Chapter 20

Copyright 2011 by the McGraw-Hill Companies, I nc. All rights reserved. McGraw-Hill/I rwin
Achieving Success
in the Small Business
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
20-4
Figure 20.1
Life Cycle Stages
20-5
Emergence
Existence
Survival Success
Resource
Maturity
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
20-9
Recency Frequency
Potency Recommendation
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 owners 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
20-14
Figure 20.2
The Hierarchy of
Business Outcomes
20-15
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.

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
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
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 firms 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 firms 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 firms
assets are sold by the bankruptcy trustee
and the proceeds used to pay the firms
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
20-27
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).
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