1. Small Business and the Entrepreneur5
Small Business and the Entrepreneur
Better Business
4th Edition
Solomon · Poatsy · Martin
chapter
© 2016 Pearson Education, Inc.

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Learning Objectives
What is the role and structure of the small business within the U.S. economy?
What are the traits of an effective entrepreneur, and what are the different types of entrepreneurs?
What are the advantages and disadvantages of franchising?
Why is a business plan crucial to small business success, and what factors lead to small business failure?
What resources are available to provide assistance and guidance to small business owners?
What are the potential benefits and drawbacks of each major source of small business financing?
In this chapter, we will study:
The role and structure of the small business within the U.S. economy
The traits of an effective entrepreneur and how these characteristics often lead to business success
The advantages and disadvantages of franchising
Why a business plan is crucial to small business success, and what factors lead to small business failure
Resources including the Small Business Administration and mentoring sources such as SCORE that provide assistance and guidance to small business owners
The potential benefits and drawbacks of each major source of small business financing
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Small Business
A small business:
- Is independently owned and operated
- Is not a dominant force in its field
- In general, has fewer than 500 employees
- Has annual revenue less than $7 million annual revenue (in retail industries)
Learning Objective 1: What is the role and structure of the small business within the U.S. economy?
The Small Business Administration, or SBA, is an independent agency of the federal government that was formed to aid, counsel, assist, and protect the interests of small businesses. It defines a small business as “one that is independently owned and operated and which is not dominant in its field of operation.”
In general, per the SBA definition, most small businesses must have fewer than 500 employees, though nearly all small businesses have 20 or fewer employees.
Revenue limitations in the SBA’s definition varies significantly by industry. But in the retail industry, the average annual revenue for a small business is less than $7.0 million.
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4. Small Business and the Economy
In the United States, small businesses:
Generate 64% of net new jobs
Create nearly one-half of U.S. GDP
Export about one-third of all U.S. exports of goods and services
Represents the second largest economy in the world
Because there are so many small businesses, they are very important to the economy and the job market. Small businesses:
Generate 64% of net new jobs
Create nearly one-half of U.S. GDP
Export about one-third of all U.S. exports of goods and services
Represent the second largest economy in the world
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5. Small Business Contributions
Foster innovation
Help bigger companies:
- Supply products and services to the larger companies that they do not or cannot supply
Help consumers:
- Supply products and services that large companies cannot or will not provide
• Small companies often introduce new products or procedures that many large businesses do not have the flexibility, time, resources, or inclination to offer. Smaller companies are also often better poised to take risks, more flexible and therefore able to explore innovative techniques, and better equipped to push through inventions than larger firms.
Small businesses often operate in cooperative relationships with bigger businesses.
In the automotive industry, for example, small businesses are important because they make and supply parts that are required in large manufacturing processes.
It is estimated that small-business suppliers now provide two-thirds of the value added in the production of cars through their increase in research and development.
Small businesses provide consumers with many of the specialized products and services we use every day. Service businesses such as hair salons, landscapers, and dry cleaners, as well as local restaurants, auto repair, and other mom-and-pop stores provide the services and products larger businesses can’t or don’t want to provide.
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6. Small Business and the Workforce
Create about 64% of new jobs each year
Employ many who do not fit into a traditional corporate structure
Provide opportunities for women and minorities
Almost all new businesses are small; therefore, they account for a substantial portion of the newly created jobs in the United States.
Small businesses hire a larger proportion of younger workers, older workers, and part-time workers, so they help employ millions who do not fit into a traditionally corporate structure.
Many individuals see owning and operating their own business as a means of achieving the American dream. To that end, women, minorities, and immigrants are becoming more important players in the small business arena.
From this pie chart, you can see that 20% of small business owners are minorities, with Hispanics making up the largest share of the group.
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7. Reasons to Start a Small Business
People start small businesses for all kinds of reasons:
Opportunity knocks: An idea for a new company often starts with envisioning a product or service that isn’t being offered yet. Other people create opportunities from their own obstacles.
Many begin a small business because they want financial independence. Traditionally, it takes three to five years for new businesses to become profitable
Many people want to take more control of business decisions than their current position allows. Others know that they wouldn’t be satisfied working for someone else.
Flexibility: Many appreciate the work/ life balance that owning their own business affords. Many view working in a small business as more rewarding than working for a larger company. With fewer channels to go through when decisions need to be made, small business owners can react more quickly to take advantage of immediate opportunities.
Some are “pushed” into starting their own business because they have no other employment opportunities.
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8. The Impact of Technology on Small Business
Created entirely new business opportunities
Impact of social media
Entrepreneurial success stories such as Zappos, YouTube, and eBay illustrate the vast opportunities that technology creates for new business start-ups.
Social media impacts (blogs, social networks, smartphones, apps, and podcasts):
- Low-cost means of marketing.
- Create opportunity to pretest product ideas and advertise upcoming promotions.
- However, business owners must monitor and update social networking pages in order to stay informed as to what costumers are saying about the business.
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Entrepreneurs
What is an entrepreneur?
Traits of successful entrepreneurs:
- Innovative
- Risk takers
- Motivated to succeed
- Flexible and self-directed
- Work well with others
- Good leadership skills
“System thinkers”
Learning Objective 2: What are the traits of an effective entrepreneur, and what are the different types of entrepreneurs?
Entrepreneurs are people who assume the risk of creating, organizing, and operating a business. Entrepreneurs most often start a business to satisfy a niche or need in the market that is not being adequately fulfilled.
Research has shown that successful entrepreneurs are:
Innovative—They recognize opportunity niches, introduce new products, or make improvements to existing products.
Risk takers—They take calculated risks, considering the likelihood of success before deciding whether to take a particular risk.
Motivated to succeed—They want to provide for themselves and their families or they want personal fulfillment.
Flexible and self-directed—They make their own decisions and react quickly to new situations.
Good with people—They possess strong leadership and communication skills.
“System thinkers”—They focus on the entire process and are able to see the whole picture when they set up their businesses.
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10. Types of Entrepreneurs
Lifestyle entrepreneurs
Micropreneurs
Home-based entrepreneurs
Internet entrepreneurs
Growth entrepreneurs
Intrapreneurs
Social entrepreneurs and social intrapreneurs
Serial entrepreneurs
Entrepreneurial teams
Lifestyle entrepreneurs look for a certain lifestyle when they begin their business, such as freedom from corporate bureaucracy, the opportunity to work at home, or flexibility in work hours or travel schedules.
Micropreneurs start their own business but are satisfied with keeping the business small. They have no aspirations of growing large and/or hiring hundreds or thousands of employees.
Home-based entrepreneurs run their businesses out of their homes.
Internet entrepreneurs create businesses that operate solely online.
Growth entrepreneurs strive to create fast-growing businesses and look forward to expansion. The companies that these types of entrepreneurs create are known as gazelles. Typically, a gazelle business has at least 20 percent sales growth every year for five years, starting with a base of at least $100,000. eBay and Google can be identified in retrospect as having been gazelles in their early years.
Some companies are fostering intrapreneurs—employees who work in an entrepreneurial way within the organizational environment. The company encourages them to generate ideas that will enhance the company’s existing products or market.
Social entrepreneurs set out to create innovating solutions in the social sector.
Social intrapreneurs build and develop ventures within a company that are designed to identify and solve large-scale problems.
Serial entrepreneurs, such as Ted Turner and Richard Branson, are known for starting multiple new ventures.
Finally, at times, entrepreneurial teams are created. An entrepreneurial team is a group of individuals with varied experiences and skills that come together to form a new venture.
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Franchise Basics
Franchise
Business opportunities
Franchiser
Franchisee
Learning Objective 3: What are the advantages and disadvantages of franchising?
A franchise is a method of doing business whereby the business (the franchiser) sells a company’s products or services under the company’s name to independent third-party operators (the franchisees).
Franchises play an important part in our economy. More than 760,000 franchised businesses are in operation, employing close to 8.3 million people with a combined annual payroll of nearly $800 billion.
Franchise opportunities exist in nearly every industry, but the greatest growth and employment is expected in the business-services, real-estate, and fast-food industries.
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12. Franchising Pros and Cons
The advantages of franchising include:
It is a proven system of operation. Franchisees can avoid many of the common start-up mistakes made by new business owners because they will be working with standardized products, systems, and financial and accounting systems.
There is strength in numbers. You might benefit from economies of scale achieved by purchasing materials, supplies, and services at discounted group rates. Also, lending institutions view franchises as less risky.
Initial training is part of the deal. The franchiser offers initial training to ensure you have a successful opening and might offer ongoing training also.
Marketing support is provided. You are often given corporate marketing materials and have the benefit of national advertising programs.
Market research is often provided. The franchiser should also help to identify the competition and offer strategies to differentiate the franchise from them.
The disadvantages of franchising include:
Lack of control. There is not much opportunity to contribute creatively to the franchise because the franchiser often controls the look of the store and the product or service.
Start-up costs. Franchisees must pay a very large start-up fee and a monthly royalty fee to the franchiser. The royalty fees are due regardless of how the business is doing. The franchisee will likely incur other regular expenses, too, such as rent.
Workload. New franchisees shouldn’t expect easy hours.
Competition. Some franchises do not restrict the location or number of their franchise locations, resulting in competition not only from other companies, but also from others in the same franchise organization.
Share common problems. If the franchiser or another franchisee is having problems, all franchisees will feel their pain.
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13. Questions to Ask Before Buying
The most common piece of advice offered to anyone interested in buying a franchise is to do homework up front. Although a lot of the start-up process is done for you, you are still buying a business that will require your time and money and is not guaranteed to succeed. This slide shows suggested questions to ask the company (the franchiser) you are buying the franchise from.
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14. Buying an Existing Business Pros and Cons
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Pros
Cons
Ease of start-up
Existing customer base
Financing opportunities
Ease of start-up
Existing customer base
Financing opportunities
Ease of start-up
Existing customer base
Financing opportunities
High purchase price
Inheriting the previous owner’s mistakes
Unknowns in transition
Although buying a franchise is a popular way to begin a business without starting from scratch, another way is to buy a pre-existing business. Just like buying a franchise or starting from scratch, the decision must be well thought out.
The advantages of buying an existing business include:
There is a reduction in start-up time and energy if you are buying a business that is operational and without serious problems. Suppliers, existing staff and management, and equipment and inventory are already in place.
An existing business may have an existing satisfied customer base.
If the business has had a positive track record, it might be easier to obtain financing.
The disadvantages of buying an existing business include:
The initial purchase price may be high. It is difficult to determine the true value of the previous owner’s goodwill—the intangible assets represented by the business’s name, customer service, employee morale, and other factors—that might be lost with a change in ownership.
You are sometimes stuck with the previous owner’s mistakes. This means you might inherit dissatisfied customers, bad debt, and unhappy distributors or purchasing agents.
There is no guarantee that existing employees, management, customers, suppliers, or distributors will stay. If staff does stay, you might be inheriting unanticipated problems.
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Due Diligence
Research and analysis of the business can uncover any hidden problems associated with it.
Before buying an existing business, make sure you perform due diligence—research and analysis of the business to uncover any hidden problems associated with it. You want to avoid buying a company with a dissatisfied customer base or with a large amount of unpaid bills. This slide provides a brief checklist of things you should look into before buying a business.
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16. Why Do Small Businesses Fail?
Accumulating too much debt
Inadequate management
Poor planning
Unanticipated personal sacrifices
Two-thirds of all start-ups fail in two years, and a little more than half survive after five years of operation.
Common reasons for failure include:
Accumulating too much debt: If the new business does not generate returns quickly enough to pay back the initial loan, there is temptation to take on more loans to keep the business running. Interest on loans can accumulate too, causing an owner to become further entrenched in a potentially unrecoverable situation.
Inadequate management: This includes poor financial and business management and ignoring signs of a business beginning to fail.
Poor planning: One of the biggest reasons businesses fail is that there was no formal plan in place to begin with.
Unanticipated personal sacrifices: Owners do not adequately anticipate the many personal sacrifices—financial and otherwise—they will be forced to make.
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Business Plans
Learning Objective 4: Why is a business plan crucial to small business success, and what factors lead to small business failure?
The old adage “failing to plan is planning to fail” certainly applies to starting a business. Many budding business owners, in the excitement of starting something new, neglect to take the “boring” but necessary steps of building an effective business plan.
A business plan is a formal document that states the goals of the business as well as the plan for reaching those goals.
The plan includes the company’s mission statement, history, and the qualifications of the owners and management team and any resources they might have to contribute to the business. It also includes a marketing plan, an operational plan, a financial plan, a risk analysis, and identifies the competition and highlights opportunities for success.
You’ll learn more about creating successful business plans in Mini-Chapter 2. Neglecting to consider any of these factors can doom a business from the start.
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18. Where Do Small Business Owners Go for Help?
Learning Objective 5: What resources are available to provide assistance and guidance to small business owners?
There are several sources of help that a small business owner can turn to:
The Small Business Administration, or SBA, is an independent agency of the U.S. government whose sole purpose is to cater to the needs of small businesses. The SBA offers assistance in the legalities associated with beginning and operating a business as well as education and training, financial assistance, disaster assistance, and counseling.
Nearly 11,000 experienced volunteers make up the SBA’s Service Corp of Retired Executives, or SCORE, and offer workshops and counseling to small businesses at no cost.
Industry-related conferences or seminars often provide opportunities to find others who can serve as sounding boards and mentors. Other organizations, such as the Entrepreneurs Organization (EO), connect business owners with experts in their industry for individual mentoring.
Business incubators are organizations that support start-up businesses by offering resources such as administrative services, technical support, business networking, and sources of financing that a group of start-up companies share. Incubators can be either private organizations or public services. Many cities and developing countries have started public business incubators.
An advisory board is a group of individuals who offer guidance to the new business owner. Such boards are similar to boards of directors in publicly held companies, except that they generally do not have the authority to make decisions. Another option is to team up with partners who offer the company strengths that the new owner does not possess, and in turn share in its profits and liabilities.
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19. Financing Considerations
Bootstrap financing
Personal savings
Borrowing from friends and family
Trading with vendors or clients
Crowdfunding
Credit cards
Banks and small business loans
Grants
Angel investors
Venture capitalists
Learning Objective 6: What are the potential benefits and drawbacks of each major source of small business financing?
Most business owners tap into their own savings when they invest in a business—this is a form of bootstrap financing. Friends and family are secondary sources of cash. They often do not require a high rate of return or demand a quick profit. New businesses may also trade goods and services with vendors or clients.
Crowdfunding sites, such as Kickstarter, solicit small amounts of money from a large number of people for startup businesses.
Credit cards are a convenient means of acquiring cash, and nearly 50 percent of small business owners use credit cards as a source of financing. The risk is the high rate of interest charged on unpaid balances.
Roughly half of all small businesses use bank loans and lines of credit.
Grants from federal and state governments may also be available, but they usually require a lot of paperwork to apply.
Angel investors are wealthy individuals willing to put up their own money in hopes of a profit return. They tend to fund more projects with lesser amounts of money than venture capitalists. In addition, angel investors can be more patient and may take on a more active advisory role rather than a direct management role.
Venture capitalists contribute money to a business in return for some form of equity. Venture capitalists want to invest in “older” businesses that have the potential to become larger regional or national companies. Venture capitalists sometimes require that they play an active role in the management of the company.
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Chapter Summary
What is the role and structure of the small business within the U.S. economy?
What are the traits of an effective entrepreneur, and how do these characteristics often lead to business success?
What are the advantages and disadvantages of franchising?
Why is a business plan crucial to small business success, and what factors lead to small business failure?
What resources are available to provide assistance and guidance to small business owners?
What are the potential benefits and drawbacks of each major source of small business financing?
Chapter Summary
1. What is the role and structure of the small business within the U.S. economy? A small business is independently owned and operated, not dominant in its field, and has fewer than 500 employees and less than $7 million in annual revenue. Small businesses account for more than half of America’s economic output, foster innovation, help larger companies, help consumers, and employ about 50 percent of the private workforce.
2. What are the traits of an effective entrepreneur, and what are the different types of entrepreneurs?
Entrepreneurs are innovative, risk takers, motivated, flexible, self-directed, work well with people, good leaders, and “system thinkers.”
3. What are the advantages and disadvantages of franchising? Advantages include: a proven system of operation, economies of scale, and training and marketing support. Disadvantages include: lack of control, start-up costs and monthly fees, a heavy workload, affected by negative news involving the franchiser or another franchisee.
4. Why is a business plan crucial to small business success, and what factors lead to small business failure? A business plan outlines the company’s goals and strategies. New businesses fail from too much debt, inadequate management, poor planning, and unanticipated personal sacrifices.
What resources are available to provide assistance and guidance to small business owners? The SBA helps with legalities, education, financial assistance, disaster assistance, and counseling. SCORE volunteers provide free advice and assistance. Other sources include industry-related conferences and organizations for individual mentoring.
What are the potential benefits and drawbacks of each major source of small business financing? Cash borrowed from friends and family members often doesn’t need to be paid back immediately or with a high return. But these types of personal loans can sometimes be handled unprofessionally. Credit cards are convenient, but they have a high rate of interest charged on unpaid balances. Grants from federal and state governments can be helpful but often require a lot of paperwork. Angel investors are wealthy individuals willing to put up their own money in hopes of a profit return. They tend to fund more projects with lesser amounts of money than venture capitalists. In addition, angel investors can be more patient and may take on a more active advisory role rather than a direct management role. Angel investors are wealthy individuals willing to put up their own money in hopes of a profit return later on. Venture capitalists get equity instead of paying back the money. But they often want a say in company decisions.
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