Module 2: Building a Business

Entrepreneurial Spirit

measured by entrepreneurial awareness, opportunity perception and self-efficacy

Entrepreneurial Awareness

do you know someone who has started a business in the past year?

Entrepreneurial Opportunity Perception

do you think there are good opportunities for starting a business in your local area?

Entrepreneurial Self-Efficacy

do you think you have the knowledge, skills and experience to start a business?

Five Characteristics the Influence Whether an Entrepreneur will be Successful

confidence

energy

internal drive

vision

tolerance for risk

Intrapreneurs

employees who bring an entrepreneurial spirit to their organization

Motivators for Starting a Buisiness

you no longer want to work for someone else

loss of a job

wanting to start a business for a long time

idea for a new product/new way to sell something

an opportunity is presented

Small Business

one that is independently owned and operated for profit and is not dominant in its field; containing a number of employees 1-99

Advantages of a Small Business

personal relationships with customers and employees

ability to adapt quickly to change

simplified record keeping

independence

ease and low cost of going into business

Disadvantages of a Small Business

high risk of failure

limited potential

limited ability to raise capital and hire qualified talent

Factors Contributing to Entrepreneurship

a culture of entrepreneurship

advances in technology

downsizing and outsourcing

The Importance of a Small Business in our Economy

providing technical innovation

providing employment

providing competition

meeting the needs of society and other businesses

Business Plan

a written document that describes the opportunity, goals and plans for a business

Communication Tool (Business Plnan)

serves a concise document that potential investors can examine; shows whether a business as potential to make a profit

Management Tool (Business Plan)

helps track monitor and evaluate progress

can be modified as you gain knowledge and experience

establishes timelines and milestones

Planning Tool (Business Plan)

guides an owner or manager through the various phases of business

Business Model

explains how the business will make money

A Business Plan Should Answer These Questions

what is the nature or mission?

why is this a good idea?

what are the goals and milestones?

how much will the new business cost?

how much revenue will it generate?

5 Components of a Business Plan

executive summary

product description and market analysis

marketing plan

operations plan

financial projections

Executive Summary

overview of the key aspects of the business plan

justification of why it will be successful

Product Description and Market Analysis

why is the product unique?

what problem does it solve?

what is the target market?

shows initial evidence of market demand

Marketing Plan

strategy for pricing, distributing and promoting the product

Operations Plan

how it will be produced and delivered

management team

personnel needs

facility requirements

launch schedule

Financial Projections

sales and cash flow forecasts

break even analysis

start-up costs

funding sources

Traditional Charity

focused on achieving social value; funding comes from donations, grants and endowment

Purpose Driven Enterprise

focused on achieving both social impact and financial return; driven by purpose to do good and do well

Traditional Business

focused on achieving financial value; pure profit orientation, mainstream investors

Social Enterprise

a venture driven first by a higher social purpose but that still is profit-driven in order to be self-sustaining

Business-Consumer (B2C)

sell to their end user, the person who actually uses/consumes the product

Business-Business (B2B)

sell to other businesses (sometimes the end user and sometimes someone who will resell the product)

Consumer-Business (C2B)

helps individuals sell their goods and services to businesses

Consumer-Consumer (C2C)

online market places; making their money by charging transaction or listing fees

Angel Investors

private individuals who invest money, typically in exchange for ownership in a company

Venture Capital (VC)

companies that invest money in high-growth companies that have the potential to become large and successful

Crowdfunding

when entrepreneurs invite people to contribute to a busines or project, usually via an online platform

Franchise

a license to operate an individually owned business as if it were part of a chain of outlets or stores

Franchising

the actual granting of a franchise

Franchisor

an individual/organization granting a franchise

supplies known and advertised business name, management skills, the required training and materials, and the production method of serving customers

Franchisee

a person/organization purchasing a franchise

supplies labour and capital, operates the franchised business and agrees to abide by the provisions of the franchise agreement

Advantages of a Franchise

nationally advertised name and marketing support

training and materials provided

management advise

products and production method provided

Disadvantages of a Franchise

must pay franchise fee to get started

must pay a certain percentage of profits to franchisor

must pay the cost of building and renovating the location

franchise agreement dictates every aspect of the business

Sole Proprietorship

a business that is owned and usually operated by one person

Advantages of a Sole Proprietorship

easy and inexpensive to form

easy to dissolve

pride of ownership

flexibility of being your own boss and having control over decisions

retention of all profits

relative freedom from government regulation

no special taxes (treated as personal income)

Disadvantages of a Sole Proprietorship

unlimited liability

responsibility for all losses

lack of continuity if something happens

difficult to obtain capital from investors and banks

management skills and expertise are limited

large time commitment

difficult attracting highly qualified employees

Partnership

an association or relationship between 2 or more individuals who join together to carry on a trade of business

What is in a Partnership Agreement?

who will make decisions

what each partner’s duties will be

the investment each partner will make

what percentage of the company’s profits each partner will recieve

General Partner

a person who shares responsibility for operating a business and unlimited liability for the debts of the business

Limited Partner

a person who invests money in a business but has no management responsibility or liability for losses beyond the amount they invested in the partnership

Advantages of a Partnership

easy to form

greater availability of capital and credit

combined business skills and knowledge

workload is spread out

relative freedom from regulations

no special tax (treated as personal income)

Disadvantages of a Partnership

unlimited liability

management disagreements

frozen investment (cannot back out easily)

Limited Liability Partnership (LLP)

each partner is protected from responsibility for the acts of the other partners

Corporations

an artificial person created by law with most of the legal rights of a real person, including the rights to start and operate a business, to buy/sell property, to borrow money, to sue or be sued, and to enter into binding contracts

Public Corporation

a corporation whose shares are widely held and available to the general public

Listed Companies

companies that are traded on a stock exchange or in the over-the-counter markets; a public company

Going-Private Transaction (Leveraged Buyout)

happens when a group of investors or management of the company buys out the shares of the public shareholders

Corporations Must Use

Ltd./Ltee, Inc. or Corp.

Advantages of a Corporation

limited liability

availability of capital and credit

ease of transferring ownership (easily sell shares)

perpetual life

ability to attract highly qualified management

Disadvantages of a Corporation

difficult and expensive to form

government regulation and reporting requirements

double taxation

lack of secrecy

Key Considerations for Choosing an Ownership Structure

business control and transfer of ownership

taxation and division of profits

legal and financial liability protection

ease of start-up and administration

Business Control and Transfer of Ownership

do I want complete control or am I willing to share?

will the business want to have additional owners/investors in the future?

how will day-to-day management decisions to be made?

One Person Corporation

A corporation with only one person as the shareholder; common in professional practices (e.g., medical doctors, accountants, or lawyers) and in trades (e.g., plumbers and electricians)

Taxation and Division of Profits

how will profits be divided at the end of the year?

which ownership will minimize tax?

corporations can deduct certain business expenses

depending on level of profits corporate tax rates are generally lower

Pass-Through Taxation

occurs when an owner's share of business profits is reported on their individual tax returns as in an unincorporated business (sole and partnership)

Corporate (Dual) Taxation

occurs when profits of a business are taxed at the entity level before profits are distributed to owners; distributions are then reported on the owner's individual tax returns as dividends and are taxed a second time

Legal and Financial Liability Protection

how risky is this business and how likely am I to be sued?

how much debt will we have?

am I willing to be personally liable?

Unlimited Liability

a legal concept that holds a business owner personally responsible for all the debts of the business

Limited Liability

a feature that limits each owner's financial liability to the amount of money that they have invested in the business

Ease of Start-Up and Administration

is this really a business or just a moneymaking hobby?

how much time an energy am I willing to commit to following various legal requirements for starting and running this business?

what is cost of starting and running this business?

sole and partnership: register name and get licenses and permits

corporation: register name, get licenses/permits, file articles with provincial and federal authorities (amount of shares and shareholders rights, purpose of corp.), adopt bylaws and elect a board of directors

Consumer Co-Op

a co-op that provides products or services to its members

Producer Co-Op

a co-op that markets goods and services produced by its members or reduces costs trough group purchasing

Worker Co-Op

a co-op owned and operated by its employees to provide employment and limited liability

Multi-Stakeholder Co-Op

a co-op that includes more than one membership group

Components of a Business Plan

title page

table of contents

vision and mission statement

company overview - background and analysis, product/service plan

human resources plan

marketing/operations plan

financial/accounting plan

appendices: supporting documents (adds credibility)

bibliography

meeting of and summative statement

Economic Causes of Busines Closures

business downturns

high interest rates

lack of contingencies

Financial Causes of Business Closures

inadequate capital

low cash balances

pricing

high expenses

Lack of Experience Causes of Business Closures

inadequate business knowledge

research

record keeping

time input

management experience

technical expertise

Personal Causes of Business Closures

the owners may decide to sell the business or move on to other opportunities

Advantages of Small Business

react more quickly to the changing market forces

develop and market ideas faster with few financial resources and few people

efficient operations keep costs down

serve specialized markets

offer a higher level of personal service

Disadvantages of Small Business

difficulties in obtaining adequate financing

limited managerial skills may impact growth

expensive to comply with regulations

requires major commitment by owner

high failure rates

SWOT Approach

strengths, weaknesses, opportunities, threats

Situational Analysis PESTEL

political, economic, social, technological, environmental and legal

categorize external opportunities and threats

Porter's Five Forces

risk of new entry by potential competitors

degree of rivalry among existing competitors

the bargaining power of buyers and sellers

the threat of substitute products

Porter's Five Forces: Substitute Products

price difference

quality difference

performance difference

cost of switching

buyers willingness to substitute

Porter's Five Forces: Buyers

number of buyers

switching costs to use another product or supplier

brand identity

threat of backward integration

Porter's Five Forces: Competitive Rivalry

number of competitors

significance of competition (size)

product differentiation

cost for buyer to go to the competition

exit barriers

Porter's Five Forces: Threat of New Competition

capital requirements

economies of scale

legal/regulatory issues

access to distribution channels

buyers’ switching costs

Porter's Five Forces: Supplier Power

number of suppliers

size of suppliers

product differentiation

buyers’ switching costs

ability to substitute

Pro Forma Financial Statements

projected financial statements of future values

Ratio Analysis

help to answer many questions concerning the company's cash flows, liquidity, funding, return on investments, payback, net investments and net annual return

Cost/Benefit Analysis

compart the costs and benefits of a particular decision

Vision

clear, concise picture of the company's future direction (used to guide and inspire)

Mission

clear, concise articulation of how the company intends to achieve its vision and how it is different from the competition

Business Level Strategy

describes a company's competitive position (market, product, service)

Keys to a Successful Business

encouraging creativity and innovation

gaining employee commitment

providing value - quality products at a reasonable price

meeting and exceeding customer needs

achieving financial performance

Mergers

combination of two or more companies to form a new company which often takes on a new corporate identity

Acquistions

the purchase of a company by another company or by an investor group

Horizontal Merger

firms at the same stage of the same industry merge

Vertical Merger

firms at different stages of the same industry merge

Conglomerate Merger

firms in unrelated industries merge

Hostile Takeover

goes against the wishes of the target company's management and board of directors