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Chapter 6 & 7. Starting New Business. Valuing Intangible Assets. Income Statement Method Value tangible net assets (I.e., $224,000) Determine before-tax rate of return (15%) Represents normal profit ($224,000 * 15% = $33,600) Determine actual average profit ($83,600)

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Chapter 6 7 l.jpg

Chapter 6 & 7

Starting New Business


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Valuing Intangible Assets

  • Income Statement Method

    • Value tangible net assets (I.e., $224,000)

    • Determine before-tax rate of return (15%)

      • Represents normal profit ($224,000 * 15% = $33,600)

    • Determine actual average profit ($83,600)

    • Determine average salary ($40,000)

    • Determine capitalization rate

      • Typically negotiated between buyer and seller (25%)

    • Value goodwill:

      • $224,000 - $40,000 - $33,600 = $10,000

    • Capitalize goodwill:

      • $10,000/25% = $40,000


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Taking Over Family Businesses

  • Planning Succession: the major cause of family business failure is lack of business succession planning for the following reasons:

    • Difficult for senior family members to address their own mortality.

    • Concern for next generation’s commitment

    • Transfer of control is put off until too late

    • Seniors are too personally tied to the business



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Advantages & Disadvantages of Starting from Scratch

  • Advantages:

    • Freedom to mold your new business

    • Ability to create distinctive competitive advantage

  • Disadvantages:

    • Risk of failure is higher among startups

    • May have trouble identifying market needs

    • May be tough to get noticed initially

    • Lots of details


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Types of New Businesses

  • Labor Intensive: is a business that is more dependent on the services of people than on money and equipment

    • Chiropractic offices

  • Capital Intensive: is a business that depends greatly upon equipment and capital for its operations.

    • Car manufacturer


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    Evaluating Potential Startups

    • Window of Opportunity: the period of time in which an opportunity is available.

      • Windows continuously open and close

      • Windows of opportunity correlate with the product life cycle.

  • Product Life Cycle:stages of introduction, growth, maturity, and decline.

    • During the introduction stage, the window of opportunity is open and little competition exists.


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    Getting Started

    • Planning:

      • Write a business plan

      • Develop market analysis - gather and analyze information about your customers.

      • Develop competitive analysis - understand what other businesses do and how they are perceived.

      • Identify startup costs - how much money will you need to start your business?

      • Decide on the legal form of your business


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    Getting Started

    • Planning:

      • Determine the location of your business

      • Develop a marketing plan

      • Consider information technology and computer integration

        • IT can make operations more efficient (ie, use in inventory management)

        • IT can reduce employee overhead (ie, computers could fill out claim forms thereby eliminating a lot of time)

        • IT can enhance customer service (ie, computers could automatically send out patient reminders or update letters or insurance follow-up)


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    How Will You Compete?

    • Operational Excellence - creates a competitive advantage by holding down costs to provide customers with the lowest-priced products.

      • Dell computer

  • Product Leaders - creates a competitive advantage based on providing the highest-quality products possible.

    • New Balance tennis shoes


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    How Will You Compete?

    • Customer Intimacy - creates a competitive advantage by maintaining a long-term relationship with customers through superior service.

      • Land’s end


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