1. Small Business, Entrepreneurship, and Franchises
Chapter 5
Small Business, Entrepreneurship,
and Franchises

2. Learning Objectives
Define what a small business is and recognize the fields in which small businesses are concentrated.
Identify the people who start small businesses and the reasons why some succeed and many fail.
Assess the contributions of small businesses to our economy.
Judge the advantages and disadvantages of operating a small business.
Explain how the Small Business Administration helps small businesses.
Appraise the concept and types of franchising.
Analyze the growth of franchising and franchising’s advantages and disadvantages.

3. Small Business
…one that is independently owned and operated for profit and is not dominant in its field.

4. 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: accessed May 4, 2009.

5. Establish a Small Business
4 days and $210
Steps
Register name
Apply for tax IDs
Set up insurance
Unemployment
Workers’ compensation

6. 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.

7. 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

8. 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

9. Small-Business Dominance
Real estate, rental, leasing = 74%
Arts, entertainment, recreational services = 76%
Construction = 90%

10. 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

11. Percent of People Who Would Prefer Being an Entrepreneur
U.S.A. = 70%
Western Europe = 46%
Canada = 58%

12. 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

13. Other Factors Driving Entrepreneurs
Independence
Desire to determine own destiny
Willingness to find/accept challenge
Coming from family of entrepreneurs
Age = 24 – 44

14. 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.

15. 5 P’s of Entrepreneurship
Planning Persistence Patience People Profit

16. Motivation to Start a Business
“Enough” of working/earning profit for someone else
Loss of job
New idea for product or sales
Sudden opportunity

17. 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, accessed October 4, 2008, and SBA
Quarterly Indicators, First Quarter 2009, released May 8, 2009, p. 1.

18. 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%

19. Entrepreneur Must Manage Finances Personnel Day-to-day operations
Handle
Sales
Advertising
Purchasing
Pricing
Other

20. Why Small Businesses Fail
Lack of capital
Lack of management skills
Lack of planning
Overexpansion

21. 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

22. 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

23. SBA Statistics on Small Businesses
Employers = 99.7%
Private work force = 50%
Net new jobs = 60–80%

24. Small Businesses Provide Competition
Challenge large firms
Force big firms to be
More efficient
More responsive to customer

25. Small Businesses Fill Needs
Satisfy niche consumers
Provide variety of goods/services to other businesses (outsourcing)

26. Advantages of Smallness
Personal relationships
Ability to adapt to change
Simplified record keeping
Independence

27. Disadvantages of Small Business
Risk of failure
Limited potential
Limited ability to raise capital

28. Weekly Hours Worked by Small Business Owners
Source: Inc. Magazine, “It’s Good to Be King,” December 2003, p. 32.
43%
19%
38%
Fewer Than 35
35 to 50
More Than 50

29. 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..

30. …a carefully constructed guide for the person starting a business.
Business Plan
…a carefully constructed guide for the person starting a business.

31. Business Plan Purposes
Communication ─ helps potential investors decide whether to invest in new venture
Management ─ helps track, monitor, evaluate progress
Planning ─ guides businessperson through business phases

32. 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.

33. Business Plan Should Answer
What is the nature/mission of new venture?
Why is it a good idea?
What are the businessperson’s goals?
How much will it cost?

34. Table 5.5: Business Plan Checklist
Source: Kathleen R. Allen, Launching New Ventures: An Entrepreneurial Approach, 4th ed. (Boston: Houghton Mifflin, 2006), p. 197.

35. Small Business Administration (SBA)
…a government agency that assists, counsels, and protects the interests of small businesses in the United States.

36. SBA Management Assistance
Free individual counseling
Courses
Conferences
Workshops
Publications

37. SBA Resources
Management courses/workshops
Service Corps of Retired Executives (SCORE)
Help for minority-owned businesses
Small Business Institutes
Small Business Development Centers
Publications

38. SBA Financial Assistance
Regular business loans
Small-business investment companies

39. Venture Capital
…money that is invested in small (sometimes struggling) firms that have the potential to become very successful.

40. Franchise
…a license to operate an individually owned business as though it were part of a chain of outlets or stores.

41. What Is Franchising? Franchise Agreement Franchisor
Franchisee
Franchisor
John Q.

42. 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

43. Table 5.7: Entrepreneur’s Top Ten Franchises (2009)
Source: accessed May 11, 2009, with permission of Entrepreneur.com, 2009 by Entrepreneur.com, Inc. All rights reserved.

44. Dual-Branded Franchise
…two franchisors offer their product together...

45. 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

46. Disadvantages of Franchising
Franchisee
Contract dictating every aspect of business
Lawsuit by franchisor for violation of contract

47. Qualities Franchisors Seek in Franchisee
Entrepreneur, “The 28th Annual Franchise 500- Top 10 Franchises for 2007”, January 2007, p. 128. 47

48. 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

49. 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
Small Business Institutes.
Small Business Investment Companies.
the Small Business Administration.
Small Business Development Centers.
Small Business Guidance Centers.

50. Chapter Quiz (cont.)
2. Small businesses cluster in which of the following industries?
Service industries
Distribution industries
Production industries
Financial industries
All of the above

51. Chapter Quiz (cont.)
3. A group of retired businesspeople who volunteer their time to help small-business owners is known as
SCORE.
ACE.
SBDC.
SBI.
SBIC.

52. Chapter Quiz (cont.)
4. A privately owned company that provides venture capital to small firms is a(n)
small-business association.
small-business investment company.
small-business institute.
active corps of executives.
small-business development center.

53. Chapter Quiz (cont.) 5. One advantage of a small business is
no risk of failure.
unlimited potential for employers.
personal relationships with customers and employees.
unlimited potential for employees.
limited ability to raise capital.