Chapter 6 & 7

1. Chapter 6 & 7 Starting New Business

2. Valuing Intangible Assets • Income Statement Method • Value tangible net assets (I.e., $224,000) • Determine before-tax rate of return (15%) • Represents normal profit ($224,000 * 15% = $33,600) • Determine actual average profit ($83,600) • Determine average salary ($40,000) • Determine capitalization rate • Typically negotiated between buyer and seller (25%) • Value goodwill: • $224,000 - $40,000 - $33,600 = $10,000 • Capitalize goodwill: • $10,000/25% = $40,000

3. Taking Over Family Businesses • Planning Succession: the major cause of family business failure is lack of business succession planning for the following reasons: • Difficult for senior family members to address their own mortality. • Concern for next generation’s commitment • Transfer of control is put off until too late • Seniors are too personally tied to the business

4. Succession Model of Family Business

5. Advantages & Disadvantages of Starting from Scratch • Advantages: • Freedom to mold your new business • Ability to create distinctive competitive advantage • Disadvantages: • Risk of failure is higher among startups • May have trouble identifying market needs • May be tough to get noticed initially • Lots of details

6. Types of New Businesses • Labor Intensive: is a business that is more dependent on the services of people than on money and equipment • Chiropractic offices • Capital Intensive: is a business that depends greatly upon equipment and capital for its operations. • Car manufacturer

7. Evaluating Potential Startups • Window of Opportunity: the period of time in which an opportunity is available. • Windows continuously open and close • Windows of opportunity correlate with the product life cycle. • Product Life Cycle:stages of introduction, growth, maturity, and decline. • During the introduction stage, the window of opportunity is open and little competition exists.

8. Getting Started • Planning: • Write a business plan • Develop market analysis - gather and analyze information about your customers. • Develop competitive analysis - understand what other businesses do and how they are perceived. • Identify startup costs - how much money will you need to start your business? • Decide on the legal form of your business

9. Getting Started • Planning: • Determine the location of your business • Develop a marketing plan • Consider information technology and computer integration • IT can make operations more efficient (ie, use in inventory management) • IT can reduce employee overhead (ie, computers could fill out claim forms thereby eliminating a lot of time) • IT can enhance customer service (ie, computers could automatically send out patient reminders or update letters or insurance follow-up)

10. How Will You Compete? • Operational Excellence - creates a competitive advantage by holding down costs to provide customers with the lowest-priced products. • Dell computer • Product Leaders - creates a competitive advantage based on providing the highest-quality products possible. • New Balance tennis shoes

11. How Will You Compete? • Customer Intimacy - creates a competitive advantage by maintaining a long-term relationship with customers through superior service. • Land’s end