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 5-1Define 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”. 5-3

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”. gbravo. “Famous Companies Founded During an Economic Recession”. recession/3265/. (accessed September 18, 2013). recession/3265/

5-9 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% MinoritySmall Business Ownership Hispanics8.3 % African-Americans7.1 % Asian5.7 % American Indian & Native Alaskan0.9 % Native Hawaiian & other Pacific Islander0.1 %

Number of Firms by Employment Size 5-11

Small Business Innovation 5-12 o Small businesses produce more than half of all innovations:

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 5-14 Especially attractive industries to entrepreneurs: Retailing and wholesaling Services Manufacturing High technology

Retailing and Wholesaling 5-15 Selling directly to consumers:

Services and Manufacturing 5-16 Service sector is 80% of U.S. jobs Attracts individuals whose skills are not required by large firms Services Small manufacturers excel at customization The Malcolm Baldrige National Quality Award rewards innovative small manufacturing firmsMalcolm Baldrige National Quality Award Manufacturing

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 5-18 AdvantagesDisadvantages IndependenceHigh stress level CostsHigh failure rate – 50% of all new businesses fail within the first 5 years FlexibilityUndercapitalization – Lack of funds to operate a business normally FocusManagerial inexperience or incompetence ReputationInability to cope with growth

Advantages of Small-Business Ownership 5-19 Some of the advantages of small businesses include:  Flexibility  Lowers start-up costs  Ability to be your own boss

Disadvantages of Small-Business Ownership 5-20  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 PartnershipCorporation

Financial Resources 5-24  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 5-26  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 5-28  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 A license to sell another’s products or to use another’s name in business, or both Franchise The company that sells a franchise Franchiser The purchaser of a franchise Franchisee

Franchises 5-33 AdvantagesDisadvantages Training & supportFees and profit sharing Brand-name appealStandardized operations Standardized quality of goods & services Restrictions on purchasing National advertisingLimited product line Financial assistancePossible market saturation Proven productsLess 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 5-35 o Organizations and programs exist to help small businesses o Small Business Administration (SBA) Small Business Administration (SBA) o Small Business Development Centers (SBDCs) Small Business Development Centers (SBDCs) o Service Corps of Retired Executives (SCOREs) 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