Chapter 3: Establishing a business

Learning outcomes

Understand and discuss Understand and discuss the key considerations that are applicable when a form of business has to be chosen

Distinguish Distinguish between the different forms of enterprise found in South Africa

Explain Explain the objectives, importance and need for a business plan

Evaluate Evaluate a business plan

Give Give an overview of a business plan

Identify Identify the location factors and the impact of these on a business.
Chapter outline

Introduction The legal forms of Developing a The location of the Summary

ownership business plan for the business
new business
The legal form of ownership

There are various forms of enterprises an entrepreneur can

choose from to conduct his/her business.

The first fundamental issue an entrepreneur is faced with is to

choose the type of enterprise.

Understanding the features of each enterprise and how it will

influence the entrepreneur’s circumstances is the key to
choosing the right form of ownership.
The legal form of ownership (continued)

Considerations in choosing a form of

enterprise:
Legal (or juristic) personality
Continuity or perpetual existence
Limited liability
Degree of control or management
authority
Potential for capital acquisition
Compliance with legal formalities
and regulations
Taxation
Transferability of interests.
Sole proprietorship

• A business that is owned and managed by

one individual.
 The partnership
• A contractual relationship between two or more persons who operate
a lawful business with the objective of making a profit.
The close corporation

• May have one or more members (not more

than 10) that own and control the close
corporation, that exists as a separate legal
person.
The company

• A company is developed to obtain more

capital than they could through a sole
proprietorship or partnership, and
ownership and control is separated.
The company (continued)

Public companies
Private companies
Profit companies State-owned companies
Personal liability

Non-profit companies
Forms of Business Ownership
Differences between a public company and
a private company

Difference in the
Difference in director Difference in
number of members
number requirements transferability of shares
required and allowed

Private company not as

General public cannot strictly controlled as
subscribe to the shares (Pty) Ltd versus Ltd public company in
of a private company terms of legal
regulations.
 The business trust
• Established out of an ordinary trust
• Has objective of conducting business for
profit
• Is not a juristic person
• Regarded as a separate tax payer
• Income tax on income according to the
conduit principle
• Transfer of the interest of a beneficiary done
by a variation of the trust deed.
Business Trust
Co-operative societies

• An autonomous association of persons who unite voluntarily to meet needs by means of

a jointly owned and democratically controlled enterprise.
Co-operative societies (continued)
Advantages Disadvantages

• Co-operatives are juristic persons • Lack the managerial requisites of

• Members benefit from limited liability operating a business
• Any person may become a member • Members need some understanding of
• There is no restriction on the maximum financial management issues
number of members • Require mentorship and support to
• The participatory nature contributes to the become viable and remain sustainable
achievement of outcomes • Tension can develop in participatory
• Necessary services may be more decision-making
accessible • Business efficiency can be influenced
• The business form is reasonably flexible negatively due to conflicts
• Legislation is less stringent in its • The short-term goals of members may
requirements contrast with the longer-term interests of
• Enable legislation facilitates the provision the co-operative
of support
Business Plan Development
Developing a business plan of a new business
• The objectives of a business plan:
• Most important objective is to identify and describe the nature of the new business opportunity or
venture
• Second objective is to present a written plan of how the entrepreneur plans to exploit the
opportunity
• A third objective of the business plan is to attract investors, or to persuade a bank or other
institution or person who provides financial resources, to lend the entrepreneur the money he/she
needs to establish the new business.
Developing a business plan (continued)
• Benefits of a business plan:
• Systematic, realistic evaluation of the new business’s chance of success
• Identification of the key variables that will determine the success of the new venture
• Game plan for managing the business successfully
• Management instrument for comparing actual results against targeted performance
• Primary tool for attracting money.
Developing a business plan (continued)
• Importance and necessity of the business plan (reasons for writing a business plan):
• To sell the business
• To obtain bank financing
• To obtain investment funds
• To arrange strategic alliances
• To obtain large contracts
• To attract key employees
• To complete mergers and acquisitions
• To motivate and focus the management team.
Developing a business plan (continued)
• Stakeholders in a business plan

Internal stakeholders External stakeholders

• Management team • Customers

• Employees • Investors
• Banks
Stakeholders in a business plan
Matrix for evaluation of business plans
Developing a business plan (continued)

• The scope of the business plan

• How much planning is needed?
• Consider the following:
• Style and ability of the entrepreneur
• Preferences of management team
• Complexity of the product or service being offered
• The competitive environment
• The level of uncertainty in business environment.
Components of the business plan

• Format of the business plan:

• Determine who should write the plan
• Identify the necessary skills to write the plan
• There are no rigid rules regarding the format of the business plan
• Appearance is important
• Length depends on the type of business and can vary from 5 to 20 pages.
Components of the business plan (continued)

• The content of the business plan

• The executive summary
• The general description of the venture
• The products-and-services plan
• The marketing plan
• The management plan
• The operating plan
• The financial plan
• The supporting materials.
Overview of a business plan
Outline of a simple business plan
New Ventures
A general description of the new venture

• Some important questions to address:

• Is this a start-up, buy-out or expansion?
• Has this business begun operations?
• What is the firm’s mission statement?
• Where was this business started?
• What is the basic nature and activity of the business?
• What is its primary product or service?
• Which customers are served?
• Is this business in manufacturing, retailing, service or another type of
industry?
A general description of the new venture (continued)
• Important questions continued:
• What are the current and projected states of this industry?
• What is the business’s stage of development?
• What are its objectives?
• What is the history of this company?
• Which achievements have been made to date?
• Which changes have been made in the structure or ownership of the existing business?
• What is the firm’s distinctive competence?
Analysing the market

• Market analysis involves the following key items:

• Concepts
• Identification of the target market/s
• Research and forecasting
• Marketing plan or strategy for the selected market segment/s.
Determining the financial needs
of the new venture
• Essential that the entrepreneur understands financial statements and how to
interpret them
• Entrepreneur must understand how profitability is assessed
• Entrepreneur must have the ability to determine the venture’s financial
requirements.
The location of the business: Location factors
• Availability of capital
• Attitude, regulations and tariffs of local authorities
• The existing business environment
• The social environment
• Climate
• Central government policy
• Personal preference.
• Sources of raw materials
• Availability of labour
• Proximity of, and access to, the market
• Availability and cost of transport facilities
• Availability and costs of power and water
• Availability and costs of a site and buildings.
Summary

• Legal forms of business

• Characteristics, advantages and disadvantages of different types of entities
• Development of a business plan for a new venture
• Location factors.