Chapter 6 Business Start-up

Learning Outcomes
On completion of this chapter you will be able to: Identify and discuss the aspects determining the capacity for survival of a new venture Discuss the necessity for a market strategy for the entrepreneur when starting a venture Discuss how competitors can influence the entrepreneur in his decision to start a venture Identify and discuss the resource needs of the entrepreneur and how the size of the prospective enterprise could influence the entrepreneur; Identify and discuss the geographical location factors to be considered when starting a venture Discuss the factors affecting the entrepreneurs choice of the form of ownership of the new venture; and identify and discuss the various forms of ownership available for new ventures Identify and discuss the reasons why entrepreneurs often make use of assistance and information provided by others and the challenges they face during start-up

Determinants of capacity for survival

Characteristics, traits and abilities of entrepreneur Resource needs of the venture Market and marketing strategy Presence of competitors Size of proposed enterprise The business form

Market and market strategy

Does similar or same products exist? Should demand be stimulated from scratch (new concept)? Characteristics of potential customers Extent of market and market share Growth pattern and potential of market Nature and extent of existing and potential competition

Presence of competitors
Existing competitors or possibility for them to emerge Substitute product or service Competitors share of market Pricing policy of competitors Effect on suppliers

Resource needs
Operating resources: facilities which allow people to do their jobs Human resources: direct and indirect resources Financial resources: to obtain operating and human resources Technology resources: support production process, IT, recipes and patents

Size of prospective enterprise

Availability of raw materials, equipment, labour, capital and managerial skills Current size of the market Optimum level of production

Minimum volume required break-eve-point

Geographic location
Sources of raw materials Availability of human resources Proximity of and access to market Availability of transport Availability of power and water Availability of site and buildings Availability of capital Attitude, regulations and tariffs of local authority Existing business environment Social environment Climate Central government policy Personal preferences

Choosing the best location

1. Establish location factors 2. Assign weighting (1-5) to each factor 3. Calculate possible cost or rating per factor for each location 4. List information in a table 5. Calculate disadvantages connected to each location 6. Decide on the best location

Factors influencing type of ownership

Legal juristic personality Liability of owner Extent of direct control by owner Ability to acquire capital Possibilities to change ownership Legal requirements

Sole proprietorship
Only one individual owner Assets belong to owner Remains personally liable for debts and claims against business May loose personal possessions if the business fails Has full control and authority over activities Owner is responsible for all management decisions limited possibilities to acquire capital Few problems with transfer of ownership can sell at any time. No formalities or legal requirements Individual simply decides to start a business and run it in his own name Special permits or licences must be obtained

Sole proprietorship (cont.)

Profit belongs to owner and pays income tax Business does not pay income tax Owner is the legal entity and not the business Business cease to exist when owner dies Need to register with following institutions: South African Revenue Service (SARS) for tax matters Department of Labour (DoL) for staff matters Local municipality matters about business premises Companies and Intellectual Property Commission (CIPC) registration of business name, trade mark, patents and other intellectual property matters

Partnership
Where 2 or more people run a business Maximum of 20 members Partnership no legal personality Partners sign contracts in their names Partners are liable for the debts of the partnership Partners have joint control over business and assets Easier to acquire capital than sole proprietor When a new partner joins or retires the partnership automatically dissolves Established by partnership agreement Agreement must make provision for every partners contribution Contribution can take form of money, assets or services

Partnership (cont.)
Must be stipulated that each partner must share in profits or losses Partners may be individuals or legal persons such as companies Profit-sharing ratio between partners is usually regulated in the partnership agreement Partners taxed on profits not partnership Insolvency of partnership can result in the sequestration of the private estates of the partners Partnership dissolves at death of a partner or when a new partner joins

Partnership (cont.)
Two types of partnership: Ordinary Extraordinary two types Anonymous Commanditaire/sleeping partner

Company
New Companies Act identifies two types: Profit company: incorporated for the purpose of financial gain Non-profit company: incorporated for public benefit and income is not distributable to incorporators/members or persons related to them

Types of profit companies

State owned: owned by state/municipality with SOC Ltd as

part of name
Private company: not state owned and Personal liability company

Public company

State owned

Private company

Personal liability company

1 50 members

Public company

Shareholders

State or municipality Not indicated Required to comply

1 50 members

No limit

Directors Extended accountability requirements Shares

At least one Not required to comply

At least one Not required to comply

At least three Required to comply

Not offered to public

At least 7 shareholders

Not offered to public

Offered to public annual general meetings Freely transferable

Transferability of shares Name of company Liability

None

Limited transferability Must end with Pty (Ltd) Company only

Limited transferability

Ends with SOC Ltd To state

Must end with Inc.

Ends with Ltd or limited Company only

Directors jointly & severally liable with the company Not to public

Sharing of information

Not to public

Not to public

Must make it known to public

Company (cont.)
General characteristics
In a company shares are issued to members the greater number of shares an individual have the greater the vote and share of profits Legal persons may hold shares in a company Company can by a private company of public company Private company (propriety limited (Pty LTD)) limitation of 50 members and is described by Companies Act (2009) as a company which: Restricts the right to transfer shares Limits the number of members to max of 50 Prohibits any offer of shares to public for subscription Public company requires its capital by offering the shares to the public must have the word limited in its name Members of public company is limited to minimum of 7 and unlimited maximum All companies must annually appoint a chartered accounted to perform an audit and other responsibilities

Company (cont.)
Company is a legal entity Assets and liabilities divorced from shareholder Personal assets of shareholders not involved in claims against company Liability of shareholder limited to share capital Shares of public company can be sold to a third party without consent of other shareholders or company Company does not dissolve at death of a shareholder or directors

Company (cont.)
Establishment
Established by registering it according to the provisions of the Act with the Companies and Intellectual Property Commission (CIPC) Name must be reserved before establishment (Form CM 5 is used) Registration - submitting the following document and prescribed fees to the CIPC Original and 2 notarially certified copies of memorandum of association and articles of association Evidence of name reserved (Form CM 5) Notice of the location of registered office (form CM 22) Power of attorney by each promoter in favour of person to lodge and uplift documents Company may start business on receipt of Certificate to Commence Business Certificate obtained by submitting: Application form (Form CM 4) Statement of each director re adequacy of capital (Form CM 47) Particulars of directors and officers (Form CM 29) Consent of auditor to act as such (Form CM 31)

Company (cont.)
Memorandum of association name, main goals, ancillary goals, special conditions, information of the authorised share capital and information about pre-incorporated contracts Articles of association regulate internal relationships or procedures of a company Management Company acts through shareholders meetings, directors and functionaries secretary and employees Management of company regulated in articles of association Management up to board of directors Shareholders meetings burdened with decision-making about affairs not entrusted to board of directors

Company (cont.)
Contracts Power to conclude a contract is a managerial act Managing director or individual director may be authorised to conclude contracts Authority to conclude contracts are in articles of association

Business Industries
The total economy consists of industrial sectors that produce products and services and have been grouped together in the Standard Industry Classification (SIC). An industry consists of establishments engaged in the same or a closely related kind of economic activity based mainly

on the principal class of goods produced or services

rendered.

Industry
The term "industry" cover all economic activity from the primary industries of agriculture, forestry, fishing and mining to the rendering of social, recreational, cultural and personal services

Industry sectors
Manufacturing Service Retail IT Industry Internet / e-business

Manufacturing industry
Agri-processing Automotive Chemicals ICT and electronics Metals Textiles, clothing and footwear

Services industry
Advertising including print, radio, television, outdoor advertising and the Internet. Professional bodies Marketing and market research organizations The South African legal system Financial and insurance services Accounting service Hospitality and tourism Consulting, office administration, hairdressing, cleaning

Retail
A retailer is defined as an enterprise deriving more than 50 per cent of its turnover from sales of goods to the general public for household use The retail industry is divided into four size groups namely large and medium enterprises and small and very small

enterprises

IT industry
Telecommunications services Telecommunication equipment manufacture Computer hardware manufacture Packaged software development IT professional services (consulting)

Internet or e-business industry

Growth in e-commerce in South Africa is fuelled by the realisation that online procurement and supply-chain management can trim costs and improve customer relationships Financial institutions facilitate e-business transactions

Business support systems

Ideas and information usually came from different sources By obtaining contributions from different sources, the entrepreneur can improve his/her decision-making abilities. After the entrepreneur has made use of specific sources of support or information, he/she will be more likely to use such sources in future with positive effect. The entrepreneur will learn that he/she does not have all the right answers - sources of support can function as a social and institutional safety net for entrepreneurs.

Sources of support
Personal sources Institutional sources Professional sources

Personal sources of support

Personal knowledge and skills Friends and relatives Other entrepreneurs Suppliers Employees Customers

Institutional sources of support Department of Trade and Industry

Incentive Administration Business Unit SMEDP in manufacturing and tourism. Skills support programme. Competitiveness fund. Black Business Supplier Development Programme. New Incentive Development Unit review and development of incentives. Business Development and Aftercare Business Unit Accessibility of incentive offerings of DTI.

Institutional sources of support Government related institutions

Industrial Development Corporation (IDC) Khula National Manufacturing Advisory Centre Coordinating Body (NAMAC) National Empowerment Fund National Enterprise Promotion Agency (Ntsika) Companies and Intellectual Property Commission(CIPC)

Institutional sources of support Associations

Black Management Forum (BMF) Business Unity South Africa (BUSA) Minara Chamber of Commerce National African Federated Chamber of Commerce (NAFCOC) Afrikaanse Handels Instituut (AHI) SA Chamber of Commerce (SACOB) Foundation for African Business and Consumer Services (FABCOS) Chamber of Commerce and Industry in SA (CHAMSA)

Other Institutional sources of support

Small Claims Court Educational Institutions Higher Education

Further Education and Training

Professional sources of support

Consultants Lawyers Accountants Agents Franchisors Franchising Association of SA (FASA)

Challenges during start-up

Might not enjoy it Survival is difficult Not enough knowledge about the business Misuse of funds Losing control of work and personal time management Inability to manage people Growth creates new challenges Lack of customer focus Poor controls