1. Small Business, Entrepreneurship, and Franchises
Chapter Six
Small Business, Entrepreneurship, and Franchises

2. Learning Objectives
Define what a small business is and recognize the fields in which small businesses are concentrated.
Identify the people who start small businesses and the reasons why some succeed and many fail.
Assess the contributions of small businesses to our economy.
Judge the advantages and disadvantages of operating a small business.
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3. Learning Objectives
Explain how the Small Business Administration helps small businesses.
Appraise the concept and types of franchising.
Analyze the growth of franchising and franchising’s advantages and disadvantages.
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4. Small Business: A Profile
A business that is independently owned and operated for profit and is not dominant in its field
SBA “smallness” guidelines
Manufacturing—a maximum of 500 to 1,000 employees
Wholesaling—a maximum of 100 employees
Retailing—maximum annual sales of $6 to $24.5 million
Mining—a maximum of 500 employees
General construction—average annual receipts of $12 to $28.5 million
Special trade construction—annual sales up to $12 million
Agriculture—maximum annual receipts of $0.75 to $5 million
Services—maximum annual receipts of $6 to $29 million
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5. Class Exercise
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
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6. Small Business: A Profile (cont’d)
The Small-Business Sector
There are 23 million businesses in the U.S.
Only about 17,000 employ more than 500 workers
In the last decade, the number of small businesses increased by 49%
Part-time entrepreneurs have increase fivefold and account for one-third of all small businesses
Over 70% of new business fail within their first 5 years, primarily due to poor management stemming from a lack of business know-how
Small businesses provide over 50% of the jobs in the U.S.
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8. Industries That Attract Small Businesses
Attractive small-business industry characteristics
Low initial capital investment
Special skill requirements
High growth and profit potential
Industry categories where small businesses tend to cluster
Distribution—retailing, wholesaling, transportation, and communications (33% of all small businesses)
Service—medical and dental care; watch, shoe, and television repairs; hair cutting and styling; restaurant meals; dry cleaning; financial services (48% of all small businesses)
Production—construction, mining, and manufacturing (19% of all small businesses)
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9. The People in Small Business: The Entrepreneurs
Why people go into business for themselves
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
High-tech opportunities, especially for teens
“Had enough” of working for someone else
Losing a job and deciding to start a business
An idea for a new product
An opportunity presents itself
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10. How Old Is the Average Entrepreneur?
Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.
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11. Career Opportunities in Small Business
Source: Robert Kreitner, Management, 9th ed. (Boston: Houghton Mifflin, 2004), p. 26.
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12. Why Small Businesses Fail
Lack of capital and cash-flow problems
Lack of management skills
Overexpansion
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13. The Importance of Small Business in Our Economy
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 ½ 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
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14. The Importance of Small Business in Our Economy (cont’d)
Providing employment
Small firms hire a larger proportion of younger workers, 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% of all employers and employ 50% of the private work force
Small businesses provide 2/3 of the net new jobs added to the economy
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16. The Importance of Small Business in Our Economy (cont’d)
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
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17. The Pro 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
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18. Sources of Capital for Entrepreneurs
Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.
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19. Developing a Business Plan
A carefully constructed guide for the person starting a business
Four questions bankers and investors are most interested in
What is the nature and mission of the new venture?
Why is the new enterprise a good idea?
What are the business person’s goals?
How much will the new venture cost?
Accuracy and realistic expectations are crucial
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22. “Seven Sacred Questions” in 45 Seconds
According to one new-venture expert, entrepreneurs who are trying to raise venture capital should be able to answer these questions in 45 seconds
What is your product?
Who is the customer?
Who will sell it?
How many people will buy it?
How much will it cost to design and build?
What is the sales price?
When will you break even?
Source: Marc Ballon, “Hot Tips,” Inc., April 1999, p. 104.
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23. 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 the franchise
Franchisee
A person or organization purchasing a franchise
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24. A manufacturer authorizes retailers to sell a certain brand-name item
Types of Franchises
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
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25. The growth of franchising
Franchising (cont’d)
The growth of franchising
Franchising accounts for more than 40% of all U.S. retail sales and provides over 8 million jobs
Franchising has expanded with the expansion of the fast-food industry
Franchising is attracting more women and minority business owners than ever before
Dual-branded franchises, in which two franchisors offer their products together, are a new trend
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26. Are franchises successful?
Franchising (cont’d)
Are franchises successful?
The success rate for franchises is higher than that for other small businesses
94 percent of franchise owners report that they are successful
Too rapid expansion, inadequate capital or management skills, or other problems can cause franchises to fail
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27. Entrepreneur’s Top Ten Franchises in 2004
SUBWAY
Curves for Women
Quizno’s Franchise Co.
7-Eleven, Inc.
Jackson Hewitt Tax Service
The UPS Store
McDonald’s
Jani-King
Dunkin’ Donuts
Baskin-Robbins USA Co.
For updates:
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28. 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
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29. 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
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30. Debate Issue: Is franchising the best way to own a business?
YES
The advantages of franchising far outweigh the disadvantages. The franchisee can start the business with limited capital but, at the same time, make use of the business experience of others. This experience usually means the franchise name is widely recognized. Therefore, franchised outlets are generally more successful than independently owned businesses. A franchisee usually receives important training regarding operations management. NO
A true entrepreneur desires ultimate control over business operations. Franchising does not allow for such independence and, in many cases, franchisees are not allowed to make crucial decisions. Beside the lack of control, the franchisee is, in effect, working for the franchisor. The more successful the franchisee, the greater the royalties paid to the franchisor. Owning any business is hard work but, with franchising, the franchisee is never justly compensated for the franchise’s success.
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31. Chapter Quiz
Which one of the following is the most likely example of a production industry?
Wholesale outlet
Retail outlet
Financial enterprise
Subassembly plant
Transportation company
Small businesses are typically managed by
family members.
professional managers.
friends.
a board of directors.
the people who start and own them.
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32. Chapter Quiz
The fact that the ball-point pen and the zipper both originated with individual inventors and small companies is testimony to the power of small business as providers of
employment.
competition.
technical innovation.
capital.
quality products.
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33. Chapter Quiz
As a business person planning to open a new small business, you know that the business plan should not contain
a discussion of the nature and mission of the new business.
information about how much it will cost to open and operate the new business.
pages and pages of detailed facts and figures.
any mention of the business person’s goals; financial institutions just aren’t interested in these.
an explanation of why opening a business of this type makes good business sense.
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34. Chapter Quiz (cont’d)
University-based groups providing individual counseling and practical training to owners of small businesses are known as
the Small Business Administration.
Small Business Development Centers.
Small Business Institutes.
Special Task Force.
None of these responses is correct.
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35. Answers to Chapter Quiz
Which one of the following is the most likely example of a production industry?
Wholesale outlet
Retail outlet
Financial enterprise
Subassembly plant
Transportation company
Small businesses are typically managed by
family members.
professional managers.
friends.
a board of directors.
the people who start and own them.
Copyright © Houghton Mifflin Company. All rights reserved.

36. Answers to Chapter Quiz
The fact that the ball-point pen and the zipper both originated with individual inventors and small companies is testimony to the power of small business as providers of
employment.
competition.
technical innovation.
capital.
quality products.
Copyright © Houghton Mifflin Company. All rights reserved.

37. Answers to Chapter Quiz
As a business person planning to open a new small business, you know that the business plan should not contain
a discussion of the nature and mission of the new business.
information about how much it will cost to open and operate the new business.
pages and pages of detailed facts and figures.
any mention of the business person’s goals; financial institutions just aren’t interested in these.
an explanation of why opening a business of this type makes good business sense.
Copyright © Houghton Mifflin Company. All rights reserved.

38. Answers to Chapter Quiz (cont’d)
University-based groups providing individual counseling and practical training to owners of small businesses are known as
the Small Business Administration.
Small Business Development Centers.
Small Business Institutes.
Special Task Force.
None of these responses is correct.
Copyright © Houghton Mifflin Company. All rights reserved.