1. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. CHAPTER 3 Understanding Entrepreneurship and Ownership

2. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-2 Learning Objectives Define small business and explain its importance to the Canadian economy Define entrepreneurship and describe some basic entrepreneurial characteristics Describe the start-up decisions made by small businesses Identify the advantages and disadvantages of franchising Identify the key reasons for the success or failure of small businesses Describe the sources of financial and management advice that are available to small businesses

3. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-3 Small Business (1 of 2) Independently owned & operated business not dominant in its field A corporation, sole proprietorship, or partnership Markets are usually local, but may be regional, national, or international Characterize every industry, particularly the retail trade

4. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-4 Small Businesses (2 of 2) 91% of businesses in Canada (2.2 million) are small businesses Over half (58%) provide self-employment, while the remainder employ under 50 people “small” businesses are smaller than others in their industry based on sales, number of employees, or other criteria

5. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-5 Prevalence of Small Business Contribute to the Canadian economy directly through innovation, job creation, and their intermediary role with big business Small business are as innovative as large businesses in research and development Dominate the construction and retail sectors Less dominant in the manufacturing sector

6. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-6 Job Creation Small business is creating jobs, while large business is reducing jobs Business success, not business size, accounts for job creation Small firms are quicker to lay off workers than are large firms in hard times Small firms are quicker to hire workers than large firms in good times

7. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-7 Innovation Small businesses create many innovations Characterized by autonomy and freedom Move rapidly Small business are responsible for the following innovations: Personal computer Jet engine Helicopter Automatic transmission A+

8. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-8 Importance to Big Business Most of the products made by big business are sold to consumers by small business Automobiles (dealers are small businesses) Software Most big businesses outsource business services to small firms

9. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-9 Popular Areas for Small Business Services Construction Wholesaling Manufacturing Transportation

10. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-10 The Entrepreneur Embraces the challenge of business ownership Accepts risks to pursue opportunities Those who are not truly entrepreneurial are content to stay small and manage their existing business

11. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-11 Describing the Entrepreneur Drive to achieve business success and be their own boss Need to control their own time Perceived market opportunity Freedom to work in their own way Adventure, independence, & challenge Profit opportunity Need to make a living

12. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-12 Starting and Operating a Small Business Take over a family business Buy an existing enterprise Start a business from scratch

13. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-13 Buying an Existing Enterprise Pros established clientele ease of financing experienced employees established lines of credit and supply less risky than starting from scratch Cons uncertainty about actual financial health of the firm location, reputation may be poor pricing strategy may need revisiting

14. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-14 Family-Owned Business Challenges Ongoing Management: Succession: Managing spouse’s contribution Recognizing spouse’s contribution Managing the “in-laws” Managing non-family managers Managing the Board of Directors Managing outside advisers Selecting a successor Timing succession Training the successor Assuring economic security for retiring leader and spouse

15. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-15 The Downside of Starting from Scratch All variables are unknown no existing operation or demand no track record to evaluate no financial or supplier relationships Start-up costs No profits until firm becomes established

16. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-16 Elements of the Business Plan

17. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-17 Defining the Business Opportunity Who are the customers? Where are they? At what price will they buy? How many will they buy? Who are the competitors? How will the products differ?

18. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-18 Microenterprise Owner is self-employed on a part-time basis still holding onto the “day job” Provides the entrepreneur time to build the business and test the idea before committing to it full time

19. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-19 A Franchise An agreement that gives franchisees (buyers) the right to sell the product of the franchiser (seller) Stipulates how the product or service will be sold, and the amount and type of payment A quick way to establish a business

20. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-20 Benefits of Franchising for the Franchiser Attain rapid growth Share advertising cost Increased investment money Team approach creates more efficient advertising delivery Increased sales revenues Development of a motivated sales team No need to deal with local business issues (managed by franchise owners)

21. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-21 Benefits of Franchising for the Franchisee Access to management expertise Do not need to build a business from scratch Lower failure rates Well-developed brand Training provided Expert advice Economies of scale in buying supplies Financial assistance Help with getting external financing Be your own boss Keep most of the profits

22. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-22 Franchise Problems Franchisers may impose policy changes without consulting franchisees Local market may be saturated Payments to franchiser are required even if profits are low Franchiser controls how business is run and how product is made Franchiser could be financially strapped and unable to help individual franchisee

23. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-23 Challenges Facing Entrepreneurs Obtaining financing Management transitions Managing the firm

24. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-24 Information Sources Small Business Textbooks Magazines and Journals Small Business Centres or Institutes Organizations (such as the Canadian Federation of Independent Business) Government & Private Agencies

25. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-25 Financing the Small Enterprise Debt Money borrowed from others Equity Money raised by selling ownership in the business Retained Earnings Profits earned by the firm

26. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-26 Management Transition Management methods must adapt as the firm grows to 50 or more employees Growth occurs in four cycles launch survival expansion maturity

27. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-27 Survival of Small Business 13% to 15% of small businesses disappear each year 50% of small businesses don’t make it through the first 3 years 75% of small businesses don’t make it through the first 10 years Average life span of small enterprises is 7.25 years Female-owned businesses have a survival rate twice as high as male-owned businesses

28. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-28 Causes of Small Business Failure Poor management skills Inadequate marketing capabilities Inadequate financial capabilities Inadequate production capabilities Personal reasons Disasters

29. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-29 Forms of Business Organizations Sole Proprietorship Partnership Corporation Cooperatives

30. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-30 Sole Proprietorships Advantages Freedom Simplicity Low Start-Up Costs Tax Benefits Disadvantages Unlimited Liability Lack of Continuity Difficult to raise Money Reliance on one individual

31. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-31 Partnerships Advantages Larger talent pool Larger money pool Ease of Formation Tax Benefits Disadvantages Unlimited Liability Lack of continuity Ownership transfer difficult Potential Conflict

32. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-32 Corporations Regardless of the size or industry corporations have the following rights and characteristics Legal status as a separate entity Property Rights and obligations Indefinite lifespan

33. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-33 Corporations Advantages Limited Liability Continuity Professional Management Easier to raise money Disadvantages Start-up costs Double taxation Regulations Stockholder revolts

34. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-34 Cooperatives Types of Cooperatives Consumer Financial Insurance An organization formed to benefit its owners in the form of reduced prices and the distribution of surpluses Each member has one vote Marketing Service Housing

35. Business Fifth Canadian edition, Griffin, Ebert & Starke © 2005 Pearson Education Canada Inc. 3-35 Trends in Business Ownership Acquisitions and Mergers Divestitures and Spin-offs Employee-Owned Corporations Strategic Alliances Subsidiary and Parent Corporations