UNIT – I

Entrepreneurship

“Entrepreneurship is the act of being an entrepreneur, which can be defined as “one who
undertakes innovations, finance and business acumen in an effort to transform innovations into
economic goods.”

Entrepreneurship can create new organizations or develop a strategy to revitalize mature

organizations in response to a perceived opportunity.

The most obvious form of entrepreneurship is that of starting a new business also called as

“Startup Company”. More recently, the term has evolved to include other types of
entrepreneurship such as:

• Social entrepreneurship that applies the “entrepreneurial principles to organize, create

and manage a venture to achieve social change”

• Political entrepreneurship or “starting a new political project, group, or political party.”

No society can exist without entrepreneurship. Every society depends on entrepreneurs.

Definition of 'Entrepreneur'

An individual who, rather than working as an employee, runs a small business and assumes all
the risk and reward of a given business venture, idea, or good or service offered for sale. The
entrepreneur is commonly seen as a business leader and innovator of new ideas and business
processes.

Who is an entrepreneur? What characteristics define an entrepreneur?

Dan Sullivan Says that: “An entrepreneur is someone who does not expect compensation until
he has created value for someone else.”

Jean-Baptist Say, Says that: “Entrepreneur is someone who takes resources from a lower level of
productivity and raise them to a higher level.”

What are the major obstacles in starting a company and becoming entrepreneur?
The life cycle of any business has four stages:

1. Starting a business

2. Staying in business

3. Growing a business

4. Exiting a business

Characteristics of an Entrepreneur:

The characteristics of entrepreneurs are numerous. A successful entrepreneur possesses a

combination of traits that show both innovation and leadership qualities. Scholars from around
the world have worked tirelessly to discover just what characteristics make a good entrepreneur;
what exactly makes up a business founder's x-factor? While many of the findings are still open to
debate, there is no questioning that great entrepreneurs have the following traits:
Ambition

A good entrepreneur is driven to make something of himself. He knows what he wants, and he
sets a course to get it. His motivation to achieve something can sometimes be overwhelming, and
the urge to establish himself can be quite consuming. An entrepreneur's ambition is often the key
ingredient that gets him off his chair and puts him into action, turning his daydreams into reality.

Enthusiasm

Often coming hand-in-hand with ambition, enthusiasm plays a great role in the entrepreneur's
motivation. While ambition may be the key to the entrepreneur's ignition, enthusiasm is the gas.
Every successful entrepreneur has a positive outlook giving him the energy to pursue his
endeavors. Without enthusiasm, an entrepreneurial project will slowly wither into inactivity and
failure.

Creativity

When problems do arise, you can count on creativity to bail you out. Creativity is

probably what led you to envision your company in the first place, and it'll be creativity that will
help you realize the possible solutions to any hitches that might come your way. Successful
entrepreneurs find inspiration throughout the entire process, and often discover ways to turn
roadblocks into opportunities.

Decision-making

Entrepreneurs call all the necessary shots. While their creativity makes them men of

Ideas, it is their ability to make decisions that will make them men of action. The decisions that
entrepreneurs make will determine the fate of the company, and it is only through decision
making that things will actually happen. An entrepreneur with poor decision-making skills will
have his company caught in a state of inactivity and degradation; good decision-making skills,
on the other hand, will ensure that the best possible measures in putting up the business will be
enforced.
Perseverance

Perhaps the most important of all the characteristics of entrepreneurs is the ability to withstand
the troubles that come with starting a business. Beginning a new enterprise is an immensely
difficult task, and as an entrepreneur, you will have to stick through the storms and stress if you
want your venture to be a success. It sometimes takes years for a good idea to start making you
money, but when it does, you will be glad you stood strong in the face of adversity.

Entrepreneurial traits

1. Passionate

Strong and barely controllable emotion. You need to be driven by a clear sense of purpose and
passion. Typically, that passion comes from one of two sources: the topic of the business, or the
game of business building itself. Why do you need passion? Simply because you are likely to be
working too hard, for too long, for too little pay with no guarantee that it will work out… so you
need to be motivated by something intrinsic and not money-related.

2. Resilient

If you are going to build a startup, you will need a spirit of determination coupled with a high
pain tolerance. You will need to be willing and able to learn from your mistakes – to be knocked
down repeatedly, get up, dust yourself off, and move forward with renewed motivation.

People will constantly tell you your baby is ugly, that your business will not work. Now, you
should listen carefully and be open to constructive criticism. However, after a while, having the
door slammed in your face repeatedly can be withering, and the best entrepreneurs learn to feed
off the negativity and actually gain strength from it.

3. Self-Possessed

You need a strong sense of self control . You cannot be threatened by being surrounded by
talented, driven people. To truly succeecd, you will need the self-confidence to surround yourself
with people “who don’t look like you”… that is, people with skills, background and domain
knowledge that complement your own. In addition, check your ego at the door: you should not
be too proud to make coffee for the team, empty the wastebaskets, or do the bank runs.
 4. Decisive

You will need to develop a comfort-level with uncertainly and ambiguity. Entrepreneurs gather
as much information as they can in a short period, and then MOVE, MOVE, MOVE! The
attitude is that it is not going to be perfect… We only have 9% or so of the data from which to
base our decision… but if we wait to have all the information, we will never get moving… and
be mired in indecision. (Big organizations are good at this – the mired thing – saying, we do not
have enough information, so let us continue to study… form a committee or a task force)

5. Fearless

On the sliding scale from “risk-averse” to “risk-seeking,” it should not surprise anyone
that entrepreneurs tend to be closer to the latter. However, you do not need to be a nut case, the
sort who bungee-jumps without a helmet. Smart entrepreneurs develop an intuitive ability to
sniff out and mitigate startup business risk. However, you know you are going to fall down, and
feel comfortable with that fact and that you are going to learn from your failures and adjust as
you go.

6. Financially Prepared

You will need the right personal financial profile to make the leap. This does not mean
that only the rich can be entrepreneurs. However, unless and until you have the personal
financial ‘runway’ (ability to go without a steady paycheck and subsidized benefits) of at least 18
to 24 months (ideally longer), you might hold off on quitting your day job.

Consider launching the startup as a side-business if that is possible, while continuing to

work the 8-to-5 shift to cover the bills. On the other hand, approach your boss about going part-
time. Then, once your business generating cash flow, you can dial back on your hours, or submit
your resignation and go full-time with your startup.

7. Flexible

I challenge you to find an entrepreneur running a startup four or more years old where that
business does not differ dramatically from the vision sketched out in their original business plan.
The point is that the folks who stay on their feet are the ones who stay flexible and adjust to new
information and changing circumstances.

8. Zoom Lens-Equipped

You may not start out with a foolproof gyroscope, but to survive as an entrepreneur, you will
need that strong sense of perspective. How to maintain simple, clear focus. How to be at peace
with, and learn from, a failure. Understanding that not all battles are worth winning, and when to
walk away. Knowing that most in your startup are not as entrepreneurial as you – that this may
be a very cool job for them, but it’s still a job. Knowing when to go home and give your loved
ones a hug. When to go for a run.

Can you ‘pin out’ to see a compelling big vision for your business, then ‘zoom in’ and focus on
near-term startup goals? Successful entrepreneurs can facilely move back and forth between
these two views. They are able to articulate the big picture, while simultaneously managing and
executing to the ‘zoom-in’ picture.

9. Able to Sell

Whether you are a born extrovert or introvert, as a founder/CEO, you will find yourself
always selling. You will be selling your vision to prospective partners and funding sources. You
will be selling prospective recruits on why they should quit their day jobs and join the startup
they have never heard of. You will be selling your products and services (yes, you will probably
be personally closing at least the first few sales). You will be selling your employees on why
they should remain calm and stay with the ship when the seas inevitably get rough.

10. Balanced

You may not start out with a foolproof gyroscope, but to survive as an entrepreneur, you
will need that strong sense of perspective. How to maintain simple, clear focus. How to be at
peace with, and learn from, a failure. Understanding that not all battles are worth winning, and
when to walk away. Knowing that most in your startup are not as entrepreneurial as you – which
this may be a very cool job for them, but it is still a job. Knowing when to go home and give
your loved ones a hug. When to go for a run.

Entrepreneur vs. manager:

The terms Entrepreneur and Manager are considered one and the same. However, the two terms
have different meanings. The following are some of the differences between a manager and an
entrepreneur.

 The main reason for an entrepreneur to start a business enterprise is that he comprehends
the venture for his individual satisfaction and has personal stake in it where as a manager
provides his services in an enterprise established by someone.
 An entrepreneur and a manager differ in their standing, an entrepreneur is the owner of
the organization and he bears all the risk and uncertainties involved in running an
organization where as a manager is an employee and does not accept any risk.
 An entrepreneur and a manager differ in their objectives. Entrepreneur’s objective is to
innovate and create and he acts as a change agent where as a manager’s objective is to
supervise and create routines. He implements the entrepreneur’s plans and ideas.
 An entrepreneur is faced with more income uncertainties as his income is contingent on
the performance of the firm where as a manager’s compensation is less dependent on the
performance of the organization.

Intrapreneur vs. Entrepreneurs

Meaning of Intrapreneur:

“A person within a large corporation who takes direct responsibility for turning an idea into a
profitable finished product through assertive risk-taking and innovation”

• Entrepreneurs provide the spark. Intrapreneur keep the flame going.

• Entrepreneurs are found anywhere their vision takes them. Intrapreneur work within the
confines of an organization.
• Entrepreneurs face many hurdles, and are sometimes ridiculed and riddled with setbacks.
Intrapreneurs may sometimes have to deal with conflict within the organization.

• Entrepreneurs may find it difficult to get resources. Intrapreneurs have their resources
readily available to them.

• Entrepreneurs may lose everything when they fail. Intrapreneurs still have a paycheck to
look forward to (at least for now) if they fail.

• Entrepreneurs know the business on a macro scale. Intrapreneurs are highly skilled and
specialized.

Entrepreneurial Decision Process:

• Entrepreneurial Decision Process is about deciding to become an entrepreneur by leaving

present activity i.e. a movement from the present lifestyle to forming a new enterprise. The
decision to start a new company occurs when an individual perceives that forming a new
enterprise is both desirable and possible.

The decision to become an entrepreneur to start a new business consist of several sequential
steps-

1. The decision to leave a present career or lifestyle (Pushing and pulling influences active in
the decision to leave a present career or lifestyle

2.The decision about desirability of new venture formation i.e. the aspects of a situation that
make it desirable to start a new venture and this relates to culture, subculture, family, teachers
and peers.

3. The decision about possibility of new venture formation i.e. factors making it possible to
create a new venture like government, background, marketing, financial, role models.

Desirability of New Venture Formation :- (Aspects of a situation that make it desirable to

start a new company)

1. The perception that starting a new company is desirable results from an individual’s
culture, subculture, family, teachers and peers.
On the other hand in some countries asking money is not as valued and failure may be a
disgrace. The rate of business formation in these countries is not as high.

2. Many subcultures that shape value systems operate within a cultural framework. These
subcultures support and even promote entrepreneurship.

3. Studies indicate that a high percentage of founders of companies had fathers and/or
mothers who valued independence.

4. Encouragement to form a company is also gained from teachers, who can significantly
influence individuals.

5. An area having a strong educational base is also a requirement for entrepreneurial activity.

6. Peers are important, also, as is an area with an entrepreneurial pool and peer-meeting place.

Possibility of New Venture Formation : - (Factors making it possible to create a new

venture)

Although the desire of new venture formation derived from the individual’s culture, subculture,
family, teachers and peers needs to be present before any action is taken, the second feature
necessary centers around this question “What makes it possible to form a new company?” o He
government contributes by providing the infrastructure to help a new venture.

Formal education and previous business experience give a potential entrepreneur the skills
needed to form and manage a new enterprise.

Although educational systems are important in providing the needed business knowledge,
individual will tend to be more successful in forming in fields in which they have worked.

The market must be large enough and the entrepreneur must have the marketing knowhow to put
together the entire package. The entrepreneur must have the marketing know-how to put together
the entire package. A role model can powerfully influence the perception of venture possibility.

Finally, financial resources must be readily available.

o Although most start-up money comes from personal savings, credit, and friends, but there is
often a need for additional capital.

Risk-capital availability plays an essential role in the development and growth of entrepreneurial
activity.

Role of Entrepreneurship in economic development

The entrepreneur who is a business leader looks for ideas and puts them into effect in fostering
economic growth and development. Entrepreneurship is one of the most important input in the
economic development of a country. The entrepreneur acts as a trigger head to give spark to
economic activities by his entrepreneurial decisions. He plays a pivotal role not only in the
development of industrial sector of a country but also in the development of farm and service
sector. The major roles played by an entrepreneur in the economic development of an economy
are discussed in a systematic and orderly manner as follows.

(1) Promotes Capital Formation:

Entrepreneurs promote capital formation by mobilizing the idle savings of public. They employ
their own as well as borrowed resources for setting up their enterprises.

Such types of entrepreneurial l activities lead to value addition and creation of wealth, which is
very essential for the industrial and economic development of the country.

(2) Creates Large-Scale Employment Opportunities:

Entrepreneurs provide immediate large-scale employment to the unemployed which is a chronic

problem of underdeveloped nations. With the setting up. Of more and more units by
entrepreneurs, both on small and large-scale numerous job opportunities are created for others.
As time passes, these enterprises grow, providing direct and indirect employment opportunities
to many more. In this way, entrepreneurs play an effective role in reducing the problem of
unemployment in the country which in turn clears the path towards economic development of the
nation.

(3) Promotes Balanced Regional Development:

Entrepreneurs help to remove regional disparities through setting up of industries in less
developed and backward areas. The growth of industries and business in these areas lead to a
large number of public benefits like road transport, health, education, entertainment, etc. Setting
up of more industries lead to more development of backward regions and thereby promotes
balanced regional development.

(4) Reduces Concentration of Economic Power:

Economic power is the natural outcome of industrial and business activity. Industrial
developments normally lead to concentration of economic power in the hands of a few
individuals which results in the growth of monopolies. In order to redress this problem a large
number of entrepreneurs need to be developed, which will help reduce the concentration of
economic power amongst the population.

(5) Wealth Creation and Distribution:

It stimulates equitable redistribution of wealth and income in the interest of the country to more
people and geographic areas, thus giving benefit to larger sections of the society. Entrepreneurial
activities also generate more activities and give a multiplier effect in the economy.

(6) Increasing Gross National Product and Per Capita Income:

Entrepreneurs are always on the look out for opportunities. They explore and exploit
opportunities,, encourage effective resource mobilization of capital and skill, bring in new
products and services and develops markets for growth of the economy. In this way, they help
increasing gross national product as well as per capita income of the people in a country.
Increase in gross national product and per capita income of the people in a country, is a sign of
economic growth.

Ways for Sources of New Ideas:

 Consumers
 Existing Companies
 Distribution Channels
 Government
 Research & Development.
1. Consumers– the potential consumer should be the final focal point of ideas for the
entrepreneurs. The attention to inputs from potential consumers can take the form of informally
monitoring potential ideas or needs or formally arranging for consumers to have an opportunity
to express their concerns. Care needs to be taken to ensure that the new idea or the needs
represents a large enough market to support a new venture.

2. Existing Companies– with the help of an established formal methods potential

entrepreneurs and intrapreneurs can evaluate competitive products & services on the market
which may result in new and more market appealing products and services.

3. Distribution channels– members of the distribution channels are familiar with the needs
of the market and hence can prove to be excellent sources of new ideas. Not only do the channel
members help in finding out unmet or partially met demands leading to new products and
services, they also help in marketing the offerings so developed.

4. Government– it can be a source of new product ideas in two ways firstly, the patent
office files contain numerous product possibilities that can assist entrepreneurs in obtaining
specific product information, and secondly, response to government regulations can come in the
form of new product ideas.

5. Research & development– Entrepreneur’s own R&D is the largest source of new idea.
A formal and well-equipped research and development department enables the entrepreneur to
conceive and develop successful new product ideas.

Methods of generating new ideas for entrepreneurs

The following are some of the key methods to help generate end test new ideas:

1. Focus Groups – these are the groups of individuals providing information in a structural
format. A moderator leads a group of people through an open, in-depth discussion rather than
simply asking questions to solicit participant response. Such groups form comments in open-end
in-depth discussions for a new product area that can result in market success. In addition to
generating new ideas, the focus group is an excellent source for initially screening ideas and
concept.
2. Brainstorming – it is a group method for obtaining new ideas and solutions. It is based
on the fact that people can be stimulated to greater creativity by meeting with others and
participating in organized group experiences. The characteristics of this method are keeping
criticism away; freewheeling of idea, high quantity of ideas, combinations and improvements of
ideas. Such type of session should be fun with no scope for domination and inhibition.
Brainstorming has a greater probability of success when the effort focuses on specific product or
market area.

3. Problem inventory analysis– it is a method for obtaining new ideas and solutions by
focusing on problems. This analysis uses individuals in a manner that is analogous to focus
groups to generate new product areas. However, instead of generating new ideas, the consumers
are provided with list of problems and then asked to have discussion over it and it ultimately
results in an entirely new product idea.

Product Planning and development Process:

New products are a vital part of a firm’s competitive growth strategy. Leaders of successful firms
know that it is not enough to develop new products on sporadic basis.

What a count is a climate of a products development that leads to one triumph after another. It is
Commonplace for major companies to have 50percent or more of their current sales In Products
introduced within the last 10 years.

Some Additional facts about new products are:

Many new products are failures. Estimates of new product failures range from 33%- 90%,
depending on industry. New product sales grow far more rapidly than sales of current products,
potentially providing a surprisingly large boost to a company’s growth rate;

Companies vary widely in the effectiveness of their new products programs;

A major obstacle to effectively predicting new product demand is limited vision;

Common elements appear in the management practices that generally distinguish the Relative
degree of efficiency and success between companies.

The stages used in developing new products

 Idea generation

Idea screening

Project planning

Product development

Test marketing

Commercialization

Idea Generation

Every product starts as an idea. But all new product aides do not equal merit or potential for
economic or commercial success. Some estimates indicate that as many as 60-70 ideas are
necessary to yield one successful product. To develop a new product the following step must be
realized:

Idea screening

The primary function of the idea screening process is twofold: first, to eliminate ideas for New
products that could not be profitably marketed by the firm, and second, to expand Viable ideas
into full product concepts. New product ideas may be eliminated either because They are outside
the fields of the firm’s interest or because the firm does not have the Necessary resources or
technology to produce the product at a profit.

These three risk categories are:

1. Strategic risk – strategic risk involves the risk of not matching the role or purpose of a
new product with a specific strategic need or issue of the organization;

2. Market risk – market risk is the risk that a new product won’t meet a market need; As

Products are being developed, customer requirements change and new technologies Evolve;

3. Internal risk – internal risk is the risk that a new product won’t be developed within
The desired time and budget;
Project planning

This stage of the process involves several steps. It is here that the new product proposal is
evaluated further and responsibility for the project is assigned to a project team. The proposal is
analyzed in terms of production, marketing, financial and competitive factors. A development
budget is established and some preliminary marketing and technical research is undertaken.
Alternative product features and component specifications are outlined. Finally, a project plan is
written up, which includes estimates of future development, production and marketing costs
along with capital requirements and manpower needs. Project proposal is given to top
management for a go or no-go decision.

Various alternatives exist for creating and managing the project team. A key component
contributing to the success of many companies’ product development efforts relates to the
emphasis placed on creating cross-functional teams early in the development process.
Frequently, marketing and sales personnel are called in to lead the teams.

Product development

At this juncture, the product idea has been evaluated from the standpoint of engineering,
Manufacturing, finance and marketing. If it has met all expectation, it is considered a Candidate
for further research and testing. A development report to management is prepared That spells out
in fine detail:

1. Results of the studies;

2. Required plan design;

3. Production facilities design;

4. Tooling requirements;

5. Marketing test plan;

6. Financial program survey and

7. estimated release data.

Test Marketing
Up until mow the product has been a company secret. Now management goes outside the
Company and submits the product candidate for customers approval. Test marketing is a
Controlled experiment in a limited geographic area to test the new product or in some cases
Certain aspects of the marketing strategy, such as packaging or advertising.

The main goal of a test market is to evaluate and adjust the general marketing strategy to be used
and the appropriate marketing mix. Throughout the test market process, findings are being
analyzed and forecasts of volume developed. Upon completion of a successful test market phase,
the marketing plan can be finalized and the product prepared for launch.

Commercialization

This is the launching step in which the firm commits to introducing the product into the
marketplace. During this stage, heavy emphasis is placed on the organization structure and
management talent needed to implement the marketing strategy. Emphasis is also given to
following up on such things as bugs in the design, production costs, quality control, and
inventory requirements.
UNIT – II

What Is the Business Plan?

A business plan is a written document prepared by the entrepreneur that describes all the
relevant external and internal elements involved in starting a new venture. It addresses both
short- and long-term decision making. The business plan is like a road map for the business’
development. The Internet also provides outlines for business planning. Entrepreneurs can also
hire or offer equity to another person to provide expertise in preparing the business plan. In
developing the business plan the entrepreneur can determine how much money will be needed
from new and existing sources.

SCOPE AND VALUE OF THE BUSINESS PLAN

The business plan must be comprehensive enough to address the concerns of employees,
investors, bankers, venture capitalists, suppliers, and customers. Three perspectives need to be
considered:

• The entrepreneur understands the new venture better than anyone.

• The marketing perspective considers the venture through the eyes of the customer.

• The investor looks for sound financial projections.

• The depth of the business plan depends on the size and scope of the proposed venture.

The business plan is valuable to the entrepreneur and investors because:

1. It helps determine the viability of the venture in a designated market.

2. It gives guidance in organizing planning activities.

3. It serves as an important tool in obtaining financing.

 Potential investors are very particular about what should be included in the plan. The
process of developing a business plan also provides a self-assessment of the entrepreneur. This
self-evaluation requires the entrepreneur to think through obstacles that might prevent the
venture’s success. It also allows the entrepreneur to plan ways to avoid such obstacles.

WRITING THE BUSINESS PLAN

The business plan should be comprehensive enough to give a potential investor a complete
understanding of the venture.

Introductory Page

The title page provides a brief summary of the business plan's contents, and should include:

 The name and address of the company

 The name of the entrepreneur and a telephone number
 A paragraph describing the company and the nature of the business
 The amount of financing needed
 A statement of the confidentiality of the report
 It also sets out the basic concept that the entrepreneur is attempting to
develop.

Executive Summary

This is prepared after the total plan is written. It should be three to four pages in length
and should highlight the key points in the business plan. The summary should highlight in a
concise manner the key Points in the business plan. Issues that should be addressed include:

1. Brief description of the business concept

2. Any data that support the opportunity for the venture.

3. Statement of you this opportunity will be pursued.

4. Highlight some key financial results that can be achieved

5. Because of the limited scope of the summary, the entrepreneur should ascertain what is
important to the audience to whom the plan is directed.

Environmental and Industry Analysis

The entrepreneur should first conduct an environmental analysis to identify trends and
change occurring on a national and international level that may impact the new venture.
Examples of environmental factors are:

Economy

Culture

Technology

Legal concerns

All of the above external factors are generally uncontrollable. Next the entrepreneur should
conduct an industry analysis that focuses on specific industry trends Some examples of industry
factors include:

• Industry demand

• Competition

The last part of this section should focus on the specific market. This would include such
information as who the customer is and what the business environment is like. The market
should be segmented and the Target market identified.

Description of the Venture

The description of the venture should be detailed in this section. This should begin with
the mission Statement or company mission, which describes the nature of the business and what
the entrepreneur hopes to accomplish. The new venture should be described in detail, including
the product, location, personnel, background of entrepreneur, and history of the venture. The
emphasis placed on location is a function of the type of business. Maps that locate customers,
competitors, and alternative locations can be helpful. If the building or site decision involves
legal issues, the entrepreneur should hire a lawyer
Evaluating Business Plans:

The following areas are of interest to lenders and investors:

a) The purpose of the loan (expansion or startup business)

b) Sources and uses of the funds

c) Management of the business

d) Industry information

e) Financial analysis

f) Collateral (secured)

g) Personal debt/credit history of borrower

Technical Business Plans may be evaluated on the following:

1. Viability

2. Management background

3. Market advantage

4. Technology

A. Viability

Definition: The viability of a business is measured by its long-term survival, and its ability to
have sustainable profits over a period of time. If a business is viable, it is able to survive for
many years, because it continues to make a profit year after year. The longer a company can stay
profitable, the better its viability. Example

The small company showed its viability by making a profit every year of its existence.

B. Management Background

For every Business Plan we have to check the background of Management, because for every
business finance is very important without capital no business will run.
C. Market advantage

It means that if the product is giving less profit means Entrepreneur has to introduce several
offers and discounts to give pick up of the product. It means that taking the Market to sell as they
wish.

D. Technology

Technology gives to evaluate the Business Plans efficiently and fastly for better output. Now a
day’s technology plays a vital role in the business world.

Using and Implementing Business Plans:

The core of your business plan is your vision for the future. From this vision, you will be
able to set objectives for various parts of the business and these objectives will need to be well
communicated to all involved to ensure a coherent approach to the tasks in hand. Your business
objectives are statements about what you want individual parts of the business to achieve. You
may, for instance, have a series of objectives about the financial side of the business, or about its
products and services, or about your marketing. The objectives you set create a 'strategy' for the
business.

Business Plan Implementation

A vital stage in business planning:

Business plan implementation: Here is where the business plan implementation puts
theory into practice. If theory and practice do not come together, the plan will remain on the
drawing board. The business plan must be implemented with due regard to deadlines set. The
responsibility of each individual involved in the plan must be clearly delineated. The
implementation plan must form an integral part of the business plan. The manager must have a
clear idea of the practical impact of his business ideas.

 Business Plan Implementation Steps

 Establishing the business objectives
 Defining and assigning the tasks needed to attain the objectives set
  Setting out a timescale
 Monitoring activities and progress
 Business Plan Implementation Objectives

The objectives must be clearly and concisely set out, with the planning of key way stages. They
must at the same time be realistic, demanding but achievable.

Tasks

The tasks must be listed with the individuals responsible for completing each task. They
must be simply and clearly stated, and need not be oppressive. The results envisaged should
outweigh the time and effort devoted to the tasks.

Timescale

Each task, and its duration, must be framed within a clear timescale. The result clearly displays
all the activities necessary with their deadlines.

Monitoring Activity and Progress

During the monitoring process, delays must be highlighted. This stage identifies and rectifies the
delays. Within a business plan, several implementation plans will be needed for the particular
aspects of the business: product planning, marketing, financial problems and human resource
management (Business Plan Implementation).
UNIT-III

FINANCING AND MANAGING THE NEW VENTURE

Finance is one of the important prerequisite to start an enterprise or capital is work as

lubricant in a production process. The success of new venture is very much depend on
availability of finance or capital.

This taken by the entrepreneur well in advance Regarding the future financial aspects of
his/her enterprise is called financial planning or it deals with following questions like Amount of
money needed, Sources of money, Time when money required.

SOURCES OF FINANCE

Finance/capital can be arranged from two major Sources:

Internal Source: Refer to the owner’s own money known as equity. This amount fulfill very
limited requirement of enterprise or it is very thin.

External source : Arranged from financial Complete requirement of enterprise and generally
taken for long period.

CLASSIFICATION OF FINANCIAL NEEDS

ON THE BASIS OF EXTENT of PERFORMANCE

Fixed Capital: The money invested in current assets like raw material, finished goods,
machinery, equipment, furniture etc. Working Capital: Money required for day to day operations
of business/enterprise.

ON THE BASIS OF PERIOD OF USE:

Long Term Capital: Money whose repayment is arranged for more than five years in future.
Short Term Capital: Borrowed capital/money that is to be repaid within one year.

INTERNAL SOURCE

Retained Profit: Profit earned by entrepreneur may be used to finance the future needs of
firm.
Reducing Working Capital: By judging the exact requirement, part of working capital may be
used For financing the enterprise.

Sale of Assets: By selling fixed assets which are of little use, fund may obtained.

Personal Savings of the Owner: Like PF, insurance policy, investment, building may be used for
fund. Deferred Credit: goods, machine, plant may be\ taken on credit basis for a particular time
period by giving bank security to supplier.

EXTERNAL SOURCE:

 Deposits or borrowings from Friend/Relatives

 Credit facilities from commercial banks Terms loans from financial institutions.
 Mortgage loans against fixed assets
 By issuing Shares or Debentures
 Public Deposits (Govt. Bonds etc.)
 Venture Capital

CAPITAL SOURCES FOR YOUR BUSINESS

Not having enough capital is the cause of many small business failures. Adequate capital
is needed to start up the business, operate through hard times, and provide a good chance to
become a profitable enterprise.

There is no one best method of raising capital. Financing methods will vary as a result of legal,
legislative and economic changes. Variations among lending institutions can affect your ability
to raise funds. Your success in raising funds for a new business depends on good planning,
realistic forecasting, and knowing what sources of capital are available.

To raise capital for your new business, you should be able to answer four questions.

1. How much capital will I need?

2. How much of my own capital can I put in the business?

3. How much capital can I get from someone else?

4. How can I convince someone to provide me with capital?

Planning your financial needs

Your ability to plan the financial needs of your new venture will play a big part in how
much capital you will be able to raise. Prepare a loan package that includes your business plans,
market analysis, projected balance sheet, profit and loss projections, and cash flow projections.
Lenders prefer these financial projections monthly for at least one year, and then annually for
three years.

The amount of detail and research needed in the financial projections is directly related to
the amount of outside capital you hope to secure. In addition, a loan package must include the
amount of the loan, how the loan money will be used, when the money will be needed, when the
loan will be repaid, the source of repayment funds, and the amount of collateral you have to
secure the loan. You should also include the amount of equity capital you are personally
investing in the business venture.

Another part of the loan package should be personal information about you and anyone
else involved directly or indirectly in the new business. Don’t assume the potential lender knows
this information. Even if you have known each other for years, the lender may not have an
accurate picture of your personal history and current financial situation.

The personal information included in the loan package should include education, work
history and business experience of everyone involved in the new business. You should also
include credit references, personal income tax statements for three years and updated financial
statements. Information about the nature of the loan and personal histories of those involved may
be a major factor in getting the loan.

If you seek professional help with the financial projections and loan package, it is vital that you
be totally familiar with the financial information. Your knowledge and understanding of the loan
package will be important when the lender evaluates it.

The five Cs of credit

What do lenders look for in a loan package? You, the borrower, provide part of the
information, but the potential lenders will also use their own credit files and outside sources. A
traditional, time-tested checklist is the five Cs of credit: character, capacity, collateral, conditions
and capital. By understanding each of these from the lender’s viewpoint, you can anticipate your
strong and weak points as they may appear to a potential lender.

1. Character

To the potential lender, character means that you will make every possible effort to repay the
loan. You must be a good manager, be honest, and have a good reputation as perceived by the
lender. Therefore, it is important to be honest about your personal strengths and weaknesses.

2. Capacity

Will your new business generate the cash flow to repay the loan? Do you have the capacity to
repay the loan? Lenders not only look at the business’s financial projections, but also your ability
to repay the loan if the business does not work out as planned. Do you have outside income
(investments, a working spouse)? Would you be able to return to your present job? Do you have
other skills that could produce income? Be prepared to provide solid answers to these questions
and be able to offer real evidence.

3. Collateral

In case the new venture is not successful and the lender must foreclose, will the collateral cover
the loan? Is the collateral adequately insured? Is the collateral marketable? In the past, a cosigner
(someone who signs the loan along with you) has been used as collateral for many small business
ventures. However, banks and traditional lending institutions now look less favorably at
cosigners as collateral. Collecting from co-signers is becoming increasingly hard, and bankers
then lose not one, but two customers. You can use your home or other real estate, cash value of
life insurance policies or marketable securities as collateral for business loans. However, before
borrowing against these items, consider carefully the consequences of the worst possible
situation in your business if you are forced to liquidate.

4. Conditions

Conditions are those factors over which you have little or no control. The lender will look at the
conditions, or trends, in the overall business economy, the trends in your community, the
seasonal character of your business, and the nature of your product or service. Other factors
entering the decision-making process are whether the lender may have already invested in a
competing business and how much competition there is in your market. Be prepared to tell the
lender how you plan to deal with these conditions, how you have assessed the market, and how
your business will weather economic changes.

5. Capital

Knowledgeable lenders will not put money into a new business unless they have concrete
evidence that you have personally made a sizable financial commitment to the business. They
know from experience that if the venture turns bad it will be easier for you to back out if you do
not have your own money at risk. From your personal resources, you should try to provide as
much of the needed capital as you can afford to put at risk. Depending on the capital needs, you
cannot expect any lender to loan 80 percent or more of the capital, as they may for a home or
investment real estate. New small businesses fail at a rapid rate and when they do fail, the assets
cannot be easily turned into cash for payment of the loan. Therefore, a new business is a much
higher risk for them than a home loan. You should expect to invest a much higher percentage of
the needed capital for your new business.

Different types of small businesses require different amounts and types of capital to get
started. In some cases, the new businesses may only need capital for short periods of time for
inventory purchases or salaries. In other cases, facilities and equipment must be bought or leased,
inventory purchased, and you must have enough cash left over to run the business until revenue
can support the needed cash flow. Knowing the type and amounts of capital needed will help you
figure out the best source of capital for your new venture.

Equity versus debt capital

If you do not have enough personal capital, you can sell equity or you can incur debt. If
shares of equity are sold in a partnership or corporation, the capital is not repaid, but the investor
takes an ownership interest in the business and receives a portion of the business’ profits. Even
though equity capital does not burden a new business with loan repayments and interest charges,
it reduces the primary owner’s share of the profits. Debt must be repaid with interest, but
normally the lender has no ownership control. Borrowing money at the very start of a new
business will drain off income to make the debt payments.
Commercial loans

There are three types of commercial loans that are usually defined in terms of the length of time
the loan is made.

• Short-term commercial loans (30 to 90 days) are the most common loans made to a small
business. They usually cover business operation expenses such as rent, insurance, advertising,
inventory or salaries. Short-term loans are often unsecured and repayment is usually a lump sum,
including interest when the loan matures.

• Intermediate-term loans are for one to five years to purchase business equipment, buy
fixed assets or provide working capital. Intermediate-term loans are usually secured by the new
equipment or business assets. They sometimes have low monthly payments, with a large balloon
payment at the end of the term.

• A long-term commercial loan is for five years or more to purchase an existing business,
buy real estate, or construct or improve a building or facility. The long-term loan is always
secured by the assets for which the loan was made, usually requires constant monthly payments
and often has a variable interest rate.

Ten sources of capital

With your new business plan, financial projections and financing knowledge, you are
now ready to secure outside capital for your new venture. The following 10 types of financing
sources are ranked according to amount of preparation required and ease of securing the outside
capital. Less preparation to secure a loan does not mean it is the best source, nor the least
expensive source of capital. Of course, there will be exceptions to these general statements about
each financial source.

1. Trade or supplier credit

Payment terms offered by your suppliers are a potential source of credit. Study the discounts for
early payment and the penalty for late payment to determine the true cost of the credit. While
some suppliers will extend credit only to well-established, proven firms, many will extend
limited credit to new businesses to encourage another outlet for their merchandise. Planning for
use of trade credit is essential. To establish good trade credit, a new business must make timely
payments as agreed. Trade credit is effectively used by large businesses to buy products at lower
cost than small firms. Do not depend too much on trade credit from one supplier. If repayment
problems arise, you may find your major source for supplies cut off when you need it the most.

2. Life insurance policies

A standard feature of most life insurance policies (except term insurance) is the owner’s ability
to borrow against the cash value of the policy. The money can be used for any business or
personal need. It normally takes two years for a policy to accumulate sufficient cash value. You
may borrow up to 95 percent of the cash value of the policy for an indefinite period of time. As
long as you continue to pay the insurance premiums, the interest can frequently be deferred
indefinitely. The policy loan will reduce the dollar value of the policy and, in case of death, the
loan is repaid first and then the beneficiaries receive the remainder. Some older life insurance
policies guarantee very favorable interest rates.

3. Friends and relatives

It is best not to borrow from friends and relatives, but many people do. If you must borrow from
a friend or relative, do it on a business basis by putting the agreement in writing. Check with a
lawyer if you want a binding, legal agreement. You may also get a sample business loan contract
form from a bank or lending institution. Use it as a basis for a written agreement that both parties
find acceptable. Unrealistic and/or naive investment expectations have ruined many friendships
and family relationships.

4. Customers

When customers pay for work in installments as it is completed or provide some of the materials,
they are, in effect, financing the business. For example, a carpenter reduces capital requirements
when the customer purchases the building materials for a remodeling project. In addition, it is
not uncommon to request a deposit from customers when ordering items, particularly special
items.

5. Leasing companies

Leasing business equipment is another way to reduce capital needs. Everything from office
furniture to food processing equipment can be obtained from leasing companies or commercial
finance companies. Leasing is generally more expensive than bank financing and is limited to
items that have a long serviceable life, widespread use, and are easily repossessed in the event of
default. In many cases, you have the option to buy the equipment for an agreed upon amount at
the end of the lease period.

6. Commercial finance companies

Commercial finance companies are generally seen as the place to go when you are unable
to secure financing from a bank. Commercial finance companies, like banks, are concerned with
your ability to repay the loan; however, they are more willing to rely on the quality of the
collateral rather than your track record or profit projections. If you do not have substantial
personal assets or collateral, a commercial finance company may not be the best place to secure
start-up capital for a business. Commercial finance company capital is usually several percentage
points higher than bank financing.

7. Commercial banks

Commercial banks are by far the most visible lenders and make the greatest number and variety
of loans. However, banks are generally conservative lenders. Although they accept collateral for
business loans, loan approval rests on your ability to repay the loan as shown by your profit
projections, management skills and your personal record. Strive to establish and keep a good
working relationship with your banker. It may help to involve the banker in the planning process
for your new business. Avoiding the banker until you need money may make a loan harder to get
because the banker is unfamiliar with the business and its history.

8. Small Business Administration

The Small Business Administration (SBA) is an independent government agency formed in 1953
to help small businesses. The SBA provides loan guarantees, participates with bank loans, and, if
funds are available, makes a limited number of direct loans. To receive financial help from SBA,
a business must be unable to secure reasonable financing from other sources. A business must
also fit the SBA’s generalized criteria for a small business, which vary for different types of
businesses.

9. Small Business Investment Companies

Small Business Investment Companies (SBIC) are privately owned companies that are licensed
and regulated by the SBA. SBICs were created to supply equity capital, long-term loan funds and
management help to small businesses. There are investment companies in Maine that are ready
to help businesses with excellent potential. Most investment companies prefer to lend to
established companies or finance purchases of existing businesses. The SBA or your local bank
can assist you in contacting one of the SBICs in Maine.

10. Rural Economic and Community Development Agency

The Rural Economic and Community Development Agency (RECD) will guarantee term loans
to non-farming businesses in rural areas. The guarantees can cover up to 90 percent of the total
loan from a private lending institution, and there is no loan limit for one company. The RECD
requires the same extensive loan documentation as the SBA. However, RECD’s goal is to
improve rural areas and, therefore, the agency requires more detail on number of jobs to be
created and the impact the new business would have on overall employment in an area.

VENTURE CAPITAL

Meaning: Venture Capital is defined as providing seed, start-up and first stage finance to
companies and also funding expansion of companies that have demonstrated business potential
but do not have access to public securities market or other credit oriented funding institutions.

Venture Capital is generally provided to firms with the following characteristics:

• Newly floated companies that do not have access to sources such as equity capital and/or
other related instruments.

• Firms, manufacturing products or services that have vast growth potential.

• Firms with above average profitability.

• Novel products that are in the early stages of their life cycle.

• Projects involving above-average risk.

• Turnaround of companies
Venture Capital derives its value from the brand equity, professional image, constructive
criticism, domain knowledge, industry contacts; they bring to table at a significantly lower
management agency cost.

A Venture Capital Fund (VCF) strives to provide entrepreneurs with the support they need to
create up-scalable business with sustainable growth, while providing their contributors with
outstanding returns on investment, for the higher risks they assume.

The three primary characteristics of venture capital funds which make them eminently suitable as
a source of risk finance are: That it is equity or quasi equity investment It is long term
investment and It is an active form of investment.

VENTURE CAPITALISTS

When someone refers to venture capitalist, the image that comes in mind is Mr. Money
bags. We all think of venture capitalists as someone who is sitting on millions of dollars and who
with the wave of his magic wand turns your dreams into reality. Well, if that’s what you think is
all about why run after him – “play Santa yourself”

Venture Capitalists is like any other professional who is paid for doing his job, yes, venture
capitalist is nothing but a fund manager whose job is to manage funds that are raised. A venture
capitalist gets a fee to invest in companies that interest his investors.

Difference between a Venture Capitalist and Bankers/Money Managers.

• Banker is a manager of other people’s money while the venture capitalist is basically an
investor.

• Venture capitalist generally invests in new ventures started by technocrats who generally
are in need of entrepreneurial aid and funds.

• Venture capitalists generally invest in companies that are not listed on any stock
exchanges. They make profits only after the company obtains listing.

• The most important difference between a venture capitalist and conventional investors
and mutual funds is that he is a specialist and lends management support and also
Financial and strategic planning

Recruitment of key personnel

Obtain bank and debt financing

Access to international markets and technology

Introduction to strategic partners and acquisition targets in the region Regional expansion of
manufacturing and marketing operations Obtain a public listing

Factor to be considered by venture capitalist in selection of investment proposal

There are basically four key elements in financing of ventures which are studied in depth by the
venture capitalists. These are:

1. Management: The strength, expertise & unity of the key people on the board bring
significant credibility to the company. The members are to be mature, experienced possessing
working knowledge of business and capable of taking potentially high risks.

2. Potential for Capital Gain: An above average rate of return of about 30 - 40% is required
by venture capitalists. The rate of return also depends upon the stage of the business cycle where
funds are being deployed. Earlier the stage, higher is the risk and hence the return.

3. Realistic Financial Requirement and Projections: The venture capitalist requires a

realistic view about the present health of the organization as well as future projections regarding
scope, nature and performance of the company in terms of scale of operations, operating profit
and further costs related to product development through Research & Development.

4. Owner's Financial Stake: The financial resources owned & committed by the
entrepreneur/ owner in the business including the funds invested by family, friends and relatives
play a very important role in increasing the viability of the business. It is an important avenue
where the venture capitalist keeps an open eye.
STAGES OF FINANCING BY VENTURE CAPITALIST

Venture capital can be provided to companies at different stages. These include:

I. Early- stage Financing

• Seed Financing: Seed financing is provided for product development & research and to
build a management team that primarily develops the business plan.

• Startup Financing: After initial product development and research is through, startup
financing is provided to companies to organize their business, before the commercial launch of
their products.

• First Stage Financing: Is provided to those companies that have exhausted their initial
capital and require funds to commence large-scale manufacturing and sales.

II. Expansion Financing

• Second Stage Financing: This type of financing is available to provide working capital
for initial expansion of companies, that are experiencing growth in accounts receivable and
inventories, and is on the path of profitability.

• Bridge Financing: Bridge financing is provided to companies that plan to go public

within six to twelve months. Bridge financing is repaid from underwriting proceeds.

III. Acquisition Financing

As the term denotes, this type of funding is provided to companies to acquire another company.
This type of financing is also known as buyout financing. It is normally advisable to approach
more than one venture capital firm simultaneously for funding, as there is a possibility of delay
due to the various queries put by the VC. If the application for funding were finally rejected then
approaching another VC at that point and going through the same process

CHARACTERISTICS OF VENTURE CAPITAL:

Ideas and innovations, which have potential for high growth but has inherent uncertainties, are
Financed by Venture capitalists. Further, venture capitalists provide networking, management
and marketing support as well. Therefore, venture capital refers to risk finance as well as
managerial support. This blend of risk financing and handholding of entrepreneurs by venture
capitalists creates an environment particularly suitable for knowledge and technology based
enterprises. Start ups, where fund is needed most, are seldom funded by Venture capitalist.
However, a rare combination of product opportunity, market opportunity, and proven
management may attract venture fund even in Start ups.

(a) Expect a very high growth rate in the assisted enterprise,

(b) bring management and business skills,

(c) expect medium term gains (5-10 years), and

(d) do not insist for any collateral to cover the capital provided.

ADVANTAGES

Venture capital has a number of advantages over other forms of finance, such as:

 Finance - The venture capitalist injects long-term equity finance, which provides a solid
capital base for future growth. The venture capitalist may also be capable of providing
additional rounds of funding should it be required to finance growth.
 Business Partner - The venture capitalist is a business partner, sharing the risks and
rewards. Venture capitalists are rewarded by business success and the capital gain.
 Mentoring - The venture capitalist is able to provide strategic, operational and financial
advice to the company based on past experience with other companies in similar
situations.
 Alliances - The venture capitalist also has a network of contacts in many areas that can
add value to the company, such as in recruiting key personnel, providing contacts in
international markets, introductions to strategic partners and, if needed, co-investments
with other venture capital firms when additional rounds of financing are required.
 Facilitation of Exit - The venture capitalist is experienced in the process of preparing a
company for an initial public offering (IPO) and facilitating in trade sales. Venture
capitalist combines risk capital with entrepreneurial management and advance technology
to create new products, new companies and new wealth. Risk finance and venture capital
environment can bring about innovation, promote technology, and harness knowledge-
 based ventures. In this sense, venture capital is different from other types of financing
such as development finance, seed capital, (At times Venture Capitalist provide) term
loan / conventional financing, passive equity investment support, and R&D funding
sources.

Venture capital is a source of investment in the form of seed capital in unproven areas, products
or start-up situations. The concept of venture capital is relatively new to the Indian economy, and
is gaining prominence in the recent years.

Angel Investment: Meaning

An investor who provides financial backing for small startups or entrepreneurs. Angel investors
are usually found among an entrepreneur's family and friends. The capital they provide can be a
one-time injection of seed money or ongoing support to carry the company through difficult
times.

Advantages and disadvantages of business angel funding

Before approaching a business angel (BA) for investment, you should consider whether other
forms of finance could better meet your organization’s needs. For other sources of alternative
funding, see the page on alternatives to equity finance in our guide on equity finance.

Advantages of business angel financing

The advantages of BA funding for your business can include:

• BAs are free to make investment decisions quickly

• no need for collateral - i.e. personal assets

• access to your investor's sector knowledge and contacts

• better discipline due to outside scrutiny

• access to BA mentoring or management skills

• no repayments or interest

Disadvantages of business angel financing

The disadvantages of BA funding for your business can include:

• not suitable for investments below £10,000 or more than £250,000

• takes longer to find a suitable BA investor

• giving up a share of your business

• less structural support available from a BA than from an investing company

JOINT VENTURES:

With the increase in business risks, hyper-competition, and failures, joint ventures have
increased. A joint venture is a separate entity involving two or more participants as partners.
They involve a wide range of partners, including universities, businesses, and the public sector.

Historical Perspective

Joint ventures are not new. In the U.S. joint ventures were first used for large-scale
projects in mining and railroads in the 1800s.The largest joint venture in the 1900s was the
formation of ARAMCO by four oil companies to develop crude oil reserves in the Middle East.
Domestic joint ventures are often vertical arrangements made between competitors allowing
economies of scale. The increase in the number of joint ventures has been significantly
throughout the 1990s.

Types of Joint Ventures

The most common type is that between two or more private-sector companies. Some joint
ventures are formed to do cooperative research. Another type of joint research for research
development is the not-for-profit research organization. Industry-university agreements for the
purpose of doing research are also increasing. Two problems have kept this type venture from
increasing even faster. A profit corporation wants to obtain tangible results-such as a patent-from
its research investment, and universities want to share in the returns. The corporation usually
wants to retain all proprietary data while university researchers want to make the knowledge
available. Joint ventures between universities and corporations take many forms, depending on
the parties involved and the subject of the research. International joint ventures are increasing
rapidly due to their relative advantages. Both companies can share in the earnings and growth.
The joint venture can have a low cash requirement. Also, the joint venture provides ready access
to new international markets. Such a venture causes less drain on a company's managerial and
financial resources than wholly owned subsidiary. There are drawbacks in establishing
international joint ventures. The business objectives of the partners can be quite different.
Cultural differences can create managerial difficulties. Government policies sometimes can have
a negative impact on the venture. The benefits usually outweigh the drawbacks.

Factors in Joint Venture Success

One critical factor for success is the accurate assessment of the parties involved and how
best to manage the new entity. A second factor involves the symmetry between the partners.
Another factor is that the expectations about the results of the joint venture must be reasonable.
The final factor is the timing. A joint venture should be considered as one of many options for
supplementing the resources of the firm.

Features and Evaluation of Joint Venture

Meaning

When two or more persons join together to carry out a specific business venture and
share the profits on an agreed basis it is called a 'joint venture'. Each one of them who join as a
party to the joint venture is called 'Co-Venturer'. Features Of Joint Ventures

1. Joint venture is a special partnership without a firm name.

2. Joint venture does not follow the accounting concept 'going concern'.

3. The members of joint venture are known as co-ventures.

4. Joint venture is a temporary business activity.

5. In joint venture, profits ans losses are shared in agreed proportion. If there is no
agreement Regarding the distribution of profit, they will share profit equally.

6. Joint venture is an agreement for polling of capital and business abilities to be employed
in some Profitable venture.
7.At the end of venture, all the assets are liquidated and liabilities are paid off: if necessary the
assets

And liabilities could be shared by co-ventures.

8. Joint venture always follows cash basis of account

ACQUISITIONS

An acquisition is the purchase of a company or a part of it in such a way that the acquired
company is Completely absorbed and no longer exists. Acquisitions can provide an excellent
way to grow a business And enter new markets. A key issue is agreeing on a price. Often the
structure of the deal can be more Important to the parties than the actual price. A prime concern
is to ensure that the acquisition fits into the overall direction of the strategic plan.

Advantages

Established business.

The acquired firm has an established image and track record.

The entrepreneur would only need to continue the existing strategy to be successful.

Location is already established.

Established marketing structure.

The employees of an existing business can be important assets.

They know the business and can help the business continue.

Employees already have established relationships with customers, suppliers, and channel
members.

Dis advantages

Culture Clashes : Even a company has a personality, a culture that permeates the entire
organization. If you acquire a company that has a way of doing things that conflict with yours,
the employees of the acquired company may bristle at your management style. Conversely, your
employees may not accept managers and supervisors from the acquired company.
Redundancy: When you acquire a company, you may have employees who duplicate each
other's functions. This can cause excessive payroll expenditures where you pay for two
employees to do the work of one.

Increased Debt: If you borrow money to acquire a company, that debt goes on the books of the
original company. In order to service that debt, you need revenues from the acquired company.
Since many companies become the target of acquisitions because they are struggling financially,
you may find that the financial problems of the acquired company prevent you from generating
the income you need to pay the new debt.

Market Saturation: If you acquire a company that is in the same line of business as your
original company, your hopes for market expansion may hit a barrier: the two companies
together already dominate the market. You may find it difficult to grow sales after the acquisition
because not enough new customers exist outside of the customer base you and the acquired
company have established.

Definition of 'Merger'

The combining of two or more companies, generally by offering the stockholders of one
company securities in the acquiring company in exchange for the surrender of their stock.

Benefits of Mergers:

1. Economies of scale. This occurs when a larger firm with increased output can reduce average
costs. Different economies of scale include:

i) technical economies if the firm has significant fixed costs then the new larger firm would have
lower average costs ii) bulk buying – discount for buying large quantities of raw materials iii)
financial – better rate of interest for large company iv) Organisational – one head office rather
than two is more efficient

2. International Competition. Mergers can help firms deal with the threat of
multinationals and compete on an international scale

3. Mergers may allow greater investment in R&D This is because the new firm will have
more profit. This can lead to a better quality of goods for consumers
4. Greater Efficiency. Redundancies can be merited if they can be employed more
efficiently

Franchising

Definition: A continuing relationship in which a franchisor provides a licensed privilege to the

franchisee to do business and offers assistance in organizing, training, merchandising, marketing
and managing in return for a monetary consideration. Franchising is a form of business by which
the owner (franchisor) of a product, service or method obtains distribution through affiliated
dealers (franchisees).

TYPES OF FRANCHISING

Product or Trade Name Franchising

The product and trade name franchising system has evolved from suppliers or
manufacturers creating sales contracts with dealers to buy or sell their products or product lines.
In this relationship the dealer (franchisee) requires the trade name, trademark, and/or product
from the supplier or manufacturer. The franchisee identifies with the supplier through the
product line. This method of franchising consists primarily of distribution by a single supplier of
manufactured products to dealers who then in turn resell this to the end consumer

Conversion

A new franchising technique allows independently operated businesses to convert to the

form of an existing franchise business system. The new franchisee is expected to make changes
in the existing business which would bring them into conformity with the common marketing
display and trade identity.

Business Format Franchising

We will be primarily concerned with the business format method of franchising which
permits the franchisee to use the franchisor's products and services, trade name, trademark, and
most importantly, the prescribed business format.
The business format provides the franchisee with great depth of knowledge and information
concerning a great breadth of business activities including marketing, promotion, site selection,
price suggestions, grand opening plans, management, operations, training, financing, accounting
systems, and legal support or information. This method or business opportunity allows an
individual without prior experience an opportunity to be completely trained and informed about
how to operate a new and different business. This also requires the franchisor to take the
franchisee through a fairly extensive training program and to provide continuous training for the
franchisee even after the franchising unit has been started.