Chapter 11

Starting an enterprise:
the entrepreneurship
alternatives
 Learning objectives
11.1 explain the three major issues to consider before going
into business
11.2 compare three different types of market entry: start-up,
purchase and franchise
11.3 use the ‘6 step’ process to organise your strategy for
going into business
11.4 explain the decisions to go global and discuss
developing strategy for international business.
LO 11.1 Issues to consider before
going into business
Three major factors:
1- What are the personal goals and abilities of the
owner/entrepreneur?
2- What resources are available to the business
owner (money, staff, time)?
3- What is the nature of the business opportunity?
Three issues to consider before
going into business Figure 11.1
 Three issues to consider
1- The Owner/Entrepreneur – Industry
knowledge, enthusiasm, personal freedom,
provides job opportunities, make business grow,
….
2- Resource availability – entry cost, exist cost,
staff, time, ……..
3- Opportunity – different opportunities impose
certain constraints – Partnership, family
business, franchise,….
LO 11.2 Three forms of
market entry
Three major options are available for market
entry:
1- Launch a new business start-up
2- Purchase an existing firm
3- Enter a franchise arrangement
Differences between businesses
 1- A new business start-up
Advantages Disadvantages
Control the business direction Raising capital

Flexibility Lack of customer base

Cost minimisation Cash flow problems

Lifestyle goals Learning curve expenses

 Costs of start-up venture
• Licenses and permits
• Working capital
• Telecommunications and IT
• Operating plant and equipment
• Staff recruitment
• Insurance
• Raw materials
• Premises (rent)
• Office supplies
 Reducing start-up costs
Home-based start-ups can be an option to reduce start
up costs.
•Benefits of starting an enterprise from home can
include: reduced travelling costs, no rental fees, use of
existing household goods
•Issues to consider include: financial record keeping,
local government laws, insurance cover and personal
security
 2- Purchasing an existing
business
Advantages Disadvantages
Can begin trading Less flexible than a start-up
immediately

Easier to arrange finance for Difficult to establish purchase

the venture price

Established track record, May ‘inherit’ existing

customers, brand liabilities
Establishing a purchase price
Three major techniques used:
1. market-based valuations
2. asset-based valuations
3. earnings-based (cash flow) valuations.

The most appropriate method to use is often a

subjective decision, or based on industry-specific
trends
1- Market-based valuations
1.1 The going market rate method
• The ‘current market’ price for a particular
type of firm
Selling price = Selling price of similar firms
1.2 Revenue multiplier method
• Common ‘industry multiple’ is used to calculate
purchase price
Selling price =
Turnover × Standard industry multiple
2- Asset based valuations
2.1 Book value
• Includes all assets and liabilities as recorded
Selling price =
Tangible assets + Intangible assets − Liabilities
2.2 Adjusted book (net asset) value
• Book value is adjusted to reflect current true value of
all assets and liabilities
• Price may reflect firms goodwill
2- Asset based valuations
2.3 Liquidation value
• Value of the business if it was to be broken up and
sold as individual assets, rather than continuing to
operate it as a going concern
• May represent the vendors ‘bottom price’
2.4 Replacement value
• Business value = cost of replacing all the firm’s
tangible assets at current market rates
• May represent the buyers ‘maximum price’
 3- Earning-based (cash flow)
valuations

3.1 Return on investment

• Formula includes estimated future profit earnings
Note: ROI must be converted to a decimal
Net annual profit
Selling Price =
ROI

. E.g. selling price of a business making $100,000 with a

ROI of 50% Selling Price = 100,000 = $200,000
0.5
 Buying a business?
Questions to ask
• Buyers should conduct a due diligence study
• Questions should relate to:
- Reasons for sale
- Existing staff: continuing employment, accrued leave
- Current liabilities, including taxation debts
- Transferability of licences and permits
- Transferability of intellectual property and intangible
assets
- Leases, stock and assets
 Other issues to consider
• Consider the inclusion of a restraint of trade clause in
the final contract of sale

• Consideration of ancillary costs which may include:

• legal fees
• accountant fees
• valuation costs
• government taxes and
• bank fees
 3- Entering a franchise system
• Definition:
– Arrangement where the owner of a business product or
operating system permits another business to sell these
goods, and/or to use the business operations system
• Franchisor:
– Business or individual who owns the rights to the system or
product
• Franchisee:
– The business or individual who operates the system or sells
the product under contract or license from franchisor
 Nature of franchising
A licensing arrangement:
• Small firm receives permission to sell the product/service
from the established parent organisation, but remains
legally independent of that parent
• Typically has lower failure rates than new
start-ups
• Good for small business owners seeking security
• Less suitable for entrepreneurial types
 Types of franchise
Product franchise: e.g. Car dealership, Supermarket IGA
• A license to sell a particular good or service
• Franchisee is a distribution mechanism; has more room
to decide how their firm operates
Business system franchise: Boost Juice, Michel's Patisserie
• Franchisor supplies the product and detailed guidelines
about how business is run
• Business processes and operations have already been
pre-tested by the franchisor
Major franchise organisations
in the Asia–
Asia Pacific Table 11.1
 Advantages of franchising
• New business owner does not have to develop their
own operating, staffing, marketing systems
• Less time wasted ‘learning by mistakes’
• Product/service is already well established
• Franchisors provide continuing training and support
• Lower costs of raw materials and supplies
• Raising capital can also be easier
 Disadvantages of franchising
• More expensive than start-up ventures
• Purchase price is often quite high
• Franchisees have to pay a proportion of their profits to
the franchisor
• Franchisees are restricted to a geographical area
• Must comply with franchisor directions
• Limited duration of the franchise agreement
 LO 11.3 Procedural steps when
starting a business venture
• The framework provides a structure for evaluating and
acting upon an intended project
• Designed to be conducted in a sequential ‘lock-step’
manner
• Idea can be aborted before to many resources have
been committed to the project
The process of going into business
Figure 11.2
The Process of going into business
1- Undertake market research:
• determine if the idea is viable
2- Check statutory requirements:
• can you meet all the regulatory requirements to
proceed?
3- Access resources:
• can you obtain all needed for example: facilities,
equipment, insurance?
The process of going into business
4- Buy, start or franchise:
• which will best help you succeed in business?
5- Perform financial projections:
• is it viable?
6- Prepare a business plan:
• put your ideas on paper
 LO 11.4 Going global
Before deciding to go global, a company faces a number of
key decisions, beginning with the following:
1- determining which foreign market(s) to enter
2- analysing the expenditures required to enter a new
market
3- deciding the best way to organise the overseas
operations.
 Levels of involvement
After a firm has completed its research and decided to do
business overseas, it can choose one or more strategies:
1- Exporting or importing
2- Entering into contractual agreements such as franchising,
licensing, and subcontracting deals
3- Direct investment in the foreign market through
acquisitions, joint ventures, or establishment of an overseas
division.
 Strategies of note
Countertrade: barter agreement whereby trade between two or
more nations involves payment made in the form of local products
instead of currency
Franchise: contractual agreement in which a franchisee gains the
right to produce and/or sell the franchisor's products under that
company's brand name if they agree to certain operating
requirements
Foreign licensing agreement: international agreement in which
one firm allows another to produce or sell its product, or use its
trademark, patent, or manufacturing processes, in a specific
geographical area in return for royalties or other compensation
 Strategies of note
Subcontracting: international agreement that involves
hiring local companies to produce, distribute, or sell
goods or services in a specific country or geographical
region
Joint venture: partnership between companies formed
for a specific undertaking
The world’s top 10 leading
companies
 Developing a strategy for
international business
In a global business (or standardisation) strategy, a
firm sells the same product in essentially the same
manner throughout the world
• Can be appropriate for some goods and services and
certain market segments that are common to many
nations
 Developing a strategy for
international business
Under a multidomestic business (or adaptation)
strategy, the firm treats each national market in a
different way.
• It develops products and marketing strategies that
appeal to the customs, tastes, and buying habits of a
particular national markets
The end