Final Chapter 13,14,15,16 on Entrepreneurship and Small Business Development

Chapter 13     Sources of Financing: Debt and Equity

Key words: Capital, Fixed capital, Working capital, Growth capital, Equity capital, Debt capital

Introduction                                                                                                                          

      New ventures need money. Raising those funds is one of the initial challenges for entrepreneurs. As capital markets rise and fall, the search for financing can be an uncertain journey.                                                

      Some of the keys to successful financing include these seven steps:                             

1.      Choosing the right sources of capital

2.      Looking for the money in the right place

3.      Plan for it to take time and effort

4.      Creativity counts

5.      Use the Internet                                                                                                   

6.      Be prepared

7.      Look for “chemistry” between the players

I.    Planning for Capital Needs                                                                                           

      Rather than relying on a single source of funds, entrepreneurs may need to piece together multiple sources, a method known as layered financing.

      Capital is any form of wealth employed to produce more wealth. It exists in many forms in a business, including cash, inventory, plant, and equipment. Small businesses require three types of capital:        

1.      Fixed capital – Capital needed to purchase the business's permanent or fixed assets.

2.      Working capital – Capital used to meet the needs of day-to-day business operations.

3.      Growth capital – Capital requirements surface when an existing business is expanding or changing its primary direction.

II.  Equity Capital vs. Debt Capital                                                                                   

      Equity capital represents the personal investment of the owner(s) in a business.

      Debt capital represents the financing that a small business owner has secured and must repay with interest.            

III. Sources of Equity Financing                                                                                        

      Potential sources of equity financing include this list of financing resources:

·         Personal savings – The most common form of equity funds is the entrepreneur's pool of personal savings. Entrepreneurs should expect to provide between 20 percent -50 percent of the required start-up funds.
                                                                                                                             

·         Friends and family members – Consider the potential ramifications and consequences with this source!                                                                                                                 

·         Angels – Angels are wealthy individuals, often entrepreneurs themselves, who invest in business start-ups in exchange for an equity stake. They fill a specific equity financing gap and the key challenge is to find them!                                                                                    

·         Partners – Entrepreneurs can choose to take on a partner(s) to expand their capital.    

·         Venture capital companies – Venture capital companies are private, for profit organizations that purchase equity positions in young businesses with high growth and profit potential.  

·         Corporate venture capital – Some large corporations, both U.S. and foreign, finance and invest in small companies.                                                                                                 

·         Public stock sale – One method of raising large capital is to sell shares of stock, known as “going public.”

¨       An initial public offering (IPO) is when a company raises capital by selling share of its stock to the public for the first time. Refer to Figure 13.6: initial Public Offerings (IPOs)                                                                                                                

¨       Successful IPO candidates are strong in the areas of consistent growth, strong earnings, 3 to 5 years of audited financial statements, a solid position in a growth industry, and a sound management team with a strong board of directors.                              

¨       Advantages of going public center on access to more capital with a higher business profile.                                                                                                                 

¨       Disadvantages of going public include potential dilution of the founder’s position, loss of control, loss of privacy, SEC and investor reporting requirements, filing expenses, pressure for short-term performance, and additional time requirements.            

¨       The registration process alone is a required, time-demanding task.
                                                                                                                

¨       Simplified registrations and exemptions enable smaller companies easier access to capital markets through some recently improved options for small businesses.           

IV. The Nature of Debt Financing                                                                                      

      Debt financing involves funds that small business owners borrow and must repay with interest. Borrowed capital does allow entrepreneurs to maintain complete ownership.

      There are many sources of debt capital and they include:

·         Commercial banks

·         Asset-based lenders

·         Vendor financing

·         Equipment suppliers

·         Commercial finance companies

·         Savings and loan associations

·         Stock brokers

·         Credit unions

·         Private placements

·         Small Business Investment Companies (SBICs)

·         Small Business Lending Companies (SBLCs)

      We will begin by talking about funds from commercial banks, one of the most common sources of debt capital for entrepreneurs: loans from commercial banks.

      Commercial Banks offer both short- and long-term loans.                                            

      In addition to the text

      The six most common reasons for rejection from commercial banks are:                      
                                                                                                                                         

1.      No interest in making small business loans

2.      Uninformed about your business

3.      Reason for financing

4.      Lack of cash flow

5.      Lack of collateral

6.      Need to back the business loan with personal assets

      The sources of debt capital from commercial banks can be short –term, immediate and long-term.

      Asset-based borrowing occurs when a business can borrow money by pledging collateral, such as accounts receivable and inventory. The advance rate is the percentage of an asset’s value that a lender will loan.     

     

      In addition to the sources of debt capital that we have discussed, other sources of debt capital include:                         

·         Vendor financing – or trade credit

·         Equipment suppliers

·         Commercial finance companies

·         Saving and loan association

·         Stock brokerage houses

·         Credit unions                                                                                                       

·         Private placements

·         Small Business Investment Companies (SBICs)

·         Small Business Lending Companies (SBLICs)

·         Federally sponsored programs

      All of these sources merit consideration. Evaluating each option enables the entrepreneur to identify the most attractive source for financing the venture.

V.  Federally Sponsored Programs                                                                                    

      The federal government provides financing options for entrepreneurs and some of those include:

·         Economic Development Administration (EDA)

·         Department of Housing and Urban Development (HUD)

·         U.S. Department of Agriculture’s Rural Business (USDA) – Cooperative Service

·         Small Business Innovation Research (SBIR)

·         The Small Business Technology Transfer Program (STTR)

·         Small Business Administration (SBA)

VI. Small Business Administration (SBA)                                                                        

The SBA has several programs designed to help finance both start-up and existing businesses that do not qualify for traditional loans. SBA programs include:

·         Patriot Express Program

·         CommunityExpress Program

·         7(A) Loan Guaranty Program

·         Section 504 Certified Development Company Program

·         Microloan Program

·         The Capline Program                                                                                           

·         Loans involving international trade

§  Export Working Capital

§  International Trade Program

·         Disaster Loans

Figure 13.7: SBA 7(A) Guaranteed Loans illustrates the increased volume of these types of SBA loans in recent years.

VII.  State and Local Loan Development Programs                                                        

State and local loan development programs come in a variety of forms. These loan programs assist small businesses that will potentially create the greatest number of jobs and offer economic benefit to the communities they serve.

VIII.    Internal Methods of Financing                                                                               

Bootstrap financing is a term used for internal methods of financing that includes factoring, leasing rather than purchasing equipment, using credit cards, and managing the business frugally. Examples of internal methods of financing include factoring accounts receivable, leasing, using credit cards.

In fact, credit cards are the most popular source of financing. Entrepreneurs also find financing through retained earnings, bank loans, loans from family and friends, vendor credit, SBA loans, and leasing. Figure 13.8: “Where Do Small Businesses Get Their Financing?” displays the percentage of business owners that use there techniques in ranked order.                                                                              

Chapter 14     Choosing the Right Location and Layout

Key words: index of retail saturation, Layout, Empowerment zones, Business incubators

Introduction                                                                                                                          

The location for a business has far-reaching and often long-lasting effects on a small company’s future. Entrepreneurs who choose their locations wisely can establish an important competitive advantage over rivals who choose their locations haphazardly. The location selection process is challenging and can set the course for the future of the enterprise.

I.    Location: A Source of Competitive Advantage                                                            

The location decision is important to entrepreneurs and considers a series of analyses of critical factors unique to each business. Tax rates, availability of qualified workers, the quality of the infrastructure, traffic patterns, and other factors vary from one site to another. Studies show that these factors can influence the growth rate and the ultimate success of a business. First, let’s address the decision regarding the region.

1.      Choosing the region                                                                                             

What region of the country has the characteristics necessary for a new business to succeed? A wealth of regional information is available online through the U.S. Census Bureau’s site, www.uscensus.gov. This information is extensive and it is free! With the availability of the 2010 census data, it is also current. A number of periodicals are available offering additional insight into an analysis of a region.

2.      Choosing the state                                                                                                

Each state has an economic development office to recruit new businesses. This information may be biased, but still is an excellent source to understand more about what the state has to offer a business. This office may provide information including the state’s:  

·         Proximity to markets

·         Proximity to raw materials

·         Wage rates

·         Labor supply

·         Business climate

·         Tax rates

·         Internet access

·         Total operating costs

3.      Choosing the city                                                                                                 

Successful small businesses within a city tend to track with population growth. The full range of considerations for city selection include:

·         Population trends

·         Competition

·         Clustering

·         Compatibility with the community

·         Local laws and regulations

·         Appropriate infrastructure

·         Cost of utilities and public services

·         Incentives

·         Quality of life

4.      Choosing the site

Few decisions are as important for retailer and service firms as the choice of a location. Because their success depends on a steady flow of customers, these businesses must locate with their target customers’ convenience and preferences in mind. Let’s explore the factors that influence the site selection in detail.

II.    Location Criteria for Retailers and Service Businesses:                                             

The following are important considerations for retail and service locations:

·         Trade area size

·         Retail compatibility

·         Degree of competition

·         Index of retail saturation                                                                                      

One of the best measures of the level of saturation in an area is the index of retail saturation, or the IRS. This takes into account both the number of customers and the intensity of competition in a trading area. The calculation measures the potential sales per square foot of a store space for a given product within a specific trading area. Ideally, this insight will enable retailers to locate where opportunity is the greatest.

·         Reilly’s law of retail gravitation                                                                           

Published in 1931, this classic work in market analysis uses an analogy of gravity to estimate the attractiveness of a particular business to potential customers. The formula provides insight into customers’ perception of the location as a “destination” and estimates the trade boundary between two market areas.

·         Transportation network                                                                                        

·         Physical, racial, or emotional barriers

·         Political barriers

·         Customer traffic

·         Adequate parking

·         Reputation

·         Room for expansion

·         Visibility

III. Location Options for Retail and Service Businesses                                                   

      Retail and service locations have additional consideration to optimize their location selection.

·         Central business district

·         Neighborhood locations

·         Shopping centers and malls

Shopping centers and malls may offer excellent locations based on their focus and reach.
                                                                                                                                         

·         Neighborhood shopping centers – Serves up to 40,000 people with 3-12 stores

·         Community shopping centers – Serves up to 150,000 with 12-50 stores

·         Power centers – A mall with convenience of a neighborhood shopping center

·         Theme or festival centers – Unifying theme, often involving entertainment
                                                                                                                             

·         Outlet centers – Manufacturers and retailers sell name-brand goods and discount prices

·         Lifestyle centers – Located near affluent residential neighborhoods with a business district-village style design

·         Regional shopping malls – Draws from a large area with 50-100 stores
                                                                                                                             

·         Super-regional shopping malls – Similar to regional malls  but larger such as Mall of America or West Edmonton Mall in Canada, the world’s largest mall

Figure 14.1: Shopping Mall Patterns, illustrates the age distribution of mall visitors and the influence of the teenage audience. 

In addition, retail and services business should also consider the implication of these factors:

·         Locating near competitors

·         Locating inside large retail stores

·         Forces of the outlying areas

·         Home-based business options

IV. The Location Decision for Manufacturers                                                                  

      The location decision for manufactures is equally important for very different reasons. Suitable manufacturing plant sites are limited by zoning regulations, utility and transportation needs, proximity to raw materials, and other special requirements.

·         Foreign trade zones                                                                                              

Figure 14.2: How a Foreign Trade Zone (FTZ) Works illustrates the influence tariffs, duties, and excise taxes have on a small company.

·         Empowerment zones                                                                                            

Empowerment zones are areas that offer business tax breaks on the investments the business makes within zone boundaries. Companies may receive federal tax credits, grants, and loans for hiring workers living in empowerment zones and for the investments they make in plant and equipment within these specified areas.

·         Business incubators                                                                                              

For many start-up companies, a business incubator may make the ideal initial location. A business incubator is an organization that combines low-cost, flexible rental space with a multitude of support services for its small business residents. An incubator’s goal is to nurture young companies during the volatile start-up period and help the business survive until they are strong enough to go out on their own.

V.  Layout and Design Considerations                                                                               

      Once an entrepreneur chooses the best location for his or her business, the next issue to address is designing the proper layout for the space to maximize sales (retail) or productivity (manufacturing or service). Layout is the logical arrangement of the physical facilities in a business that contributes to efficient operations, increased productivity, and higher sales.

      External layout factors involve these considerations:                                                       

·         Adequate size

·         External appearance

·         Entrances

·         Creative window displays                                                                                    

·         Compliance with Americans with Disabilities Act

·         Signage

      The signage for the business should:                                                                                

·         Tell potential customers who you are and what you are selling

·         Have contrasting colors and simple typeface

·         Be visible, simple and clear

·         Legible both day and night

·         Be maintained

·         Comply with all local sign ordinances

      The interior of the building needs to address issues relating to:                                       

·         Ergonomics

·         Proper layout and design to optimize productivity, efficiency, and sales

·         Proper lighting and fixtures

·         Sound and scent should appear to all customers

·         Environmental-friendly design for efficiency and appeal.

      Layout guidelines are key factors to connect with customers and optimize sales revenues. An ideal layout demonstrates that the business:                                                                                        

·         Knows its customers and their buying habits

·         Displays merchandise attractively

·         Displays complementary items together

·         Recognizes the value and the importance of floor space

Figure 14.4: Space Values for a Small Store illustrates the relative importance and selling power of each section of a store. As customers enter the store, 50 percent of the store’s “selling power is in the front, right-hand section of the space.                                                                                  

      This section contains information in addition to the text:

VI. Layout: Maximizing Revenues, Increasing Efficiency, or Reducing Cost

      The layout for retailers falls into one of three patterns:

·         Grid layout                                                                                                           

Rectangular isles to control traffic flow and maximize space efficiency.

·         Free-form layout                                                                                                  

Informal “wandering” flow to create interest.

·         Boutique layout                                                                                                    

Divides the store into individual shopping areas with their own theme and feel.

      Factors to consider in manufacturing layouts are:                                                          

·         Type of product

·         Type of production process

·         Ergonomic consideration

·         Economic considerations

·         Space availability within the facility

      Layout for manufacturers should consider:                                                                      

·         Designing layouts

·         Analyzing production layouts including these considerations:

·         Transportation

·         Inventory

·         Motion

·         Waiting

·         Overproduction

·         Processing

·         Defects

Chapter 15     Global Aspects of Entrepreneurship

Key words: countertrade, Bartering, WTO, GATT, NAFTA

Introduction                                                                                                                          

The global marketplace offers tremendous potential for many entrepreneurial companies. The Internet combined with other forms of affordable technology, increased access to information on conducting global business, and the growing interdependence of the world’s economies have made it easier than ever before for companies to engage in international trade.

I.    Why Go Global?

Today’s business environment is highly competitive and businesses can no longer consider themselves as domestic companies if they truly want to compete.

The advantages of going global include:                                                                       

·         Offset sales declines in domestic markets

·         Increase sales and profits

·         Extend the product life cycle

·         Lower manufacturing costs

·         Lower product cost

·         Improve competitive position

·         Raise quality levels

·         Become more customer-oriented

      Global questions to address:

·         Are there profitable markets?

·         Do we have the necessary resources?

·         Do we understand the cultures, economic systems, and other unique aspects of prospective trading nations?

·         Are there viable exit strategies?

·         Can we afford not to go global?

II.  Strategies for Going Global                                                                                          

We can list nine strategies for going global.

1.      Creating a presence on the Web

2.      Relying of trade intermediaries

3.      Creating joint ventures

4.      Foreign licensing

5.      International franchising

6.      Countertrading and bartering

7.      Exporting

8.      Importing and outsourcing

9.      Establishing International locations

We will now address each of these nine global strategies in detail.

·         Creating a presence on the Web                                                                          

The power and reach of the Internet is staggering and the worldwide user base continues to grow.

·         Trade intermediaries may be wise to involve such as:                                        

·         Export management companies

·         Export trading companies (ETCs)

·         Manufacturer’s export agents (MEAs)

·         Export merchants

·         Resident buying offices

·         Foreign distributors

·         Joint ventures                                                                                                       

The most important ingredient for a joint venture is to choose the right partner and then use the joint venture experience as a learning process. Joint ventures may be:

·         Domestic – when two or more U.S. companies form an alliance to export their goods and services abroad.

·         Foreign – when a domestic firm forms an alliance with a company in the target nation

·         Foreign licensing                                                                                                  

Rather than sell products or service directly to international customers, some small companies enter foreign markets by licensing businesses in other nation to use their patents, trademarks, copyrights, technology, processes, or products. These companies collect royalties in exchange. There is risk including too much knowledge and control by the foreign organization. Securing proper patent, trademark, and copyright protection in advance can minimize those risks.

·         International franchising                                                                                      

A growing number of franchises have been attracted to international markets to boost sales and profits and the domestic market has become increasing saturated. Following these steps is important.

Figure 15.3: Which Countries Rate Best for Franchising? graphs this global ranking.                    

·         Countertrading and bartering                                                                               

A countertrade is a transaction in which a company selling goods in a foreign country agrees to promote investment and trade in that country.

Bartering is an exchange of goods and services for other goods and services and offers advantages when doing business with countries lacking convertible currency.

·         The Exporting Process                                                                                         

Anyone can export. Although small business accounts for greater than 90 percent of companies involved in exporting, these businesses generate just 21 percent of the dollar value of the nation’s exports.

Figure 15.4 titled “Small Business Exports: Number of Countries to Which Small Companies Export” illustrates this percentage allocation.

The exporting process should start by developing an export business plan and the following steps may enhance the chances of success:                                                                  

1.      Recognize that all companies have the potential to export.

2.      Analyze your product or service.

3.      Analyze your commitment to developing export markets.

4.      Research potential markets and select your target markets.

5.      Develop a distribution strategy.                                                               

6.      Find your customers.

7.      Find financing for export sales.

8.      Ship your goods.

9.      Collect your money.

A letter of credit enables a business to complete transactions with foreign buyers. Figure 15.5: How a Letter of Credit Works maps out this process.                                                                           

·         Establish international locations                                                                          

One a business establishes a presence in an international market, some set up permanent locations. This may require a substantial investment and present unique management issues and other challenges. For example, securing the necessary licenses and permits may take a substantial amount of time and money.

·         Use importing and outsourcing                                                                           

In the U.S. alone, companies import more than $2.5 trillion worth of goods and services each year. Entrepreneurs who are considering importing good and services or outsourcing their manufacturing to foreign countries should follow these important steps.

IV.  Barriers to International Trade                                                                                  

Many U.S. firms are simply ignorant about exporting opportunities. In addition, some governments use a variety of barriers that block free trade among nations in an attempt to protect their own industries. Foreign firms are restricted access into global markets and all consumers suffer and pay the price.       Barriers to international trade include domestic and international barriers.

Domestic barriers include:

·         Government imposed barriers

·         The “I’m too small to export” attitude

·         Lack of information about how to get started

International barriers include:                                                                                         

·         Lack of available financing

·         Tariffs barriers

·         Nontariff barriers

·         Quotas

·         Embargos                                                                                                             

·         Dumping

·         Political barriers                                                                                                   

·         Business barriers

·         Cultural barriers

V.  International Trade Agreements                                                                                 

In an attempt to boost world trade and address trade issues, several organizations and agreements among nations exist. The most prominent organizations include:

·         The World Trade Organization (WTO) mission is to settle trade disputes among member nations, replacing the General Agreement on Tariffs and Trade (GATT) in 1995.

·         The North American Free Trade Agreement (NAFTA) created a free trade area among Canada, Mexico, and the United States.

·         The Dominican Republic-Central America Free Trade Agreement (CAFTA-DR and also referred to as CAFTA) is to Central America what NAFTA is to North America. CAFTA was implemented between 2006 and 2008 to promote free trade among the U.S. and six Central American countries.

Guidelines for enhancing success in international market include:                                      

·         Take time to learn about the market before jumping in.

·         Seek a presence in North American, Europe, and Asia

·         Make yourself at home in all three of the world’s key markets – North American, Europe and Asia.

·         Appeal to the similarities in the segments while you recognize the differences in local cultures

·         Develop new products for the world market

·         Learn foreign customs and languages

·         “Glocalize” and make global decisions based on local resources and markets.
                                                                                                                             

·         Recruit and retain multicultural employees

·         Hire local managers to staff foreign locations

·         Do what you need to regardless of potential employment impacts at home

·         Consider using partners and joint ventures to break into foreign markets

Chapter 16     Building a New Venture Team and
Planning for the Next Generation

Key words: Leadership, Job simplification, Job enlargement, Job rotation, Job enrichment

Introduction                                                                                                                          

Small business managers take on a wide range of roles and responsibilities, but the most important is the role of leader. This can present significant challenges for the entrepreneur and yet is critical to the success of the venture.

I.    Leadership in the New Economy                                                                                 

Leadership is the process of influencing and inspiring others to work to achieve a common goal and then giving them the power and the freedom to achieve it. Management and leadership are not the same; yet both are essential to a small company’s success.

Leadership without management is unbridled; management without leadership is uninspired. Leadership gets a small business going; management keeps it going.

Effective business should exhibit the following characteristics:                                     

·         Innovative – They develop new ideas

·         Passionate – To create inspiration

·         Willing to take risk – Understanding the risk/return trade off

·         Adaptable – Modifying their style as needed

Effective leaders consistently exhibit certain behaviors:                                                

1.       Create a set of values and beliefs for employees and passionately pursue them.

2.       Establish a culture of ethics.

3.       Define and then constantly reinforce the vision they have for the company.

4.       Respect and support their employees.

4.      Set the example for their employees.

5.       Create a climate of trust in the organization.

6.       Build credibility with their employees.

7.       Focus employees’ efforts on challenging goals and on reaching those goals.
                                                                                                                             

8.       Provide the resources employees need to achieve their goals.

9.       Communicate with their employees.

10.    Listen to their customers.

11.    Value the diversity of their workers.

12.    Celebrate their workers’ successes.

13.    Are willing to take risks.

14.    Encourage creativity among their workers.

15.    Maintain a sense of humor.

16.    Create an environment of motivation, training, and freedom to achieve goals.
                                                                                                                             

17.    Become a catalyst for change when change is needed.

18.    Become a catalyst for change when change is needed.

19.    Develop leadership talent.

20.    Keep their eyes on the horizon.

To become effective, a small business leader must perform three vital tasks:               

1.      Add the right employees and constantly improve their skills.

2.      Create a culture for retaining employees.

3.      Plan for passing the torch to the next generation of leadership.

II.  Building an Entrepreneurial Team: Hiring the Right Employees                           

“Bad hires” can poison a small company’s culture. Hiring mangers say that they regret 50 percent of the hiring decisions. One study by Leadership IQ reports that 46 percent of the newly hired employees fail in their new jobs within 18 months. The study also reveals that the most common cause of failure was a lack of interpersonal skills. This can be avoided through improving hiring techniques.  

The labor force is changing and a “skilled worker gap” is a potential concern. Figure 16.1: Annual Growth Rate in the U.S. Labor Force plots this projected distribution of workers by decade.                            

Companies need to commit to hiring the best talent available and bringing new an better skills into the organization.  

      Hiring managers can escalate the process to a strategic recruiting level by:                 

·         Looking inside the company first

·         Encouraging employee referrals

·         Making employment advertisements stand out

·         Using the Internet as a recruiting tool

·         Recruiting on campus

·         Getting involved in a college internship program                                               

·         Recruiting retired workers

·         Considering the use of offbeat recruiting techniques
This may include social networking, connecting with college students on a personal level, and posting online videos about the job opportunities at your organization.

·         Offering what workers want
In addition to compensation and benefits, works are looking for options such as flexible work schedules and telecommunicating options. Gaining an understanding of the workforce can provide insight regarding what to expect and how to recruit future employees more effectively.

·         Create practical job descriptions and job specifications through a job analysis.
                                                                                                                             

·         Creating a job description

·         Creating job specifications

Sample job descriptions may be helpful in the process and the Dictionary of Occupation Titles is one resource to investigate.    

      Next, plan an effective interview.                                                                                   

·         Involve others in the interview process.                                                              

·         Developing a series of core questions and ask them of every candidate.

·         Ask open-ended questions rather than closed “yes or no” questions.

·         Create hypothetical situations candidates would likely encounter on the job and ask how they would handle them. A situation interview is one way to accomplish this.

·         Probe for specific examples in the candidates’ past work experience that demonstrate the necessary traits and characteristics.                                                                                     

·         Ask candidates to describe a recent success and a recent failure and how they dealt with them.

·         Arrange a noninterview setting that allows others to observe the candidate in an informal setting.

      Again, hiring the right employees involves taking the time and effort to:                      

·         Conduct a job analysis and create job descriptions and job specifications

·         Plan an effective interview

·         Conduct the interview

      Conducting an effective interview begins with:                                                             

·         Breaking the ice

·         Asking questions

·         Selling the candidate on the company

Be disciplined and check references and conduct a background check. These are essential tasks for finding the right people for your company. Hiring is an important decision. It takes an investment of time and effort to do this important step. If this is not done, the time invested may end up inviting a problem into the work place.
                                                                                                                                         

III.   Creating an Organizational Culture That Encourages Employee Retention
                                                                                                                                               

Company culture is the unwritten code of conduct that governs the behavior, attitudes, relationships, and style of an organization. For a small company, having the right kind of structure and culture can lead to a competitive advantage. The most successful companies rely on the following principles:

·         Distinctive, unwritten, informal code of conduct that governs the behavior, attitudes, relationships, and style of an organization.

·         It describes “the way we do things around here.”

·         In small, entrepreneurial companies, culture plays an important part in gaining a competitive edge.

      Characteristics of a positive culture include:                                                                  

·         Respect for work and life balance

·         A sense of purpose

·         A sense of fun

·         Diversity

·         Integrity

·         Participative management

·         Learning environment

      Job design strategies involve:                                                                                         

·         Job simplification – breaks work down and standardizes each task

·         Job enlargement – more tasks to broaden its scope

·         Job rotation – cross-training benefits

·         Job enrichment – motivates  through increased responsibilities                       

·         Five core characteristics –

1.        Skill variety

2.        Task identity

3.        Task significance

4.        Autonomy

5.        Feedback

·         Flextime – employees have input into their work hours                                     

·         Job sharing – two or more share a single full-time position

·         Flexplace – employees work from other locations                                              

·         Telecommuting – employees work from home

      Rewards and compensation involve:                                                                              

·         Motivating workers through rewards that meet their individual needs

·         Money can work as an effective motivator—up to a point.
Non-monetary rewards can be through pay-for-performance systems, profit-sharing plans, open book management and cafeteria benefit plans. These intangible rewards are very powerful yet inexpensive and entrepreneurs tend to relay on nonmonetary rewards.

Figure 16.3: U.S. Workforce by Generation illustrates the distribution of the U.S. workforce by age.                  

IV.   Management Succession: Passing the Torch of Leadership                                                                        

Family-owned businesses make up 90 percent of all U.S. companies and account for 64 percent of the U.S. GDP, comprising more than one-third of the Fortune 500 companies. Family businesses have creased 80% of the U.S. economy’s net new jobs over the last two decades.

However, only 30 percent of the first-generation businesses survive into the second generation, only 12 percent make it to the third generation, and a meager 3 percent to the fourth generation.                           

For most growing family businesses, 81 percent of them, the leadership will be passed on to the next generation. However, just 29 percent of family business owners have prepared a written management succession plan.   

The succession plan specifies how and potentially when the next generation will assume responsibilities. A management succession plan involves:                                                                       

Step 1: Select the successor

Step 2: Create a survival kit for the successor

Step 3: Groom the successor

Step 4: Promote an environment of trust and respect

Step 5: Cope with the financial realities of estate and gift taxes

Estate taxes are a factor in this process. There are ways to address this issue before it becomes a problem.                 

·         Buy/sell agreement

·         Lifetime gifting

·         Setting up a trust

§  Bypass trust

§  Irrevocable life insurance trust

§  Irrevocable asset trust

§  Grantor-retained annuity trust (GRAT)

·         Estate freeze

·         Family limited partnership (FLP)

      Entrepreneurs often use one or two exit strategies:                                                  

·         Sell to outsiders

·         Sell to insiders

§  Cash plus a note

§  Leveraged buyout (LBO)

§  Employee stock ownership plan (ESOP)