Achieving Success

in the Small Business

Chapter 20

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

LO1 Know how to recognize the stages of the

small business cycle
LO2 Understand the four types of firm-level growth
strategies
LO3 Understand the options for harvesting or
closing the small business
LO4 Know the firm-level critical success factors for
small businesses
LO5 Understand what success means with the
quadruple bottom line

20-2
 Small Business Life Cycle

Business life cycle

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

20-3
 The Small Firm Life Cycle

Figure 20.1

20-4
 Life Cycle Stages

Emergence

Resource
Existence
Maturity

Success Survival
20-5
 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.

20-6
 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 profits
B. Supplemental profits
C. Success profits
D. Slack resources

20-7
 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.

20-8
Avoiding Customer
Complacency

Recency Frequency

Potency Recommendation

20-9
 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.

20-10
 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.

20-11
 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.

20-12
 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.

20-13
 Types of Firms

Figure 20.2

20-14
 The Hierarchy of
Business Outcomes

Figure 20.3

20-15
 Closing the Small Business

 Harvest  Initial public

– Recover value offering (IPO)
through a sale of a – Transfer method
firm or its assets. describing the first-
time public sale of
a stock listed on a
public stock
exchange.

20-16
 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.

20-17
 Closing the Small Business

 Transfer  Termination
– An endgame – An endgame
strategy in which strategy in which
ownership is the owner closes
moved from one down a business
person or group to
another.

20-18
 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.

20-19
 Question

What is the type of business termination

in which the firm’s legal or financial
obligations are not fully met at closing?
A. Walkaway
B. Bankruptcy
C. Workout
D. Estate freeze

20-20
 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.

20-21
 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.

20-22
 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

20-23
 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.

20-24
 The Not-So-Secret Secrets of
Success
Critical Success Factors fall into two
broad types:
Outside help
Entrepreneurial experience.

20-25
 Entrepreneurial Experience

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

20-26
 The Four Bottom Lines

Table 20.1

20-27
 The Firm

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

20-28
 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.

20-29