Sexton s experiences in entrepreneurship

EXPERIENCESIN ENTREPRENEURSHIP ANDSMALL BUSINESS MANACEMENT DONALDL.SEXTONPHILIPM.\AN AUKEN EXPERIENCES IN ENTREPRENEURSHIP AND SMALLBUSINESS MANACEMENT DONALD L SEXTON Caruth ProJessorof Entrepreneurship Center for Pivate Enterprise and lintrepreneurship Baylor University PHILIP M VAN AUKEN Centerfor Private Enterpise and Entrepreneurship Bavlor Universitv Prentice-Hall, Inc., Englewood Cliffs, ltlew Jersey 07632 Library of Congress Cataloging in t\tblication Datd Sexton, Donald L i x p e r i e n c e s i n e n t r e p r e n e u r s h i pa n d s m a l l b u s i n e s sm a n a g e m e n t - S m a l lb u s i n e s s - M a n a g e m e n t - C a s es t u d i e s ' 2.-Entrepreneur-Casestudies' I'-Van Auken, II.-Title Philip M 81-13803 6s8'.o22 HD6i.7.S4s AACR2 ISBN 0-13-294884-2 Editorial/production supervision and interior design bY Alice Lrdman Cover design by Carol Zawislak Manufacturing buyer: Ed O'Dougherty o b y P r e n t i c e - H a l l ,I n c , D n g l c w o o d C l i f f s , N ' J All rights reselved No part of this book may be rcproduced in anY form or by any means without permission in writing from the publisher Printed in the United States of America t0 rsBN0-1,3-a1'{88q-a Prentice-HallInternational, lnc., London Prentice-Hallof Australia Pty Limited, Sydney Prentice-Hallof Canada, Ltd., Toronto Prentice-Hallof India Private Limited, New Delhi Prentice-Hallof J aPan, lnc-, TokYo Prentice-Hallof Southeast Asia Pte Ltd.' Singapore Whitehall Books Limite d,Ilellington, New Zealand to CAROL and CAROLYN contents Prefacc xv lntroduction xvii P H A S El : V e n t u r el n i t i a t i o n EXPERIENCE W i c k e rD c s i g n s sit uati onoI manogement cholIengesassociated wllh eachstageof the compznygrowth cycle T h e K l o t h e sK o r n e r of alternativepro forma Jinancialplans 7ssessment vut contenrs P h a r rC o m p o sni g S e r v i c e 13 eorly venturegrowth and finoncing,.relationship with a banker,.business buyou t o ffe r,' femole en trepreneur A s p h c r i cE n t e r p r i s e s difficulties of new venture initiation; forminq the venture team Peppy's Pizza 26 businassplan evulua! ion CraigNichols andGaryHarwcll 44 new venture strllegy and cornpetitive edge E x p l o r a t i oG nraphics 46 new venlurefinancing,'timingof growlh,,charat:leristics of entrepreneurs W a t c r h a uAsq u aS l i d e 55 ossessment of new venturepotential & S Farms 58 financial zssessmenlof an agricultural venture,.formers0s entrepreneurs contents E X P E R I E N C EP H A S EI l : V e n t u r eM a n a g e m e n t lx 65 10 67 C u m b e r l a nC drafts manogementof growth; operationsmanogenlenl 11 80 T h eM l l l i o n a i r e ent of personoI entrepren eur i0| sty Ie SSm ventu re i nvestment strategy,' osse 12 P o l y m a rM a n u f a c t u r i n g smalI businessPlanning 81 13 83 S u nC i t y D c l i v c r Y on key customers, monogementof growth and expansion,'dependence ur businessbuyout,' female en treprene 14 93 Store B i SS k y W e s t e r n system;competitivestrotegyfocused inventory designof computeri/ecl on pricing 15 TelguardSer.'rices 100 busi n essgrowth ; strotegy evoIut i on; en trepreneuri oI Ieadership ; ro le of in largercompanies entrepreneurs 16 E m c r g e n cM y o b i l eG a r a g e promotionol strotegy 108 't7 V c s s eAl p p a r e S l hop 110 entrep reneuri aI p lann i ng; operat i ons p lann i ng 18 S o n i c sS y s t e m s - A u dA i or t s 115 growth strategy; ossessing sm0ll compzny's performance copobility 19 A t k i n sM a c h i n i n g 122 smoll businessmonogerialresponsibilitiesand roles 20 MagicCarpetTravelAgency 124 responseto threateninggovernmentollegislotion 2't OMNISkiProductions businessforecasting 126 22 128 ColonialAmericanKitchens production monlgement; getting new venture through the keyhole; product innovation contents 23 f nfomaticsCorporation businessethics 140 24 C h a m aS t e e l w o r k s 142 smoll businesssociol responsibility; public relotions 25 M i d w e s tM u n i c i p aAl i r p o r t 145 growth planning,.organizationsuruivol 26 E b e r h a r dPt r o d u c t sI,n c morketing research 148 27 K a t h S u r g i c aEl q u i p m e n t cashflow plctnning 150 28 F a n t a s iM a u s i cC o m p a n y 152 profit management;monogeriolphilosophy 29 P e o p l eP r o v i d e r s 160 strotegicplanning,.competitive edge xi = contents 30 167 C a m e r o nM o b i l eH o m e s izotion pted u nion lttem to response P H A S El l l : V e n t u r eT r a n s i t i o n EXPERIENCE 171 31 173 f a n e c kF u r n i t u r e plonning for exPonsion 32 179 PrudhoeBay Oilfield Servicing key portner death; strotegicreolignment 33 183 P h i l m a r kP r o d u c t i o n s to professional manogement moking the tronsition from entrepreneuriol 34 185 lron Kettle Restaurant i c reoI ign m ent teg buyo u t d ec ision; stra 3s 189 C a s n eFr i l t r a t i o nS Y s t e m s compony fomily tronsition in o small business;preporltion for smoll monogement Dameron seems to have a good understanding of the various market segments in the toy industry, but he clearly has rejected any notion of carget marketing ("go after all narkets large enough to be profirable") Gauglng from Aninatorrs successful slx year track record (Exhibit 5), the "I following statement by Dameron rvould not appear to be idle boasting: think our nonspecialized approach separates us from competltors and persuades customers to form a lasEing relationship with us." past success, Anlmator cannot seriously Despite expect to be all thlngs people to all Such a strategy could be suicide over the long haul for a sma11 company If Darneron resists his target narket by age clarifying groups, he should at least attempt to better spe11 out his product line ( w h l c h i t e m s h e r ^ r o u dr n o s t l i k e strategy to se1l to each urarket segment he inlends to cater to) Recornmendpolicy guidelines for the ma1l expansion issue The authors canrt help but conclude that Dameron 1s being blinded by what he perceives to be the glamor of na11s The wlsdon of converting currently successful sEores to na11 operations is hardly apparent to the authors, even though rnal1s geoerate a predictable anount of traffic flow during the tollday season Dameron adnits that his preseni stores are attractlve in appearance anC iocated in good traffic The finanF€.tterns cial success cf the AnLnator chain tns already been aliuded to ln short, there appears to be no compelling rational reason why Dameron lrould want to get into the higher rent and overhead associated with ma11s, some of which are not yet even built Dameron night well to ask hinself what he is in business for: to generate a healthy profit or tc be at the forefront of ne\r retal1lng trends What are the inherent risks and opportunities of rna11 expanslon? Burrell Dulany enumerates rnost of these towards the end of the case The authors would only add one other thought Boyd Daroeron must bear in mlnd Ehat the success of locating in a rnall ls by no neans assured He seems to assume that ina11s are some sort of a retalling In necca actualiEy rna11s are sinply one more business situation requi-ring rational analysis and applicat:lon of business common sense To abandon a good "sure thing" in favor of a possi.ble better thing would hardly appear !o be econoprudent Ma11 sLore operations normally change ownership qulte mically Frequently often the third ovlner of a store ln a mal1 1s the first Lo generate any real profits SICORSKIAND ASSOCIATES Issues l Techniques Financiai Business for buying evaluation buy-out and selling businesses of a business tactlcs I.Jhy would an errtrepreneur prefer than start his or her own? *"o purchase an ex_fgli-r1A-lgglryjj_Ig$9! l He or tunity t The entrepreneur start-up value He or she may be experleneed ln the lndustry and percelve to sEimulate the companyrs perfornance may be able she feel co acqulre the rnarket will not assets support at an oppor_ be10w replacement another The entrepreneur may slmply wlsh to avold the nunerous worries associated with new venture start_up or conpetltor hassles and Even though the entrepreneur be buylng sone headaches, he or she ls also buying an ongoing business wlth a "rr"toru base, suppllers es-tabllshed, a recognlzed name, and in sone cases, an already devel0ped relationship with the flnancial communltv 6' Loans are much easier to obtain for startlng a nei^rone for buylng an existlng lon noney of buslness the tine than vaLue of urtinately any business must be appralsed on the basis of what return 1ts owners/investors could earn on allernate lnvestments; hence buslness worth is virtually synonynous wlth the tlne value of oroney Frorn the standpoint of how the lrorth of money declines over tlme aL to inflatlon, business valuation 1s agaln a f,nction of rnoneyrs tlne value Ar.r four of the evaluatlon urethods discussed by sicorskl revolve around tlme value consideratlons As the rlsk free lnterest rate lncreases, the flrnrs xnent must also increase r]nder current conditlons wlth paying about 19 percent, a relatlvely stable firn would least 20-23 percent Besldes the thlnes mentloned by Mr Slcorskr, what other return on lnvestrlsk free noney need co return at factors should -nager1a1ab11ityandknow1edgeofthebus1nessandits lndus try The flrnrs strengths Dependency of Pendlng Lease arrangenents Depreciatlon Union contracts Supplier contracts Exlstlng credit cornpetl'lve standing, and weaknesses the lawsults lncluding market conpany on a few key custoners against schedule policy the conpa.ny share, lnage, and 10 Age of l ! Condition accounts of recelvable equipment and furniture NARDIS CREATIONS I ssue s l Business Strategic realignment Business reorganizatlon turnaround Develop the l981-1982 prioritles actlon for tlonal changes Dodgers plan for Nardis turnaround the company, inplernentation prloritles turnaround should Creations guldelines, be the Recommend and organiza- followlng: I Weeding out and renixing the product llne: glft drop the falllng line; reduce Ehe types of staEionery carrled to only the rnost profitable; reduce the number of cards offered, agaln ln keeping with profitability; trin down Ehe number of envelope options to enable (The profitabllity productlon runs longer, more efficlent analysis product 1ines, the estlmated assoclated wlth the various savings, and pro forma cash flows are presenLed ln Appendix A, B, and C ahead.) Replace the controller sulEants to redesi-gn Sell off the dead staElonery working capltal ReLire Revltallze unrketing hrith someone nore qualified and retain conthe Nardls accountlng and informatlon systems lnventory head Jererny Blake the nondvnamic Nardis Conslder a new equity long-term debt What dlfficulties is infusion and sales sales director needed Henry Gladstone force to bolster Todd Dodge 1lke1y to generate lonedlately Ehe cornpanyrs conslderable to encounter in irnplementlng your Dlfficulties: l Employee resistance UnwlJ.lingness tlve ideas Further communication breakdowns belween Controller Manager as the new financial inforrnation sysEen is Opposltion of to Blake from present personnel changes and Gladstone Nardls sales oz to retlre or to accept representatives any lnnova- and Accountlng implemented to sales changes Unwillingness Advlce l of Nardls to generate additional equlty to Todd Dodge C,et the conplete, unequlvocal ,t:r:;':il persuaslvelv :i:':;:l;":nd Be prepared to accept support of the Nardls changes swlfrly :::il::: "a1 3' 4' fanlly explain crltlclsn to family ro nlnirnlze personnel and be ernbrolled reslsrance the reasons ln for rine each of controversv ? The answer to thls questl0n depends on the organlzatlonal context: large 11 ls' how the u"*::: of a ,tonon! ".j"t.o uy ttri t,r.r or-d usually Eanager, etc Eurnaround irtrsrs " p.oi.""io.r.r ,"r.gu." ;h;-;;*.ther peoplers companles rather than their own I"-i;i; context, t h e y i l ;w ;;o ,u l d n o t b e classlfled as entrepreneurs in the rradlrlonal sense as change agents w'thln thelr organlzatl.ns, turnaround managers nlght be thought of as entrepreneurs-_internal opportunlty seeRers APPENDIX A Proflrabiliry Analysls $ : : :G" :Sa n d o p e r C G & A t,g}4 6oq ',ii: lelrrlq conrrlburion 88 (000,s) -ah -;; ,i: r zoAt t tl 2,318 ,i :'Jii (50) (68) Ratlonale l 2' Sales - g70 per o1d9r- fo1 cards, gl7 per order for Subtracr rotals from toiai s"ie" on f.r.or Remalnder 1s glft sa1es cGS & oper' - starLonery ;;;;;;"" (a) Nuurber of orders of statlonery Is 251 0f thar of cards Cosr of urarerials is estlnated-;; ;; rhe sane cost of packaging rhe saure cosE of J""igi'a.rirr.a.ry more for cards Cost of an order of stationery 1s estl_ nared a r 2o t a n o r d e r o f c a r d s l s i - " i isz = rcZ (b) cffrs were figured at " 1o f t o t " i C C S - p f , r $" , 0 for the catalog c & A ;iB;:* Selling - on percenr of sales _ srarlonery at 62 and gifts Flgured on percent of sales: statlonery APPENDIX B Savlngs Estirnations l D i _ s c o nt l l r u e S t a E i o n e r , v rates Uperations $343,000 67., glfts at 0.97 G & A Selllng , ,0 0 1I6,000 Expense -D i s c o n t i n u e G i f E s Cosr;F Saies & Operarlons G & A Transport & Storage Catalogue $ 2I,500 6,000 4,900 50,000 Se11 Excess InvenEorv statlonery & Gifts Other (Sel1 at 402) Sell Statlonery qg:lqo $53,000 12,000 $ 65,000 8!!90 Machines $33,000 (sel1 Ar 40%) $498,000 $13,000 Reduced Interest Expense Froro Shlftlng to Long-TErrn-nebt Pro SALES (est 182 growrh rate) Cost of Goods and Oper G & A Selling Total Expenses Operatlon Profit Inte rest Increase ln Receivables Incorne before Taxes Taxes Net Profir Depreciation One Tine Cash Flows Sale of Inventory Sale of Machinery Net Cash Flow $ 5,000 APPENDIX C Forma Cash Flow \ Lard s unly) r9B0 1981 s r,eoz z2d6 609 1,903 -T 189 I28 6l 848 2,479 5,826 444 r05 l5 aar l7o r335 o1 r)4 73 isrq 7r,o 2,050 , 75 338 r25 t5 -19=8 T:m -l 1982 60 13 -T73 43 o $ 253 0 $ l9-.7 Notes: 1980 sales Expenses breakdown cornes from profitability Cost of Goods and operating expense has history of lncrease in sales So used 16% increase per year G & A and selling 5' rnterest is reduced as one tr.ne c-ash flows flows are used to reduce debt reduced by 77" to give sales of cards on1y analysis chart being " / "b e L o v expense - used lg% o.{ and subsequent positlve cash 6, Taxes in l98l are 1ow