Lecture 7

Question 1

What % of businesses don’t survive 5 years?

Answer 1

57%

Question 2

Why do some businesses continue to trade whilst others exit?

Answer 2

• attractive job in another firm
• some surviving firms ‘persist’ with low returns
• alternative earning opportunities

Question 3

What happens to businesses that close?

Answer 3

• 35% sold for financial gain
• 20% insolvent
• 30% not fulfilling objectives of owner
• 15% technical closure (tax or legal reasons)

Question 4

How can a sole trader close?

Answer 4

because the profits of a sole trader are deemed to be his/her salary, this is less formal than for other business closures and therefore can close voluntarily

Question 5

How can a company close?

Answer 5

• pre-pack sale: an arrangement where the sale of all or part of the company is negotiated with a purchaser
• company voluntary arrangement
• administration
• creditors voluntary liquidation
• members voluntary liquidation

Question 6

What are some other forms of exit for a company?

Answer 6

• sale or transfer to insiders
• selling equity to strategic partners
• merging with another organisation
• public offering or IPO

Question 7

What is gambler’s ruin?

Answer 7

A predominant random element

• based on the fact gamblers are over optimistic and confident
• no entrepreneurial learning through ‘wins’
• chance is key
• small businesses likely to close
• if the entrepreneur does not reduce their bet when they lose, they will eventually fail

Question 8

What is population ecology?

Answer 8

focus on the population, not the individual/ business

• looks at resources in the environment
• focus on the level of competition for resources
• small businesses likely to fail if up against a lot of competition

Question 9

What is the resource based approach?

Answer 9

focuses on the resources AND capabilities of the business
Four main issues relate to this:
- lack of financial controls and resources
- deficiencies in managerial resources
- lack of organisational resources, liability of newness
- closure arising within the resource based view: closure due to lack of competitive advantages derived from resources and capabilities

Question 10

What is entrepreneurial learning?

Answer 10

Prior entrepreneurial experience has a mixed impact on business survival
- younger businesses more likely to close as owners learn about their talent
- over confident owners likely to re-enter
Criticisms:
- talent is unknown before you enter
- even if you have talent you might be unlucky
- lottery analogies (the more tickets purchased, the more likely you are to win)