Group 6 - BSA 1-2

Alberto, Frency How does one discover or invent new products?

Bayta, Althea
Doron, Eunice Michaela  One of the ways to uncover new-product concepts is through
close observation of the world around you. Making lists of
annoying everyday experiences or of problems in using known
products or services has led to innovative business ventures.
CHAPTER 7: PATHWAYS TO Objects that fall out of one's hand, household chores that are
ENTREPRENUERIAL VENTURES difficult to do, and items that are hard to store are examples of
everyday annoyances that have led to new venture creations.

7-1 CREATING NEW VENTURES 7-1b New-Old Approach to Creating New Ventures

The most effective way to start a new business is to create a Most small ventures do not start with a totally unique idea.
new and unique product or service. The next-best way is to adapt an Instead, an individual piggy-backs on someone else's idea by either
existing product or service or to extend an offering into an area improving a product or offering a service in an area in which it is not
wherein it is not presently available. The first approach is often currently available hence the term new-old approach. Some of the
referred to as new-new; the second, as new-old. most common examples are setting up restaurants, clothing stores, or
similar outlets in sprawling suburban areas that do not have an
abundance of these stores. Of course, these kinds of operations can be
7-1a New-New Approach to Creating New Ventures risky because competitors can move in easily. Potential owners
considering this kind of enterprise should try to offer a product or
New products or services frequently enter the market. Typical
examples include smart-phones, MP3 players, plasma televisions, and
global positioning systems (GPS). All of these products and more were
introduced as the result of research and development (R&D) efforts by
major corporations (see Table 7.1 for a list of emerging ideas). What
we must realize, however, is that unique ideas are not the sole province
of large companies. Individuals create, too. Most business ideas tend to
come from people's experiences. Figure 7.1 illustrates the sources of
new business ideas from a study conducted by the National Federation
of Independent Business. In general, the main sources for both men
and women are prior jobs, hobbies or interests, and personally
identified problems. The new-new approach indicates the importance
of people's awareness of their daily lives (work and free time) for
developing new business ideas.
service that is difficult to copy.
 covered. If the firm is in the manufacturing business, however, it will
be three to four months before any goods are produced and sold, so the
factors in Column 3 have to be doubled, and the amount of cash
needed for start-up will be greater. Much of the information needed to
fill in this worksheet already should have been gathered and at least
partially analyzed. Now, however, it can be put into a format that
allows the owner to look at the overall financial picture. At this point,
the individual should be concerned with what is called upside gain and
downside loss. This term refers to the profits the business can make
and the losses it can suffer. How much money will the enterprise take
in if everything goes well? How much will it gross if operations run as
expected? How much will it lose if operations do not work out well?
Answers to these questions provide a composite picture of the most
optimistic, the most likely, and the most pessimistic results. The owner
has to keep in mind that the upside gain may be minimal, whereas the
downside loss may be great. It is necessary to examine overall gains
and losses. This kind of analysis is referred to as risk versus reward

7-1c Examining the Financial Picture When Creating New

Ventures
A prospective entrepreneur decides that creating a new venture
is a wise option, it is imperative to remember that the plan may not
work perfectly. Some modification may be necessary, and flexibility is
key. A contingency or backup plan should be available because the
worst thing an entrepreneur can do is adopt an all-or-nothing strategy.
As we know, prospective entrepreneurs of new ventures must
evaluate an enterprise's financial picture. How much will it cost to stay
in business for the first year? How much revenue will the firm
generate during this time period? If the outflow of cash is greater than
the inflow, how long will it take before the business turns the corner?
It is time to look at these questions in more detail.
Answering these questions requires consideration of two kinds
of expenses: start-up and monthly. Table 7.2 illustrates a typical
worksheet for making the necessary calculations of start-up expenses.
Notice that this worksheet is based on the assumption that no money
will flow in for about three months. Also, all start-up costs are totally
analysis and points out the import. The budgeting an adequate return
on the amount of money risked.
7-2 ACQUIRING AN ESTABLISHED ENTREPRENEURIAL
VENTURE
A prospective entrepreneur may seek to purchase a business
venture rather than start an enterprise. This can be a successful method
of getting into business, but numerous factors need to be analyzed.
Purchasing a business venture is a complex transaction, and the advice
of professionals always should be sought.
7-2a Personal Preferences
Entrepreneurs need to recognize certain personal factors and to
limit their choices of ventures accordingly. An entrepreneur's
background, skills, interests, and experience are all important factors
in selecting the type of business to buy. In addition, personal
preferences for location and size of a business should guide the
selection process. If an entrepreneur always has desired to own a
business in the South or West, then that is exactly where the search
should begin.
7-2b Examination of Opportunities
Entrepreneurs in search of a possible venture to buy need to examine
the available opportunities through various sources:
 Business brokers. Professionals specializing in business
opportunities often can provide leads and assistance in finding
a venture for sale. However, the buyer should evaluate the
broker's reputation, services, and contacts. The entrepreneur
also should remember that the broker usually represents and
gets a commission on the sale from the seller.
 Newspaper ads. Business Opportunity classified ads are
another source. Because an ad often will appear in one paper
and not another, it may be necessary to check the classified
sections of all the papers in the area.
 Trade sources. Suppliers, distributors, manufacturers, trade
publications, trade associations, and trade schools may have
information about businesses for sale.
 Professional sources. Professionals such as management
consultants, attorneys, and accountants often know of
businesses available for purchase.
7-2c Three Advantages of Acquiring an Ongoing Venture
1. Because the enterprise is already in operation, its successful
future operation is likely.
2. The time and effort associated with starting a new enterprise
are eliminated.
3. It sometimes is possible to buy an ongoing business at a
bargain price.
LESS FEAR ABOUT SUCCESSFUL FUTURE OPERATION
A new business faces two great dangers: the possibility that it
will not find a market for its goods or services, and the chance that it
will not be able to control its costs. If either event occurs, the new
business will go bankrupt. Buying an existing concern, however,
alleviates most of these fears. A successful business already has
demonstrated the ability to attract customers, control costs, and make a
profit. Additionally, many of the problems a newly formed firm faces
are sidestepped. Thus, when a new owner buys an ongoing operation,
he or she is often purchasing a known quantity. Of course, it is
important to check whether hidden problems exist in the operation.
Barring something of this nature, how ever, the purchase of an existing
successful operating venture can be a wise investment.
REDUCED TIME AND EFFORT
An ongoing enterprise already has assembled the inventory,
equipment, personnel, and facilities necessary to run it. In many cases,
this has taken the owners a long time to do. They have spent countless
hours “working out the bugs” so that the business is as efficient as
possible. Therefore, if the new owners treat the workers fairly, they
should not have to worry about hiring, placing, and training personnel.
In addition, the previous owners undoubtedly have established
relations with suppliers, bankers, and other business people. These
individuals often can be relied on to provide assistance to the new
owners. They can be a source of advice about managing the operation,
as can the bankers with whom the enterprise has been doing business.
These individuals know the enterprise's capital needs and often
provide new owners with the same credit line and assistance they gave
the previous owners. The same holds true for the accountant, the
lawyer, and any other professionals who served the business in an
advisory capacity.
A GOOD PRICE
Sometimes it is possible to buy an ongoing operating venture at
a very good price. The owner may want to sell quickly because of a
retirement decision or illness. Or the owner may be forced to sell the
business to raise money for some emergency that has occurred. Or the
owner may seek a greater opportunity in another type of business and
therefore be willing to sell at a low price in order to take advantage of
the new opportunity. Ideally, when one is looking to buy an ongoing,
successful operating venture, one of these three advantages (especially
the last one) is present. However, seldom does someone in business
sell a successful firm at an extraordinarily low price. The owner of a
successful small venture built the enterprise through skillful business
practices, knows how to deal with people, and has a good idea of the
operation's fair market value. Therefore, the prospective owner must
avoid bidding high on a poor investment or walking away from a good
bargain because it smells fishy. The way to prevent making the wrong
decision is to evaluate the existing operation in a logical manner.
7-2d Evaluation of the Selected Venture
After the entrepreneur considers personal preferences and examines
information sources, the next step is to evaluate specific factors of the
venture being offered for sale:
 The business environment. The local environment for business
should be analyzed to establish the potential of the venture in
its present location.
 Profits, sales, and operating ratios. The business’s profit
potential is a key factor in evaluating the ventures
attractiveness and in later determining a reasonable price for it.
To estimate the potential earning power of the business, the
buyer should review past profits, sales, and operating ratios,
and project sales and profits for the next one to two years.
 The business assets. The tangible (physical) and intangible
(e.g., reputation) assets of the business need to be assessed. The
following assets should be examined:
- Inventory
- Furniture, equipment, fixtures
- Accounts receivable
- Trademarks, patents, copyrights, business names
- Goodwill
WHY IS THE BUSINESS BEING SOLD?
In the acquisition process, it's vital to discern the true
motivations behind the owner's decision to sell, as stated reasons may
not always align with reality. Common explanations like retirement or
seeking new challenges should be verified. Gathering comprehensive
business-related information, including supplier relations, lease terms,
and potential site- location issues, is crucial. Financial considerations
and the seller's future plans must be carefully assessed. To mitigate
risks, potential buyers should explore legal agreements, such as non-
compete clauses, to safeguard against competition from the previous
owner. These steps are essential for preserving the business's customer
base and protecting the investment.
WHAT IS THE CURRENT PHYSICAL CONDITION OF THE
BUSINESS?
Even if the asking price for the operation appears to be fair,it is
essential to thoroughly assess the physical condition of its assets, even
if the asking price seems reasonable. This includes examining property
ownership and the need for repairs or enhancements. For owned
buildings, the extent of required repairs should be evaluated, while
leased properties necessitate a review of lease terms regarding
maintenance responsibilities. Additionally, buyers should be aware that
permanent additions to leased property remain with the landlord.
Therefore, the key question while evaluating the physical facilities is
"How much will it cost to get things in order?"
WHAT IS THE CONDITION OF THE INVENTORY?
 How much inventory does the current owner show on the
books? Does a physical check show that inventory actually exists?
Additionally, is inventory salable, or is it out-of-date or badly
deteriorated?
WHAT IS THE STATE OF THE COMPANY'S OTHER ASSETS?
Operating ventures typically possess assets beyond physical
facilities and inventory, such as technology equipment and records. It's
important to assess the usefulness of these assets and determine if they
are obsolete. Business records can provide valuable insights into
customer creditworthiness and sales trends, aiding in decision- making
and inventory management. Past contracts, including lease agreements,
should be examined to understand their terms and potential impact on
future operations. Additionally, intangible assets like goodwill,
representing the company's reputation and customer loyalty, should be
considered when evaluating the business's overall value.
HOW MANY OF THE EMPLOYEES WILL REMAIN?
Retaining seasoned employees is crucial for maintaining the
level of service customers expect when acquiring an existing business.
Prospective buyers must assess if enough employees will remain to
uphold service standards, particularly key personnel whose departure
could impact business value. Conducting evaluations of current
employees and discussing their value with the current owners can aid
in decision-making. Proactive measures, such as seeking out key
employees before the purchase, can help ensure their retention. The
incoming owner should interview all current employees and make
staffing decisions prior to taking over the business.
WHAT TYPE OF COMPETITION DOES THE BUSINESS
FACE?
Competition in business is inevitable, and it significantly
affects a company's profitability. As competition increases, the chances
of earning large profits decrease, leading to higher advertising costs
and price reductions. The quality and location of competitors are
important factors to consider, especially if a business lacks uniqueness
and relies on convenience for customer attraction. Proximity to
competitors can either split the customer base or provide advantages,
particularly for carefully shopped items like furniture. Unethical
practices among competitors, such as price fixing, should be
monitored, as they can tarnish a business's reputation and lead to
customer boycotts. Ultimately, unethical behavior by one competitor
can negatively impact others in the same area.
WHAT DOES THE FIRM'S FINANCIAL PICTURE LOOK
LIKE?
Prospective buyers may need to enlist the services of an
accountant to review the company's financial records to gauge its
financial health. Key areas of interest include profitability, trends in
profits over time, and comparison of performance with similar
companies in the industry. Reviewing bank deposit records, previous
owners' records, and income tax returns can provide a more accurate
picture of the company's financial status. Analyzing key financial
ratios, such as current assets to liabilities, net profit margin, and return
on net worth, can help assess the business's performance relative to
industry standards. By comparing internal accounting information with
external financial data, prospective buyers can determine the business's
financial standing and make informed decisions regarding acquisition
offers.
7-2f Negotiating the Deal
The potential buyer must negotiate the final deal. This negotiation
process, however, involves a number of factors. Four critical elements
should be recognized: information, time, pressure, and alternatives.
 Information may be the most critical element during
negotiations. The performance of the company, the nature of its
competition, the condition of the market, and clear answers to
all of the key questions presented earlier are all vital
components in the determination of the business's real
potential.
 Time is also a critical element. If the seller already has
purchased another business and a potential buyer is the only
prospect to buy the existing firm, then that buyer has the power
to win some important concessions from the seller. If, however,
the owner has no such deadline but simply is headed to
 retirement, or if the buyer's financial sources wish to invest in
the project quickly, then the buyer is at a serious disadvantage.
 Pressure from others also will affect the negotiation process. If
the company is owned by several partners, then the individual
who is selling the company may not have complete autonomy.
If one of the owners is in favor of accepting an offer, the
negotiator for the company must decide whether to accept the
bid on behalf of all owners or attempt to hold out for more
money. This causes a distraction during the negotiation process.
 Finally, the alternatives available to each party become
important factors. The party with no other alternatives has a
great deal of interest in concluding negotiations quickly.
Additional considerations that a person should keep in mind when
purchasing a business include the following:
1. 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, to keep the seller
concerned about the immediate future performance of the business.
2. Buyers should be wary of any promises made without written
corroboration.
3. Spend time with the seller's books, reconstructing financial
statements to determine how much cash is actually available, is an
absolute.
4. And, it goes without saying, investigations should be thorough
and wide-ranging, encompassing interviews not only with the
owner but with vendors, competitors, customers, and employees as
well.
7-3 FRANCHISING: THE HYBRID
One form of business that incorporates some of the
independence of an entrepreneur with the larger umbrella of a
corporation is the franchise. Thus, it is a hybrid form of entering
business.
7-3a How Franchising Works
Business franchise systems for goods and services generally work the
same way. The franchise, an independent businessperson, contracts for
a complete business package. This usually requires the individual to do
one or more of the following:
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
In turn, the franchisor provides the following types of benefits and
assistance:
1. The company name. For example, if someone bought a Burger
King franchise, this would provide the business with drawing
power. A well-known name, such as Burger King, ensures
higher sales than an unknown name, such as Ralph's Big
Burgers.
2. Identifying symbols, logos, designs, and facilities. For
example, all McDonald's units have the same identifying
golden arches on the premises. Likewise, the facilities are
similar inside.
3. Professional management training for each independent unit's
staff.
4. Sale of specific merchandise necessary for the unit's operation
at wholesale prices. Usually provided is all of the equipment to
run the operation and the food or materials needed for the final
product.
5. Financial assistance, if needed, to help the unit in any way
possible.
6. Continuing aid and guidance to ensure that everything is done
in accordance with the contract.
7-3b ADVANTAGE OF FRANCHISING
 TRAINING AND GUIDANCE
Perhaps the greatest advantage of buying a franchise, as
compared to starting a business or has the greatest advent that
 the franchisor usually will provide both training and guidance
to the franchisee. As a result, the likelihood of success is much
greater for national franchisees who receive this assistance than
for small-business owners in general. For example, it has been
reported that the ratio of failure for small enterprises in general
to franchised businesses may be as high as 4:1 or 5:1.
 BRAND-NAME APPEAL
An individual who buys a well-known national
franchise, especially a big-name one, has a good chance to
succeed. The franchisor's name is a drawing card for the
establishment, People are often more aware of the product or
service offered by a national franchise and prefer it to those
offered by lesser-known outlets. See Table 7.3 for some
examples of well known franchise names.
 A PROVEN TRACK RECORD
Another benefit of buying a franchise is that the
franchisor has already proved that the operation can be
successful. Of course, if someone is the first individual to buy a
franchise, this is not the case. However, if the organization has
been around for 5 to 10 years and has 50 or more units, it
should not be difficult to see how successful the operations
have been. If all of the units are still in operation and the
owners report they are doing well financially, one can be
certain the franchisor has proved that the layout and location of
the store, the pricing policy, the quality of the goods or service,
and the overall management system are successful.
 FINANCIAL ASSISTANCE
Another reason a franchise can be a good investment is
that the franchisor may be able to help the new owner secure
the financial assistance needed to run the operation. In fact,
some franchisors helped franchise get started by lending money
and quiring any repayment until the operation is hinning
smoothly. In short, buying a franchise is often an ideal way to
assistance from the financial community.
7.3c DISADVANTAGES OF FRANCHISING
 FRANCHISE FEES
In business, no one gets something for nothing. The
larger and more successful the franchisor, the greater the
franchise fee. For a franchise from a national chain, it is not
uncommon for a buyer to be faced with fee could range from
$50,000 to $1,000,000. Smaller franchisors or those who have
not had great success charge less.
 FRANCHISOR CONTROL
In a large corporation, the company controls the
employee's activities. If an individual has a personal business,
he or she controls his or her own activities. A franchise
operator is some where between these extremes. The franchisor
generally exercises a fair amount of over the operation in order
to achieve a degree of uniformity. If entrepreneurs do not
follow franchisor directions, they may not have their franchise
license renewed when the contract expires.
 UNFULFILLED PROMISES
 In some cases, especially among less-known
franchisors, the franchisees have not received all they were
promised, For example, many franchisees have themselves
with trade names that have no drawing power. Also, many
franchisees have found that the promised assistance from the
franchisor has not been forthcoming. For example, instead of
being able to purchase supplies more cheaply through the
franchisor, many operators have found themselves paying
exorbitant prices for supplies. If franchisees complain, they risk
having their agreement with the franchisor terminated or not
renewed.
7-3d FRANCHISE LAW
Franchise operations have grown quickly, outpacing laws
regulating them. Without specific case law, courts apply general
principles and rules, often likening franchising to other relationships
like principal/agent or employer/employee. The FTC introduced The
Franchise Rule for disclosure, but it mainly helps with purchasing, not
ongoing legal issues. Many disputes arise over termination terms in
franchise agreements, which typically favor the franchisor. So,
franchisees, who invest a lot, may get little or nothing back if the
business ends, as the franchisor owns the trademark and business.
7-3e Evaluating Franchising Opportunities
 LEARNING OF FRANCHISING OPPORTUNITIES
 INVESTIGATING THE FRANCHISOR
 SEEKING PROFESSIONAL HELP
MAKING THE DECISION: IT'S UP TO THE ENTREPRENEUR
After the prospective entrepreneur has gathered all of the
necessary information, it is up to him or her to make the final decision
on the matter. As with buying an ongoing business, however, the series
of right questions outlined previously can help.