Fundamentals of Entrepreneurship Exam #1 – Flashcards

1) Desire and willingness to take initiative. Entrepreneurs feel a personal responsibility for the outcome of ventures they start. They are willing to step forward and build businesses based on their creative ideas. 2) Preferences for moderate risk. Entrepreneurs are calculating risk-takers. They often have a different perception of the risk involved in a business situation. 3) Confidence in their ability to succeed. Entrepreneurs typically have an abundance of confidence in their ability to succeed, and they tend to be optimistic about their chances for business success. "Entrepreneurs believe they can do anything." says one researcher.

1) Opportunity to Gain Control over Your Own Destiny. Entrepreneurs cite controlling their own destinies as one of their own businesses. Owning a business provides entrepreneurs the independence and the opportunity to achieve what is important to them. Entrepreneurs want to "call the shots" in their lives, and they use their businesses to bring this desire to life. The "being my own boss" mentality. 2) Opportunity to Make a Difference. Entrepreneurs are starting business because they see an opportunity to make a difference in a cause that is important to them. Known as social entrepreneurs, these business builders seek to find innovative solutions to some of society's most pressing and most challenging problems. Although they see the importance of building viable, sustainable business, social entrepreneurs' primary goal is to use their companies to make a positive impact on the world. 3) Opportunity to Reach Your Full Potential. Too, many people find their work boring, unchallenging, and unexciting. But to most entrepreneurs, there is little difference between work and play; the two are synonymous. Owning a business challenges all of an entrepreneur's skills, abilities, creativity and determination. Therefore, allowing owners to reach their full potential.

1) Uncertainty of Income. Opening and running a business provides no guarantees that an entrepreneur will earn enough money to survive. Even though business owners tend to earn more than wage-and-salary workers, some small businesses barely generate enough revenue to provide the owner-manager with an adequate income. The median income of small business owners is ($59,708) which is 56% higher than the average salary worker ($38,376) 2) Long Hours and Hard Work. The average small business owner works 54 hours per week, compared to 39.5 hours per week the typical U.S. worker. Business owners typically work 6-7 days a week in their business and sometimes 10-12 hour days. A research shows that an entrepreneur loses 700 hours of sleep in the year they launch a company. 3) High Levels of Stress. Launching and running a business can be an extremely rewarding experience, but it also can be a highly stressful one. Most entrepreneurs have made significant investments in their companies. Failure often means total financial ruin, as well as a serious psychological blow, and that creates high levels of stress and anxiety.

The entrepreneurial sector of the United States consists of a rich blend of people of all races, ages, backgrounds, and cultures. Diversity can be one of the entrepreneur's biggest strengths. When embracing this asset an entrepreneur can make big returns on investments, especially when advertising to the right community.

Small businesses employ 50.2 percent of the nation's private sector workforce, even though they possess less than one-fourth of total business assets. Another contribution small business do is that they provide 67 percent of workers with their first job and basic job training.

A business owner can avoid pitfalls by knowing their business in depth, everything that is to know about it. They need to read about their industry, trade journals, business periodicals, books, etc. Another way to avoid failure is by having a well-written business plan since it is a crucial ingredient to the business to succeed. A lot of small business fail because of poorly managed employees. A business owner needs to learn to manage people effectively so they work for their benefit and also the company.

A mission statement addresses the first question of any business venture: "What business am I in?" Establishing the purpose of the business in writing must come first to give the company a sense of direction. The mission is the mechanism for making it clear to everyone the company touches "why we are here" and "where we are going." Because a mission statement reflects the company's core values, it helps create an emotional bond between a company and its stakeholders, especially employees and its customers.

A vision is the result of an entrepreneur's dream of something that does not exist yet and the ability to paint a compelling picture of that dream for everyone to see. A clearly defined vision provides direction, determines decisions, motivates people and allows a company to persevere in the face of adversity.

SWOT - Strengths, weaknesses, opportunities and threats. Strengths are positive internal factors that contribute a company's ability to achieve its mission, goals, and objectives. Weaknesses are negative internal factors that inhibit the accomplishment of its mission, goals, and objectives. Opportunities are positive external options that the firm can exploit to accomplish its mission, goals, and objectives. Threats are negative external forces that hamper a company's ability to achieve its mission, goals, and objectives.

Some of the factor that a owner needs to consider about the competition are: • Who are your major competitors and where are they located? • What distinctive competencies have they developed? • How do their cost structures compare to yours? Their financial resources? • How do they market their products and services? • What are their key strategies? • What are their strengths? How can your company surpass them?

SMART - Specific, measurable, assignable, realistic, timely. It is a well-written strategic-plan document that contains several details about the company. (specific) Objectives should be quantifiable and precise. For example "to achieve a healthy growth in sales" is not a meaningful objective. (measurable) Entrepreneurs should be able to plot their companies' progress toward its objectives; this requires a well-defined reference point from which to start and a scale for measuring progress. (assignable) Unless an entrepreneur assigns responsibility for an objective to an individual, it is unlikely that the company will ever achieve it. (realistic) Objectives must be within the reach of the organization or motivation evaporates. However, entrepreneurs and their employees must set challenging objectives. Finally, (timely) objectives must specify not only what is to be accomplished but also when it is to be accomplished. A time frame for achievement is important.

Some advantages of sole proprietorship: • Simple to create It is really easy to start this type of business. There are just a couple of forms and licenses that usually can be filled within a day. • Least costly form of ownership to establish There is no need to create and file legal documents, such as the ones required to partnerships and corporations. • Profit incentive Once the entrepreneur has paid all of the company's expenses, he can keep the remaining after-tax profits. • Easy to discontinue If an entrepreneur decides to discontinue the business, he can terminate the business quickly. Even though he is still liable for all of the business's outstanding debts and obligations.

Some disadvantages are: • Unlimited personal liability This is the greatest disadvantages of operating this type of business. The owner of the business is liable to all products and services in case of a lawsuit, including personal assets. • Limited access to capital Basically, there is so much money one can raise by himself. That limits the amount of money the business can raise and therefore expand upon. • Limited skills and abilities A proprietor may not have all skills that are needed in order to run a successful business. • Lack of continuity of the business If the owner dies, retires, or becomes incapacitated, the business automatically terminates. A family member can take over the business but otherwise the business could be in jeopardy.

Some advantages of a C-corporation: • Ability to attract capital Corporations have proved to be the most effective form of ownership for accumulating large amounts of capital, largely due to the protection of limited liability. • Ability to continue indefinitely As a separate legal entity, a corporation can continue indefinitely or in perpetuity unless limited by its charter. Unlike a proprietorship or partnership in which the death of a founder ends the business, the corporation lives beyond the lives of those who create it. • Transferable ownership If stockholders in a corporation are displeased with the business's progress, they can sell their shares to someone else. Millions of shares of stock representing ownership in companies are traded daily on the world's stock exchange.

Some disadvantages: • Cost and time involved in the incorporation process Corporations can be costly and time consuming to establish. As the owners give birth to this artificial legal entity, the gestation period can be prolonged. • Double taxation As a separate legal entity, a corporation must pay taxes on its net income to the federal, most state, and many local. Before stockholders receive any net income as dividends, a corporation must pay these taxes at the corporate tax rate. • Potential for diminished managerial incentives As corporations grow, they often require additional managerial expertise beyond that which the founder can provide. Because they created their companies and often have most of their personal wealth tied up in the business, entrepreneurs have an intense interest in ensuring their success and are willing to make sacrifices for their businesses. • Potential loss of control by the founders When entrepreneurs sell shares of ownership in their companies, they relinquish some degree of control. In corporations that require large capital infusions, entrepreneurs may have to give up a significant amount of control, so much, in fact, that they become minority shareholders.

S corporations retain all of the advantages of a regular corporation, including continuity of existence, transferability of ownership, and limited personal liability for its owners. The S-corp also is taxed only once.

Although tax implications should not be the sole criterion when choosing a form of ownership, they are important to business owners. Congress's constant tinkering with the tax code means that the tax advantages that the S corporation offers may not be permanent. S corporations lose their attractiveness if either personal income tax rates rise above those of C corporations rates, or c-corp rates fall below personal income tax rates.

Limited liability company is a hybrid structure that features elements of a partnership and a corporation. LLCs provide owners with many of the benefits of S corporations but are not subject to the restrictions imposed on them. LLC do not restrict members' ability to become involved in managing the company, unlike a limited partnership, which prohibits limited partners from participating in day-to-day management of the business.

A group of persons chosen to govern the affairs of a corporation or other large institution by appointing a CEO or president to oversee the company's future.

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.[1] When a corporation earns a profit or surplus, it can either re-invest it in the business (called retained earnings), or it can distribute it to shareholders.

...

Leveraged Buyout (LBO) The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company.

Here are some benefits of having a franchise: 1) A business system One major benefit of joining a franchise is gaining access to a business system with proven track record. In many cases, franchisors provide their franchisees with turnkey operations, allowing entrepreneurs to get their business up and running faster, more efficiently, and more effectively. 2) Brand name appeal Franchisees purchase the right to use a known and advertised brand name for product or service, giving them the advantage of identifying their business with a widely recognized name. Customers recognize the identifying trademark, the standard symbols, the store design, and the products of an established franchise. 3) Financial assistance Purchasing a franchise can be just as expensive (if not more) than launching an independent business. Although franchisees typically invest a significant amount of their own money in their business, most of them need additional financing programs. Some franchisors are willing to provide at least a portion of that additional financing through their own internal financing programs.

Tradename franchising involves being associated with a brand name, such as True Value Hardware or Western Auto. In tradename franchising, a franchisee purchases the right to become identified with the franchisor's trade name without distributing particular products exclusively under the manufacturer's name. Product distribution franchising involves licensing the franchisee to sell specific products under the manufacturer's brand name and trademark through a selective, limited distribution network. Pure franchising involves providing the franchisee with a complete business format. This highly structured relationship includes a license for a trade name, the products or services to be sold, the physical plant, the methods of operation, a two-way communication system and the necessary business services.

1) Franchise fees and ongoing royalties Virtually every franchisor imposes fees and demands a share of franchisees' sales revenue in return for the use of the franchisor's name, products or services, and business system. The fees and the initial capital requirements vary among the different franchisors. 2) Restrictions on purchasing To maintain quality standards, franchisors sometimes require franchisees to purchase products, supplies, or special equipment from the franchisor or from approved suppliers. The franchise contract spells out the penalty for using unapproved suppliers, which usually is termination of the franchise agreement. 3) Limited product line In most cases, the franchise agreement stipulates that franchisees can sell only those products approved by the franchisor. Franchisees must avoid selling any unapproved products through their outlets unless they are willing to risk cancellation of their franchise license. A franchise may be required to carry an unpopular product or be prevented from introducing a desirable one by the franchise agreement.

• Safest way to go • Less money to open • No need for hands-on management

Uniform Franchise Offering Circular (UFOC) known as well franchise disclosure document (FDD) is a legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process in the United States.

1) Evaluate yourself Before looking at any franchise, entrepreneurs should study their own traits, goals, experience, likes, dislikes and other characteristics. Knowing how much you can invest is important, but it is not the only factor to consider. 2) Research the market Entrepreneurs should research the market in the areas they plan to serve before shopping for a franchise. Solid market research should tell a prospective franchisee whether a particular franchise is merely a passing fad. Steering clear of fads and into long-term trends is a key to sustained success in franchising. 3) Get a copy of the FDD and study it Once you narrow down your franchise choices, contact each franchise and get a copy of the franchise FDD. The document is an important tool in your search for the right franchise. Look for traits such as unique concepts, profitability, registered trademark and others.

A franchise fee is a fee that a person pays to operate a franchise branch of a larger company and enjoy the profits therefrom.

Piggybacking is a method of franchising in which two or more franchises team up to sell complementary products or services under one roof (ex: Taco Bell, KFC, Pizza Hut, A&W-Yum! Brands)

1) Successful businesses often continue to be successful A business that has been profitable for some time often reflects an owner who has established a solid customer base, has developed critical relationships with suppliers, and has mastered the day-to-day operation of the business. 2) Leveraging the experience of the previous owner In cases in which the business has a history of success, a new owner may negotiate with the current owner to stay on as a consultant for a time. This allows a smooth transition during which the seller introduces the new owner to customers and suppliers and shows the new owner the secrets of making the company work. 3) Employees and suppliers are in place Experienced employees who choose to continue to work for the company are a significant resource because they can help the new owner learn the business. In addition, an existing business has an established set of suppliers with a history of business transactions.

"Why are you selling the business?" - Ask as many time as you think is required to receive a truthful answer.

The best way to financing it is through a built-in source of financing, the seller. That makes both the seller and owner want the business to succeed and have a return on investment.

1) Cash requirements One of the most significant challenges to buying a business is acquiring the necessary funds for the initial price. "[Because] the business concept, customer base, brands and other fundamental work have already been done." 2) Current employees are unsuitable If a new owner plans to make changes in a business, current employees may not suit the company's need. Some workers may have a difficult time adapting to the new owner's management style and the new vision for the company. 3) Location has become unsatisfactory What was once an ideal location may no longer be because of changing demographic patterns. Recently open malls and shopping centers, new competitors, or traffic pattern changes can spell disaster, especially for a small retail shop.

1) Balance sheet technique The balance sheet method computes the book value of a company's net worth, or owner's equity and uses this figure as a value. 2) Earnings approach The buyer of an existing business is purchasing its future income potential. The earnings approach is more refined than the balance sheet method because it considers the future income potential of the business. 3) Market approach The market approach uses the price/earnings ratios of similar businesses to establish the value of a company. The buyer must use businesses whose stocks are publicly traded in order to get a meaningful comparison.

...

CPO accountants, the wall street journal, biz-to-biz.com. The best way to find businesses for sale is by going to the company's certified accountant. They usually know when the owner is going to be open to selling the business.

1) Motivation: Why does the owner want to sell? 2) Asset valuation: What is the real value of the firm's assets? 3) Market potential: What is the market potential for the company's products or services?

Capital, Capacity, Collateral, Character, Conditions. 1) A small business must have a stable capital base before any lender will grant a loan. Otherwise the lender would be making, in effect, a capital investment in the business. 2) A synonym for capacity is cash flow. Lenders and investors must be convinced of a company's ability to meet its regular financial obligations and to repay the bank loan, and that takes cash. 3) Collateral includes any assets an entrepreneur pledges to a lender as security for repayment of the loan. If an entrepreneur defaults on the loan, the bank has the right to sell the collateral and use the proceeds to satisfy the loan. 4) Before putting money into a small business, lenders and investors must be satisfied with the owner's character. An evaluation of character frequently is based on intangible factors such as honesty, competence, polish, determination, etc. 5) The conditions surrounding a loan request also affect the owner's chance of receiving funds. Banks consider factors relating to the business operation, such as potential growth in the market, competition, location, form of ownership, and loan purpose.

A feasibility study is not the same as a business plan; both play important, but separate, roles in the start-up process. A feasibility study answers the question, "should we proceed with this business idea?" Its role is to serve as a filter, screening out ideas that lack the potential for building a successful business, before an entrepreneur commits the necessary resources to building a business plan.

...

...

1) A business plan forces you to consider every detail of your business venture. As you work through the nitty gritty of your plan, you may come across issues that you had not considered or overlooked during the conceptualization stage. Dealing with a problem before it occurs saves time, money and future aggravation. 2) A business plan serves as a resume when trying to secure outside funding. Banks and investors need cold hard facts to aid in their decision process. Having a written business plan is absolutely necessary to secure funding and/or appeal to investors. 3) A written business plan can serve as a management tool for your company. Running a business is a huge undertaking. It's easy to lose focus at times and give too much attention to things that do not contribute to your desired ends. Having a clear business plan reminds you and your employees of your established goals and what you must do to achieve these goals.

A feasibility study is not the same as a business plan; both play important, but separate, roles in the start-up process. A feasibility study answers the question, "should we proceed with this business idea?" Its role is to serve as a filter, screening out ideas that lack the potential for building a successful business, before an entrepreneur commits the necessary resources to building a business plan.

It is a written document of what is known as "the elevator pitch." The executive summary is a synopsis of the entire plan, capturing its essence in a condensed form. It should explain the basic business model and the problem the business will solve for customers, briefly describing the owners and key employees, target markets, etc.