Becoming the Owner of a Small Business

1
Chapter
4

• Becoming the Owner of a Small Business

2
Decide to go into business?

• Search for a needed product
• Study the market for the product
• New business, existing one, or franchise?
• Strategic plan (mission, objectives, strategies)
• Operational plans (policies, budgets, standards,
  planning and marketing the product)
• Financial plans (estimating income and expenses,
  initial investment, locating sources of funds)
• Develop detailed business plan
• Implement plan

3
Niche Marketing

• The process of finding a small but profitable
  demand for something, then producing a
  custom-made product for that market.
• Dont forget to look at the past for a new
  product
• Hobbies, recreation, and working at home can lead
  to creation of new products

4
Questions to Ask to Help Eliminate Possible
Businesses

• How much capital is required to enter and compete
  successfully in this business?
• How long will it take to recoup my investment?
• How long will it take to reach an acceptable
  level of income?
• How will I live until that time?
• What degree of risk is involved? Am I willing to
  take that risk?
• Can I make it on my own, or will I need the help
  of my family or others?

continued
5
Questions to Ask to Help Eliminate Possible
Businesses (contd)

• How much work is involved in getting the business
  going? In running it? Am I willing to put out
  that much effort?
• Do I want to acquire a franchise from an
  established company, or do I want to start from
  scratch and go it on my own?
• What is the potential of this type of business?
  What are my chances of achieving that potential?
• Is sufficient information available to permit
• reaching a meaningful decision? If so,
• what are the sources of information?
• Is it something I would enjoy?

6
Places to look for help

• SCORE Service Corps of Retired Executives
• A group of retired managers from all walks of
  life who help people develop their business
  ideas. (388 chapters)
• SBA
• US Department of Commerce
• Local colleges
• Public libraries
• Chambers of commerce

7
Market Research

• Gathering, recording, and analyzing of data
  related to the marketing of goods and services.
• Library
• US Census (10 yrs) (census.gov)

8
Estimating the Size of the Market

• How large is the industry?
• Where is the market for the company, and how
  large is it?
• Are sales to be made to a selected age group,
  and, if so, how large is that group?
• What are the size and distribution of income
  within the population?

continued
9
Estimating the Size of the Market (continued)

• Is the sales volume for this kind of business
  growing, remaining stable, or declining?
• What are the number and size of competitors?
• What is the success rate for competing
  businesses?
• What are the technical aspects
• (state of the art) of the industry?

10
Buying an Existing Business

• Find Classified Section, Business Broker, Small
  Business Administration, Chamber of Commerce
• Advantages
• Already has customers, suppliers, and procedures
• Seller may train new owner
• Prior records of revenues, expenses and profits
• Financial arrangements can be easier
• Disadvantages
• Not making profit
• Poor reputations with customers, suppliers or
  poor location
• Capital is required cant purchase existing
  business

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Steps to Purchase a Business

• Objectives about type of business you want to
  buy.
• Meet with business brokers
• Visit during business hours to observe
• Ask owner for finances for the last 3 years
• Ask for information in written form suppliers,
  pending legal action, copy of lease/mortgage
• Determine how you would finance business
• Get expert help to determine a price for business
  (valuator)

12
Enter a Family Business

• Advantages?
• Disadvantages?

13
Franchise

• A legal agreement that give an individual the
  right to market a companys products or services
  in a particular area.
• Franchisee the person who purchases a franchise
  agreement
• Franchisor person or company who offers a
  franchise for purchase
• UFOC Uniform Franchise Offering Circular
• More than 500,000 people in US own franchises

14
Operating Costs

• Initial franchise fee payment in return for the
  right to run the franchise (few thousand to few
  hundred thousand) Nonrefundable
• Start-up costs renting, purchasing inventory
  etc.
• Royalty fees weekly or monthly payments made by
  the owner to the seller of franchise ( of
  income)
• Advertising fees TV, Mag., etc.
• Ex. Marry Maids 14,000 22,000 Franchise Fee,
  12-20,000 start-up Costs, 7 Royalty Fee

15
Business Math

• You have purchased a car wash franchise. The
  franchise fee was 25,000. You must return 6 of
  your earnings in royalty fees. During your first
  year, you spent 10,000 on equipment, 4,300 on
  operating costs (water and electricity), and
  10,700 on your part-time employee. Your first
  year total revenues were 120,000. Calculate the
  total expenditures for the first year. What was
  your profit?
• 120,000 x 6 7200
• 25,000 10,000 4,300 10,700 7,200
  57,200
• 120,000 57,200 62,800

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Advantages

• Established product or service
• Franchisors offer management, technical, and
  other assistance
• Equipment and supplies can be less expensive
• A guarantee of consistency attracts customers

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Disadvantages

• Franchises cost lots of money and cut down on
  profits
• Owners have less freedom to make decisions
• Franchisees are dependent of the performance of
  other franchises in chain
• The franchisor can terminate the franchise
  agreement

18
Myths of Franchising

• Franchising is the safest way to go into business
  because franchises never fail.
• The bigger the franchise the more successful Ill
  be.
• All franchises are the same.
• The franchiser will solve my business problems
  for me after all, thats why I pay an ongoing
  royalty fee.
• Once I open my franchise, Ill be able to run
  things the way I want to

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Expected Areas of Growth in Franchising

• RESTAURANTS
• Examples McDonalds, Burger King, Wendys,
  Chilis, The Olive Garden, Howard Johnsons
• MOTELS
• Examples Motel 6, Holiday Inn
• CONVENIENCE STORES
• Examples Bread Basket, T-Shirts Plus, Health
  Mart
• TECHNOLOGY
• Examples Radio Shack, Circuit City, Babbages,
  Muzak

continued
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Expected Areas of Growth in Franchising
(continued)
TM 4-13B

• AUTOMOTIVE PARTS, ACCESSORIES, SERVICE
• Examples General Tire, Midas International,
  Precision Tune, Jiffy Lube, Valvoline Instant Oil
  Change
• COMBINATION FRANCHISING
• Examples KFC/Taco Bell Exxon and Subway
  Sandwiches
• GLOBAL FRANCHISING
• Examples KFC (Kentucky Fried Chicken),
  McDonalds, Pizza Hut, Pepsi, Chick-fil-A, Mail
  Boxes Etc.

21
Teaming Up

• Synergy Concept that two or more people,
  working together in a coordinated way can
  accomplish more than the sum of their independent
  efforts.
• Some franchisers currently using the DUAL-BRAND
  CONCEPT include
• Arby's Sbarro
• Baskin-Robbins Dunkin' Donuts
• Carls Jr.. Long John Silver's
• Denny's Baskin-Robbins
• KFC Taco Bell
• Taco Bell T. J. Cinnamons