Many new businesses are formed as a result of the entrepreneur’s previous work
experience, through which he or she sees ways to improve or modify a product.
The entrepreneurs are usually drawn to opportunities that others reject because they
misread their potential.
You Make the CallSituation 3
H. Abbe International, owned by Herb Abbe, is a travel agency and freight forwarder
located in downtown Minneapolis. When the building that housed the firm’s offices
suffered damage as a result of arson, the firm was forced to relocate its 2 computers and
11 employees. Moving into the offices of a client, Abbe worked from this temporary
location for a month before returning to his regular offices. The disruption cost him
about $70,000 in lost business and moving expenses. In addition, he had to lay off four
employees.
Question 1 What are the major types of risk faced by a firm such as H. Abbe
International? What kind of insurance will cover these risks?
Question 2 What kind of insurance would have helped Abbe cope with the loss
resulting from arson? In purchasing this kind of insurance, what questions must be
answered about the amount and terms?
Question 3 Would you have recommended that Abbe purchase insurance that would
have covered the losses in this case?
In a family business, the family’s primary function it to ensure the profitability and
survival of the business.
Marketing research is an expensive and complicated process and, therefore, is usually
not feasible for small businesses.
Profit sharing provides a more direct work incentive in small firms than it does in large
firms.
Capabilities are best viewed as a loose collection of several resources.
Some possibilities for new startup ideas based on knowledge gleaned from a present or
recent job are modifying an existing product, improving a service, or duplicating a
business concept in a different location.
Attitudes have an indirect impact on consumer behavior.
According to the textbook, promotion is based on communication.
Generally, as long as a firm’s operating income return on its assets in greater than the
cost of debt, the owners’ return on equity investment will decrease as the firm uses more
debt.
When customers know very little about product characteristics, they often use product
category as an indicator of quality.
You Make the CallSituation 1
Marty Lane worked for a card company specializing in invitations and announcements.
Every day for 25 years, he went to an office, sat at a desk, and took orders over the
phone. He hated it. He was bored out of his mind. He didn’t know what to do.
So he began skimming the business opportunities section of the Sunday New York
Times. He wasn”t sure what he was looking for. At almost 50 years of age, he had few
business skills. Accounting was a foreign language to him. He figured that if he ever
bought a business, it would have to be one that didn’t require much specialized
knowledgesomething that would be relatively easy to manage. He considered a
franchise, but he found that the good ones were very expensive. Then he came across an
Italian-bread route for sale. He thought “How difficult could it be to run a delivery
route?” He called the phone number in the ad and spoke with the business broker who
was handling the sale.
It turned out that the route was in Queens, New York, not far from where Lane and his
wife, Annabelle, lived. It was a one-person operation. The individual owned the
company for 20 years and took home about $65,000 a year. He wanted $200,000 for the
business, but he was willing to help finance the deal. If Lane would put $60,000 down,
he could pay the balance over five years at 10 percent interest, or about $35,000 a year.
That would leave Lane with an annual income of $30,000 until the debt was paid.
Combined with Annabelle’s salary, it would be enough to make ends meet. If he worked
hard, moreover, he could expect his sales, and his income, to grow by 10 to 15 percent a
year.
It seemed perfect. Lane went to meet with the owner and returned sounding even more
enthusiastic. “This is a can”t-miss deal,” he told his wife. “The guy has signed contracts
with all the places he delivers to, and none of them is more than 25 miles from here. I
could do the entire route in seven hours.”
However, Annabelle wasn”t buying. “You”re not quitting your job until you talk to an
expert,” she said. Lane agreed to meet with a broker.
On the date of the meeting, Lane brought all his paperwork along. He laid out the terms
of the deal in great detail. “What do you think?” he asked.
The broker said, “Tell me something, Marty. Do you like this business?”
He shrugged. “I can”t really say. I haven”t tried it yet.”
“What’s involved in it besides picking up the bread and delivering it to the stores?”
“I”m not sure,” he said. “Whatever it is, it can”t be that complicated.”
“What happens if the truck breaks down?” “I don”t know,” he said. “I guess I”ll just
work it out.”
After asking Lane a series of questions along those lines, the broker finally said,
“Listen, Marty. You want to know if this deal makes sense from a financial standpoint.
That’s easy to check. The guy has an income tax return, and his sales are verifiable. This
isn”t a cash business, after all. He sells to delis and supermarkets. They pay by check.
We can go over his expense figures and make sure they”re realistic, but my guess is that
the deal is OK. If you”re asking me whether I could negotiate him down a little, the
answer is probably yes.”
Lane turned to his wife: “See, I told you he”d approve.”
The broker said, “I didn’t approve anything. Only you can do that, and you”re not ready
to.”
“What do you mean?” he asked.
“You haven”t done your homework,” the broker said. “You don”t know what you”re
actually going to do in this business, and you don”t know if you”ll be happy doing it.”
“How am I going to find that out?” Lane asked.
Question 1 How would you suggest that Lane find out if he would be happy in this
business?
Question 2 Would you recommend that Lane buy the business, given the asking price
and terms of the deal?
Question 3 Is Lane relying too much on nonquantitative factors?
Other factors being equal, new retail and services businesses prefer to locate in areas of
declining population.
If a business is to survive, its interests cannot be unduly compromised to satisfy family
wishes.
When conducting marketing research, it is important that small business owners be
concerned with determining if the research is necessary, if the data obtained will justify
the expense, and if the owner is capable of conducting the research.
An effective accounting system can help a small business find employee fraud, theft,
waste, and record-keeping errors.
Business practices and other behaviors reflect the underlying values of the leaders and
employees of a business.