Part 2

Starting and Growing a Business

© 2015 McGraw-Hill Education.

CHAPTER 4 Options for Organizing Business

CHAPTER 5 Small Business, Entrepreneurship, and Franchising

5-2

Learning Objectives

LO 5-1 Define entrepreneurship and small business.

LO 5-2 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.

LO 5-3 Specify the advantages of small-business ownership.

LO 5-4 Summarize the disadvantages of small-business ownership, and analyze why many small businesses fail.

LO 5-5 Describe how you go about starting a small business and what resources are needed.

LO 5-6 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.

LO 5-7 Explain why many large businesses are trying to “think small”.

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The Nature of Entrepreneurship

5-4

Entrepreneurship movement is accelerating, and many new small businesses are emerging Technology is now easier to obtain by a small

business Websites, podcasts, online videos, social media,

cellular phones, and expedited delivery services

Entrepreneurship• The process of creating and managing a

business to achieve desired objectives

Great Entrepreneurs of Our Time

5-5

What Is a Small Business?

5-6

“Smallness” is relative

Employs less than 500 people

Small Business • Any independently owned and operated business

that is not dominant in its competitive area

Small Business Administration (SBA)• An independent agency of the federal government that

offers managerial and financial assistance to small businesses

Importance of Small Businesses to Our Economy

5-7

Economic Cycles and Entrepreneurship

5-8

Many companies begin in times of economic recession due to high unemployment and the tendency for people to become less risk averse Hewlett Packard, Revlon, and IHOP are just a few

examples of companies that began in suboptimal economic conditions and survived to become large, profitable, and long-lasting

The Great Recession of 2008 is no exception: Groupon, founded in 2008, has since become publicly traded

and valued at near $10 billion

Playdom, a social game developer, was founded in 2008 and sold for $500 million in 2010

SOURCES: Matt Rosoff “Born From the Ashes: Big Tech Companies Founded During Busts and Recessions”. http://www.businessinsider.com/great-tech-companies-that-started-in-terrible-economic-times-2011-8?op=1; gbravo. “Famous Companies Founded During an Economic Recession”. http://www.resourcenation.com/blog/famous-companies-that-were-founded-in-an-economic-recession/3265/. (accessed September 18, 2013).

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Women in Small Business

• Are responsible for more than 23 million American jobs

• Contribute almost $3 trillion to the national economy

• Woman own more than 8 million businesses nationwide

Women-owned Businesses

Minorities in Small Business

5-10

Minority-owned businesses have been growing faster than other classifiable firms Represents 21.3% of all small businesses

Number of minority-owned businesses is increasing at a rate of 30%

Minority Small Business Ownership

Hispanics 8.3 %

African-Americans 7.1 %

Asian 5.7 %

American Indian & Native Alaskan 0.9 %

Native Hawaiian & other Pacific Islander 0.1 %

Number of Firms by Employment Size

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Small Business Innovation

5-12

o Small businesses produce more than half of all innovations:

Airplane Audio tape recorderFiber-optic examining equipment Heart valveOptical scanner Personal computerSoft contact lenses InternetZipper

Innovation

5-13

While Buffalo Wild Wings did not create Buffalo-style chicken wings, it became known for its tasty chicken wings smothered with the franchise’s own signature spices and sauces

Today the franchises has more than 800 locations worldwide

Popular Industries for Small Business

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Especially attractive industries to entrepreneurs: Retailing and wholesaling

Services

Manufacturing

High technology

Retailing and Wholesaling

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Selling directly to consumers:

Music stores Sporting-goods storesDry cleaners BoutiquesDrugstores RestaurantsCaterers Service stationsHardware stores

Services and Manufacturing

5-16

Services

•Service sector is 80% of U.S. jobs•Attracts individuals whose skills are not required by large firms

Manufacturing

•Small manufacturers excel at customization•The Malcolm Baldrige National Quality Award rewards innovative small manufacturing firms

High Technology

5-17

Businesses that depend heavily on advanced scientific and engineering

knowledge

43% of high-tech jobs are

with small businesses

High-technology businesses require

greater capital and have higher initial startup costs than do other small businesses

Many of the biggest firms started out in

garages, basements, kitchens, and dorm

rooms

Small-Business Ownership

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Advantages Disadvantages

Independence High stress level

Costs High failure rate – 50% of all new businesses fail within the first 5 years

Flexibility Undercapitalization – Lack of funds to operate a business normally

Focus Managerial inexperience or incompetence

Reputation Inability to cope with growth

Advantages of Small-Business Ownership

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Some of the advantages of small businesses include:

Flexibility

Lowers start-up costs

Ability to be your own boss

Disadvantages of Small-Business Ownership

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Entrepreneurs experience a great deal of independence but also a great deal of stress

Many fail

Starting a Business

5-21

Start with a concept or general idea

Create a business plan

Devise a strategy to guide planning & development

• Form of ownership• Financing• Acquiring existing business or

start new business• Buy a franchise

Make Decisions

The Business Plan

5-22

Acts as a guide and reference document: Explanation of the business

Analysis of competition

Income/expense estimates

Business Plan

• A precise statement of the rationale for a business and a step-by-step explanation of how it will achieve its goals

Forms of Business Ownership

5-23

After developing a business plan, the entrepreneur has to decide on an appropriate legal form of business ownership

Sole Proprietorship

Partnership Corporation

Financial Resources

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Often, the small-business owner has to put up a significant percentage of the necessary capital Cash money

Obtain capital

Financing options: Loans

Stocks

Equity financing

Equity Financing

5-25

Referred to as equity financing because the owner uses real personal assets

rather than borrowing funds from outside sources to get started in a new business

The owner may bring useful personal assets (such as a computer, desks, and other furniture, a car or truck) as part of his or her ownership interest in the firm

Venture Capitalists

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Although this form of equity financing has helped many small businesses, they require that the small-business owner share the profits of the business (and sometimes the control, as well) with the investors

Venture Capitalists

• Persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock

Debt Financing

5-27

May lead to inflation – a

continuing rise in prices

May lead to recession – a

decline in production, employment and income

Borrowing financial resources typically from a bank or lending institution

$ Banks often require the entrepreneur to put up collateral, a financial interest in the property or fixtures of the business

$ Small-business owner may have to provide personal property as collateral, such as his or her home, in which case the loan is call a mortgage

$ Line of credit – An agreement by which a financial institution promises to lend a business a predetermined sum on demand

Debt Financing

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Small businesses may obtain funding from their suppliers in the form of a trade credit Suppliers allow the business to take possession of

the needed goods and services and pay for them at a later date or in installments

Occasionally, small businesses engage in bartering Trading their own products for the goods and

services offered by other businesses

Debt Financing

5-29

Learned that banks were much more willing to loan them money to buy a gas station, they purchased a Conoco station

Opened up a successful restaurant in one-half of it.

Their motto is “fill’er-up outside, fill’er-up inside.”

Franson Nwaeze and Paula Merrell wanted to open a restaurant, but most lenders were skeptical about their lack of experience and money

Venture Capitalists and Angel Investors

5-30

Venture capitalists (VCs) are usually experienced and successful business people and investors who find businesses in which to invest

The money with which VCs invest is a pool of money from a fund so there are certain standards a startup has to meet before they will be considered for investment

If a startup does not have sales or any real evidence of having been successful, VCs will most likely be reluctant to invest their money because the business poses a high level of risk

Angel investors tend to be affluent people who invest their own money and may or may not have business or investing experience

They tend to judge a startup less harshly than a VC, and may be prone to invest because they believe in the business

Starting from Scratch vs. Buying an Existing Business

5-31

Starting from scratch can be expensive and will require a lot of promotional efforts to familiarize customers with the business

• Reduces some of the guesswork inherent in starting a new business

• Entrepreneur who buys an existing business also takes on any problems the business already has

Existing businesses have the advantage of a built-in network

of customers, suppliers, and

distributors

Franchising

5-32

Franchise

• A license to sell another’s products or to use another’s name in business, or both

Franchiser

• The company that sells a franchise

Franchisee

• The purchaser of a franchise

Franchises

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Advantages Disadvantages

Training & support Fees and profit sharing

Brand-name appeal Standardized operations

Standardized quality of goods & services

Restrictions on purchasing

National advertising Limited product line

Financial assistance Possible market saturation

Proven products Less freedom in decisions

Centralized buying power

Site selection & territorial protection

Greater chance for success

Fastest Growing and Hottest New Franchises

5-34

Help for Small-Business Managers

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o Organizations and programs exist to help small businesses

o Small Business Administration (SBA)

o Small Business Development Centers (SBDCs)

o Service Corps of Retired Executives (SCOREs)

o Active Corps of Executives (ACEs)

o Small Business Institutions (SBIs)

o U.S. and Local Departments of Commerce

o Other small businesses

The Future for Small Business

5-36

Demographic Trends: The Baby Boomers

Generation Y (Millennials)

Immigrants and shifting demographics

The Latino population is the biggest and fastest growing minority segment in the United States—and a lucrative market for businesses looking for ways to meet the segment’s many needs.

The Future for Small Business

5-37

•Internet usage continues to increase•Increase in service exports•Economic turbulence•Deregulation of the energy market & alternative fuels

Technological and

Economic Trends

Technology and Economic Trends

5-38

Jack Dorsey founded the idea for Twitter on a sketchpad

The idea was based on how dispatched vehicles (such as cabs) communicate with one another

Via radio, they are constantly squawking to each other about where they are and what they are doing

Making Big Businesses Act “Small”

5-39

The continuing success and competitiveness of small businesses through rapidly changing conditions in the business world have led many large corporations to take a closer look at what their smaller rivals tick Large firms emulate smaller ones to improve their bottom line

Downsizing (rightsizing) – To reduce management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative

Intrapreneurs

• Individuals in large firms who take responsibility for the development of innovations within the organizations

Discussion

? What demographic, technological, and economic trends are influencing the future of small businesses?

? Why do large corporations want to become more like small businesses?

5-40