Chapter 20

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Achieving Successin the Small Business

Learning ObjectivesLO1 Know how to recognize the stages of the

small business cycleLO2 Understand the four types of firm-level

growth strategiesLO3 Understand the options for harvesting or

closing the small businessLO4 Know the firm-level critical success factors

for small businessesLO5 Understand what success means with the

quadruple bottom line

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Small Business Life Cycle Business life cycle

– The sequence or pattern of developmental stages any business goes through during its life span.

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The Small Firm Life Cycle

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Figure 20.1

Life Cycle Stages

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Small Business Life Cycle Liability of newness

– The set of risks faced by firms early in their life cycles that comes from a lack of knowledge by the owners about the business they are in and by customers about the new business.

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Question

What are profits that are available to be used to satisfy the preferences of the owner in how the business is run?

A.Substitution profitsB.Supplemental profitsC.Success profitsD.Slack resources

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Small Business Life Cycle Slack resources

– Profits that are available to be used to satisfy the preferences of the owner in how the business is run.

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Avoiding Customer Complacency

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Growth Strategies Lifestyle or part-time firm

– A small business primarily intended to provide partial or subsistence financial support for the existing lifestyle of the owner, most often through operations that fit the owner’s schedule and way of working.

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Growth Strategies Traditional small business

– A firm intended to provide a living income to the owner, and operating in a manner and on a schedule consistent with other firms in the industry and market.

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Growth Strategies High-performing small business

– A firm intended to provide the owner with a high income through sales or profits superior to those of the traditional small business.

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Growth Strategies High-growth venture

– A firm started with the intent of eventually going public, following the pattern of growth and operations of a big business.

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Types of Firms

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Figure 20.2

The Hierarchy ofBusiness Outcomes

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Figure 20.3

Closing the Small Business Harvest

– Recover value through a sale of a firm or its assets.

Initial public offering (IPO)– Transfer method

describing the first-time public sale of a stock listed on a public stock exchange.

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Closing the Small Business Consolidation

– A transfer method in which a small business is bought by a larger firm for the purpose of quickly growing the larger firm.

Employee stock ownership plan– A formalized legal method to transfer

some or all of the ownership of a business to its employees.

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Closing the Small Business Transfer

– An endgame strategy in which ownership is moved from one person or group to another.

Termination – An endgame

strategy in which the owner closes down a business

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Closing the Small Business Liquidity enhancement

– An estate planning strategy which focuses on generating cash to cover likely estate taxes.

Tax management– An estate planning strategy which

focuses on minimizing estate tax payments.

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Question

What is the type of business termination in which the firm’s legal or financial obligations are not fully met at closing?

A.WalkawayB.BankruptcyC.WorkoutD.Estate freeze

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Closing the Small Business Estate freeze

– An estate planning strategy which focuses on transferring assets to heirs when the asset costs are low.

Walkaways – Business terminations in which the

entrepreneur ends the business with its obligations met.

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Closing the Small Business Bankruptcy

– An extreme form of business termination which uses a legal method for closing a business and paying off creditors when debts are substantially greater than assets.

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Closing the Small Business Workout

– A form of business termination in which the firm’s legal or financial obligations are not fully met at closing.

Reorganization – The popular name for a Chapter 13

bankruptcy in which a bankrupt firm continues to operate while paying off debts identified by the bankruptcy trustee

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Closing the Small Business Liquidation

– The popular name for a Chapter 7 bankruptcy in which a bankrupt firm’s assets are sold by the bankruptcy trustee and the proceeds used to pay the firm’s debts.

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The Not-So-Secret Secrets of Success

Critical Success Factors fall into two broad types:

Outside help Entrepreneurial experience.

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Entrepreneurial Experience Being incorporated Employees Extreme start-up capital Protectable intellectual property Brand name affiliations or partners Optimal strategies Presales

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The Four Bottom Lines

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Table 20.1

The Firm Supplemental profits

– Returns above costs intended as a secondary income for entrepreneurs (where self-employment is secondary to their main job).

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The Firm Substitution profits

– Returns intended to equal and replace the salary or wages the entrepreneur could draw working for someone else.

Success profits– Returns at levels higher than the

entrepreneur could make working for others.

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