2. Entrepreneurship and Small-Business Ownership
Chapter 6

3. Copyright © 2015 Pearson Education, Inc.
Learning Objectives
Highlight the contributions small businesses make to the U.S. economy
List the most common reasons people start their own companies and identify the common traits of successful entrepreneurs
Explain the importance of planning a new business and outline the key elements in a business plan
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4. Learning Objectives (cont.)
Identify the major causes of business failures and identify sources of advice and support for struggling business owners
Discuss the principal sources of small-business private financing
Explain the advantages and disadvantages of franchising
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5. The Big World of Small Business
A company that is independently owned and operated, is not dominant in its field, and employs fewer than 500 people (although this number varies by industry)
Defining just what constitutes a small business is surprisingly tricky, but it is vitally important because billions of dollars are at stake when it comes to such things as employment regulations—from which the smallest companies are often exempt—and government contracts reserved for small businesses. Roughly speaking, a small business is an independently owned and operated company that employs fewer than 500 people and “is not dominant in its field of operation,” in the words of the U.S. Small Business Administration (SBA). Beyond that general starting point, the SBA defines the maximum size of “small” through either annual revenue or number of employees, and the limits vary by industry.
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6. Economic Roles of Small Business
They provide jobs
They introduce new products
They meet the needs of larger organizations
They inject a considerable amount of money into the economy.
From employing millions of people to creating essential products, small businesses play a vital role in the U.S. economy. Here are some of the major contributions small firms make.
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7. Economic Roles of Small Business (cont.)
They take risks that larger companies sometimes avoid
They provide specialized goods and services
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8. Copyright © 2015 Pearson Education, Inc.
The Economic Impact of Small Businesses in the United States
Exhibit 6.1
In terms of employment, innovation, and exports, there is nothing small about small business in the United States.
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9. Characteristics of Small Businesses
Most small firms have a narrow focus
Small businesses have to get by with limited resources
Small businesses often have more freedom to innovate
Entrepreneurial firms find it easier to make decisions quickly and react to changes in the marketplace
Regardless of their primary objectives, small companies tend to differ from large ones in a variety of important ways. First, most small firms have a narrow focus, offering fewer goods and services to fewer market segments. Second, unless they are launched with generous financial backing, which is rare, small businesses have to get by with limited resources. Third, smaller businesses often have more freedom to innovate and move quickly. As they grow larger, companies tend to get slower and more bureaucratic. In contrast, entrepreneurial firms usually find it easier to operate “on the fly,” making decisions quickly and reacting to changes in the marketplace.
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10. Factors Contributing to the Increase in the Number of Small Businesses
E-commerce
Social media
Technological advances
Growing diversity in entrepreneurship
Corporate downsizing and outsourcing
Three factors are contributing to the increase in the number of small businesses today: e-commerce, social media, and other technological advances; the growing diversity in entrepreneurship; and corporate downsizing and outsourcing.
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11. The Entrepreneurial Spirit
The positive, forward-thinking desire to create profitable, sustainable business enterprises
Every professional should understand the entrepreneurial spirit—the positive, forward-thinking desire to create profitable, sustainable business enterprises—and the role it can play in every company, not just small or new firms. The entrepreneurial spirit is vital to the health of the economy and to everyone’s standard of living, and it can help even the largest and oldest companies become profitable and competitive.
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12. Why People Start their Own Companies
More control over their future
Tired of working for someone else
Passion for new product ideas
Pursue business goals that are important to them on a personal level
Inability to find attractive employment anywhere else.
Starting a company is nearly always a difficult, risky, exhausting endeavor that requires significant sacrifice. Why do people do it? Some want more control over their future; others are simply tired of working for someone else. Another reason, one that becomes more common during tough job markets, is the inability to find attractive employment anywhere else.
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13. Copyright © 2015 Pearson Education, Inc.
Qualities Shared by Successful Entrepreneurs
Exhibit 6.2
Although no single personality profile fits all successful entrepreneurs, here are the qualities that entrepreneurs tend to have.
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14. Blueprint for an Effective Business Plan
A document that summarizes a proposed business venture, goals, and plans for achieving those goals
A business plan summarizes a proposed business venture, communicates the company’s goals, highlights how management intends to achieve those goals, and shows how customers will benefit from the company’s goods or services. Preparing a business plan serves three important functions. First, it guides the company operations and outlines a strategy for turning an idea into reality. Second, it helps persuade lenders and investors to finance your business if outside money is required. Third, it can provide a reality check in case an idea just isn’t feasible.
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15. STUDY - *Blueprint for an Effective Business Plan (cont.)
Summary
Mission and objectives
Company overview
Products and services
Management and key personnel
Target market
Marketing strategy
• Summary. In one or two paragraphs, summarize your business concept, particularly the business model , which defines how the company will generate revenue and produce a profit.
• Mission and objectives. Explain the purpose of your business and what you hope to accomplish.
• Company overview. Give full background information on the origins and structure of your venture.
• Products or services. Concisely describe your products or services, focusing on their unique attributes and their appeal to customers.
• Management and key personnel. Summarize the background and qualifications of the people most responsible for the company’s success.
• Target market. Provide data that will persuade an investor that you understand your target market. Be sure to identify the strengths and weaknesses of your competitors.
• Marketing strategy. Provide projections of sales volume and market share; outline a strategy for identifying and reaching potential customers, setting prices, providing
customer support, and physically delivering your products or services.
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16. Blueprint for an Effective Business Plan (cont.)
Design and development plans
Operations plan
Start-up schedule
Major risk factors
Financial projections
Exit strategy
• Design and development plans. If your products require design or development, describe the nature and extent of what needs to be done, including costs and possible problems.
• Operations plan. Provide information on facilities, equipment, and personnel requirements.
• Start-up schedule. Forecast development of the company in terms of completion dates for major aspects of the business plan.
• Major risk factors. Identify all potentially negative factors and discuss them honestly.
• Financial projections and requirements. Include a detailed budget of start-up and operating costs, as well as projections for income, expenses, and cash flow for the first three years of business. Identify the company’s financing needs and potential sources.
• Exit strategy. Explain how investors will be able to cash out or sell their investment, i.e. through a public stock offering, sale of the company, or a buyback of the investors’ interest.
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17. Copyright © 2015 Pearson Education, Inc.
Exhibit 6.4
Why New Businesses Fail
You may have heard some frightening “statistics” about the failure rate of new businesses, with various sources saying that 70, 80, or even 90 percent of new business ventures fail. Unfortunately, calculating a precise figure that represents all types of businesses across all industries is probably impossible.
These 12 blunders are among the most common reasons for the failure of new businesses.
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18. Government Agencies and Not-for-Profit Organizations
Small Business Administration
Minority Business Development Agency
SCORE – SERVICE CORPS OF RETIRED EXECUTIVES
U.S. Chamber of Commerce
Keeping a business going is no simple task, to be sure. Fortunately, entrepreneurs can get advice and support from a wide variety of sources.
At the federal level, small businesses can apply for loans backed by the Small Business Administration (SBA), get management and financing advice, and learn about selling to the federal government at The Minority Business Development Agency ( offers advice and programs to minority owned businesses. Many state agencies also have offices to help small firms compete.
Some of the best advice available to small businesses is delivered by thousands of volunteers from the Service Corps of Retired Executives (SCORE), a resource partner of the SBA. These experienced business professionals offer free advice and one-to-one counseling to entrepreneurs. You can learn more at
Many colleges and universities also offer entrepreneurship and small-business programs. Check with your college’s business school to see whether resources are available
to help you launch or expand a company. The U.S. Chamber of Commerce (www .uschamber.com) and its many local chambers offer advice and special programs for small
businesses as well.
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19. Mentors and Advisory Boards
A team of people with subject-area expertise or vital contacts who help a business owner review plans and decisions
An advisory board is a form of “group mentoring” in which you assemble a team of people with subject-area expertise or vital contacts to help review plans and decisions.
Unlike a corporate board of directors, an advisory board does not have legal responsibilities, and you don’t have to incorporate to establish an advisory board. In some cases, advisors will agree to help for no financial compensation. In other cases, particularly for growth companies that want high-profile experts, advisors agree to serve in exchange for either a fee or a small portion of the company’s stock (up to 3 percent is standard).
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20. Copyright © 2015 Pearson Education, Inc.
Print and Online Media
Inc .
Business 2.0
Bloomberg BusinessWeek
Fortune and Money
Your local library and the Internet offer information to help any small-business owner face just about every challenge imaginable. For instance, blogs written by business owners, investors, and functional specialists such as marketing consultants can offer valuable insights. Websites such as provide free advice on every aspect of managing an entrepreneurial organization. Also, the websites affiliated with these wellknown business magazines should be on every small-business owner’s regular reading list:
• Inc. (
• Business 2.0 (
• Bloomberg Businessweek (
• Fortune and Money (
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21. Copyright © 2015 Pearson Education, Inc.
Social Networking for Entrepreneurs
Exhibit 6.5
Here are just a few of the many online networks that provide advice and vital connections for entrepreneurs.
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22. Copyright © 2015 Pearson Education, Inc.
Business Incubators
Business Incubators
Facilities that house small businesses and provide support services during the company’s early growth phases
Business incubators are centers that provide “newborn” businesses with various combinations of advice, financial support, access to industry insiders and connections, facilities, and other services a company needs to get started. Some incubators are not-for-profit organizations affiliated with the economic development agencies of local or state governments or universities, some are for-profit enterprises, some are run by venture capitalists, and some companies have internal incubators to encourage new ventures.
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23. Financing Options for Small Businesses
Seed Money
The first infusion of capital used to get a business started
Micro Lenders
Organizations, often not-for-profit, that lend smaller amounts of money to business owners who might not qualify for conventional bank loans
Private financing covers every source of funding except selling stocks and bonds. Nearly all companies start with private financing, even those that eventually “go public.” The range of private financing options is diverse, from personal savings to investment funds set up by large corporations looking for entrepreneurial innovations. Many firms get seed money, their very first infusion of capital, through family loans. If you go this route, be sure to make the process as formal as a bank loan would be, complete with a specified repayment plan. Otherwise, problems with the loan can cause problems in the family.
In response to the needs of entrepreneurs who don’t qualify for standard bank loans or who don’t need the amount of a regular loan, hundreds of organizations now serve as microlenders, offering loans up to $35,000 or so. You can learn more at the Association for Enterprise Opportunity website, at
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24. Financing Options for Small Businesses (cont.)
Venture Capitalists (VCs)
Investors who provide money to finance new businesses or turnarounds in exchange for a portion of ownership, with the objective of reselling the business at a profit
At the other end of the funding scale are venture capitalists (VCs), investment specialists who raise pools of capital from large private and institutional sources (such as pension funds) to finance ventures that have high growth potential and need large amounts of capital. VC funding provides a crucial stimulus to the economy by making risky, early stage investments in firms that are likely to become major employers if their products succeed in the marketplace. Because one-third of VC-funded start-ups don’t succeed, those that do succeed need to really pay off to compensate. VCs are therefore extremely focused and selective; they invest in only a few thousand companies in the United States every year.
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25. Financing Options for Small Businesses (cont.)
Angel investors
Private individuals who invest money in start-ups, usually earlier in a business’s life and in smaller amounts than VCs are willing to invest or banks are willing to lend
Initial public offering (IPO)
A corporation’s first offering of shares to the public
Start-up companies that can’t attract VC investment (perhaps because they are too early in their product development) often look for angel investors, private individuals who put their own money into start-ups, with the goal of eventually selling their interest for a profit. These individuals are willing to invest smaller amounts than VCs and often stay involved with the company for a longer period of time. Many of these investors join angel networks or angel groups that invest together in chosen companies. Angel investing tends to have a more local focus than venture capitalism, so you can search for angels through local business contacts and organizations.
Companies with solid growth potential may also seek funding from the public at large, although only a small fraction of the companies in the United States are publicly traded. Whenever a corporation offers its shares of ownership to the public for the first time, the company is said to be going public. The shares offered for sale at this point are the company’s initial public offering (IPO). Going public is an effective method of raising needed capital, but it can be an expensive and time-consuming process with no guarantee of raising the amount of money needed.
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26. Financing Options for Small Businesses (cont.)
Crowdfunding
Soliciting project funds, business investment, or business loans from members of the public.
Crowdfunding is an intriguing twist to funding that combines elements of public and private financing. Kickstarter is perhaps the best known of these web services that provide a way for people and organizations to seek money from the public. Crowdfunding services fall into two general categories. Kickstarter and a number of other sites focus on individual projects or charitable endeavors, and people provide money in exchange for the product being created or simply to help people and causes they believe in. In contrast, services such as Crowdfunder ( and SoMoLend ( help business owners raise money to launch or expand companies, and the people who provide money are investing in or lending to the company.
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27. Copyright © 2015 Pearson Education, Inc.
Financing Possibilities over the Life of a Small Business
Exhibit 6.6
The potential funding sources available to a business owner vary widely, depending on where the business is in its life cycle. Note that this is a general map and covers only the most common funding sources. Individual lending opportunities depend on the specific business owner(s), the state of the economy, and the type of business and its potential for growth. For example, venture capital is available only to firms with the potential to grow rapidly and only in a few industries.
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28. The Franchise Alternative
A business arrangement in which one company (the franchisee) obtains the rights to sell the products and use various elements of a business system of another company (the franchisor)
An alternative to creating or buying an independent company is to buy a franchise, which enables the buyer to use a larger company’s trade name and sell its goods or services in a specific territory. In exchange for this right, the franchisee (the small-business owner who contracts to sell the goods or services) pays the franchisor (the supplier) an initial startup fee, then monthly royalties based on sales volume. Franchises are a large and growing presence in the U.S. economy, accounting for roughly 10 percent of all employer businesses (those that hire employees).
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29. The Franchise Alternative (cont.)
Franchisee
A business owner who pays for the rights to sell the products and use the business system of a franchisor
Franchisor
A company that licenses elements of its business system to other companies (franchisees)
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30. Advantages of Franchising
Combines at least some of the freedom of working for yourself with many of the advantages of being part of a larger, established organization.
Name recognition, national advertising programs, standardized quality of goods and services, and a proven formula for success.
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31. Disadvantages of Franchising
You typically agree to follow the business format
Little control over decisions the franchisor makes that affect the entire system
You don’t have the option of independently changing your business in response to market changes
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32. Copyright © 2015 Pearson Education, Inc.
Twelve Questions to Ask Before Signing a Franchise Agreement
Exhibit 6.7
A franchise agreement is a legally binding contract that defines the relationship between a franchisee and a franchisor. Before signing a franchise agreement, be sure to read the disclosure document and consult an attorney.
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