FOUNDATIONS OF BUSINESS Fifth Edition Chapter 5 Small

FOUNDATIONS OF BUSINESS Fifth Edition Chapter 5 Small Business Entrepreneurship, and Franchises Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives (1 of 2) 5 -1 Define what a small business is and recognize the fields in which small businesses are concentrated. 5 -2 Identify the people who start small businesses and the reasons why some succeed and many fail. 5 -3 Assess the contributions of small businesses to our economy. 5 -4 Describe the advantages and disadvantages of operating a small business. • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Learning Objectives (2 of 2) 5 -5 Explain how the Small Business Administration helps small businesses. 5 -6 Explain the concept and types of franchising. 5 -7 Analyze the growth of franchising and its advantages and disadvantages. • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Small Business: A Profile A small business is one that is independently owned and operated for profit and is not dominant in its field • • 99. 7% of all employer firms Employ about half of all private sector employees Pay 42% of total U. S. private payroll Have generated 63 percent of net new jobs over the past 20 years • Hire 37% of high-tech workers • Are 52% home-based and 2% franchises • Produce 16. 5 times more patents per employee than large patenting firms • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Small-Business Sector (1 of 2) • There about 28. 2 million businesses in the United States • Just 17, 700 employ more than 500 workers • In the last decade, the number of small businesses increased 49 percent • Part-time entrepreneurs have increase fivefold and account for one-third of all small businesses • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Small-Business Sector (2 of 2) • 69% percent of new businesses survive at least two years, about 50% survive at least five years, and 31% survive at least ten years • The primary reason for failures is due to poor management stemming from a lack of business know-how • Small businesses provide over 50% of the jobs in the United States • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Industries That Attract Small Businesses (1 of 2) • Attractive small-business industry characteristics – Low initial capital investment – Some special skill requirements – High growth and profit potential • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Industries That Attract Small Businesses (2 of 2) • Industries that attract small businesses – Distribution—retailing, wholesaling, transportation, and communications (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) • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Personal Factors and Motivation (1 of 2) • Characteristics and other personal factors – The “entrepreneurial spirit” – The desire for independence – The desire to determine one’s own destiny – The willingness to find accept a challenge – Personal background – Age • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Personal Factors and Motivation (2 of 2) • 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 • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The People in Small Businesses: The Entrepreneurs (1 of 2) • Women – Own 36% of all small businesses – Own 66% of home-based businesses – About 7. 8 million women-owned businesses in the United States provide almost 7. 6 million jobs and generate $1. 2 trillion in sales • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The People in Small Businesses: The Entrepreneurs (2 of 2) • Teenagers – High-tech entrepreneurship is exploding – Face unique pressures juggling schoolwork, social live, business workload – Need skills for planning, persistence, patience, people management, generate profit • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Why Some Entrepreneurs and Businesses Fail (1 of 2) • Lack of capital and cash-flow problems • Lack of management skills • Overexpansion New (In Thousands) Closures (In Thousands) Bankruptcies (In Thousands) 2013 1, 233 NA 33, 212 2012 800 732 40, 075 2011 782 752 47, 806 2010 741 755 56, 282 2009 702 877 60, 837 2005 867 737 39, 201 2000 826 759 35, 472 • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Why Some Entrepreneurs and Businesses Fail (2 of 2) NA = Not available. Source: U. S. Small Business Administration, Office of Advocacy, Small Business Quarterly Bulletin, 2 nd Quarter 2014, released September 9, 2014, https: //www. sba. gov/advocacy/small-businessquarterly-bulletins (accessed January 12, 2015). • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Importance of Small Businesses: Providing Technical Innovation Small firms. . . • Employ 43% of all high-tech workers • Produce 2. 5 times as many innovations as large firms relative to the number of persons employed • Produce 16 to 17 times more patents per employee than large patenting firms • According to the U. S. Office of Management and Budget, more than half the major technological advances of the 20 th century originated with individual inventors and small companies • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Importance of Small Businesses: Providing Employment Small firms. . . • Hire a larger proportion of younger and older workers, women, and part-time workers • Provide 67% of workers with their first job and initial job skills • Represent 99. 7% of all employers and employ over 50% of the private work force • Provide 2/3 of the net new jobs added to the economy • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Importance of Small Businesses: Providing Competition and Filling Needs • 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 • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Pros and Cons of Smallness (1 of 2) Advantages • Personal relationships with customers and employees • Ability to adapt to change • Simplified record keeping • Independence • Profit retention • Ease of start-up • Ability to keep secrets • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Pros and Cons of Smallness (2 of 2) Disadvantages • High risk of failure • Limited potential • Limited ability to raise capital • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Importance of a Business Plan (1 of 2) • Business plan—A carefully constructed guide for the person starting a business • Three basic purposes – Communication – Management – Planning • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Importance of a Business Plan (2 of 2) • Banking officials’ and investors’ questions – What is the nature and mission of new venture? – Why is it a good idea? – What are the goals? – How much will it cost? • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Components of a Business Plan (1 of 5) 1. Introduction. Basic information such as the name, address, and phone number of the business; the date the plan was issued; and a statement of confidentiality to keep important information away from potential competitors. 2. Executive Summary. A one- to two-page overview of the entire business plan, including a justification why the business will succeed. • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Components of a Business Plan (2 of 5) 3. Benefits to the Community. Information on how the business will have an impact on economic development, community development, and human development. 4. Company and Industry. The background of the company, choice of the legal business form, information on the products or services to be offered, and examination of the potential customers, current competitors, and the business’s future. • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Components of a Business Plan (3 of 5) 5. Management Team. Discussion of skills, talents, and job descriptions of management team, managerial compensation, management training needs, and professional assistance requirements. 6. Manufacturing and Operations Plan. Discussion of facilities needed, space requirements, capital equipment, labor force, inventory control, and purchasing requirement. 7. Labor Force. Discussion of the quality of skilled workers available and the training, compensation, and motivation of workers. • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Components of a Business Plan (4 of 5) 8. Marketing Plan. Discussion of markets, market trends, competition, market share, pricing, promotion, distribution, and service policy. 9. Financial Plan. Summary of the investment needed, sales and cash flow forecasts, breakeven analysis, and sources of funding. 10. Exit Strategy. Discussion of a succession plan or going public. Who will take over the business? • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Components of a Business Plan (5 of 5) 11. Critical Risks and Assumptions. Evaluation of the weaknesses of the business and how the company plans to deal with these and other business problems. 12. Appendix. Supplementary information crucial to the plan, such as résumés of owners and principal managers, advertising samples, organization chart, and any related information. Source: From HATTEN , Small Business Management, 5 E. • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Small Business Administration • A governmental agency that assists, counsels, and protects the interests of small business in the United States • 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 • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

SBA: Financial Assistance (1 of 2) • The SBA partially guarantees regular business loans – SBA will repay 90% of loan if the borrower cannot repay it – Loans may be as large as $2 million – Average loans are $300, 000 over eight years • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

SBA: Financial Assistance (2 of 2) • The SBA licenses, regulates, and provides financial assistance to small-business investment companies (SBICs) – SBICs: privately owned firms that provide venture capital to small enterprises that meet their investment standards – Venture capital: money invested in small firms that have the potential to become very successful • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Franchising • A franchise is a license to operate an individually owned business as though it were part of a chain of outlets or stores – Franchising is the actual granting of a franchise – A franchisor is an individual or organization granting a franchise – A franchisee is a person or organization purchasing a franchise • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

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 • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

The Growth of Franchising • Franchising began in the United States around the time of the Civil War • Originally used by large firms to distribute products • Franchising has been increasing steadily in popularity since the early 1900 s • Has experienced enormous growth since the mid 1970 s • Dual-branded franchises, in which two franchisors offer their products together, are a new smallbusiness trend • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Are Franchises Successful? • The success rate for franchises is significantly higher than that for other small businesses • 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 • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Advantages of Franchising (1 of 2) 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 • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Advantages of Franchising (2 of 2) 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 • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Disadvantages of Franchising To the Franchiser • 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 • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Global Perspectives in Small Business (1 of 2) • National and international economies are growing more interdependent • Trade barriers are diminishing or disappearing • Globalization and instant worldwide communications are rapidly shrinking distances at the same time that they are expanding business opportunities • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Global Perspectives in Small Business (2 of 2) • The Internet is the favored strategy for growth for small businesses • Technology provides leverage and power to reach markets previously limited to large corporations • Small businesses must adapt to demographic and economic changes in the world marketplace • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Global Perspectives in Small Business: Government Assistance • The SBA helps U. S. small business owners enter world markets – Matches executives with potential overseas customers – Helps exporters secure financing – Brings small U. S. firms into direct communication with overseas buyers and partners – SBA International Trade Loan guarantees up to $5 million in loans • The U. S. Commercial Service aids small and mediumsized businesses in selling overseas and has 251 offices in more than 70 countries • Copyright © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.