New business formation

Question 1

Why is it hard for a new business to form?

Answer 1

-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’

Question 2

What is a new business (start up)?

Answer 2

-Attempt to establish profitable business model

-Temporary concept; either fails or transitions to an established business

Question 3

What happens when a new business fails?

Answer 3

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

Question 3

What are the 3 common approaches to starting a business?

Answer 3

-Naïve procedural approaches

-Start-up life cycling

-Funding ladders

Question 4

Explain the ‘naïve procedural’ approach of starting a new business

Answer 4

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:

Question 5

Explain the ‘Start-up life cycling’ approach of starting a new business

Answer 5

-Breaks up complex processes into 4 discrete steps
-Reduces risk of loss of all investment by taking steps

Question 6

Explain the ‘Funding Ladders’ approach of starting a new business

Answer 6

-Additional funding from investors required

-Investment exchanged for shares in the business

Question 7

What are the 3 pathways for entrepreneurs to obtain ownership of an existing business?

Answer 7

-Buying a franchise

-Buying into a partnership

-Buying a business

Question 8

Explain buying into a franchise agreement

Answer 8

-‘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

Question 9

Explain buying into a business partnership

Answer 9

-Entrepreneur buys part (shares) of the business

-Either has knowledge of the industry or existing owner needs funding

Question 10

Explain buying a business outright

Answer 10

-Business offered for sale

-What is the reason for selling the business?

-Price is based on: turnover, stock and good will

Question 11

What is the success criteria for buying a business?

Answer 11

-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

Question 12

What does the required level of funding for a new business require?

Answer 12

-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)

Question 13

What is ‘burn rate’ and ‘Runway’?

Answer 13

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

Question 14

Explain the Family, Friends and Fools (FFF) strategy of funding

Answer 14

-Cheapest source of funding, but risky

-Investors must understand the nature of the business and risk of investment (sour friendship if fails)

Question 15

Explain the ‘Loans from high-street banks’ strategy of funding

Answer 15

-Applicant provides a large amount of their own money for a loan to be approved

-Collateral (usually house) taken if business fails

Question 16

Explain the ‘Private investors (business angels)’ strategy of funding

Answer 16

-Private investors

-Offer investment in exchange for shares in the company

-Investor may want to control (part of or all) of the company

Question 17

Explain the ‘Venture capitalist’ strategy of funding

Answer 17

-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)

Question 18

Explain the Government (funded) organisations strategy of funding

Answer 18

-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)

Question 18

Explain the ‘Community Funding (crowd funding)’ strategy of funding

Answer 18

eg: Kickstarter, indiegogo

-Amateur investors

-Investment in return for products

Question 19

What are the constituent elements of the standard format business plan?

Answer 19

-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

Question 20

Explain the ‘Formal parts and summaries’ section of the standard format business plan

Answer 20

-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

Question 21

Explain the ‘Founder background and team’ section of the standard format business plan

Answer 21

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)

Question 22

Explain the ‘Product or service’ section of the standard format business plan

Answer 22

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

Question 23

Explain the ‘Market’ section of the standard format business plan

Answer 23

-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

Question 24

Explain the ‘Market research’ section of the standard format business plan

Answer 24

-Evidence of market research

-Data collection, methodology

-Test trading, minimum viable products

Question 25

Explain the ‘Marketing strategy’ section of the standard format business plan

Answer 25

-How the product will be sold

-Customer relationships

-Sales team

-Pricing strategy

-Marketing cost

-Concept for sales pitch

Question 26

Explain the ‘Competitor analysis’ section of the standard format business plan

Answer 26

-Who are the competitors?

-Size, market position, likely response to market entry

-Nature of competitive environment in the industry

Question 27

Explain the ‘Operations’ section of the standard format business plan

Answer 27

-Location of site, premises

-Key suppliers, key partners

-Manufacturing facilities

-Other equipment, IT strategy and technology

Question 28

Explain the ‘Cost and pricing’ section of the standard format business plan

Answer 28

-Key resources and activities

-Revenue streams, willingness to pay

-Competitor prices

-Monetisation and revenue model

-Pricing tactics

Question 29

Explain the ‘Financial analysis’ section of the standard format business plan

Answer 29

-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

Question 30

Explain the ‘Prospects and contingency plans’ section of the standard format business plan

Answer 30

-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