New-Old
Approach Creating a New Approach
Venture

New-New Approach to Creating New Ventures New-Old Approach to Creating New

The most effective way to start a new business Ventures
is via the introduction of new products or Most small ventures do not start with a
services into a market. Most business ideas for totally unique idea. Instead, they often
new ventures come from one’s experience, “piggyback” on someone else’s idea by
such as prior jobs, hobbies or interests, and either improving a product or offering a
personally identified problems. service in an area where it is not currently
available.

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Table
7.1 Trends in Creating Business Opportunities

Emerging Opportunities
Green Products Health Care Niche Consumables Home Automation and
Organic foods Healthy food Wine Media Storage
Organic fibers/textiles School and govt.- Chocolate Lighting control
Alternative Energy sponsored programs Burgers Security systems
Solar Exercise Coffee houses Energy management
Biofuel Yoga Exotic salads Comfort management
Fuel cells Niche gyms Entertainment systems
Energy conservation Children Networked kitchen
Nonmedical appliances
Pre-assisted living
Assisted living transition
services

Emerging Internet Opportunities

Mobile Advertising Virtual Economies
Cell phones “Online auctions”
PDAs Educational Tutoring
Concierge Services Human Resources Services
Niche Social Networks “Matchmaking”
Seniors “Virtual HR”
Music fans “Online Staffing”
Groups of local users
Pet owners
Dating groups
Source: adapted from Steve Cooper, Amanda C. Kooser, Kristin Ohlson, Karen E. Spaeder, Nichole L. Torres, and Sara Wilson, “2007 Hot List,” Entrepreneur
(December 2006): 80–93; and “The World’s 50 Most Innovative Companies,” Fast Company, (March, 2015).

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Figure
7.1 Sources of New Business Ideas Among Men and Women

Source: William J. Dennis, A Small Business Primer (Washington DC., National Federation of Independent Business, 1993) 27. Reprinted with permission.

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 Examining the Financial Picture
When Creating New Ventures
• Upside gain and downside loss expectations
➢ The profits the business can make and the losses it
can suffer.
• How much money will the enterprise take in if all goes well?
• How much will it gross if operations run as expected?
• How much will it lose if operations do not work out well?

• Risk vs. reward analysis

➢ Points out the importance of getting an adequate
return on the amount of money risked.

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Table
7.2 Checklist for Estimating Start-Up Expenses

Source: U.S. Small Business Administration, “Management Aids” MA. 2.025 (Washington, DC.: U.S. Government Printing Office.)

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Table
7.2 Checklist for Estimating Start-Up Expenses (cont’d)

Source: U.S. Small Business Administration, “Management Aids” MA. 2.025 (Washington, DC.: U.S. Government Printing Office.)

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 Acquisition of an Established Business Venture

Personal
Preferences

Acquiring an
Examination of Established Evaluation of
Opportunities Entrepreneurial the Venture
Venture

Asking Key
Questions

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 Advantages of Acquiring an Ongoing Venture

Less fear about

Reduced time Purchasing at
successful future
and effort a good price
operation

Buying an
Ongoing Venture

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 Evaluation of the Selected Venture

Factors Affecting Sale

of the Venture

The business Assets of the

environment venture
Profits, sales, and
operating ratios

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 Key Questions to Ask
• Why is this 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 employees will remain?
• What type of competition does the business face?
• What does financial picture of the business look like?

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 Negotiating the Deal

Information

Time
Factors Affecting Pressure
Negotiations

Alternatives

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 Considerations When Buying a Business
• Request that the seller retain a minority interest
in the business or establish the final purchase
price dependent on the performance of the
business over a three-to-five-year span.
• Be wary of any promises made without written
corroboration.
• Spend time reconstructing financial statements to
determine how much cash is actually available.
• Interview the owner, vendors, competitors,
customers, and employees.

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 Franchising: The Hybrid
• Franchising
➢ Any arrangement in which the owner of a trademark,
trade name, or copyright has licensed others to use it
in selling goods or services
• Franchisee
➢ A purchaser of a franchise

• Franchisor
➢ The seller of the franchise

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 How Franchising Works
• Franchisee Obligations:
1. Make a financial investment in the operation.
2. Obtain and maintain a standardized inventory
and/or equipment package usually purchased
from the franchisor.
3. Maintain a specified quality of performance.
4. Follow a franchise fee as well as a percentage
of the gross revenues.
5. Engage in a continuing business relationship.

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 How Franchising Works (cont’d)
• Franchisor Provides:
1. The company name
2. Identifying symbols, logos, designs, and facilities
3. Professional management training for each
independent unit’s staff
4. Sale of merchandise necessary for the unit’s
operation, equipment to run the operation, and the
food or materials needed for the final product
5. Financial assistance, if needed
6. Continuing aid and guidance to ensure that
everything is done in accordance with the contract

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 Franchising
• Advantages • Disadvantages
➢ Training and guidance ➢ Franchise fees
➢ Brand-name appeal ➢ Franchisor control
➢ A proven track record ➢ Unfulfilled promises
➢ Financial assistance of franchisor

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Table
7.3 Some of the Most Recognized Franchises

• Burger King
• Dairy Queen
• Days Inn
• Denny’s
• Dunkin’ Donuts
• H&R Block (Tax Preparation)
• McDonald’s
• Meineke Car Care Centers
• Papa John’s Pizza
• 7-Eleven
• Snap-on Tools
• Sports Clips (Hair Salons)
• Subway
• UPS Store (Mail Boxes Etc.)

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 Franchise Law
• Franchise Disclosure Document (FDD)
➢ Divided into 23 categories that provide different
segments of information for prospective franchisees
➢ Developed to provide guidance in complying with the
Franchise Disclosure Rule that requires franchisors
to make full presale
disclosure about their franchises
*There are no specific laws governing
franchising in the Philippines. Franchise
agreements are regulated by the
applicable provisions of the: Intellectual
Property Code (IPC). Civil Code.
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Figure
7.2 The Decision to Purchase a Franchise: Process Model

Source: Patrick J. Kaufmann, “Franchising and the Choice of Self Employment,” Journal of Business Venturing, 14, no. 4 (1999): 348.

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Table
7.4 The Cost of Franchising

1. The basic franchising fee

2. Insurance
3. Opening product inventory
4. Remodeling and leasehold improvements
5. Utility charges
6. Payroll
7. Debt service
8. Bookkeeping and accounting fees
9. Legal and professional fees
10. State and local licenses, permits, and certifications

Source: Donald F. Kuratko, “Achieving the American Dream as a Franchise,” Small Business Network 3 (July 1987): 2 (updated by author April 2015) .

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Table
7.5 World Wide Web Franchise Sites
American Bar Association Forum on Franchising www.americanbar.org/groups/franchising.html
U.S. Small Business Administration www.sba.gov
Entrepreneur Magazine www.entrepreneur.com/franchises/
Minority Business Entrepreneur Magazine www.mbemag.com
Franchise Times www.franchisetimes.com
Franchise Update www.franchising.com
National Restaurant Association www.restaurant.org/tools/
Source Book Publications www.franchisordatabase.com
Federal Trade Commission www.ftc.gov/bcp/franchise/
Franchise.com www.franchise.com/
World Franchising www.worldfranchising.com/
Franchise Solutions www.franchisesolutions.com/
Franchise Opportunities www.franchiseopportunities.com/
Franchise Know How www.franchiseknowhow.com/
The Franchise Magazine www.thefranchisemagazine.net/
Franchise Mall www.franchismall.com/
Franchise Advantage www.franchiseadvantage.com
US Franchise News www.usfranchisenews.com/

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 Evaluating Franchising Opportunities

The Franchise
Opportunity Decision

Learning of
Investigating the Seeking
Franchising
Franchisor Professional Help
Opportunities

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 Sources of Capital for Entrepreneurs
The Search for Capital
Every entrepreneur faces the challenge of finding start-up capital.
There are numerous possibilities and combinations of financial
packages that may be appropriate for a business.

Debt versus Equity Financing

The use of debt to finance a new venture requires a
payback of funds plus a fee, whereas equity financing
involves the sale of some of the ownership in the venture.

Debt Financing - a popular for short term borrowing (one

year or less) for working capital and for long term
borrowing (one to five years or more) for the purchase of
property or equipment.
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Advantages of Debt Financing
No relinquishment of ownership.

More borrowing allows for potentially greater return on investment.

During periods of low interest rates opportunity cost is justified.

Disadvantages of Debt Financing

Regular (monthly) interest payments are required.

Cash-flow problems can intensify because of payback responsibilities

Heavy use of debt can inhibit growth and development.

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 Sources of Funds for Entrepreneurs
• Many entrepreneurs do not know where to
acquire funding when starting out or expanding. If
you know where to look, you'll find that there are
many different sources for entrepreneurs to raise
capital.
• However, not every source of capital is suitable
for every business. An entrepreneur should
choose one which meets the capital structure
that best fits their business. A business' capital
structure is the way that it is funded, either
through debt (loans) or equity (shares sold to
investors) financing.
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 Financial backing usually includes loans,
grants, or investor funding. Some of the top
ways to raise capital are through angel
investors, venture capitalists, government
grants, and small business loans. There are
other methods for financing such as credit
cards or invoice financing, but these should be
used only if you need cash quickly and know
the risks involved.

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Angel Investors
Angel investors are generally individuals or groups
who provide capital from their personal assets to
assist you with starting your business. These types of
investors are looking for startups that have good
potential for earnings. Since they are investors, you'll
be expected to present them with a portfolio that is
favorable. This differs from venture capitalists, who
are more interested in organizations that are already
doing well but need more sources of capital.

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Venture Capitalists
Venture capitalists (VCs) are usually groups of individuals that provide
capital through an organization they have established. Generally, VCs like
to fund companies that are already somewhat established, and in need of
more finances. However, VCs have been known to sponsor startups that
show significant promise.

VCs are looking for high returns on their investments (your business). This
is not unusual for investors, but some VCs may want to be involved in
your business decisions after they grant you some funding.

In the past, VCs have wanted to make decisions for the businesses they
have funded to protect their investments. However, many VCs have
moved to more of a mentor role, assisting you with business decisions
and offering guidance as a protective measure. Ensure you enquire about
the role a VC would like to have before you accept any funds.

If©you do not find any suitable VCs, a small business loan may be the next
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option.
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 Small Business Loans
The Small Business Administration (SBA) has been
established to assist business owners with their businesses.
A small business loan through SBA partner lenders, while
competitive, are guaranteed by the SBA and come with
generally lower rates than traditional loans.

Small business loans are not the only form of government

assistance. A source of capital often overlooked by
entrepreneurs is government grants.

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 Government Grants
The government offers grants through the SBA
to entrepreneurs who have research-related
businesses. The most attractive benefit of a
grant is that it is free and you won't need to
repay the government.

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Crowdfunding
Crowdfunding is a method of raising funds from individuals,
using an internet-based platform. This method depends upon
the generosity of people, and upon the exposure your
crowdfunding campaign receives.

To have a successful crowdsourcing endeavor, you must be

able to win the crowd's support. They'll want to know why
you need the money and may want a reason to contribute.
Create a reasonable monetary goal, and decide on a reward
for the crowd that assists you. This could be public
recognition for donations or letting them be the first ones to
receive your product.

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 Microloans
These are small loans designed for small
businesses and startups. What makes these loans
attractive is that they are short-term loans with low-
interest rates compared to traditional small
business loans.

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Invoice Factoring
Sometimes referred to as invoice advances, invoice factoring
is a process where an entrepreneur agrees with a lender to
sell their invoices due, and let the lender collect future
payment by the customers.

This works by a lender purchasing your open invoices from

you for a reduced amount, then collecting the amount that is
due. For example, if you had a sale with receivables pending
for $11,000 you could sell it to a lender who might buy it for
$9,000. You receive cash, and the lender receives the
$11,000 when it is paid.

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Credit Cards
Many companies use personal and business credit
cards to finance immediate expenses. Credit cards
are convenient when you don't have the cash to
make purchases at the moment.

If you do not have the means to make your monthly

payments, credit cards can exponentially increase
your debt with high annual percentage rates.

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 PEER-TO-PEER LENDING (P2P) - is the practice of lending money
to unrelated individuals, or “peers,” without going through a bank or
other traditional financial institution. Social lenders, often Internet-
based sites, pool money from investors willing to lend capital at
agreed-upon rates. Once thought of as an alternative funding option
only for entrepreneurs unable to qualify for commercial loans, P2P
lending is beginning to attract borrowers among established
entrepreneurs seeking quick capital without the administrative
overhead of traditional lenders.

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 Equity Financing
Equity Financing
Requires sharing ownership and profit
with the funding source.

PUBLIC OFFERINGS

Advantages of public Disadvantages of public

offerings: offerings:

Size of capital amount Costs

Liquidity Disclosure
Value Requirements
Image Shareholder pressure

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