1. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 1 Small Business, Entrepreneurship, and Franchises Chapter5

2. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 2 1.Define what a small business is and recognize the fields in which small businesses are concentrated. 2.Identify the people who start small businesses and the reasons why some succeed and many fail. 3.Assess the contributions of small businesses to our economy. 4.Judge the advantages and disadvantages of operating a small business. 5.Explain how the Small Business Administration helps small businesses. 6.Appraise the concept and types of franchising. 7.Analyze the growth of franchising and franchising’s advantages and disadvantages. Learning Objectives

3. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 3 “A business that is independently owned and operated for profit and is not dominant in its field”  SBA (Small Business Administration) This government agency developed specific “smallness” guidelines for various industries Small Business: A Profile

4. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 4 Industry Group-Size Standards

5. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 5  The SBA has developed “smallness” guidelines for various industries. Would you classify the following businesses in your community as big or small? General Motors Corporation’s assembly plant, employing 7,000 workers A local wholesaler with 95 employees A local department store with $1.5 million in yearly sales receipts A home builder with annual receipts of $2.8 million A shopping mall developer with a $50 million construction contract A farmer with annual sales of $3 million A farmer with annual sales of $500,000 A travel agent whose annual sales range from $1.2 million to $2.5 million A dry cleaning business with $175,000 in annual receipts Class Exercise Large Small

6. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 6  Small-business sector (part of the overall business environment) There are about 26.9 million businesses in the U.S. Just over 17,000 employ more than 500 workers. In the last decade, the number of small businesses increased 49%. Part-time entrepreneurs have increased fivefold and account for one-third of all small businesses. 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. Small Business: Definition (cont.)

7. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 7  Attractive small-business industry characteristics Low initial capital investment Some special skill requirements High growth and profit potential  Industries that attract small businesses Distribution—retailing, wholesaling (sales), transportation (truck drivers, and communications (cell phones, computers) (about 33% of all small businesses) Service—medical and dental care; watch, shoe, and TV repairs; haircutting and styling; restaurant meals; dry cleaning; financial services (over 48% of all small businesses) Production—construction, mining, and manufacturing (about 19% of all small businesses) Industries That Attract Small Businesses

8. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 8  Characteristics and other personal factors 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  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

9. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 9 Clip from the Shark Tank  https://www.youtube.com/watch?v=1KkUSiDlH BU https://www.youtube.com/watch?v=1KkUSiDlH BU The Story of Lori Lite teaches us about  What the typical entrepreneur looks like age, gender, background  The process to find capital  The personal risk of entrepreneurship “Shark Tank”

10. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 10 How Old Is the Average Entrepreneur?

11. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 11  Women Owned at least 50% of small businesses in 2008 Own 66% of home-based businesses, over 40% for twelve years or more; less risk of failure than average 9.1 million businesses in the U.S. provide almost 27.5 million jobs and generate $3.6 trillion in sales  Teenagers High-tech entrepreneurship is exploding (website design) Face unique pressures juggling schoolwork, social lives, business workload Need skills for planning, persistence, patience, people management, generating profit The People in Small Businesses: The Entrepreneurs (cont.)

12. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 12  Lack of capital and cash-flow problems  Lack of management skills  Overexpansion Why Some Entrepreneurs and Small Businesses Fail

13. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 13 U.S. Business Start-ups, Closures, and Bankruptcies

14. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 14  Providing technological innovation Innovation among small-business workers is higher than among workers in large businesses Small firms produce 2.5 times as many innovations as large firms relative to the number of persons employed More than half of the major technological advances of the 20th century originated with individual inventors and small businesses Inventions may spark new industries or contribute to established industries The Importance of Small Businesses in Our Economy

15. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 15  Providing employment Small firms hire a larger proportion of younger and older workers, women, and part-time workers Small businesses provide 67% of workers with their first job and initial job skills Small businesses represent 99.7% of all employers and employ over 50% of the private work force Small businesses provide two-thirds of the net new jobs added to the economy The Importance of Small Businesses in Our Economy (cont.)

16. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 16  Providing competition Small firms can compete with large firms, forcing the larger firm to become more efficient and responsive to customer needs  Filling needs of society and other businesses Small firms can meet the special needs of smaller groups of customers Small firms can act as specialized suppliers of goods and services to larger businesses The Importance of Small Businesses in Our Economy (cont.)

17. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 17 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

18. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 18 Sources of Capital for Entrepreneurs

19. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 19  Business plan—a carefully constructed guide for the person starting a business  Three basic purposes Communication Management and organization 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? Developing a Business Plan

20. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 20 http://www.youtube.com/watch?v=kN1wgKosS8A &feature=related Writing a Business Plan Video 1.Idea/Dream/Vision 2.Goals (short, med, long) 3.Unique Offer (simple, narrow) 4.Marketing (price, message) 5.Demand (study competition) 6.Current Market Environment (economy) 7.Customers (who is your target)

21. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 21 Components of a Complex Business Plan

22. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 22  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

23. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 23  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 – Small-business investment companies: privately owned firms that provide venture capital to small enterprises that meet their investment standards The Small Business Administration (cont.)

24. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 24  Franchise 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 Finally: Franchising

25. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 25 What Is Franchising? FranchiseAgreement Franchisee Franchisor John Q.

26. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 26 Basic Rights & Obligations Delineated in a Franchise Agreement

27. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 27  A manufacturer authorizes retailers to sell a certain brand-name item.  A producer licenses distributors to sell a product to retailers.  A franchisor supplies brand names, techniques, or services instead of a complete product. Types of Franchises

28. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 28  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. The Growth of Franchising

29. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 29 Hampton Hotels $3.7M - 13.52M Subway $85.2K - 260.35K 7-Eleven Inc. $30.8K - 1.64M Servpro $133.05K - 181.45K Days Inn $187.37K - 6.99M McDonald's $1M - 2.16M Denny's Inc. $1.18M - 2.4M H & R Block $31.51K - 138.7K Pizza Hut Inc. $295K - 2.15M Dunkin' Donuts $374.72K - 1.61M Top 10 Franchises in America 2012

30. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 30  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. The Growth of Franchising (cont.)

31. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 31 Diversity of Products and Services  The International Franchise Association lists more than 75 different franchise categories.  Some industry categories: Automotive Baked Goods Building and Construction Business Services Child-Related Services Education-Related Services Lodging Maintenance Services Real Estate Travel Sports and Recreation Printing

32. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 32 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

33. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 33 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

34. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 34 Qualities Franchisors Seek in Franchisee

35. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 35  National and international economies grow more interdependent as trade barriers diminish.  Instant communication shrinks distances and expands business opportunities.  The Internet is the favored strategy for growth for small businesses. Technology provides leverage and power to reach markets previously limited to large corporations.  The SBA offers counseling on how and where to market overseas.  Small businesses must adapt to demographic and economic changes in the world marketplace. Global Perspectives in Small Business

36. © 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 36 Small Business Globalization by the Numbers Source: Allbusiness.com/Focus Magazine/Going Global, U.S. Department of Commerce, and SBA Office of Advocacy.