Chapter 5 Small Business, Entrepreneurship, and Franchises
Small Business one that is independently owned and operated for profit and is not dominant in its field. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 2
Table 5.1: Industry Group Size Standards Small-business size standards are usually stated in number of employees or average annual sales. In the United States, 99.7 percent of all businesses are considered small. Source: http://www.sba.gov/services/contractingopportunities/owners/basics/gc_small_business.html, accessed May 4, 2009. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 3
Establish a Small Business 4 days and $210 Steps Register name Apply for tax IDs Set up insurance - Unemployment - Workers compensation Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 4
Table 5.2: Establishing a Business Around the World Source: World Bank (2004); as found in Inside the Vault, Federal Reserve Bank of St. Louis, Fall 2004, p. 1. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 5
U.S. Small Business in Last Decade Number up 49% Record-breaking new-business formation in last few years Nearly 637,000 new incorporations Part-time entrepreneurs up 5-fold (equal 1/3 of small businesses) Provides more than 50% of jobs 56% of new businesses fail in first 4 years Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 6
Industries That Are and Are Not Attractive to Small Business Attractive: Growing industries with profit potential (such as outpatient-care facilities) Not attractive: Industries requiring a huge investment Auto manufacturing Machinery Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 7
Small-Business Dominance Real estate, rental, leasing = 74% Arts, entertainment, recreational services = 76% Construction = 90% Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 8
Top Small Business Categories Distribution: 33% small business Retailing Wholesaling Transportation Communications Service: 48% small business Medical/dental Watch/TV/shoe repair Haircutting/styling Restaurants Dry cleaning Financial services Production: 19% small business Construction Mining Manufacturing Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 9
Percent of People Who Would Prefer Being an Entrepreneur U.S.A. = 70% Western Europe = 46% Canada = 58% Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 10
Entrepreneurial Spirit Desire to create a new business Small businesses are managed by people who start and own them Owners could be employed elsewhere if they wanted Owners would rather take risk of starting and operating even if they ll make less money Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 11
Other Factors Driving Entrepreneurs Independence Desire to determine own destiny Willingness to find/accept challenge Coming from family of entrepreneurs Age = 24 44 Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 12
Figure 5.1: How Old Is the Average Entrepreneur? People in all age groups become entrepreneurs, but more than 70 percent are between 24 and 44 years of age. Source: Data developed and provided by the National Federation of Independent Business Foundations and sponsored by the American Express Travel Related Services Company, Inc. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 13
5 P s of Entrepreneurship Planning Persistence Patience People Profit Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 14
Motivation to Start a Business Enough of working/earning profit for someone else Loss of job New idea for product or sales Sudden opportunity Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 15
Table 5.3: U.S. Business Start-ups, Closures, and Bankruptcies Source: U.S. Department of Commerce, Bureau of the Census; Administrative Office of the U.S. Courts; U.S. Department of Labor, Employment and Training Administration, Small Business Administration, Office of Advocacy, Frequently Asked Questions, September 2008, www.sba.gov/advo, accessed October 4, 2008, http://web.sba.gov/faqs/faqindexall.cfm?areaid=24; and SBA Quarterly Indicators, First Quarter 2009, released May 8, 2009, p. 1. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 16
Women-Owned Businesses Population = 51% Small businesses = 50% Home-based businesses = 66% Businesses = 10.4 million Jobs = 7.1 million Sales = $941 billion Payroll = $174 billion In business 12+ years = 40% Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 17
Entrepreneur Must Manage Finances Personnel Day-to-day operations Handle Sales Advertising Purchasing Pricing Other Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 18
Why Small Businesses Fail Lack of capital Lack of management skills Lack of planning Overexpansion Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 19
Technical Innovation New ways to do a job with less effort for less money Small business vs. large: 2.5 times innovation per employee 41% of high-tech workers 13 14 times more patents Many inventions that sparked new industries Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 20
Small Firms and Employment U.S. economy created 3+ million jobs 70% in small-business-dominated industries Business services = leisure, hospitality, special trade contractors Small firms hire greater proportion of Younger/older workers Women Part-time employees Worker s first job = 67% Initial on-the-job training Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 21
SBA Statistics on Small Businesses Employers = 99.7% Private work force = 50% Net new jobs = 60 80% Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 22
Small Businesses Provide Competition Challenge large firms Force big firms to be More efficient More responsive to customer Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 23
Small Businesses Fill Needs Satisfy niche consumers Provide variety of goods/services to other businesses (outsourcing) Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 24
Advantages of Smallness Personal relationships Ability to adapt to change Simplified record keeping Independence Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 25
Disadvantages of Small Business Risk of failure Limited potential Limited ability to raise capital Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 26
Weekly Hours Worked by Small Business Owners 19% 43% 38% Fewer Than 35 35 to 50 More Than 50 Source: Inc. Magazine, It s Good to Be King, December 2003, p. 32. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 27
Figure 5.2: Sources of Capital for Entrepreneurs Small businesses get financing from various sources; the most important is personal savings. Source: Data developed and provided by the National Federation of Independent Business Foundations and sponsored by the American Express Travel Related Services Company, Inc.. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 28
Business Plan a carefully constructed guide for the person starting a business. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 29
Business Plan Purposes 1. Communication helps potential investors decide whether to invest in new venture 2. Management helps track, monitor, evaluate progress 3. Planning guides businessperson through business phases Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 30
Table 5.4: Components of Business Plan Source: Adapted from Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 3d ed. (Boston: Houghton Mifflin, 2006), pp. 108 120. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 31
Business Plan Should Answer 1. What is the nature/mission of new venture? 2. Why is it a good idea? 3. What are the businessperson s goals? 4. How much will it cost? Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 32
Table 5.5: Business Plan Checklist Source: Kathleen R. Allen, Launching New Ventures: An Entrepreneurial Approach, 4th ed. (Boston: Houghton Mifflin, 2006), p. 197. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 33
Small Business Administration (SBA) a government agency that assists, counsels, and protects the interests of small businesses in the United States. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 34
SBA Management Assistance Free individual counseling Courses Conferences Workshops Publications Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 35
SBA Resources Management courses/workshops Service Corps of Retired Executives (SCORE) Help for minority-owned businesses Small Business Institutes Small Business Development Centers Publications Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 36
SBA Financial Assistance Regular business loans Small-business investment companies Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 37
Venture Capital money that is invested in small (sometimes struggling) firms that have the potential to become very successful. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 38
Franchise a license to operate an individually owned business as though it were part of a chain of outlets or stores. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 39
What Is Franchising? Franchise Agreement Franchisor Franchisee John Q. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 40
Types of Franchising Manufacturer authorizes retail store to sell brand-name item Producer licenses distributors to sell given product to retailers Franchisor supplies brand names, techniques, or other services instead of complete product Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 41
Table 5.7: Entrepreneur s Top Ten Franchises (2009) Source: http://www.entrepreneur.com/franchises/printthis/282570.html, accessed May 11, 2009, with permission of Entrepreneur.com, Inc. @ 2009 by Entrepreneur.com, Inc. All rights reserved. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 42
Dual-Branded Franchise two franchisors offer their product together... Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 43
Advantages of Franchising Franchisor Fast/well-controlled distribution of products No high cost of construction/ operation Highly motivated franchisee Franchisee Ability to start business with limited capital Access to others business experience Nationally recognized name Local and national advertising Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 44
Disadvantages of Franchising Franchisee Contract dictating every aspect of business Lawsuit by franchisor for violation of contract Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 45
Qualities Franchisors Seek in Franchisee 0.17 0.23 0.29 0.76 0.84 0.86 0.87 94% 0% 20% 40% 60% 80% 100% Entrepreneur, The 28 th Annual Franchise 500- Top 10 Franchises for 2007, January 2007, p. 128. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 46
Global Perspectives in Small Business Internet most favored growth strategy = 50+% Technology gives reach/power U.S. Commercial Service aids small and medium-sized businesses in selling overseas Businesses must adapt to demographic/economic changes in world marketplace Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 47
Chapter Quiz 1. A government agency that was created to assist, counsel, and protect the interests of small businesses in the United States is called a) Small Business Institutes. b) Small Business Investment Companies. c) the Small Business Administration. d) Small Business Development Centers. e) Small Business Guidance Centers. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 48
Chapter Quiz (cont.) 2. Small businesses cluster in which of the following industries? a) Service industries b) Distribution industries c) Production industries d) Financial industries e) All of the above Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 49
Chapter Quiz (cont.) 3. A group of retired businesspeople who volunteer their time to help small-business owners is known as a) SCORE. b) ACE. c) SBDC. d) SBI. e) SBIC. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 50
Chapter Quiz (cont.) 4. A privately owned company that provides venture capital to small firms is a(n) a) small-business association. b) small-business investment company. c) small-business institute. d) active corps of executives. e) small-business development center. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 51
Chapter Quiz (cont.) 5. One advantage of a small business is a) no risk of failure. b) unlimited potential for employers. c) personal relationships with customers and employees. d) unlimited potential for employees. e) limited ability to raise capital. Copyright Cengage Learning. All rights reserved. Chapter 5 Slide 52