CHAPTER 6 Entrepreneurship and Starting a Small Business
CHAPTER 6 Entrepreneurship and Starting a Small Business Mc. Graw-Hill/Irwin Copyright © 2015 by the Mc. Graw-Hill Companies, Inc. All rights reserved.
WHAT is ENTREPRENEURSHIP? • Entrepreneur -- Someone who risks their time, effort and money owning and operating a business • Entrepreneurship -- Accepting the risk of starting and running a business. 6 -2
YOU’RE NEVER TOO YOUNG to be an ENTREPRENEUR Four reasons to start your business right away: 1. You don’t have a mortgage or kids to take care of. 2. You can survive on little funds and work long hours. 3. No disruption to your career path. It hasn’t started yet! 4. Use your alma mater for resources. Source: Entrepreneur, www. entrepreneur. com, accessed November 2014. 6 -3
YOU’RE NEVER TOO OLD to be an ENTREPRENEUR EITHER! • The highest rate of entrepreneurship activity is in the 55 -64 age group! • Since 1996, older Americans have opened businesses at a higher rate than 20 -34 year olds. • Older entrepreneurs have greater experience and more financial resources. Source: U. S. News and World Report, www. usnews. com, accessed October 2014. 6 -4
WHY TAKE the RISK? LO 6 -1 • Opportunity – entrepreneurial spirit, the desire to start your own business • Profit • Independence • Challenge 6 -5
BIG TIME PROFIT LO 6 -1 • Michael Dell could buy 1, 100 new laptops for every student at the University of Texas at Austin! • Dietrich Mateschitz could buy himself a can of Red Bull every day for the next 11 million years! • Liliane Bettencourt could buy a box of L’Oreal hair color for every woman in the world! Source: Forbes, www. forbes. com, accessed November 2014. Photo Credit: Emran Kassim 6 -6
WHAT DOES IT TAKE to be an ENTREPRENEUR? LO 6 -1 • Self-directed • Self-nurturing (SELFCONFIDENT) • Action-oriented • Highly energetic • Tolerant of uncertainty (Risk Takers) 6 -7
FIVE STEPS to STARTING YOUR BUSINESS in SCHOOL LO 6 -1 1. Find a problem or need. 2. Zero in on specifics. 3. Do research on campus, test products with students. 4. Move forward with your ideas. Don’t wait! 5. Sacrifice. Source: Entrepreneur, www. entrepreneur. com, accessed November 2014. 6 -8
An IDEA is a GOOD OPPORTUNITY IF… LO 6 -1 • It fills customers’ needs. • You have the skills and resources to start a business. • You can sell the product or service at a reasonable price and still profit. • You can get your product or service to customers before the window of opportunity closes. • You can keep the business going. 6 -9
MICROPRENEURS LO 6 -1 • Micropreneurs -- Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle. • About half of U. S. micropreneurs are home-based business owners – writers, consultants, video producers, architects, bookkeepers, etc. • Nearly 60% of home-based micropreneurs are men. 6 -10
HOME-BASED BUSINESS GROWTH LO 6 -1 • Computer technology has leveled the playing field. • Corporate downsizing has led many to venture on their own. • Social attitudes have changed. • New tax laws have loosened restrictions on deducting expenses for home offices. 6 -11
HOME-BASED BUSINESS ISN’T EASY LO 6 -1 • Getting new customers is difficult. • Managing your time requires self-discipline. • Work and family tasks are sometimes not separated. • Government ordinances may restrict your business. • Homeowner’s insurance may not cover businessrelated claims. 6 -12
BENEFITS of HOME-BASED BUSINESSES • Ability to start your business immediately • Minimal start-up capital needed • No rent or excessive set-up charges • Comfortable working conditions • Reduced wardrobe expenses • No commuting • Tax benefits • Elimination of office politics • Low risk for trial and error LO 6 -13
DOWNSIDES of HOME-BASED BUSINESSES • Difficult to establish work habits • Limited support system • Isolation • Work space may be limited • Clients may be uncomfortable coming to your home • Zoning restrictions • Success is based 100% on your efforts LO 6 -14
THINK YOU’RE READY to WORK from HOME? LO 6 -1 Yes? No? If I don’t know the answer, I can figure it out. I’m hardworking, self-directed and disciplined. I’m organized and can multitask. I don’t mind working long hours or weekends. I regularly set goals and measure progress. I’m happy being alone. I’m an excellent communicator. I can create relationships with people I’ve never met. I’m productive on my own. My family and friends don’t expect me to be available when I’m working at home. Source: Entrepreneur, June 2010. 6 -15
ONLINE BUSINESS LO 6 -1 • Online sales reached $262 billion in 2013, about 8% of all retail sales. • All retail sales were up 2. 5% in 2013. However, online retail sales grew 13%. 6 -16
BOOSTING YOUR BUSINESS’S ONLINE PRESENCE LO 6 -1 • Establish an identity. • Be easy to find. • Steal good ideas and make them your own. • Look out for opportunities. • Remember other forms of marketing. Photo Credit: Marc Wathieu • Be friendly! Source: Entrepreneur, www. entrepreneur. com, accessed November 2014. 6 -17
INTRAPRENEURS LO 6 -1 • Intrapreneur -- A creative person who works as an entrepreneur within a corporation. • Intrapreneurs use a company’s existing resources to launch new products for the company. • Art Fry of 3 M developed Post-Its when he was trying to mark pages of his hymnal without damage. 6 -18
SMALL BUSINESSES LO 6 -2 • Small Business -- Independently owned and operated, not dominant in its field of operation and meets certain standards of size*. *Generally less than 500 employees and less than $2. 5 m in annual sales • Businesses are “small” in relation to other businesses in their industries. 6 -19
SMALL BUSINESS STATISTICS LO 6 -2 • Over 70% of all small businesses fail within first year of operation • Why? • There are 28 million small businesses in the U. S. • Over 99% of all businesses are considered small (i. e. textbook mentions 97% of all nonfarm businesses are considered small). • Small businesses account for over 50% of the GDP. • Small businesses have generated 65% of new jobs since 1995. • About 80% of U. S. workers’ first jobs were in small business. • Can be operated on a part-time or full-time basis • Small business offer several unique advantages 6 -20
ADVANTAGES of SMALL OVER BIG BUSINESS LO 6 -2 • More PERSONAL customer service. (and personal service to employees!) • The ability to respond quickly to opportunities (i. e. ADAPTABILITY and FLEXIBILITY). • Fosters innovation • Provides competition • Fulfills market niches • Serves the needs of larger businesses Photo Credit: Elliot Brown 6 -21
BUSINESS FAILURES are LOWER THAN the REPORTS BECAUSE… LO 6 -2 • Owner closing a business to start another is reported as a “failure. ” • Changing forms of ownership is reported as a “failure. ” • Retirement is reported as a “failure. ” 6 -22
THEY DID WHAT? LO 6 -2 Famous Business Failures • Tommy Hilfiger – First store went bankrupt • Milton Hershey – First confectionery failed • H. J. Heinz – Company went bankrupt six years after start • Walt Disney – First film company went bankrupt • Henry Ford – First two car companies failed • L. L. Bean – Almost went bankrupt in first year Source: World Features Syndicate. 6 -23
CAUSES of SMALL BUSINESS FAILURES LO 6 -2 • Lack of Knowledge and Experience • Competition • Too Little Money • High Stress Level • Personal extravagance • Lack of self-discipline 6 -24
INCREASING SMALL BUSINESS SUCCESSES LO 6 -25
GOING INTO BUSINESS LO 6 -3 • Learn from Others – Investigate your local colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs. • Get Some Experience – Gain three years experience in the field; then start a part-time small business. • Take Over a Successful Firm – Serve as an apprentice and eventually take over once the owner steps down. 6 -26
STARTING YOUR OWN BUSINESS LO 6 -4 §Recognize Opportunity • New Business, Existing Business, Franchise §Business Plan • “Blue print for business, ” a carefully constructed guide for the person starting the business • SBA, SBDC, Score • Write on a 4 th Grade Level §Seek Capital • $100, 000 avg “seed” money • Lenders/Investors –What do they look at? • Family or Friends §File and Register Business §Operate and Manage 6 -27
A FAMILY AFFAIR LO 6 -4 What to Consider Before Starting a Family Business • Clarify Expectations – What will each person contribute? • Discuss Work/Family Boundaries – What is the line that separates work from personal relationships? • Develop Good Communication – Agree about types of decisions you’ll make jointly and on your own. • Clarify Long-Term Intentions – Discuss how long everyone will work full time and goals for the business. • Have an Escape Hatch – Have a Plan B. Source: Bloomberg Businessweek, www. businessweek. com, accessed November 2014. 6 -28
COMMON BUSINESS OPPORTUNITIES • New Business – starting a brand-new business from scratch • Existing Business – buying an existing business • Franchises – the right to operate an individually owned business as though it was a part of a chain or outlet of stores 6 -29
STARTING A BRAND NEW BUSINESS ADVANTAGES • • Control you own destiny Personal satisfaction – It’s your business, you started it Unlimited income potential True independence LO 6 -4 DISADVANTAGES • • High risk of failure Long hours and hard work High stress levels Complete responsibility 6 -30
BUYING AN EXISTING BUSINESS LO 6 -4 Pros Cons • Ease of start-up • Existing customer base • Financing opportunities • Purchase price may be high • Inheriting the previous owner’s mistakes • Unknowns in transition • Alienated customers? Employees? 6 -31
FRANCHISE BASICS §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 NOTE: Information regarding FRANCHISES can be found in Ch. 5 of the textbook 6 -32
FRANCHISING LO 4 -5 • Franchise Agreement -- An arrangement whereby someone with a good idea for a business (franchisor) sells the rights to use the business name and sell a product or service (franchise) to others (franchisees) in a given territory. • More than 770, 000 franchised businesses operate in the U. S. , employing approximately 8. 5 million people. 5 -33
ADVANTAGES of FRANCHISING LO 4 -5 1. Management and marketing assistance 2. Personal ownership 3. Nationally recognized name 4. Financial advice and assistance 5. Lower failure rate 5 -34
DISADVANTAGES of FRANCHISING 1. LO 4 -5 Large start-up and operational costs • Royalty Fee - % of sales or profits that franchisee pays to franchisor • Franchise Fee – Start up fee that franchisee pays to franchisor 2. Shared profit 3. Management regulation (Lack of Franchisee Freedom) 4. Coattail effects 5. Restrictions on selling 6. Fraudulent franchisors 5 -35
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