GST 302 (Business Creation) Business Plan PDF

Module 1 Concept of Business and New Value Creation --------------------------------------------------- ### Unit 1 Business Planning Process A plan is systematic and scientific. Before the launching of the business you logically organize the process you want to adopt to achieve the set business ob...

Module 1 Concept of Business and New Value Creation --------------------------------------------------- ### Unit 1 Business Planning Process A plan is systematic and scientific. Before the launching of the business you logically organize the process you want to adopt to achieve the set business objectives. The organized procedure is the planning. The term "business plan" has different meanings to different people. Banks that release their own planning guidelines consider formal business loan applications to be synonymous with business plans. Venture capitalists see them as investment proposals, purely fund raising documents. Corporate managers think of them in terms of departmental budgets and financial forecasts.(Touchie, 2005). According to Kuratko and Hodgetts (1998), the business plan describes to investors and financial sources all of the events that are likely to affect the proposed venture. Details are required for various projected actions of the venture, with associated revenues and costs outlined. A Business Plan describes a business opportunity. It is like a road map because it tells you what to expect #### A successful Business Plan and what alternative routes you can take to arrive at your destination. Planning helps you to work smarter rather than harder. It keeps you future oriented and motivates you to achieve the results you want. Perhaps most importantly, the process of completing a Business Plan enables you to determine what commitment you need to make to the venture (Department of Trade and Economic Development, 2010) #### Importance of Business Plan According to Cagan (2006), they include the following: - You plan to launch a new business. - Your business has grown substantially. - You want to expand your existing business into new markets. - You want to add a new product or product line. - You are thinking about buying a business. **Other reasons why business plan is** necessary according to Department of Trade and Economic Development (2010) are to: - Control future risks - Prepare for future uncertainty - Control business environment - Control business growth - Avoid sales crises - Avoid liquidity crises - Avoid succession crises - Ensure people development - Ensure work space available - Avoid stock buying crises According to Timmons and Spinelli, (2004), developing the business plan is one of the best ways to define the blueprint, strategy, resource, and individual requirements for a new venture. A good business plan must be developed with a view to exploiting the defined opportunity, developing the opportunity and determining the resources required, obtaining those resources and successfully managing the resulting venture (Hisrich, Peters and Shepherd,2008). Writing a business plan is time consuming and financial wastage. **Writing Business Plan** can be laborious and financially demanding, but it is really worth the trouble. A well writing business plan will enables an entrepreneur to control future risk, prepare for future uncertainty, control business growth, take charge of organizational growth and development. It allows for consistencies in decision-making. #### Principles of Planning in Feasibility Studies and Business Plan A plan must be: ***Explicit***: All steps completely spelled out. I***ntelligible***: Capable of being understood by those who will carry it out. ***Flexible***: Capable of accepting change. ***Written:*** Committed to writing in a clear and concise manner. #### Benefits of Planning 1. Reduces 'firefighting': Many small business owners spend so much time 'putting out the fires' that they never have a chance to do anything else. By preparing a Business Plan you can anticipate problems that are likely to occur and decide how they should be handled in advance. 2. Justifies your plans and actions: Often, one decides to do something because it 'sounds' or 'feels' right. You may do something because that is the way that you have always done it. Preparing a Business Plan forces you to prove the validity, or at least consider the reasoning of your plans. 3. Tests your ideas on paper: It is much better to produce a Business Plan and find that the business is likely to be unprofitable than to start the business and find out the same thing. 4. Indicates your ability and commitment: A well-prepared Business Plan is an impressive document. It shows outsiders such as lenders and suppliers that you understand the business. #### Components of a written plan A written Business Plan should contain the following: 1. The Business Idea: An outline and description of the product or service and background on the industry. 2. The Entrepreneurs: A history of the founders of the business including their skills, abilities and proposed ownership structure. 3. Business Objectives: · What the business intends to achieve including long range goals · The advantage of the product or service over existing competitors · The image and character of the business to be developed. **The product or service Technical description of the business**. 1. Manufacturing: · Description of process and machinery used · Patents and design registrations · Predictions on changes to the industry · Costs of materials, machinery, etc · Plant location and layout · Labour availability and costs. 2. Retailing: Goods to be sold; Location; Stocking policy and procedures; and Suppliers and potential suppliers and the sales terms. 3. Service: · Description of service · Qualifications necessary to enter the industry · Industry and/or legal controls · Processes and services to be offered. #### Financial information 1. Capital Needs: Fixed assets needed; Working capital needed; and Starting capital needed. 2. Sources of Finance:· Types of finance needed; and Owners funds to be used. 3. Cost of Finance: Set up costs; Current interest rates; Ability to meet borrowings and Current returns on owners funds. 4. Financial Viability:· Projected profit and loss accounts; Break even analysis; Projected balance sheets; Cash flow forecasts; Working capital needs; Budgets; Expenses/Sales/Income and Taxation. #### The market 1. Market Research: Market size; Market description; Market trends; Customer profiles; and target markets then Preliminary sales forecasts and estimated market share. 2. Competitive Position: Competitors; Unique selling position; Quality of existing products or services and Marketing practices of competitors. 3. Marketing Program: Distribution channels; Sales outlets; Storage and transport of goods; Pricing policy; Packaging; Sales promotions and sales strategy; Advertising strategy and costs; Public relations. **Management and operations** Personnel: Numbers of staff needed; Skills necessary; Training programs. #### Business organisation 1. Form of legal organization: Sole Trader; Partnership; Company or Trust; Registration of business name; Organization chart. 2. **Legal Considerations:** Licenses; Federal and State taxes; Consumer Law; Business Law; Insurance. 3. Premises: Space required; Buy or rent contracts; Commercial lease requirements and problems; Availability of suitable premises. #### Questions to be answered in a business plan 1. *Description of the business*: · What type of business are you planning 2. *Marketing:* - How will you attract and hold your share of the market? - Who are your competitors? - How are their businesses prospering? - How will you promote sales? - Who will be your best suppliers and why? - Where will the business be located? - What factors will influence your choice of location? - What features will your location have? - How will your building contribute to your marketing strategy? - What will your building layout feature? 3. Organization: - Who will manage the business? - What qualifications will you look for in a manager? - How many employees will you need and what are their job descriptions? - What are your plans for employees' hiring, salaries and wages, benefits, training and supervision? - How will you manage finances? - How will you manage record-keeping? - What consultants or specialists will you need? - What legal form of ownership will you choose? - What licences and permits will you need? - What regulations will affect your business? #### Components of a Good Business Plan - Executive Summary. Your executive summary should appear first in your **business** plan. - Company Description - Market Analysis. - Competitive Analysis. - Description of Management and Organization. - Breakdown of Your Products and Services. - Marketing Plan. - Sales Strategy. #### Self-Assessment Exercises 1. The need for a business plan includes all except: a. Planning to launch a new business b. Expanding your existing business c. Adding a new product or product line d. Increasing your labour force 2. A plan must be............ e. Readable f. Accommodating g. Explicit h. Durable 3. One of the benefits of planning is..... i. It justifies your plans and actions j. It increases "firefight" k. It keeps ideas in your memory l. It indicates your inability 4. A written business plan should have all the following except \_\_ m. Financial information n. Product or service o. Business objective p. Liquidation plan 5. The importance of feasibility study cannot be overemphasized as it \_\_\_ q. provides comprehensive details about the business to determine if, and how it can succeed, and serve as a valuable tool for developing a good business plan r. does not list in details all the things you need to make the business works. s. does not identify logistical and other business related problems and solutions. t. does not serve as a solid foundation for developing your business plan. 6. The type of business you are planning should be stated under \_\_\_\_ u. Description of the business v. Marketing w. Organization x. All of the above 7. Which of the following question will be answered in a business plan under organization? y. What products or services will you sell? z. Who are your potential customers? a. How will you promote sales? b. Who will manage the business? 8. The following except............ is a component of feasibility study. c. Executive Summary d. Product/Service e. Acquisition f. Technology 9. The importance of feasibility studies include g. Listing in details all the things you need to make the business works. h. Identifying logistical and other business related problems and solutions. i. Serving as a solid foundation for developing your business plan. j. All of the above 10. The need for a full-scale business plan according to Cagan (2006) is spurred by the following except one: k. You plan to launch a new business. l. You want to expand your existing business into new markets. m. You want to add a new product or product line. n. None of the above #### Feedback 1. D 2. C 3. A 4. D 5. A 6. A 7. D 8. C 9. D 10\. D #### 4.0 Conclusion - Developing the business plan is one of the best ways to define the blueprint, strategy, resource, and individual requirements for an on-going venture. - A properly crafted business plan can help solidify your vision. - When you are undertaking a new venture (feasibility studies), or remaking an old one (business plan), a written strategy can help ensure its success. - Business Plans and Feasibility studies are required as controlled process for identifying business problems and opportunities, determining objectives, describing situations, defining successful outcomes, and assessing the range of costs and benefits associated with several alternatives for solving a problem. ### Unit 2 ### Start-up Decision -- What Motivate people to begin new businesses #### 1.0 Introduction Don't go into a business because your friend or someone you know is into that business. Go into a business because you have passion for it. Your passion is first to motivate your business start-up. Read more in the main content. #### 3.0 Main Content Intrinsic Motivation. Also known as the \"entrepreneurial obsession,\" intrinsic motivation is a term used to refer to the predisposition to work on something because it\'s interesting, engaging, stimulating, satisfying or challenging on a **personal** level.  Nothing beats the freedom of being the boss --- at least when it comes to the entrepreneurial efforts of small business owners. It is interesting to contemplate what drives people to start a business. Starting a business of your own requires money, many hours of hard work, patience and the understanding that you might not make a whole lot of money the first year or two or your business could fail completely. Starting a business is something that many people think about at one time or another during their lives. Motivations for wanting to become an entrepreneur can vary greatly. Common motivators can include escaping the corporate grind, taking greater advantage of special skill sets, supplementing income or a strong drive to achieve personal or financial success. According to the American Small Business Administration, approximately 30 percent of small businesses close their doors within the first two years. Yet people still start their own businesses on a regular basis. There are many factors that drive entrepreneurs to strike out on their own. #### Business Involvement According to the website More Business, an entrepreneur is sometimes motivated to start a business because he has the desire to become involved in all aspects of company\'s operation. The entrepreneur wants to be part of the product design team, sales, marketing, engineering and production. An entrepreneur has a very specific way that he feels a successful business should be run, and this motivates the entrepreneur to start his own business and get directly involved. #### Make it Personal An entrepreneur might feel that doing business with a large corporation, or working for a larger company, can become very impersonal. The drive to start a business comes from the desire to put a personal touch back into doing business. #### Being in Charge Some entrepreneurs start their own business because they want to be their own boss and in charge of all of the day-to-day operations of a company. The entrepreneur wants to be the one making the important business decisions, determining the direction the company will take, making the call on product development and marketing and being responsible for every aspect of the company\'s operation. #### Financial Need According to Know Accounting, some entrepreneurs are driven to start their own company out of necessity. If a job does not offer enough income, an entrepreneur might start a side business to generate extra income that can turn into a full-time business. #### Accomplishment To some entrepreneurs, having a successful business brings a feeling of accomplishment. They feel that they are offering a valuable service to their customers, and they pride themselves on doing the best job possible. Many entrepreneurs give back to their communities through charitable donations and by participating in charitable events. This feeling of accomplishment and pride is an important factor in starting a business. #### Self-Fulfillment If you feel that your company is not utilizing your talents properly, starting a business can allow you to maximize your abilities and create a sense of fulfillment. For example, if you\'re a police officer whose investigative skills are not being put to the test, you could consider starting your own investigative agency where you can make full use of your abilities. #### Additional Income Perhaps you\'re happy with your present job but would like to supplement your income. If you have a special skill or a hobby you enjoy, you can use these to start a small business on the side. If you enjoy writing, for example, you can look for freelancing opportunities for the local newspaper or online. #### Second Career If you\'re a retiree, starting a business can take the form of a second career. People who retire early from a job may have the desire to continue working. Older retirees may feel that they need additional income or have concerns about how long their present retirement benefits may last. Starting a business in retirement can also allow for pursuing a passion in addition to providing income. Others yet have their own philosophies which includes **Passion.** The passion you feel as an entrepreneur -- for the startup life, for your company, for your vision -- is all-encompassing. You're driven to succeed, to experience everything a startup has to offer, and to make things happen. P1assion is a prerequisite to starting a business, and it's also a huge motivator, because through your startup you fuel your passion. **Creating Value.** Entrepreneurs are builders. Creators. We need to produce "stuff" in order to succeed. And that "stuff" needs to create value. It's extremely motivating to know that something you've started has created value for others. And part of creating value is contributing to the entrepreneurial community on a whole. For me, this is a particularly motivating factor; I'm able to build a company, blog about it and communicate to others about my experiences. **Changing the World.** Not every business has the potential to change the world, but many entrepreneurs take this mantra to heart. Lots of entrepreneurs believe their businesses will change the world. It's part of creating value. Starting a business and tossing yourself into it with unequivocal passion, gives you the chance. **Being in Control.** Entrepreneurs are control freaks. We believe we can do things better than others, and off we go! Having that opportunity is on one hand motivating and on the other hand scary -- you're in control, you're the boss, you better get out there and make things happen. Luckily, being in control feeds many of the other motivating factors, so it all comes together. **Money.** There's no question that money is a motivating factor, although it belongs at the bottom of the list. The truth is that you can probably earn more money at a fairly high paying job, over enough years, than you can starting a business because of the likelihood of failure. But the only way to hit a financial home run is with a startup. You get to take your swing at the plate and aim for the fences. **Self-Assessment Exercise** Identify the factors that can moviate someone to start a business? #### Feedback 1. Flexibility. Work your own hours. 2. More spare time (eventually). Spend more time with your family and friends. 3. Call the shots. Nobody else is going to set the rules. You are. 4. Set your own deadlines. 5. Sell how you want to sell. Online? In person? Inbound? Outbound? It's your call. 6. Create your own environment. You can set the formality and culture of your organization. 7. Pursue your passion. You can do what makes you happy. 8. Create something from scratch. Watch your organization grow from start to finish. 9. Meet new people. Network with other entrepreneurs and professionals. 10. Build a team. You decide who to hire and bring into your company. 11. Create jobs. Improve the economy with new job opportunities. 12. Help people. Use products and services to improve people's lives. ### Unit 3 Opportunity Search and Identification This unit will give you an insight of why you need to search for opportunity and how to key into opportunity for start-up. At start-up you may not have all it takes to commence. But ability to key into opportunities around you could make your dream come true. Opportunity refers to the extent to which possibilities for new ventures exist and the extent to which entrepreneurs have the leeway to influence their odds for success through their own actions. Simply put, opportunity is a perceived means of generating incomes that previously have not been exploited and are not currently being exploited by others. Opportunity identification can, in turn, be defined as the cognitive process or processes through which individuals conclude that they have identified an opportunity. It is important to note that opportunity identification is only the initial step in a continuing process, and is distinct both from detailed evaluation of the feasibility and potential economic value of identified opportunities and from active steps to develop them through new ventures. It is essentially a situation in which new goods, raw materials, markets and organizational strategies can be introduced through the formation of new means, ends or means-ends relationships.  The focus these days is on innovative opportunities which are the ones that truly break new grounds rather than merely expand or repeat existing business models. Opening a new Hausa or Igbo cafeteria in a neighborhood dominated by a populace from these extractions that currently do not have one is an example. Not everyone can identify opportunities. Some individuals are more likely to identify and exploit opportunities than are others. Opportunity is a major process of self-evaluation of one's ability to start, operate and run a business venture with the popular analysis often referred to as SWOT (Strength, Weaknesses, Opportunity and Threat). It helps to check the chances of succeeding in a particular choice of venture open to an individual through his experiences. These experiences include family, religious or professional linkages, membership of any network group. Searching for a business opportunity that is right for them is the major challenge would- be entrepreneurs face. New startups always focus on introducing a new product or service based on an unmet need, select an existing product or service from one market and offer it in another where they are not available; and sometimes the firm relies on a tried and tested formula that has worked elsewhere in a franchise setup. **B. Theory and Practice** #### I. Business Opportunity Identification Process He then considers if: - His final business decision idea corrects a deficiency in the market. The resources and capability to carry out this business idea are available to him/her - The market for it are readily available and at profit sales the new business idea can compete favorably with existing related competitors and their market. - This business market is growing or not and how one should prepare to join that business. #### The Stages of Opportunity Identification process Opportunity identification is the collection of three main factors, which are the entrepreneur's background, the business influence and the general business environment. Opportunity identification has five stages that lead to 'recognition'. The five stages are discussed in relationship with the process of opportunity identification. These stages are: - Preparation - Incubation - Insight - Evaluation - Elaboration #### Preparation Preparation stage is that knowledge and experience exercised just before the opportunity discovery process. These knowledge and experience are not often deliberately acquired. However, preparation itself is usually a deliberate attempt to widen capability in an area and become sensitive to concerns in a field of interest. In an organized situation, the background of the business, the products or services or the technological knowledge must have majorly informed the main ideas of the successful venture. One cannot however, rule out the role of new ideas and expertise originating from individuals in the organization that will eventually result in a new business. #### Incubation Incubation stage is the part of the opportunity identification process that involves the consideration of a concept or a specific problem ordinarily not subjected to conscious or formal analysis by a businessman or his team. It is usually not consciously done and therefore more often than not, an instinctive and unempirical approach for the consideration of several potential alternatives. #### Insight Insight stage occurs at the moment a fundamental solution suddenly becomes recognized unexpectedly. It is a particular moment that keeps occurring persistently right through the process of opportunity identification. Insights have been found to be extensive channels to the discovery of startup businesses and sometimes reveal additional knowledge for the development of a current process of discovery. In respect of a business venture, insight predictably encompasses the abrupt recognition of an opportunity in business, the answer to an adequately pondered crisis and the possession of a concept from social networks and associates. **Evaluation.** Evaluation stage is about investigating if the recognized and developed ideas are feasible, if the businessman has the required abilities to realize the ideas and if the idea is sufficiently innovative for prospects. It sometime involves full feasibility analysis of the ideas through all forms of research instruments and criticisms from relevant business acquaintances. It is fundamental to also investigate the prospect and viability of the new insight ideas as the spirit of entrepreneurship is to make satisfactory and sensible profits. **Elaboration.** Elaboration is that stage that exposes the opportunity/ideas to external analysis with the tedious and time--consuming options selection, choice decision and organization of resources. It is customarily in search of all egalities that could build confidence and guarantee the practicability of the business. Elaboration also reduces uncertainties by providing the detailed planning activities after the evaluation viability confirmation. This will eventually reveal the concept areas that still need further analysis and attention. **Self-Assessment Exercise** How do you evaluate a business opportunity? #### Feedback +-----------------------------------------------------------------------+ | Writing a business plan and weighing all relevant factors can help | | you better plan your entry into new areas. This will help you: | | | | 1. Evaluate your market. | | | | 2. Study the business\' to measure potential earning power. | | | | 3. Examine your own finances. | | | | 4. Look at industry trends. | | | | 5. Consider your competition. | | | | 6. Listen to your potential clients and past leads. When you\'re | | targeting potential customers listen to their needs, wants, | | challenges and frustrations with your industry. \... | | | | 7. Listen to your customers. | | | | 8. Look at your competitors. | | | | 9. Look at industry trends and insights | +-----------------------------------------------------------------------+ #### 4.0 Conclusion To capture business opportunities, you must listen to your potential clients and past leads. When you\'re targeting potential customers listen to their needs, wants, challenges and frustrations with your industry. Listen to your customers. Look at your competitors Unit 4 Legal Issues at Start-up #### All over the world, there are some laws that entrepreneurs must follow to ensure their businesses are legally sound right from its foundation. If these laws are not obeyed, the entrepreneur may face a serious legal challenge in future which will affect his business negatively. Starting a business venture can be a difficult task involving many important decisions, but it is highly exciting that the business idea is taking shape with every decision ready for takeoff. All over the world, there are some laws that entrepreneurs must follow to ensure their businesses are legally sound right from its foundation. If these laws are not obeyed, the entrepreneur may face a serious legal challenge in future which will affect his Businesses number negatively. One needs to make sure that all legal formalities have been put in place. To avoid severe legal and liability consequences in future, a targeted business plan should list all legal concerns that might negatively affect the business and invariably other investors. The right legal structure that will suit ones particular type of business or circumstances and ambitions shouldering today are the Thinnest for me are for this payment and are for are workouts because considered. Company filings and regulations may not the most exciting parts of your startup. Yet they're critical to the health of your business and personal finances. Here\'s a quick rundown of eight administrative aspects you need to consider for your startup or small business. Of course, depending on your situation and type of business, hiring a tax accountant and/or good attorney with specific experience in your industry can go a long way toward helping you steer clear of trouble. 1. Did You Pick a Name? Make Sure You're Legally Permitted to Use It Before you start printing out business cards, make sure the great new name you thought of isn't infringing on the rights of an already existing business. In most cases, you don\'t need an attorney for this task, as you can perform a free search online that looks at business names registered with the Secretary of State --- that will tell you if the name is available in your state. Then, take your search to the next level and conduct a no-conflict, free trademark search to see if your name is available for use in all the states. And considering you can still infringe on someone else's trademark even if they've never formally registered it with the. Patent and Trademark Office, you should also do a comprehensive search into all state and local databases (look for an affordable online service to help you with this). 2. Register a Fictitious Business Name/DBA. Ever notice those endless fictitious name announcements in the classifieds of your local paper? You may need one, too. A DBA (Doing Business As) must be filed whenever your company does business under a different name. If you've got a sole proprietorship or general partnership, a DBA is needed if your company name is different from your own name. For an LLC or corporation, a DBA must be filed to conduct business using a name that's different from the official Corporation or LLC name you filed. For example, my company is officially incorporated as CorpNet, Inc., so we needed to file DBAs for the variations CorpNet.com and CorpNet. These are typically filed at the state and/or county level. 3. Incorporate Your Business or Form an LLC. Forming an LLC or corporation is an essential step to protect your personal assets (such as your personal property or your child's college fund) from any liabilities of the company. Each business structure has its own advantages and disadvantages, depending on your specific circumstances. Three popular options are: the LLC (great for small businesses that want legal protection, but minimal formality), S Corporation (great for small businesses that can qualify), or C Corporation (for companies who plan to seek funding from a VC or go public). And one other word of advice, Delaware and Nevada are two popular states for business incorporation. However, if your business has less than five shareholders, you're better off forming an LLC in the state where you operate your business (i.e. where you live). 4. Get a Federal Tax ID Number. To distinguish your business as a separate legal entity, you\'ll need to obtain a Federal Tax Identification Number, also referred to as an Employer Identification Number (EIN). Issued by the IRS, the tax ID number is similar to your personal social security number and allows the IRS to track your company\'s transactions. If you're a sole proprietor, you're not obligated to get a Tax ID number, but it's still good practice as you won't have to provide your personal social security number for business matters. 5. Learn About Employee Laws. Your legal obligations as an employer begin as soon as you hire your first employee. You should spend time with an employment law professional to fully understand your obligations for these (and other) procedures: federal and state payroll and withholding taxes, self- 6. Obtain the Necessary Business Permits and Licenses. Depending on your business type and physical location, you may be required to have one or more business licenses or permits from the state, local or even federal level. Such licenses include: a general business operation license, zoning and land use permits, sales tax license, health department permits, and occupational or professional licenses. 7. File for Trademark Protection. You\'re not actually required by law to register a trademark. Using a name instantly gives you common law rights as an owner, even without formal registration. However, as expected, trademark law is complex and simply registering a DBA in your state doesn't automatically give you common-law rights. In order to claim first use, the name has to be 'trademark able' and in use in commerce. Since you've spent untold hours brainstorming the ideal name, and you'll be putting even more effort into cultivating name recognition, you should consider registering your trademark for proper legal protection. Registering a trademark makes it exponentially easier to recover your properties, like if someone happens to use your company name as their Twitter handle. Having the right documentation means you have the legal right to that handle, and Twitter will take steps to give it to you. 8. Open a Bank Account to Start Building Business Credit. When you rely on your personal credit to fund your business, your personal mortgage, auto loan and personal credit cards all affect your ability to qualify for a business loan (and for how much). Using business credit separates your personal activities from that of the business. To begin building your business credit, you should open a bank account in the name of your company, and the account should show a cash flow capable of taking on a business loan. No matter how busy things with your startup get, set aside some time to address these matters and take your legal obligations seriously. Getting your legal ducks in a row right from the start will help you avoid any pitfalls down the road, and will help you scale your business successfully as you grow. In Nigeria, whether it is a corporate or limited company or even an enterprise, you will need to register with some government bodies, parastatals, agencies or even some professional bodies. It all depends on your business idea and hence you need to seek specialist legal advice that could cover copyright, trade marking, design registration or patenting Here are five important legal requirements to review and understand before launching your small business. - Registered Business Name - Federal Taxes - State and Local Taxes - Business Permits and Licenses Business Laws and Regulations. For limited liability companies, requirement includes: Documents play an essential role in protecting the interests of the business and business owners over the course of a company's lifetime. Here is a list of the 10 most common legal documents to help you determine what your business needs. 1. Company bylaws for corporations. Most states require corporations to keep a written record of bylaws, although you don't need to file the document with a state office. Bylaws define how the company will govern itself. Even if your company is incorporated in the handful of states that don't require bylaws, they are still a good idea as they spell out your business' structure, individual roles, and governance issues. For example, bylaws can help settle a dispute on the length of a director's term or define if you need a simple majority to approve a decision. 2. Meeting minutes. Most states also require corporations to document what happens at major meetings. They keep an official account of what was done or talked about at formal meetings, including any decisions made or actions taken. They can help settle a dispute about what happened or didn't happen in a past meeting. Your minutes should be detailed enough to serve as your corporation's "institutional memory." They should include: type of meeting; time and place of meeting; detailed attendance; all actions taken (purchases, elections, etc.); as well as any votes including how everyone voted and who abstained. 3. Operating agreement for LLCs. Although not required in most states, an operating agreement is recommended for every LLC, particularly when there are multiple members involved. This document outlines an LLC's financial and functional decisions. If there is more than one member, it becomes all the more important to define how key business decisions will be made, how profits and losses will be distributed, what are the rights and obligations of members and what happens when someone wants out of the business. Once members sign the document, it becomes an official, binding contract. 4. Non-disclosure agreement. Whether you realize it or not, your business has information that should remain private, such as customer list, financial records, or ideas for a new pricing plan. An NDA is your first line of defense to protecting this information. This legal document creates a confidential relationship between your business and any contractors, employees, and other business partners who might get a behind-thescenes look at your operations. 5. Employment agreement. This contract sets the obligations and expectations of the company and employee in order to minimize future disputes. Not every hire requires an employment agreement, but the document can be a useful if you want to dissuade certain new hires from leaving your company too soon, disclosing confidential information about your business, or going to work at a competitor. The contract should be reviewed by an experienced employment law attorney before given to an employee to sign. 6. Business plan. A business plan may not be a legal document, but it's required should you ever decide to seek financing or sell your business. Your business plan can be one page or a hundred pages, as long as it provides clarity on your business' opportunity and your roadmap to get there. 7. Memorandum of understanding. An MOU falls somewhere between a formal contract and a handshake. It documents any important conversations you have with suppliers, potential partners and others involved in the business. MOUs are great ways to lay out the terms of a project or relationship in writing, but do not rely on the document to be legally binding. 8. Online terms of use. While not required by law, any business with a website should include their terms of use. These pages can limit your liability in cases where there are errors in your own content, as well as information contained in any hyperlinks from your website. Furthermore, your Terms should let visitors know what they can or can't do on your site, particularly in cases where visitors can comment on blogs or share their own content. 9. Online privacy policy. If you gather any information from your customers or website visitors (such as email addresses), you are legally required to post a privacy policy that outlines how this information will be used and not used. 10. Apostils. Businesses involved in international trade with other Hague Convention countries may need a certificate, known as an \"apostille,\'\' that authenticates the origin of a public document (like articles of incorporation) so they can be recognized in another country. Apostilles are only valid in countries that are members of the Hague Convention. In most cases, you don't need to create any of these documents from scratch. You can find free templates online to serve as a starting point. While these legal documents are important part of staying compliant with your state requirements, they are more than empty formalities. By taking the time to think about the various elements on each document, you are setting the right foundation for your business. **Self-Assessment Exercise** What are the legal requirements to start a business? #### Feedback +-----------------------------------------------------------------------+ | Important legal requirements to review and understand before | | launching your small business**.** | | | | - Registered Business Name. \... | | | | - Federal **Taxes**. | | | | - State and **Local Taxes**. | | | | - Business Permits and Licenses. Business Laws and Regulations. | +-----------------------------------------------------------------------+ #### 4.0 Conclusion The majority of businesses are regulated with both government and legal oversight in order to ensure that they are operating within the confines of the law. As a new business owner, you should be familiar with all the legal considerations as you start your new business. While many entrepreneurs have a basic understanding of the law, the majority of them do not consider the legal implications of starting a company. Entrepreneurs must endeavor to ensure their businesses are legally sound right from its foundation. If the laws are not obeyed from the onset, the entrepreneur may face a serious legal challenge in future which will affect his business negatively. ### Unit 5 Feasibility Analysis of New Ventures and New Venture Financing A feasibility study is an analysis used in measuring the ability and likelihood to complete a project successfully including all relevant factors. It accounts for factors that affect it such as economic, technological, legal and scheduling factors. Project managers use feasibility studies to determine potential positive and negative outcomes of a project before investing a considerable amount of time and money into it. **2.0 Intended Learning Outcome (ILO)** By the end of this unit, you will be able to determine the viability of a business. **3.0 Main Content** #### The concept of feasibility analysis Feasibility analysis is a comprehensive research study required by the entrepreneur or his agent to determine the practicability, profitability and viability of the business idea. Before jumping into a start up business, expanding an existing one or even acquiring an existing one, it is very necessary to analyze the feasibility of that business. For whatever purpose, the main task of feasibility analysis is to express the model of the business and its marketability; check its prospect for financial profitability and success; and convey the managing group's capability to implement and accomplish the business objectives. Feasibility analysis is therefore an overview of the business and a preliminary appraisal of the business idea to consider if it merits pursuing. It reasonably reveals without prejudice the strengths and weaknesses of the business, its opportunities and threats through the background and the assets required to carry through as well as the eventual diagnosis for achievement. A feasibility analysis provides the entrepreneur the opportunity to flesh up the initial business plan, consider the missing and available features needed to be put in position for the business to succeed. It is an opportunity to consider if it is visibly feasible and viable; despite the challenges one is likely to experience and how to solve those challenges. The main concern and tool of feasibility analysis are the necessary expenditure and the profit to be accomplished. This means it is all about finance. A new startup business requires some financial funding which comes in several unique categories of financing options. Some universal and reliable funding sources easily available to most entrepreneurs are through the entrepreneur's savings and personal bank soft loans, financial supports from friends and family which may or may not involve interests. These are typically the first stage of financing whereby the entrepreneur invests his own funds and raise funds from friends and family. For more ambitious businesses, the next stage source is usually the funding from angel investors. These are private investors who use their own capital to finance businesses. After this is the next stage of financing from institutional investors like venture capitalists companies who are specialists in funding new businesses for profitable gains. Such venture capitalists also sometimes provide any observable potential weakness in the business. These include legal, marketing or operational deficiencies that may be threatening the survival of the business. Sometimes angel investors and Venture capital companies' bargain cash exchanges for an equity stake in startup businesses struggling to start operating. #### Reasons for Feasibility Analysis Feasibility analysis is all about questioning your concept, ascertaining which components are in place to make it realistic to easily execute and recognizing the biggest obstacles you\'re likely to face. Feasibility analysis mainly assists to: - Appraise the business marketplace for the new business idea; - Assess if the Managing team have the personality generally known with successful business persons. It is advisable to have self-assessment first.One must have that personality suited, skilled and knowledgeable to run abusiness and lead a group to success. - Identify the challenges of startups and how one can overcome those challenges, - Consider the financial feasibility of the business viz-a-viz its expected sales incomes, fixed and variable costs as well as breakevencalculations; - decide to continue with the business plan due to its viability and other attractions or not. Sometime it takes asking oneself some bitter but pertinent questions whether to scrap the idea if it is no longer as originallyenvisaged or needs to be amended, redirected or altered immensely. In this wise, an ingenious suitable feasibility analysis will supply the historical setting of the business, describe the products and services, the account/financial profile/data, information on its operations as well as management, marketing research and strategy, including legal necessities. In actual fact, for such a serious research, all strata of the business are subjected to feasibility analysis, depending on the type. #### Self-Assessment Exercise 1. What viable business ideas? 2. What is the purpose of feasibility analysis? #### Feedback 1. Business can be operated successfully: A viable business idea is a 2. feasibility analysis is to express the model of the business and its MODULE 2 THEORIES OF GROWTH: AN OVERVIEW ---------------------------------------- ------------ ------------------------------------ **Unit 1** **Concepts and Reasons of Growth** ------------ ------------------------------------ Conventionally, people ascribe businesses successes or failures to fate/chance or certain environmental conditions including family background. Even though one could not entirely rule out the influence of changes in the environmental factors, the entrepreneur\'s positive attitude, discipline, skills, competences , resilience and experience are real factors determining the transition of an enterprise form state up to a fully grow or diversifies venture ### 2.0 Intended Learning Outcome (ILO) By the end of this unit, you will be able to apply appropriate theories in business start up. ### 3.0 Main Content Business growth means expanding firm\'s products and services or expanding its target markets, or some combination of each. Any increase in the volume of activities of enterprises is a clear indication of growth.Businesses grow for a number of reasons including to take advantage of a gap in the market, to gain a competitive advantage over rivals, and to win increased market share. Usually ventures start small because of limited knowledge of the market, shortage of capital and lack of skilled employees etc. It is expected that as the entrepreneur gains more skills, knowledge and acquire additional resources, the volume of activities of the business will expand. An entrepreneur may also capitalize on changes in the environment to expand his operations in order to exploit new opportunities. Theorists have shown that behavioral traits are significant influence to entrepreneurs desire to grow his business. Some people inherently derive satisfaction from being excellent in what they do; they tend to have insatiable desire to grow and positively affect the world around them. Other people tend to comfortable with average results while others are \"easy come easy go\". In explaining the pattern of business growth, many theories rely on \"the life-cycle approach. This approach posits that just as humans pass through stages of physiological and psychological development from infancy to adulthood, businesses also evolve in predictable ways and encounter similar problems in their growth\" (Bhide, 2000). It is proposed that businesses pass through infancy, growth, maturity and then decline or even close shop. Some scholars suggest more or fewer stages of development. However, there is no consensus on the number of stages, nor on how they are related. moreover, the proposition that all businesses follow the set sequence is not at all supported by the empirical evidence. The main issue is that companies are started at one point and they need to be nurtured and managed to grow bigger and bigger. There are companies around the world that survive decades or centuries. The question is why do some businesses survive and grow while others do not. ### Reasons for Business Growth Researchers have shown that more than half of all businesses fail in less than two years of commencement. Also, a large number of those businesses that survive the first two years hardly grow. It is only few businesses that survive, grow, regenerate and even create other businesses. Conventionally, people ascribe businesses success or failures to fate/chance or certain environmental conditions including family background. Even though one could not entirely rule out the influence of changes in the environmental factors, the entrepreneur \'s positive attitude, discipline, skills, competences , resilience and experience are real factors determining the transition of an enterprise form state up to a fully grow or diversifies venture. The question often asked is what motivates people commit to starting and growing their businesses. Usually, entrepreneurs tend to make critical investments, take acceptable risks and learn consistently because of their desire to make money and enjoy all the rights and privileges that come along with wealth. Other reasons include improved social status and well-being, greater opportunity for philanthropy and community services, and gaining control over their own destiny. Employees attribute increase in income/benefits and advancement with businesses that grow. Government tends to favor business growth because it lessens unemployment and social tension in addition to raising more revenue from taxes. Thus, it is in the best interest of business owners and other stakeholders in the society for businesses to grow and flourish because growth tends to create social and economic value for all. On general note, start ups and small businesses generate employments opportunities. ILO (2007) estimated that about 70% of the people in subSaharan Africa rely on small and informal establishment for their livelihood. For example I\'m South Africa, the share of employment provided by SMEs sector is estimated at 60% and generated about 40% output (Lukacs, 2005). In Botswana, small business contributed between 30-45% to the nations GDP and accounted for more than 60% of wage employment. Thus, any increase in the activities of small enterprises will lead to corresponding increase in employment. As employments are generated, the increase productivity raises the level of wealth creation is a given economic environment. This is why the productiveness of an economy is related to increasing income and improving standards of living. Businesses combine human and material resources to create value. So, as activities of enterprises increase due to increase in labour productivity and efficient use of resources, all things being equal lead to high wages for individual worker, more profit for the company and rise in GDP for the nation. When productivity is higher, cost of production tends to be lower. With lower cost of production, citizens obtain products cheaper and these, in turn, increase living standards. ### Types of Business Growth Two main types of business growth are Internal growth and External growth **internal growth:** Internal growth is typically a steady process of expansion from within the firm. The owners of the business contribute more capital, or plough back profits into the business to acquire new assets, employ more staff, build additional plant or deploy new technology. The main advantage of this approach is that the business is able to leverage its assets and experience over time. The main disadvantage is that it takes time, and rivals may be expanding and gaining competitive advantage as well. NASCO Nigeria plc used this approach by expanding into the production of detergents and carpets. Thus, through hard work and careful planning owners can grow their businesses successfully. **External growth**: External growth can be carried out by seeking external finance, or by merger and acquisition. These approaches tend to rely on bringing external resources into the business in order to fund expansion. In this case, there is the possibility of changes in the ownership structure of the firm or changes in its gearing position ### Reasons why businesses grow There are many reasons that help to explain the motivations for businesses to grow 1. **Profit motive:** - Businesses grow to achieve higher profits and provide better returns for shareholders - The stock market valuation of a firm is influenced by expectations of future sales and profit streams so if a company achieves disappointing growth figures, this can be reflected in a fall in the share price. This opens up the risk of a hostile take-over and also makes it more expensive for a quoted company to raise fresh capital by issuing new shares 2. **Cost motive**: - Economies of scale the long run increase the productive capacity of the business leading to lower average costs. They help to raise profit margins at a given market price 3. **Market power motive**: 1. Firms may wish to increase market dominance giving them increased pricing power 2. This market power can be used as a barrier to the entry of new businesses in the long run 3. Larger businesses can build and take advantage of buying power (monopsony power) 4. **Risk motive**: 1. Growth might be motivated by a desire to diversify production and/or sales so that falling sales in one market might be compensated by stronger demand in another sector 2. This is known as achieving economies of scope and is a feature of conglomerates 5. **Managerial motives**: Behavioral theories of the firm predict that business expansion might be accelerated by senior and middle managers whose objectives differ from major shareholders. ### Self-Assessment Exercise Increased productivity raises the level of wealth creation growth in a given economic environment. This is why the productiveness of an economy is related to growth and development. How does the internal growth differ fom the External growth of a business? ### Feedback ***Internal growth*** is typically a steady process of expansion from within the firm. The owners of the business contribute more capital, or plough back profits into the business to acquire new assets, employ more staff, build additional plant or deploy new technology. The main advantage of this approach is that the business is able to leverage its assets and experience over time. ***External growth*** can be carried out by seeking external finance, or by merger and acquisition. These approaches tend to rely on bringing external resources into the business in order to fund expansion. In this case, there is the possibility of changes in the ownership structure of the firm or changes in its gearing position ### 4.0 Conclusion To be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors and analysts. A company\'s net profit is the revenue after all the expenses related to the manufacture, production and selling of products are deducted. ### Unit 2 Challenges of Growth Growth is the goal of virtually every business owner, after all. But what many entrepreneurs fail to take into account is the need to build systems and have the right people in place to help clear the many hurdles that emerge as a company expands from a few people to dozens, to hundreds or even thousands. And if that expansion process plays out too quickly, it can spell operational doom for even the savviest entrepreneurs. #### 2.0 Intended Learning Outcome (ILO) By the end of this unit, you will be able to solve basic challenges in business start up. #### 3.0 Main Content Growing businesses face a range of challenges. As a business grows, different problems and opportunities demand different solutions - what worked a year ago might now be not the best approach. All too often, avoidable mistakes turn what could have been a great business into an also-ran. Recognizing and overcoming the common pitfalls associated with growth is essential if your business is to continue to grow and thrive. Crucially, you need to ensure that the steps you take today don\'t themselves create additional problems for the future. Effective leadership will help you make the most of the opportunities, creating sustainable growth for the future. This guide highlights the particular risks and mistakes that most commonly affect growing businesses and outlines what you can do about them. - Keeping up with the market - Planning ahead - Cash flow and financial management - Problem solving - The right systems - Skills and attitudes - Welcoming change #### Keeping up with the Market Market research isn\'t something you do as a one-off when you launch your business. Business conditions change continually, so your market research should be continuous as well. Otherwise you run the risk of making business decisions based on out-of-date information, which can lead to business failure. The more you succeed, the more competitors notice - and react to - what you are doing. A market-leading offer one day may be no better than average a few months later. Apparently loyal customers can be quick to find alternative suppliers who provide a better deal.As products (and services) age, sales growth and profit margins get squeezed. Understanding where your products are in their lifecycles can help you work out how to maximise overall profitability. At the same time, you need to invest in innovation to build a stream of new, profitable products to market. Information sources Published information can provide useful insights into market conditions and trends. As a growing business, your own experience can be even more valuable.You should be able to build up an in-depth picture of what customers want, how they behave and which of your marketing approaches work best. Taking the time to talk to key customers pays off. Your suppliers and other business partners can be important sources of market information. You should encourage your employees to share what they know about customers and the market. Effective IT systems can also make it easier to share and analyze key information such as customers\' purchasing behaviour and preferences.You may want to carry out extra research as well - for example, to test customer reaction to a new product. You might do this yourself, or use a freelance researcher or market research agency. #### Planning Ahead The plan that made sense for you a year ago isn\'t necessarily right for you now. Market conditions continually change, so you need to revisit and update your business plan regularly. See the page in this guide on keeping up with the market. As your business grows, your strategy needs to evolve to suit your changed circumstances. For example, your focus is likely to change from winning new customers to building profitable relationships and maximizing growth with existing customers. Existing business relationships often have greater potential for profit and can also provide reliable cash flow. Newer relationships may increase turnover, but the profit margins may be lower, which may not be sustainable. See the page in this guide on cash flow and financial management. At the same time, every business needs to be alert to new opportunities. There are obvious risks to relying solely on existing customers. Diversifying your customer base spreads those risks. Following the same business model, but bigger, is not the only route to growth. There are other strategic options such as outsourcing or franchising that might provide better growth opportunities.It\'s important not to assume that your current success means that you will automatically be able to take advantage of these opportunities. Every major move needs planning in the same way as a new business launch. Watch out for being too opportunistic - ask yourself whether new ideas suit your strengths and your overall vision of where the business is going. Bear in mind that every new development brings with it changing risks. It\'s worth regularly reviewing the risks you face and developing contingency plans. #### Cash Flow and Financial Management Good cash flow control is important for any business. For a growing business, it\'s crucial - cash constraints can be the biggest factor limiting growth and overtrading can be fatal. Making the best use of your finances should be a key element in business planning and assessing new opportunities. With limited resources, you may need to pass up promising opportunities if pursuing them would mean starving your core business of essential funding. Every element of working capital should be carefully controlled to maximise your free cash flow. Effective credit management and tight control of overdue debts are essential. You may also want to consider raising financing against trade debts.Good stock control and effective supplier management tend to become increasingly important as businesses grow. Holdings of obsolete stock may become a problem that needs periodic clearing up. You may want to work with suppliers to reduce delivery cycles, or switch to suppliers and systems that can handle just-in-time delivery. Planning ahead helps you anticipate your financing needs and arrange suitable funding. For many growing businesses, a key decision is whether to bring in outside investors to provide the equity needed to underpin further expansion. #### Problem Solving New businesses often run in perpetual crisis mode. Every day brings new challenges that urgently need resolving and management spends most of their time troubleshooting.As your business grows, this approach simply doesn\'t work. While a short-term crisis is always urgent, it may not matter nearly as much as other things you could be doing. Spending your time soothing an irritated customer might help protect that one relationship - but focusing instead on recruiting the right salesperson could lay the foundations of substantial new sales for years to come. As your business grows, you also need to be alert to new problems and priorities.For example, your business might be increasingly at risk unless you take steps to ensure your intellectual property is properly protected.If you are focusing on individual marketing campaigns, you might need to devote more resources to developing your brand.Identifying the key drivers of growth is a good way of understanding what to prioritise. A disciplined approach to management focuses on leading employees, developing your management team and building your business strategy. Instead of treating each problem as a one-off, you develop systems and structures that make it easier to handle in the future. #### The Right Systems All businesses produce and rely on large volumes of information - financial records, interactions with customers and other business contacts, employee details, regulatory requirements and so on. It\'s too much to keep track of - let alone use effectively - without the right systems.Responsibilities and tasks can be delegated as your business grows, but without solid management information systems you cannot manage effectively. The larger your business grows, the harder it is to ensure that information is shared and different functions work together effectively. Putting the right infrastructure in place is an essential part of helping your business to grow. Documentation, policies and procedures also become increasingly important. The informality that might work with one or two employees and a handful of customers simply isn\'t practical in a growing business. You need proper contracts, clear terms and conditions, effective employment procedures and so on.Many growing businesses find using established management standards one of the most effective ways of introducing best practice. Quality control systems can be an important part of driving improvements and convincing larger customers that you can be relied on. Investing in the right systems is an investment that will pay off both short and long term. You benefit every day from more effective operations. If you ever decide to sell the business, demonstrating that you have well-run, efficient systems will be an important part of proving its value. #### Skills and Attitudes Entrepreneurs are the driving force behind creating and growing new businesses. All too often, they are also the people holding them back.The abilities that can help you launch a business are not the same as those you need to help it grow. It\'s vital not to fool yourself into valuing your own abilities too highly. The chances are that you\'ll need training to learn the skills and attitudes required by someone who is leading growth. To grow your business, you need to learn to delegate properly, trusting your management team and giving up day-to-day control of every detail. It\'s all too easy to stifle creativity and motivation with excessive interference. As the business becomes more complex, you also need to develop your time management skills and learn to focus on what\'s really important. As your business grows, you may need to bring in outsiders to help. You\'ll want to delegate responsibility for particular areas to different specialists, or appoint a non-executive director or two to strengthen your board. As you start tackling a new opportunity, someone who has experience of that activity can be vital. For many successful entrepreneurs, learning to listen to - and take - advice is one of the hardest challenges they face. But it may also be essential if you are going to make the most of your opportunities. Some entrepreneurs, recognizing their own limitations, even appoint someone else to act as managing director or chairman. #### Accepting Change Complacency can be a major threat to a growing business. Assuming that you will continue to be successful simply because you have been in the past is very unwise.Regularly revisiting and updating your business plan can help remind you of the changing market conditions and the need to respond to them. See the page in this guide on planning ahead.An up-to-date plan helps you identify what action you need to take to change your business and the way it operates, for example: - Changing to suppliers who can grow with you and meet your new priorities. As your business grows, consistent quality and reliability may be more important than simply getting the cheapest offer. - Renegotiating contracts to take account of increased volume. - Training and developing employees. Your own role will also evolve as the business grows. See the page in this guide on skills and attitudes. - Making sure that you keep up to date with new technologies. You need to be fully committed to your strategy, even if it takes you out of your comfort zone. This may involve hard decisions - for example making employees redundant or switching business away from suppliers you have become friends with. But unless you\'re prepared to do this, you risk putting your business at a dangerous competitive disadvantage. Discussion Forum In your context, identify the basic challenges confronting business start up? Paste your post in the discussion forum. #### 4.0 Conclusion Growing businesses face a range of challenges. As a business grows, different problems and opportunities demand different solutions - what worked a year ago might now be not the best approach. All too often, avoidable mistakes turn what could have been a great business into an also-ran. Recognizing and overcoming the common pitfalls associated with growth is essential if your business is to continue to grow and thrive. Crucially, you need to ensure that the steps you take today don\'t themselves create additional problems for the future. Effective leadership will help you make the most of the opportunities, creating sustainable growth for the future. ### Unit 3 Strategies for Growth (External Growth Strategies, Franchising, Buy-In and Buy-Out) Franchise is a successful business concept developed by the franchisor who grows a multi-unit network through selling the rights to their intellectual property and the systems and processes to operate one or more individual units to franchisees Franchising has become an important growth strategy but there are few guidelines for managing franchise systems 'strategically". This article develops a strategic perspective on franchising by first discussing the growth and strategic importance of franchising. The authors then show how the strategic concepts of portfolio management, global strategy and network analysis can be used in formulating and implementing franchise strategies. These perspectives are combined into a framework for the use of practicing managers. **Why is franchise important?** Franchising is the growth strategy of choice even when economies are going through tough times. Why is this? In simple terms because it addresses the two fundamental requirements for business growth: 1. Raising the funds to expand 2. And finding the right people to manage that growth? A franchise is a successful business concept developed by the franchisor who grows a multi-unit network through selling the rights to their intellectual property and the systems and processes to operate one or more individual units to franchisees. The franchisees in turn operate their businesses under their guidance of the franchisor that gets an ongoing royalty or fee. For more on what is franchising, visit our site. Franchises dot our landscape and meet thousands of our goods and service needs every day. From frozen yoghurt, blow waves and guinea pigs to nose rings, IVF or a mortgage, 453,000 people working in almost 83,000 franchised outlets across Australia contribute about \$154 billion per year to the economy, according to IBIS world. Franchising is a huge part of the global economy. Pepsi, Shell, BP, Ford, General Motors and KFC have used franchising as a capital raising, HR, management and marketing tool to span the planet. **Common Ways you can Participate In a Franchise Program:** **The Classic Path:** This is how most people think of franchise opportunities: You buy a new franchise, find the location and build it out yourself. It\'s all new, and it\'s all yours. You roll up your sleeves and plunge into your new business as an owner/operator. This is the classic route because it is precisely how so many thousands of franchisees built their multiunit empires, and it describes how much of the franchise world still operates. Newer (and hotter) franchise offerings usually provide the classic route to business ownership. There is always a downside, of course (business imitating life?). With the classic route, the biggest possible downside is the untried location. It can make or break a retail business, and you may have a substantial sum of money riding on that outcome. Second, your team is untried, so the training and opening support had better be solid. The startup phase of the franchise at a new location will drain your cash until the operation\'s growing revenue begins to carry the payroll, inventory and other expenses; so plan carefully, and never go into a startup franchise undercapitalized. #### Buy an Existing Franchise The strongest advantage of buying an existing franchise business is that you have a chance to examine its performance numbers. You know what the sales and expenses were in the past year\--and even earlier, assuming the records are accurate (ask the franchisor to provide a royalty payment record so that you can cross-check the key sales numbers). You have an opportunity to discuss the business with the owner, interview key employees and observe the operation. You can research the industry and gain an understanding of objective valuations in that business sector. In an important sense, you also lower your investment\'s uncertainty... and your own risk. Where will you make your money? Maybe you can identify a struggling franchise that needs a new shot of leadership and enthusiasm for the business. If you\'re successful, you\'ll build a strong business out of a weak one, and reap the financial benefits. Buying an existing franchise business means that you\'re subject to the transfer provisions of the existing franchise agreement, which can be very restrictive. Many franchisors reserve the right of first refusal on all proposed transfers, so it\'s possible that you can end up putting a big effort into a formal purchase offer only to have the franchisor match it and take you out of the picture. The franchise agreement might also impose a hefty transfer fee, often expressed as a percentage (5 to 15 percent) of the purchase price. This will, of course, fall on your shoulders, so include it in your calculations and your price negotiations. You might also negotiate with the franchisor on the transfer fee, especially if you\'re buying a troubled franchise. A new, enthusiastic owner may be the answer to the franchisor\'s prayers; the company may be more than willing to lower or eliminate the transfer fee altogether just to help you take over the ailing franchise. Your major risk: hidden problems of the previous owner\'s making. No one likes surprises in a new venture, and these hidden problems will cost you money you didn\'t plan on spending. They range from unhappy supply vendors to dishonest employees to defective equipment\--and they simply come with the territory. Add an \"unexpected problems\" line to your opening budget, and plan for the unexpected. The appointment as a master franchisee is usually extended to existing franchise owners who prove successful in their operations and are interested in expanding their involvement in the system. If you enjoy teaching and want to super-size the return on your franchise investment, inquire about master franchise programs. It\'s the involvement in franchise sales that draws many investors to master franchise programs, and it is there that the law imposes the most restrictions. As a third party participating in a franchise sale, the master franchisee will be considered a \"franchise broker\" and, as such, must be included in the company\'s Uniform Franchise Offering Circular, disclosing business experience and litigation history. The franchisor must submit a \"salesman disclosure\" form to most registration states. In a few states, a broker must independently register with state authorities. A master franchise is often confused with a sub-franchising program, but there\'s one important distinction: A sub-franchisor offers and sells franchises directly, for its own account; and, of course, a master franchisee does not sell franchises directly. A master franchisee typically generates leads, meets with and qualifies prospective franchisees, and sends them on to the franchisor for closing. A master franchisee is the utility infielder of franchising. Success is measured by the ability to manage, teach and recruit, while continuing to operate your own franchise business successfully. #### Absentee Ownership & Conversion Franchises **Be an Absentee Investor.** For the right kind of business, with the right employees running that business, it is entirely possible\--though rare\--to own a franchise business and not be directly involved in its management. Rare, I think, because it is hard enough to own and operate a successful small business even when you\'re on the floor every day. What type of business lends itself to absentee ownership? First, it must be a business that doesn\'t have valuable inventory. I once had a senior executive of a muffler franchisor tell me his shops couldn\'t be run by employee managers because too much of the inventory would leave at the end of the workday. Only an owner on the premises is sufficiently motivated to prevent that from happening. Second, the business must have sufficient margins to be profitable after the expense of having a reliable manager. So many franchise businesses have razor-thin margins that allow for the owner to take out not much more than a modest salary. So the key question then becomes: What drops to the bottom line for the owner? Service businesses with training programs that can support an employee manager may meet these qualifications. It would be a mistake to assume that any franchise can prosper with an uninvolved owner, but with the right program and a handpicked management team, it can work. **Buy Into a Conversion Franchise.** A conversion franchise allows an existing independent business to affiliate with a national brand. The classic conversion program is Century 21 Real Estate Corp., which converts independent real estate brokers and allows them the benefits of a strong brand affiliation while allowing them to continue using their individual identification. Affiliation programs have been launched by a variety of professional service providers, such as handymen, home-repair programs and hotel chains. Conversion franchise programs offer an attractive balance of brand identification and buying power. If you\'re operating an independent business and long for the competitive advantages of being tied in to a national reservations system or receiving local leads generated by a national or regional advertising campaign, you may want to consider joining a franchise affiliation program in your business category. Often, the fees paid for an affiliation program are considerably lower than those of traditional franchise systems, reflecting the fact that the franchisee is an experienced business owner and needs less training and less support than someone new to the business. Franchising doesn\'t exist in a single investing dimension; it has developed in ways that allow virtually any level of investor in any business situation to participate. The lesson is clear: Keep looking until you find an investment that\'s well-structured for your interests and needs, and you\'ll probably find it in the franchise arena. #### Self-Assessment Exercises 1. List the essential business skills that are critical in growing a business. 2. Why is franchise important as a business growth strategy? #### Feedback +-----------------------------------------------------------------------+ | 1. Essential busines skills are: | | | | a. Financial management. | | | | b. Being able to effectively manage your finances is critical. | | | | c. Marketing, sales and customer service. | | | | d. Communication and negotiation. | | | | e. Leadership. | | | | f. Project management and planning. | | | | g. Delegation and time management. | | | | h. Problem solving. \... | | | | i. Networking. | | | | 2. Franchising is the growth strategy of choice even when economies | | are going through tough times. The reason in simple terms is | | because it addresses the two fundamental requirements for | | business growth: | | | | j. Raising the funds to expand; and | | | | k. Finding the right people to manage that growth? | +-----------------------------------------------------------------------+ #### 4.0 Conclusion When it comes to developing growth strategies, Small businesses have several options to choose from, depending on various factors and circumstances. We will look into five of the growth strategies that are applicable to small businesses hoping to improve sales and customer base. For your business to sustain long-term growth, you must understand what sets it apart from the competition. Identify why customers come to you for a product or service. What makes you relevant, differentiated and credible. ### Unit 4 Mergers and Acquisition Mergers and acquisitions (M&A) is a general term that refers to the consolidation of companies or assets through various types of financial transactions. M&A can include a number of different transactions, such as mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions. #### 2.0 Intended Learning Outcome (ILO) By the end of this unit, you will be able to apply the techniques of mergers and acquisition in growing a business. #### 3.0 Main Content **Mergers and acquisitions** (**M&A**) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position. From a legal point of view, a merger is a legal consolidation of two entities into one entity, whereas an acquisition occurs when one entity takes ownership of another entity\'s stock, equity interests or assets. From a commercial and economic point of view, both types of transactions generally result in the consolidation of assets and liabilities under one entity, and the distinction between a \"merger\" and an \"acquisition\" is less clear. A transaction legally structured as an acquisition may have the effect of placing one party\'s business under the indirect ownership of the other party\'s shareholders, while a transaction legally structured as a merger may give each party\'s shareholders partial ownership and control of the combined enterprise. A deal may be politely called a *merger of equals* if both CEOs agree that joining together is in the best interest of both of their companies, while when the deal is unfriendly (that is, when the management of the target company opposes the deal) it may be regarded as an \"acquisition\". Mergers: Sherman and Hart (2006) define Merger as \"a combination of two or more companies in which the assets and liabilities of the selling firm(s) are absorbed by the buying firm. Although the buying firm may be a considerably different organization after the merger, it retains its original identity.\" In other words, in a merger one of the two existing companies merges its identity into another existing company or one or more existing companies may form a new company and merge their identities into a new company by transferring their businesses and undertakings including all other assets and liabilities to the new company (hereinafter referred to as the merged company). The shareholders of the company (or companies, as the case may be) will have substantial shareholding in the merged company. They will be allotted shares in the merged company in exchange for the shares held by them in the merging company or companies, as the case may be, according to the share exchange ratio incorporated in the scheme of merger as approved by all or the prescribed majority of the shareholders of the merging company or companies and the merged company in their separate general meetings and sanctioned by the court. #### Acquisitions and Takeovers \"An acquisition\", is the purchase of by one company (the acquirer) of a substantial part of the assets or the securities of another (target company). The purchase may be a division of the target company or a large part (or all) of the target company\'s voting shares.\" Acquisitions are often made as part of a company\'s growth strategy whereby it is more beneficial to take over an existing firm\'s operations and niche compared to expanding on its own. Acquisitions are often paid in cash, the acquiring company\'s shares or a combination of both. Further, an acquisition may be friendly or hostile. In the former case, the companies cooperate in negotiations; in the latter case, the takeover target is unwilling to be bought or the target\'s board has no prior knowledge of the offer. Acquisition usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger or longer established company and keep its name for the combined entity. This is known as a reverse takeover. #### Types of Mergers and Acquisitions Mergers appear in three forms, based on the competitive relationships between the merging parties. #### Horizontal Merger Horizontal mergers occur when two companies sell similar products to the same markets. The goal of a horizontal merger is to create a new, larger organization with more market share. Because the merging companies\' business operations may be very similar, there may be opportunities to join certain operations, such as manufacturing, and reduce costs. Horizontal mergers raise three basic competitive problems. The first is the elimination of competition between the merging firms, which, depending on their size, could be significant. The second is that the unification of the merging firms\' operations might create substantial market power and might enable the merged entity to raise prices by reducing output unilaterally. The third problem is that, by increasing concentration in the relevant market, the transaction might strengthen the ability of the market\'s remaining participants to coordinate their pricing and output decisions. The fear is not that the entities will engage in secret collaboration but that the reduction in the number of industry members will enhance tacit coordination of behaviour. #### Vertical Merger A vertical merger joins two companies that may not compete with each other, but exist in the same supply chain. Vertical mergers take two basic forms: forward integration, by which a firm buys a customer, and backward integration, by which a firm acquires a supplier. Replacing market exchanges with internal transfers can offer at least two major benefits. First, the vertical merger internalizes all transactions between a manufacturer and its supplier or dealer, thus converting a potentially adversarial relationship into something more like a partnership. Second, internalization can give management more effective ways to monitor and improve performance. Vertical integration by merger does not reduce the total number of economic entities operating at one level of the market, but it might change patterns of industry behavior. Whether a forward or backward integration, the newly acquired firm may decide to deal only with the acquiring firm, thereby altering competition among the acquiring firm\'s suppliers, customers, or competitors. Suppliers may lose a market for their goods; retail outlets may be deprived of supplies; or competitors may find that both supplies and outlets are blocked. These possibilities raise the concern that vertical integration will foreclose competitors by limiting their access to sources of supply or to customers. Vertical mergers also may be anticompetitive because their entrenched market power may impede new businesses from entering the market. #### Conglomerate Mergers Conglomerate mergers occur when two organizations sell products in completely different markets. There may be little or no synergy between their product lines or areas of business. The benefit of a conglomerate merger is that the new, parent organization gains diversity in its business portfolio. Conglomerate transactions take many forms, ranging from short-term joint ventures to complete mergers. Whether a conglomerate merger is pure, geographical, or a product-line extension, it involves firms that operate in separate markets. Therefore, a conglomerate transaction ordinarily has no direct effect on competition. There is no reduction or other change in the number of firms in either the acquiring or acquired firm\'s market. Conglomerate mergers can supply a market or \"demand\" for firms, thus giving entrepreneurs liquidity at an open market price and with a key inducement to form new enterprises. The threat of takeover might force existing managers to increase efficiency in competitive markets. Conglomerate mergers also provide opportunities for firms to reduce capital costs and overhead and to achieve other efficiencies. #### Motives for Mergers and Acquisitions Mergers and acquisitions are resorted to by the corporate entities due to more than one reason. Some of the significant motives for mergers include the following: - Growth - Diversification of risk - Financial synergy - Building Empire M&A and restructuring commonly occur together, and can bleed into one another, as well as other, unusual but less dramatic business decisions: **Self-Assessment Exercise** Differentiate between MERGERS andACQUISITIONS #### Feedback #### 4.0 Conclusion The essential strategic rationale behind mergers and acquisition is what companies hope to achieve The various drivers behind strategic mergers establishing and maintaining strategic focus. The main difference between a merger and an acquisition lies in the way in which the combination of the two companies is brought about. In a merger there is usually a process of negotiation involved between the two companies prior to the combination taking place. In an acquisition the negotiation process does not necessarily take place. In an acquisition company A buys company B. Company B becomes wholly owned by company A. **Module 3 Sources of Funds** ### Unit 1 Internal Sources and External Sources All businesses need money. Where the money comes from is known as 'sources of finance'. Now there are two different types of sources of finance: internal (finance from inside the business) and external (finance from outside the business). New businesses starting up need money to invest in long-term assets such as buildings and equipment. They also need cash to purchase materials, pay wages, and to pay the day-today- bills such as water and electricity #### 2.0 Intended Learning Outcome (ILO) By the end of this unit, you will be able to synthesize the different sources of fund to fund a business. #### 3.0 Main Content All businesses need money. Where the money comes from is known as 'sources of finance'. Now there are two different types of sources of finance: internal (finance from inside the business) and external (finance from outside the business). New businesses starting up need money to invest in long-term assets such as buildings and equipment. They also need cash to purchase materials, pay wages, and to pay the day-today- bills such as water and electricity. Inexperienced entrepreneurs (or social entrepreneurs) often underestimate the capital needed for the everyday running of the business. Generally, for every £1000 required to establish the business, another £1000 is needed for day-today needs. This is why sources of finance is crucial for any business. **Sources of finance** are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture **funding** etc. These **sources of funds** are used in different situations. Internal sources of finance are funds found inside the business. Alternatively the business can sell assets (items it owns) that are no longer really needed to free up cash. External sources of finance are found outside the business, eg from creditors or banks. #### Internal Sources of Finance Profit! Over 60% of business investments comes from reinvested profit. #### External Sources of Finance If a business needs to generate more finance and can't internally, they may seek for external sources of finance. There are two types: loan capital and share capital. - **Loan Capital.** The most common way is through borrowing from a bank. This can be in a form of an overdraft or loan. and is usually set over a period of time. It could be short (2-3 years), medium (3-5 years) or long term (5+ years). There will be an interest rate on the loan, either fixed or variable. The bank will demand collateral to provide security in case the loan cannot be repaid. - **Share Capital.** On the other hand, if the business is a limited company, it may look for additional share capital. This could come from private investors or venture capital funds. Venture capital providers are interested in investing in businesses with dynamic growth prospects. They are willing to take a risk if a business fails, or does well. The way it works is that a venture capitalist invests in ten businesses, five could flop, four do okay and one does amazingly well. Peter Theil, the original investor in Facebook, probably turned his \$0.5 million investment into \$200 million: a nice profit of 400%. #### The Advantages and Disadvantages of Sources of Finance Internal Sources Reinvested Profit - Profit can provide a return for investors in which investors plough back into business to help it grow. - Does not have associated costs. - Does not have to be repaid unlike loans. - No interest charges.**--** May be limited which will constrain rate at which business expands. Cash Squeezed Out by Day-to-Day Finance - Reduces amount needed to be borrowed (cutting stocks, chasing up customers or delaying payments to suppliers). Sale of Assets - Sold to raise cash. - Makes sense to dispose of underused assets. - Finance development without extra borrowing. - They can sale and lease it back.**--** Loses assets but has the use of the cash. External Sources Bank Overdrafts The firm only needs to borrow only when and as much as it needs. **--** Very expensive and bank can insist being repaid within 24 hours. Trade Credit Good way of boosting day-to-day finance. - Other businesses may be reluctant to trade with the business if they do not get paid in good time. Venture Capital Usually want to contribute to the running of the business -- bring in new experience and knowledge. - Requires a substantial part of the ownership of the company. Finding finance may involve balancing conflicting interests. Internal sources of finance may be too limited to provide opportunities for business development. Obtaining external finance increases the money available, but has its downsides. Borrowing too much can be risky. Raising extra share capital dilutes the control held by existing shareholders. Having adequate and appropriate finance at each stage in the firm's development will ensure it stays healthy. Decisions about where to obtain the fina