New business formation Flashcards
Why is it hard for a new business to form?
-Intense social process to create trust with people (customers, suppliers, employees)
-Must be small enough to respond to unforeseen situations
-Target audience are ‘yet to be convinced’
What is a new business (start up)?
-Attempt to establish profitable business model
-Temporary concept; either fails or transitions to an established business
What happens when a new business fails?
STAKEHOLDERS LOSE PART OR ALL OF THEIR INVESTMENT
For unincorporated legal forms:
-Business stops trading
-Attempts to dissolve all contractual obligations (founders personally liable)
For incorporated legal forms:
-Involves ‘winding up’; liquidate objects the company owns to pay debts
What are the 3 common approaches to starting a business?
-Naïve procedural approaches
-Start-up life cycling
-Funding ladders
Explain the ‘naïve procedural’ approach of starting a new business
Inexperienced in business and must learn:
-Finance
-Sales
-Marketing
-Securing intellectual property
-Managing human resources
-Handling legal issues
Must apply a step list as follows:
Explain the ‘Start-up life cycling’ approach of starting a new business
-Breaks up complex processes into 4 discrete steps
-Reduces risk of loss of all investment by taking steps
Explain the ‘Funding Ladders’ approach of starting a new business
-Additional funding from investors required
-Investment exchanged for shares in the business
What are the 3 pathways for entrepreneurs to obtain ownership of an existing business?
-Buying a franchise
-Buying into a partnership
-Buying a business
Explain buying into a franchise agreement
-‘Entrepreneur’ buys into the name and advertising of the existing business
-Rents or buys the premises (and supplies) from the parent company
-Takes advantage of the established name
Explain buying into a business partnership
-Entrepreneur buys part (shares) of the business
-Either has knowledge of the industry or existing owner needs funding
Explain buying a business outright
-Business offered for sale
-What is the reason for selling the business?
-Price is based on: turnover, stock and good will
What is the success criteria for buying a business?
-New owner must match the business potential to their personality (does the business require constant growth?)
-For multiple owners; they must share the same business objectives
What does the required level of funding for a new business require?
-Financial planning: profit & loss budget, cash flow forecast
-Founders secure maximum funding from outside sources (increase time and resources)
-Founder includes personal living expenses
-Utilise risk management techniques
-Budget allocated towards professional fees and services (accountant & legal advise)
What is ‘burn rate’ and ‘Runway’?
Burn rate:
-Tracks amount of cash a company spends every month before it generates income
Runway:
-Time a new business can operate before it runs out of money
Explain the Family, Friends and Fools (FFF) strategy of funding
-Cheapest source of funding, but risky
-Investors must understand the nature of the business and risk of investment (sour friendship if fails)
Explain the ‘Loans from high-street banks’ strategy of funding
-Applicant provides a large amount of their own money for a loan to be approved
-Collateral (usually house) taken if business fails
Explain the ‘Private investors (business angels)’ strategy of funding
-Private investors
-Offer investment in exchange for shares in the company
-Investor may want to control (part of or all) of the company
Explain the ‘Venture capitalist’ strategy of funding
-Professional investors (banks and private investors)
-Invest money in exchange for equity (shares)
-Complex relationships
May require:
-Payments on invested money
-Control of the company (change management for more qualified candidate)
Explain the Government (funded) organisations strategy of funding
-Support to develop a product rather than support the company as a whole
-Helps by providing soft loans (low interest) and match funding (matches whatever the company puts in)
Explain the ‘Community Funding (crowd funding)’ strategy of funding
eg: Kickstarter, indiegogo
-Amateur investors
-Investment in return for products
What are the constituent elements of the standard format business plan?
-Formal parts and summaries
-Founder background and team
-Exposition of the product or service
-Market, market research, market strategy, competitor analysis
-Operation plan
-Costs, pricing and financial analysis
-Prospects and contingency plans
Explain the ‘Formal parts and summaries’ section of the standard format business plan
-Business (and owner) general information
Summarises business attractions:
-What is the business?
-What is the market?
-Business aims and potential
-Forecast profit figures
-Investment needs
-Prospects for the investor/lender
Explain the ‘Founder background and team’ section of the standard format business plan
Notes the following:
Founder:
-Motivation, past employment, business record and achievements
Team:
-Past employment, business record and achievements
Expertise:
-Skills and qualifications held
Mitigation plan (if there are weaknesses in the team/skills or plan)
Explain the ‘Product or service’ section of the standard format business plan
Simple description of product or service (without jargon)
-Why is product unique or distinct?
-Value proposition?
-Product/service variants
-Product: development, replacement and introduction
-Intellectual property held or arising
Explain the ‘Market’ section of the standard format business plan
-Market size, past and future growth
-Analysis of market sectors (target sector)
-Likely customers: who, type, size, customer segments, channels
-Existing customers or orders
-Expressions of intent/support from prospective customers
Explain the ‘Market research’ section of the standard format business plan
-Evidence of market research
-Data collection, methodology
-Test trading, minimum viable products
Explain the ‘Marketing strategy’ section of the standard format business plan
-How the product will be sold
-Customer relationships
-Sales team
-Pricing strategy
-Marketing cost
-Concept for sales pitch
Explain the ‘Competitor analysis’ section of the standard format business plan
-Who are the competitors?
-Size, market position, likely response to market entry
-Nature of competitive environment in the industry
Explain the ‘Operations’ section of the standard format business plan
-Location of site, premises
-Key suppliers, key partners
-Manufacturing facilities
-Other equipment, IT strategy and technology
Explain the ‘Cost and pricing’ section of the standard format business plan
-Key resources and activities
-Revenue streams, willingness to pay
-Competitor prices
-Monetisation and revenue model
-Pricing tactics
Explain the ‘Financial analysis’ section of the standard format business plan
-Sales budget, cash flow forecast, profit forecast, forecast balance sheet
-Suggested time horizon (3-5 years)
-Audited accounts for previous activity
-Clear statement of assumptions and limitations
Explain the ‘Prospects and contingency plans’ section of the standard format business plan
-Summary of objectives, distinguishing between short and long term
-Discussion and justification of finance requirements
-Shareholding suggested
-Contingency measures if something goes wrong
Prospects for investor/lender:
-Future valuation of the business
-Stock market floatation
-Investor exit strategy
