3 chapter Entrepreneurship New Ventures and Business Ownership

3 chapter Entrepreneurship, New Ventures, and Business Ownership Business Essentials, 7 th Edition Ebert/Griffin Instructor Lecture Power. Points Power. Point Presentation prepared by Carol Vollmer Pope Alverno College

LEARNING OBJECTIVES After reading this chapter, you should be able to: 1. 2. 3. 4. Define small business, discuss its importance to the economy, and explain popular areas of small business. Explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities. Describe the business plan and the start-up decisions made by small businesses and identify sources of financial aid available to such enterprises. Discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses. 2009 Pearson Education, Inc. 2

L E A R N I N G O B J E C T I V E S (cont’d) After reading this chapter, you should be able to: 5. Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages and disadvantages of each. 6. Describe corporations, discuss their advantages and disadvantages, and identify different kinds of corporations. 7. Explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership. © 2009 Pearson Education, Inc. 3

What’s in It for Me? • By understanding the material discussed in this chapter, you’ll be better prepared to: 1. Understand the keys to entrepreneurial success, including business planning 2. Discuss the reasons for success or failure 3. Evaluate the advantages and disadvantages of different kinds of ownership © 2009 Pearson Education, Inc. 4

Exercise A. Write down one example of a small business that you visit frequently. Then write down why you think it is important for this small business and others like it to be part of Gaza economy. 5

What Is a “Small” Business? • Small Business Defined – A business that is independent (not part of a larger business) and that has relatively little influence in its market. • Why Small Business is important in the U. S. Economy – Job creation: more than half of all new jobs created in the U. S. are by small businesses. – Innovation: Most new innovative product or service ideas come from small businesses. E. g. , PC, photocopyier. – Contributions to big business: • Suppliers of specialized services and raw materials • Sellers of larger firms’ products © 2009 Pearson Education, Inc. 6

FIGURE 3. 2: Small Business by Industry © 2009 Pearson Education, Inc. 7

Entrepreneurship • Entrepreneurship – The process of seeking business opportunities under conditions of risk • Entrepreneur – One who accepts the risks and opportunities of creating, operating and growing a new business • Small Business Owner – A person who independently owns a business that has relatively little impact in its market © 2009 Pearson Education, Inc. 8

Entrepreneurial Characteristics • Successful Entrepreneurs: 1. Are resourceful. 2. Are concerned about good customer relations. 3. Desire to be their own boss. 4. Can deal with uncertainty and risk. 5. Are open-minded. 6. Rely on networks, business plans, and consensus. 7. Have different views on how to succeed, to automate a business, and when to rely on experience or business acumen/wisdom. © 2009 Pearson Education, Inc. 9

Starting and Operating a New Business • The first step: Crafting a Business Plan – Business Plan: Conveys a description of the business strategy for the new venture and how it will be implemented – A business plan should address: • The entrepreneur’s goals and objectives • The strategies that will be used to obtain them • The implementation of the chosen strategies © 2009 Pearson Education, Inc. 10

Starting and Operating a New Business • How do we prepare a business plan? – Setting goals and objectives – Sales forecasting – Financial planning: prepare budget, financial statements, financial analysis. © 2009 Pearson Education, Inc. 11

Methods of Starting the Small Business 1. Buying an Existing Business – Less risk in purchasing ongoing, viable business 2. Franchising – Advantages • Proven business opportunity for franchisee • Access to management expertise of franchisor – Disadvantages • Start-up costs for franchise purchase • Ongoing payments to the franchisor • Management rules and restrictions on the franchisee © 2009 Pearson Education, Inc. 12

Starting the Small Business (cont’d) • Starting from Scratch – Disadvantage: Higher risk of business failure – Advantage: Avoids problems of an existing business • Questions to Be Answered: 1. Who and where are my customers? 2. How much will those customers pay for my product? 3. How much of my product can I expect to sell? 4. Who are my competitors? 5. Why will customers buy my product rather than the product of my competitors? © 2009 Pearson Education, Inc. 13

Financing the Small Business 1. Personal Resources 2. Loans from Family and Friends 3. Bank Loans 4. Venture Capital Companies 5. Small-Business Investment Companies (SBICs) 6. Minority Enterprise Small-Business Investment Companies (MESBICs) 7. Small Business Administration (SBA) Financial Programs include: – Guaranteed loans and immediate loan programs – Management advice (SCORE and SBDCs) © 2009 Pearson Education, Inc. 14

Exercise What is the first thing you need in order to obtain most of these types of financing? 15

Trends in Small-Business Startups Emergence of E-commerce Crossovers from Big Business Opportunities for Minorities & Women Global Opportunities Better Survival Rates © 2009 Pearson Education, Inc. 16

Five largest growth trends for new small business startups The first is the emergence of ecommerce. The Internet provides new ways of doing business, and entrepreneurs are jumping on board. Internet sales have increased from $55. 7 billion in 2003 to $125. 1 billion in 2007. 17

Five largest growth trends for new small business startups Crossovers from big business is another big trend. Our text offers the example of John Chambers who turned Cisco into a huge Internet connectivity firm, after first spending years working for IBM and Wang. 18

Five largest growth trends for new small business startups Opportunities for minorities and women within the small business market have grown rapidly. For example, African American small business owners own 1. 2 million small businesses, an increase of 48% over the last five years. Hispanic American small business owners own 1. 6 million small businesses, an increase of 31% over the last five years. Asian American small business ownership has grown 24% Nearly 11 million small businesses are now owned by women. All together, these businesses generate $2. 5 trillion in revenues each year. 19

Five largest growth trends for new small business startups Women cited a number of reasons for starting their own small business. Let’s review them: • 46% of the women started their own business to better control their own schedule. • 24% of the women saw a market opportunity and decided to pursue it. • 23% of the women were frustrated by the “glass ceiling” in wages at big companies. • And the remaining 7% cited other reasons. 20

Five largest growth trends for new small business startups Global opportunities represent another new market for small business owners, such as software development companies, consulting firms and higher education. 44% of small businesses will succeed and remain in operation after 4 years, offering better survival rates than in the 1970 s when nearly half of all new businesses failed. 21

How about in Palestine? A. More than 95 -98% percent of all businesses are small, they employ 10 persons or less. B. Why the businesses in Palestine are dominated by small ones? 1. Individualism trend. 2. Family oriented. 3. Lack of availability of fund. 4. Lack of awareness of the process of establishing corporations. 5. The skills needed to set and manage large companies are not there. 6. The Israeli occupation’s policies. 7. Lack of government support. 22

The Labor Force Reflects the Importance of Small Business Over 86% of U. S. businesses have no more than 20 employees. The total number of people employed by these small businesses is about 25% of the entire U. S. workforce. Another 29% of the workforce is employed by businesses with fewer than 100 employees. 23

Success and Failure in new ventures • Ultimately, 63% of all new businesses fail in US. • Each year 600, 000 and 650, 000 new businesses are launched in US. 500, 000 to 600, 000 are failed. 24

Reasons for failure 1. Poor management: it is not enough to know a common sense about business, they must have the basic business principles. How make a proper decisions. 2. Neglect: Starting a new business requires an overwhelming time commitment. Doing it “on the side” usually isn’t enough. 3. Weak control systems: Without control systems, small business owners don’t know about problems until it’s too late. 4. Insufficient capital: Many experts recommend that a new business should have enough capital to last six months to one year without earning a profit. 25

Reasons for success • • • Hard work, drive, and dedication: Commitment is essential. Nearly 44% of successful entrepreneurs interviewed by the Ontario Department of Industry and Commerce cited determination as the personal quality that contributed to success. Market demand: Clearly, if there is demand for a product, success will be easier. Managerial competence: Training and experience make a real difference. Most successful entrepreneurs spend time working in successful companies or they partner with others who bring more expertise. Luck: Never underestimate the importance of luck, but keep in mind Thomas Jefferson’s saying: “The harder I work, the luckier I become”!. Example, Mc. Afee made a significant profit once Microsoft announced that it is entering the 26 security business.

Business Ownership • Forms of Legal Ownership – Sole proprietorship: Owned and operated by one person – Partnership: Sole proprietorship multiplied by the number of partner-owners – Corporation • Choice of Ownership Form – Based on the entrepreneur’s needs/desires for control, ownership participation, financing sources, and appropriateness of the chosen form for the industry© 2009 in Pearson which the firm will compete Education, Inc. 27

Sole Proprietorships Advantages: Disadvantages: • Freedom • Unlimited Liability Limited resources Limited fundraising capability Lack of continuity • Simple to form • Low start up costs • Tax benefits Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business 28

Sole proprietorships traders A. Sole proprietorships are the most basic legal form of business organization. B. Advantages: A. Freedom: Sole proprietors answer to no one but themselves—this is a terrific fit for certain personalities (and we can probably all think of someone who fits the profile!). B. Simple to form: In some states, forming a business is as simple as hanging a sign on the door. C. Low start-up costs: Low costs go hand-in-hand with minimal legal requirements D. Tax benefits: Sole proprietors are taxed only on personal income, and can take advantage of certain tax deductions. 29

Sole proprietorships traders A. Sole proprietorships are the most basic legal form of business organization. B. Disadvantages: A. Unlimited liability: Sole proprietors are personally liable for all debts incurred by the company (including damages in lawsuits/claims). This is the most significant drawback to this form of business. B. Limited resources: This can ultimately limit the size of the business. C. Limited fundraising capability: Sole proprietors often find it difficult to borrow money. Difficult to provide loan security. D. Lack of continuity: A sole proprietorship legally dissolves when the owner dies. 30

Partnerships Advantages: Disadvantages: • More talent and money • Unlimited Liability Disagreements • More fundraising among partners capability Lack of continuity • Relatively easy to form • Tax benefits Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business 31

Partnerships A. The most common type of partnership, a general partnership, is simply a sole proprietorship multiplied by the number of partner-owners. A. Advantages: B. More talent and money: A partnership draws on the talent and money of more than one person. C. More fundraising capability: Partnerships are able to borrow money more easily from lending institutions, and also have the option of inviting more partners to invest. D. Relatively easy to form: Legal requirements are limited, but must include a partnership agreement of some kind. E. Tax benefits: Partners are taxed only on personal income. 32

Partnerships A. Disadvantages: 1. Unlimited liability: Each partner is liable for all debts incurred in the name of the partnership, even if one partner incurs a debt without the knowledge of the other partners. 2. Disagreements among partners: Partnerships have been known to ruin relationships between close friends and family members. A. Discussion: What are some possible safeguards against this happening? 33

Partnerships 1. Lack of continuity: When one partner leaves or dies, the original partnership dissolves, and must be reorganized if other partners want to continue. 2. Within a partnership, a significant level of conflict can be healthy and creative, generating more effective solutions to a range of different obstacles. However, an exit plan is still crucial in case disagreements become unmanageable. A. Discussion: What should be included in the exit plan for a partnership? 34

Alternatives to General Partnerships • Limited Partnership – Allows for limited partners who invest money but are liable for debts only to the extent of their investments – Must have at least one general (or active) partner, who is usually the person who runs the business and is responsible for its survival and growth • Master Limited Partnership (agreement) – Organization sells shares (partnership interests) to investors on public exchange. Investors are paid back from profits – The master partner retains at least 50 percent ownership and runs the business, while minority partners have no management voice © 2009 Pearson Education, Inc. 35

Cooperatives • Combine the freedom of sole proprietorships with the financial power of corporations • Groups of sole proprietorships or partnerships agree to work together for their common benefit © 2009 Pearson Education, Inc. 36

What is a Corporation? “An artificial being, invisible, intangible, and existing only in contemplation reflection of the law. ”

Corporations • Corporation – Firms that have filed papers of incorporation. – There are 4. 93 million corporations in the U. S. that account for 20% of all U. S. businesses, but generate 85% of all revenue. • Corporations may: 1. 2. 3. 4. 5. 6. Be small or large Sue and be sued Buy, hold, and sell property Make and sell products Commit crimes and be tried and punished for them Have limited liability for individuals who form them © 2009 Pearson Education, Inc. 38

Discussion A. : guess the largest Palestinian companies. 39

Corporations • Disadvantages: • Advantages: – Limited liability: The owners’ responsibility for the debts of a business is limited to their investment in a business – Double taxation of dividends – Fluid control – Complicated and expensive to form – Continuity – Stronger fundraising capability © 2009 Pearson Education, Inc. 40

Corporation Advantages: 1. Limited liability: The liability of investors (owners) for the debts of a corporation is limited to the size of their investments—a huge benefit! 2. Continuity: Theoretically, a corporation may continue to exist forever, with ownership transferred via sale of stock. 3. Stronger fund-raising capability: Lenders are more willing to grant loans. Larger corporations also have the option of selling stock to raise capital.

Corporation Disadvantages 1. Double taxation: Profits earned by corporations are taxed at the corporate level, and then taxed again at the ownership level. Is it fair? Who benefits? 2. Fluid difficult control: Given the easy transfer of ownership, corporations are subject to hostile takeovers, which (at the very least) distract/divert management from achieving the corporation’s goals. El-Fayed took over Harrots. 3. Complicated and expensive to form: Costs include filing fees to meet government incorporation requirements, and usually legal fees as well. (e. g. , must register to: ministry of Justice, chamber of commerce, ministry of economics, local authority).

Types of Corporations • Closely Held (Private) Corporation: stock is held by few people, not available to public. • Publicly Held (Public) Corporation: shares are publically issued. • Subchapter S Corporation. These firms are corporations and they are organized like a corporation but they are treated like partnerships for tax purposes. © 2009 Pearson Education, Inc. 43

Types of Corporations • Limited Liability Corporation (LLC). This is a popular form of incorporation because owners are taxed like partners but have the limited liability of a corporation. • Professional Corporation. These are usually doctors, lawyers, etc. Their corporate status provides limited liability, but an individual’s negligent performance can make an individual within the firm personally liable. • Multinational (Transnational) Corporation © 2009 Pearson Education, Inc. 44

Comparative Summary: Three Forms of Business Form Liability Continuity Management Investment Sources Proprietors hip Personal, unlimited Ends with death or decision of owner Personal, unrestricted Personal General Partnership Personal, unlimited Ends with death or decision of any partner Unrestricted or depends on partnership agreement Personal by partner(s) Corporatio n Capital invested As stated in charter, perpetual/ continue or for specified period of years Under control of board of directors, which is selected by stockholders Purchase of stock Copyright © 2003 Prentice Hall, Inc. 4 - 45

Managing a Corporation • Corporate Governance – The roles of shareholders, directors, and other managers in corporate decision making and accountability – Corporate governance is established by the firm’s bylaws and involves three bodies: • Stockholders (shareholders): Investors who buy ownership shares in the form of stock • The board of directors: Group elected by stockholders to oversee corporate management • Corporate officers: Top managers hired by the board to run the corporation © 2009 Pearson Education, Inc. 46

Stockholders: Owners of Corporations • Stock: A share of ownership in a corporation • Dividends: Profits distributed among stockholders © 2009 Pearson Education, Inc. 47

Types of Stocks: 1. Common Stock: The most basic form of ownership. Common stockholders always have voting rights. 2. Preferred Stock: Offers fixed dividends but no corporate voting rights. A. Discussion: How many of you own stock? Which companies? Why? 48

Special Issues in Corporate Ownership • Joint Ventures and Strategic Alliances: – Strategic alliance: Two or more organizations collaborate on a project for mutual gain – Joint venture: the collaboration of two or more organizations on a project for mutual gain. Partners share ownership of a new enterprise. • Employee Stock Ownership Plans – Allows employees to own a share of the corporation through trusts established on their behalf • Institutional Investors – Control enormous resources and can buy huge blocks of stock © 2009 Pearson Education, Inc. 49

Special Issues in Corporate Ownership (cont’d) • Mergers, Acquisitions, Divestitures, and Spin. Offs: – Merger: Two firms combine to create a new company – Acquisition: One firm buys another outright – Divestiture: Strategy whereby a firm sells one or more of its business units – Spin-off: A firm sells part of itself to raise capital © 2009 Pearson Education, Inc. 50

Review A. From the standpoint of the franchisee, what are the primary advantages and disadvantages of most franchise arrangements?

Review Why might a closely held corporation choose to remain private? Why might a closely held corporation choose to become a publicly traded corporation?

Homework Answer questions (7 -10)page 45. 53