MGT 3375 Entrepreneurship Exam #2 Chapter 6-10 TTU

Business Plan

a written narrative, typically 25 to 35 pages long, that describes what a new business intends to accomplish and how it intends to accomplish it

Two Primary reasons for writing a business plan

(1) Internal Reason

(2) External Reason

Internal reason

Forces the founding team to systematically think through every aspect of its new venture

External reason

Communicates the merits of a new venture to outsiders, such as investors and bankers

Three types of business plans

summary, full, operational

summary business plan

10-15 pages, works best for new ventures in the early stages of development that want to "test the waters" to see if investors are interested in their idea

full business plan

25-35 pages, works best for new ventures that are at the point where they need funding or financing; serves as a "blueprint" for the company's operations

operational business plan

40-100 Pages; meant primarily for an internal audience; works best as a tool for creating a blueprint for a new venture's operations and providing guidance to operational managers

1. Executive Summary

brief overview of entire business plan

- dont exceed 2 pages

- written last because it's subject to change

- most important part to plan

2. Industry Analysis

this section should begin by describing the industry the business will enter in terms of it's size, growth rate and sales projections

3. Company Description

general description of the company

- mission statement

- Key partners

- company history

*shows how to translate idea into a business

4. Market Analysis

breaks the industry into segments and zeroes in on the specific target market to which the firm will try to appeal.

- buyer behavior

- target market and market segmentation

- competitor analysis

5. Economics of the Business

the basic logic of how profits are earned in the business and how many units of a business profits should be sold to break even or make profit.

- revenue drivers and profit margins

-fixed and variable costs

-start-up costs

6. Marketing Plan

focuses on how the business will marker and sell it's market or service

- overall marketing strategy

- product, price, place, promotion, and distribution

- sales process

7. Product or Service Design and Development Plan

if your developing a new product or service, you need to include a section in your business plan that focuses on the status of your development efforts

- Development Status

- challenges and risks

- Projected development costs

- proprietary issues: (patents, trademarks, copyrights, licenses, brand names)

8. operations plan

outline how your business will be run and how your product or service will be produced.

-business location

-facilities and equipment

9. management team and company structure

the management team of a new venture typically consists of the founder or founders and a handful of key management personnel.

- mgmt team

- Board of directors

- Board of advisors

- company structure

10. Overall Schedule

a schedule that shows all the major events required to launch the business

*should be in the format of milestones critical to business success

11. Financial Projections

The final section of a business plan presents a firm's projected (pro forma) financial projections

- projected income statements

- pro forma balance sheet

-pro forma cash flows

- ration analysis

Ethical and legal issues for new firm

- est. strong ethical organization

- choosing an attorney

- drafting a founders agreement

-avoiding legal disputes

- obtaining business licenses and permits

- choosing a firm of business organization

code of conduct

a statement that guides the ethical behavior of a company and its employees

ethical dilemma

a situation in which you have to decide whether to pursue a course of action that may benefit you or your organization but that is unethical or even illegal

founders agreement

a written document that deals with issues such as the relative split of the equity among the founders of the firm, how individual founders will be compensated for the cash or the "sweat equity" they put into the firm, and how long the founders will have to remain with the firm for their shares to fully vest

Items to Include in a Founders' Agreement

1.) nature of the prospective business

2.) identity and proposed titles of the founders

3.) legal form of business ownership

4.) apportionment of stock (or division of ownership)

5.) consideration paid for stock or ownership share of each of the founders

6.) identification of any intellectual property signed over to the business

7.) description of the initial operating capital (how profits will be divided)

8.) buyback clause

buyback clause

legally obligates departing founders to sell to the remaining founders their interest in the firm if the remaining founders are interested (be able to buy back stock)

nondisclosure agreement

binds an employee or another party (such as a supplier) to not disclose a company's trade secrets

noncompete agreement

prevents an individual from competing against a former employer for a specific period of time

Federal Licenses and Permits

Most businesses do not require a federal license to operate, but some do.

Examples of businesses that require federal licenses and/or permits to operate include businesses that sell (or provide)

Alcohol, Tobacco, Firearms, Animal Transport Across State Lines, Commercial Fisheries, and Radio and Television Broadcasting.

State Licenses and Permits

In most states, there are three different categories of licenses and permits that you may need to operate a business.

- Business Registration Requirements. Some states require all new businesses to register with the state.

- Sales Tax Permits. Most states and communities require businesses that sell goods, and in some cases services, to collect sales tax and submit the tax to the proper state authorities.

- Professional and Occupational Licenses and Permits. In all states, there are laws that require people in certain professions to pass a state exam and maintain a professional license to conduct business. Examples includes barbers, nurses, and real estate agents.

Local Licenses and Permits

On the local level, there are two categories of licenses and permits that may be needed.

- The first is to operate a certain type of business.

Examples include child care, barber shops and salons, automotive repair, and hotels and motels.

- The second category is permits for engaging in certain types of activities.

Examples include building permit (required if you are building or remodeling), health permit (normally required if you are involved in preparing food), and signage permit (may be required to erect a sign).

Sole Proprietorship

A business owned by one person. not a separate legal entity

Partnerships

A business in which two or more persons combine their assets and skills

(corporation or limited liability)

limited partnership

type of partnership consisting of limited partners and a general (or managing) partner

GENERAL: Liable for the debts and obligations of the partnership

LIMITED: partners are liable up the amount of their investment.

Corporation

a separate legal entity organized under the authority of a state.

C Corporation

S Corporation

C Corporation

The most common type of corporation, which is a legal business entity that offers limited liability to all of its owners, who are called stockholders

- governed by board of directors which are elected by shareholders

- owners are shareholders

- subject to double taxation on net income and shareholders personal income tax

- formed by articles of incorporation

S corporation

A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships

Limited Liability Company

type of business enterprise that protects members against losing all of their personal wealth; members are taxed as if they were in a sole partnership

- A business organization in which the business (not the owner) is liable for the company's debts

- does not pay taxes. Profits and losses are passed through to the tax returns of owners

financial forecast

an estimate of what business conditions will be like in the future

- based on sales

- cost of sales or COGS

Budgets

itemized forecasts of a company's income, expenses, and capital needs and are also an important tool for financial planning and control

Financial Ratios

depict relationships between items on a firm's financial statements

- helps a firm determine whether it's meeting its financial objectives and how it stacks up against industry peers

Income Statement

A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time.

Balance Sheet

a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.

Statement of Cash Flows

the financial statement that identifies a firm's sources and uses of cash in a given accounting period

ratio analysis

the most practical way to interpret or make sense of a firm's historical financial statements

comparing a firms financial results to industry norms (helps determine in comparison to competitor)

new-venture team

the group of founders, key employees, and advisors that move a new venture from an idea to a fully functioning firm

liability of newness

situation that often causes new firms to falter because the people who start the firms can't adjust quickly enough to their new roles, and because the firm lacks a "track record" with customers and suppliers

Elements of a New Venture Team

-key employees

-board of directors

-other professionals

-lenders and investors

-board of advisors

-management team

Preferred Attributes of Sole Entrepreneurs and Members of a New-Venture Team

Higher education

Prior entrepreneurial experience

Relevant Industry experience

Broad Social and Professional Network

skills profile

A(n) ________ is a chart that depicts the most important skills that are needed in a new venture and where skills gaps exist.

board of directors

A panel of individuals who are elected by corporations shareholders to oversee the management of the firm

- If a new venture organizes as a corporation it is legally required to have.

- can provide guidance

-lend legitimacy

inside directors

an officer of the firm (close family members)

outside directors

someone who is not employed by the firm

board of advisors

a panel of experts asked by a firm's management to provide counsel and advice on an ongoing basis

- no legal responsibility for the firm and give non-binding advice

Lenders and Investors

have a vested interest in the companies they finance, often causing them to become very involved in helping the firms they fund

-provide guidance and lend advice

business consultant

an individual who gives professional or expert advice

1. paid consultant

2. Those available for free or a reduced rate through government agency.

Bootstrapping

finding ways to avoid the need for external financing or funding through creativity, ingenuity, thriftiness, cost-cutting, or any means necessary

Sweat Equity

represents the value of the time and effort that a founder puts into a new venture

Equity Funding

Means exchanging partial ownership in a firm, usually in the form of stock, for funding.

debt financing

is getting a loan

Business Angels

individuals who invest their personal capital directly in start-ups

venture capital

money that is invested by venture capital firms in start-ups and small businesses with exceptional growth potential

- invest later on in comparison to angels

- fund < 1% of new firms

-venture capitalists are well connected in business world and offer assistance beyond funding

Initial Public Offering (IPO)

a company's first sale of stock to the public. When a company goes public its stock is traded on one of the major stick exchanges.

Reasons firms go public

It is a way to raise equity capital to fund current and future operation

raises a firms public profile, making it easier to attract high quality customers and business partners

liquidity event

creates a form of currency that can be used to grow company

commercial bank

interested in firms that have strong cash flow, low leverage, audited financials, good management, and healthy balance sheet

SBA Guaranteed Loans

Loans from the Small Business Administration (SBA) that guarantee up to 85% of a bank loan to a small business that would not otherwise be able to get a loan.

Leasing

a written agreement in which the owner of a piece of property allows an individual or business to use the property for a specified period of time in exchange for payments

Crowdfunding

the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.

rewards-based crowdfunding

allows entrepreneurs to raise money in exchange for some type of amenity or reward