Chapter 5: Business Start-up PDF

Chapter 5 Business start-up Learning outcomes Discuss the different aspects to be considered when starting a new business Discuss the aspects to consider while planning a new venture Describe the steps you can follow when refining your idea Identify the questions you should ask when doing...

Chapter 5 Business start-up Learning outcomes Discuss the different aspects to be considered when starting a new business Discuss the aspects to consider while planning a new venture Describe the steps you can follow when refining your idea Identify the questions you should ask when doing market research for your new venture Differentiate between the different business structures available for establishing a start-up business Describe the factors that will influence the entrepreneur when choosing a type of ownership Discuss franchising as an option to start a new business Explain the process involved in moving a franchise internationally Differentiate between the advantages and disadvantages of franchising Elaborate on the different location factors an entrepreneur should consider when choosing a location for the business Identify the different resources a start-up business should consider and elaborate on each Explain the different sources of finance Explain the legal aspects that should be considered during business start-up Compare the advantages and disadvantages of business start-ups Explain corporate entrepreneurship and the four models of corporate entrepreneurship Introduction The start-up process 5.1 Plan for a successful start Plan every step carefully Establish your resource and financial needs Surround yourself with the right people Know your customers, competitors, suppliers and market Plan for growth, to adapt to changing situations with ease and accuracy and to exit when necessary 5.2 Refine your idea Have such a clear business idea that you can describe it in a single sentence Test your prototype on a select group of people Check the competition Talk to experts 5.3 Find your market Determining the extent of the need for a product or service that the entrepreneur wants to offer is probably the single most important factor in determining the future success of the prospective venture Entrepreneurs need to do market research Market research is any organised effort to gather information about target markets or customers It asks questions such as: Is the proposed product or service the first of its kind? Do similar, or even the same, products or services already exist? (This must be established for both existing and proposed products and services) If the prospective product or service is an entirely new concept, should a demand for it be stimulated from scratch? Which characteristics do the potential consumers of the product or service have? What is the market’s future growth potential? What is the nature and extent of the existing and potential competition (including substitutes) in the market What possibility does the prospective business have for capturing and retaining a share of the market? 5.3 Find your market (cont.) 5.3.1 The presence of competitors When establishing the presence of competitors , ask: Are there any competitors offering the same product or service and, if not, what is the possibility that a competitor could emerge? What is the possibility of a substitute for the product or service being developed? What share of the market does the competitor have? What is the pricing policy of competitors? What effect will the development of the proposed venture have on the suppliers of such competitors? Analysing competitors is essential 5.4 Determine your business structure Entrepreneurs need to decide in advance on which form their businesses will take In South Africa, most entrepreneurial ventures are sole proprietorships, partnerships, companies (for-profit and non-profit) and co-operatives Type of ownership has to be suited to the entrepreneur’s particular circumstances, objectives, requirements and personal characteristics 5.4 Determine your business structure (cont.) 5.4.1 Factors affecting the choice of the type of ownership The possibilities of a change in ownership The ability of the venture to acquire capital on its initial establishment and with further expansion The liability of the owner The extent to which the owner has direct control The legal (juristic) personality of the venture The legal requirements regarding the establishment, management and dissolution of the venture 5.4 Determine your business structure (cont.) 5.4.2 Sole proprietorship The owner has no partners and their venture is not registered as a company or close corporation No independent legal personality and cannot exist independently of the owner The assets of the venture belong to the owner, who remains personally liable for all the debts of and claims against the venture The owner may lose all their personal possessions if the venture is unable to meet its obligations Needs to register with: SARS for tax matters The Department of Labour for staff matters The local municipality for matters relating to premises The CIPC for business name and IP matters 5.4 Determine your business structure (cont.) 5.4.3 Partnerships A contractual relationship between two or more persons, but usually not more than 20, who practise a lawful business to which every partner contributes, with the objective of making a profit to be distributed among them Partnerships do not have a legal personality: All transactions, contracts or agreements are entered into by the partners in their personal capacities and not by the partnership All the partners bear equal responsibility for debts incurred and are jointly and severally liable for claims against the partnership Can be dissolved when any of the following occurs: By mutual agreement between the partners The retirement or death of one of the partners The addition of a new partner A partner being declared insolvent A partner being declared contractually incompetent The partnership being declared insolvent Extraordinary partnerships: Anonymous or sleeping partnership, commanditarian partnerships 5.4 Determine your business structure (cont.) 5.4.4 Companies Company: A more advanced form of ownership in which the drawbacks of sole proprietorship and partnership, insofar as these concern unlimited liability and the ability to acquire capital, are eliminated 5.4.4.1 For-profit companies State-owned companies Private companies Personal liability company Public company 5.4.4.2 Non-profit companies A company that is incorporated for a public benefit and the income and property are not distributable to its incorporators, members, directors or persons related to any of them Not required to have members, but must appoint at least three directors 5.4 Determine your business structure (cont.) 5.4.4.3 Description of companies Subject to many more legal requirements than a sole proprietorship or partnership: Establishment and registration of a company: The requirements of the Companies Act (2008) have to be complied with Requirements regarding accounting practices, financial reports, auditing, minutes, membership register, and so forth, have to be complied with Requirements regarding the rights, powers and duties of directors and other office bearers, in respect of which the relevant provisions of the articles of association also have to be adhered to Legal requirements concerning the dissolution or liquidation of a company must be complied with The company and its shareholders are taxed 5.4 Determine your business structure (cont.) 5.4.5 Other forms of ownership Co-operative: A type of ownership with limited possibilities of utilisation Trust: Offers its members limited liability and reduced costs while looking to make a profit and further the objectives of the trustees 5.4 Determine your business structure (cont.) 5.4.6 Franchising Business-format franchising The franchisor offers the franchisee a clearly defined package of deliverables and services such as: a strong corporate identity, including the use of trademarks and logos a complete system of conducting the business at optimal efficiency hands-on assistance with site selection, store layout and design, sourcing of equipment, hiring and training of staff, initial promotional activities, sourcing of products The franchisee pays an upfront fee in exchange (initial fee) and agrees to pay continuing fees to the franchisor in exchange for ongoing business assistance Most popular franchise format 5.4 Determine your business structure (cont.) Product or trade-name franchising The franchisee is expected to focus on the franchisor’s product range Warranty policies, service levels and the appearance of the outlet are controlled by the franchisor The franchisor provides trademarks and logos, national advertising campaigns and a limited range of initial and ongoing support services In return, the franchisee is obliged to purchase a specified product, or range of products, exclusively from the franchisor Does not always require the payment of ongoing fees, although fees and royalties have to be paid for the use of the franchisor’s trademarks, trade name, logo and national advertising campaigns 5.4 Determine your business structure (cont.) Preliminary planning Do detailed planning in which you establish whether: There are clearly defined and optimised operating guidelines and practices Business processes have been standardised The target market population for the product or service is big enough There is a well-defined market for the product or service The prospective franchisor recognises and accepts the fact that building a successful network of franchises depends on creating win–win outcomes for the franchisor and the franchisee A brand has been created and registered the franchisor has operated at least one pilot outlet It is difficult to copy or imitate the product or service The growth potential and profit margins within the industry are sufficiently robust The prospective franchisor has made sizable investments in the establishment of franchise infrastructure The existing business has been operating profitably for at least one year 5.4 Determine your business structure (cont.) Establish network potential Establish the marketing potential of the franchising network in detail, which should culminate in the creation of a network expansion plan This plan should: Identify the target areas for expansion and assessing their potential Rank the areas according to potential Give timelines and milestones Plan carefully to guard against oversaturation of an area Financial projections Develop a sound business plan Address the different costs and projected income related to the franchise The establishment of a franchise infrastructure requires a substantial initial investment 5.4 Determine your business structure (cont.) The idea of taking your business to a foreign country is attractive But doing so is complex, so entrepreneurs need to do the following in preparation: Assess feasibility If a franchise is in a strong position, the franchisor could set up an international department But if the franchise is not, international franchising should be avoided Develop a master licence Master licence: A franchise that grants the licensee the rights to open up businesses in an entire country, instead of conferring territorial rights over a specific site or territory Assess the country Ask: Is the potential market big enough? Will enough people be interested in buying a franchise? Are margins acceptable? Is the prospect suitable? 5.4 Determine your business structure (cont.) Investigate the licensee Once you have decided to move into the country you have researched, investigate the person wanting to purchase the master licence Ask: Does the licensee have the ability to make the franchising concept successful? Do their business ethics match the franchisor’s? Will they be willing and able to uphold the system of the franchise and franchise network? Involve support systems These include: Legal professionals with international links and knowledge Training consultants with international links and expertise Financial consultants with expertise in international accounting principles FASA 5.4 Determine your business structure (cont.) Advantages: Ongoing advice, training, research and development Reduced capital outlay with increased profits Brand awareness Buying power Infrastructure Business synergy Increased success rate Exit strategy 5.4 Determine your business structure (cont.) Disadvantages: The franchisee is not independent Restrictions include the products or services that can be offered, pricing and geographic territory Franchisees must pay ongoing royalties and advertising fees Franchisees must balance restrictions and support provided by the franchisor with their own ability to manage their business A damaged image can result if other franchisees perform poorly The term of a franchise agreement is usually limited The services provided by the franchisor to the franchisee can be expensive The franchise contract may protect only the rights of the franchisor The franchisee ,ay still fail because of cash flow problems and/or inexperience The franchise arrangement may be a vehicle for fraud Some franchisors do not fulfil their initial undertakings The trade name is not always of value 5.5 Name your business Your business name shapes the first impression on prospective customers, investors and suppliers Choose one of the following approaches: Descriptive names Suggestive names Arbitrary names Acronyms/initialisms Names based on other languages 5.6 Choose your location Location: The premises needed to produce a business’s products or render its services Important location factors: Sources of raw materials Availability of labour and other human resources Proximity of, and access to, the market Availability of transport facilities Availability of reasonably priced power and water Availability of a site and buildings Availability of capital Attitude, regulations and tariffs of local authorities Existing business environment Social environment Climate of the region Central government policy Personal geographical references of the entrepreneur and his or her family 5.6 Choose your location (cont.) Steps in choosing the best location for a business: Step 1: Establish the location factors applicable to the proposed business enterprise Step 2: Assign a weighting (1 to 5) to each factor to indicate its importance Step 3: Calculate, as accurately as possible, the cost per location factor for both locations Step 4: List the information gathered in steps 1 to 3 in a table Step 5: Calculate the disadvantages connected with each location and determine the ratio between the disadvantages of both locations Step 6: Decide on the best location 5.7 Identify resource needs Four broad categories: Operating resources Human resources Financial resources Technology resources The nature of the business venture, and the services and products that it will offer, will determine its resource needs Availability of suppliers of the physical and financial resources could have a direct effect on the establishment of the venture and on the pricing of products or services 5.7 Identify resource needs (cont.) Different types of funding: Government grant Loan financing Bootstrapping Family, friends and associates Crowdfunding Angel investors Venture capital 5.7 Identify resource needs (cont.) Other resources: Human resources Educational resources Physical resources Personal support resources 5.8 Comply with legislation Business licensing Compliance Protecting intellectual property Contracts Taxation 5.9 Plan for growth, change and exit Plan for growth through the entrepreneurial life cycle (see Chap 15) Determine your eventual exit routes Use your business plan (see Chap 13) 5.10 Advantages and disadvantages of start-ups 5.10.1 Advantages of starting a business Lifestyle Financial Learning new roles Job satisfaction You choose who you work with 5.10.2 Disadvantages of owning a business Financial risks Stress and health issues Time commitment Numerous roles 5.11 Corporate entrepreneurship Corporate entrepreneurs: The in-house counterparts of classic entrepreneurs who build new revenue-generating products and services and sometimes new business entities within an existing business Corporate entrepreneurship (CE): A culture within an existing organisation that sets the context (framework) for innovation and growth Management vs corporate entrepreneurship: Managers follow the organising, planning, co-ordinating and control route; focus and report on organisational objectives set; collect facts, analyse them and report on progress; focus on basic managerial principles and values with a strong sense of accountability Entrepreneurs have vision and they are willing to take calculated risks to create a future 5.11 Corporate entrepreneurship (cont.) 5.11.1 Models of corporate entrepreneurship The Opportunist The Enabler The Advocate The Producer 5.11.2 B-BBEE Codes of Good Practice and corporate entrepreneurship Businesses must comply with all the elements of the new codes