Small Business, Entrepreneurship, and Franchises Chapter 5

Small Business: A Profile A business that is independently owned and operated for profit and is not dominant in its field

Industry Group-Size Standards

Small Business: A Profile (cont.) Important facts In the last decade, the number of small businesses increased 49%. 70% of new businesses survive at least two years, about 50% survive at least five years, and 31% survive at least seven years. The primary reason for these failures is due to poor management stemming from a lack of business know-how. Small businesses provide over 50% of the jobs in the U.S.

The Entrepreneurs Characteristics Motivation The “entrepreneurial spirit” The desire for independence The desire to determine one’s own destiny The willingness to find and accept a challenge Personal background Age-most are 24-44 years old Motivation “Had enough” of working for someone else High-tech opportunities, especially for teens Losing a job and deciding to start a business An idea for a new product An opportunity presents itself

The People in Small Businesses: The Entrepreneurs (cont.) Women Owned at least 50% of small businesses in 2008 Women have less risk of failure than average Teenagers High-tech entrepreneurship is exploding Face unique pressures juggling schoolwork, social lives, business workload Need skills for planning, persistence, patience, people management, generating profit Successful entrepreneurs under age 30

The Pros and Cons of Smallness Advantages Personal relationships with customers and employees Ability to adapt to change Simplified recordkeeping Independence Advantages of sole proprietorships Keeping all profits Ease and low cost of going into business Keeping business information secret Disadvantages Risk of failure Limited potential Limited ability to raise capital Guy Kawasaki from Apple “Make Meaning”

Sources of Capital for Entrepreneurs

Developing a Business Plan Business plan—a carefully constructed guide for the person starting a business Three basic purposes Communication Management Planning Banking officials’ and investors’ questions What is the nature and mission of the new venture? Why is it a good idea? What are the goals? How much will it cost?

The Small Business Administration A governmental agency that assists, counsels, and protects the interests of small business in the U.S. SBA management assistance Management courses and workshops Service Corps of Retired Executives (SCORE) Help for minority-owned small businesses Small-business institutes (SBIs) Small-business development centers (SBDCs) SBA publications

The Small Business Administration (cont.) SBA financial assistance Regular business loans Loans made by private banks but partially guaranteed by the SBA Small-business investment companies Venture capital: money invested in small firms that have the potential to become very successful

Franchising Franchise Franchising Franchisor Franchisee A license to operate an individually owned business as though it were part of a chain of outlets or stores Franchising The actual granting of a franchise Franchisor An individual or organization granting a franchise Franchisee A person or organization purchasing a franchise

Look at Dunkin’ Donuts Franchise Agreement What Is Franchising? Franchise Agreement Franchisee Franchisor John Q. Look at Dunkin’ Donuts Franchise Agreement

Basic Rights & Obligations Delineated in a Franchise Agreement

The Growth of Franchising Franchising has expanded with the growth of the fast-food industry. Franchising is attracting more women and minority business owners than ever before. Dual-branded franchising, in which two franchisors offer their products together, is a new trend. Example: Taco Bell and KFC

The Growth of Franchising (cont.) Are franchises successful? The success rate for franchises is significantly higher than that for other small businesses. The vast majority, 94%, of franchise owners report that they are successful. Too rapid expansion, inadequate capital or management skills, or other problems can cause franchises to fail.

Entrepreneur’s Ten Franchises in 2011 Source: http://www.entrepreneur.com/franchise500/index.html (accessed March 15, 2011).

Advantages of Franchising To the franchisor Fast and well controlled distribution of its products No need to construct and operate its own outlets More working capital available for expanded production and advertising Franchising agreements maintain product and quality standards Motivated work force of franchisees To the franchisee Opportunity to start a proven business with limited capital Guaranteed customers Franchisor available for advice and guidance Materials for local promotional campaigns and participation in national campaigns Cost savings when purchasing in cooperation with other franchisees

Disadvantages of Franchising To the franchisor Failure of the franchisee to operate franchise properly Disputes with and lawsuits by franchisees over the terms of the franchise To the franchisee Franchisor retains a large amount of control over the franchisee’s activities Franchisor opening competing franchises within the franchisee’s market

Qualities Franchisors Seek in Franchisee

Chapter Quiz Which one of the following would most likely be classified as a service industry? Grocery store Jewelry store Pet shop Dry cleaning shop Clothing store

Chapter Quiz Roger Jones, a graduate business student, has decided to open his own consulting firm. Since he is an intelligent and hard-working student with previous management experience, Roger feels he is well prepared to succeed since more new businesses fail due to a lack of adequate financing. low consumer demand for their products. hostile competition. a lack of owner commitment. mismanagement and lack of business know-how.

Chapter Quiz A license to operate an individually owned business as if it were part of a chain of outlets or stores is called a joint venture. syndicate. franchise. SCORE. small-business development center.

Chapter Quiz Jim Moniz is contemplating obtaining a franchise. He would like to purchase a franchise in an industry that has had extensive success with franchising in the past. All of the following are possible choices for Jim except a fast-food industry. the semiconductor industry. filling stations. car dealerships. the soft-drink industry.