Small Business, Entrepreneurship, and Franchises Chapter 5 Small Business, Entrepreneurship, and Franchises

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. 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.

Small Business …one that is independently owned and operated for profit and is not dominant in its field.

Table 5.1: Industry Group Size Standards Small-business size standards are usually stated in number of employees or average annual sales. In the United States, 99.7 percent of all businesses are considered small. Source: http://www.sba.gov/services/contractingopportunities/owners/basics/GC_SMALL_BUSINESS.html, accessed May 4, 2009.

Establish a Small Business 4 days and $210 Steps Register name Apply for tax IDs Set up insurance Unemployment Workers’ compensation

Table 5.2: Establishing a Business Around the World Source: World Bank (2004); as found in Inside the Vault, Federal Reserve Bank of St. Louis, Fall 2004, p. 1.

U.S. Small Business in Last Decade Number up 49% Record-breaking new-business formation in last few years Nearly 637,000 new incorporations Part-time entrepreneurs up 5-fold (equal 1/3 of small businesses) Provides more than 50% of jobs 56% of new businesses fail in first 4 years

Industries That Are and Are Not Attractive to Small Business Attractive: Growing industries with profit potential (such as outpatient-care facilities) Not attractive: Industries requiring a huge investment Auto manufacturing Machinery

Small-Business Dominance Real estate, rental, leasing = 74% Arts, entertainment, recreational services = 76% Construction = 90%

Top Small Business Categories Distribution: 33% small business Retailing Wholesaling Transportation Communications Service: 48% small business Medical/dental Watch/TV/shoe repair Haircutting/styling Restaurants Dry cleaning Financial services Production: 19% small business Construction Mining Manufacturing

Percent of People Who Would Prefer Being an Entrepreneur U.S.A. = 70% Western Europe = 46% Canada = 58%

Entrepreneurial Spirit “Desire to create a new business” Small businesses are managed by people who start and own them Owners could be employed elsewhere if they wanted Owners would rather take risk of starting and operating ─ even if they’ll make less money

Other Factors Driving Entrepreneurs Independence Desire to determine own destiny Willingness to find/accept challenge Coming from family of entrepreneurs Age = 24 – 44

Figure 5.1: How Old Is the Average Entrepreneur? People in all age groups become entrepreneurs, but more than 70 percent are between 24 and 44 years of age. Source: Data developed and provided by the National Federation of Independent Business Foundations and sponsored by the American Express Travel Related Services Company, Inc.

5 P’s of Entrepreneurship Planning Persistence Patience People Profit

Motivation to Start a Business “Enough” of working/earning profit for someone else Loss of job New idea for product or sales Sudden opportunity

Table 5.3: U.S. Business Start-ups, Closures, and Bankruptcies Source: U.S. Department of Commerce, Bureau of the Census; Administrative Office of the U.S. Courts; U.S. Department of Labor, Employment and Training Administration, Small Business Administration, Office of Advocacy, Frequently Asked Questions, September 2008, www.sba.gov/advo, accessed October 4, 2008, http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24; and SBA Quarterly Indicators, First Quarter 2009, released May 8, 2009, p. 1.

Women-Owned Businesses Population = 51% Small businesses = 50% Home-based businesses = 66% Businesses = 10.4 million Jobs = 7.1 million Sales = $941 billion Payroll = $174 billion In business 12+ years = 40%

Entrepreneur Must Manage Finances Personnel Day-to-day operations Handle Sales Advertising Purchasing Pricing Other

Why Small Businesses Fail Lack of capital Lack of management skills Lack of planning Overexpansion

Technical Innovation New ways to do a job with less effort for less money Small business vs. large: 2.5 times innovation per employee 41% of high-tech workers 13–14 times more patents Many inventions that sparked new industries

Small Firms and Employment U.S. economy created 3+ million jobs 70% in small-business-dominated industries Business services = leisure, hospitality, special trade contractors Small firms hire greater proportion of Younger/older workers Women Part-time employees Worker’s first job = 67% Initial on-the-job training

SBA Statistics on Small Businesses Employers = 99.7% Private work force = 50% Net new jobs = 60–80%

Small Businesses Provide Competition Challenge large firms Force big firms to be More efficient More responsive to customer

Small Businesses Fill Needs Satisfy niche consumers Provide variety of goods/services to other businesses (outsourcing)

Advantages of Smallness Personal relationships Ability to adapt to change Simplified record keeping Independence

Disadvantages of Small Business Risk of failure Limited potential Limited ability to raise capital

Weekly Hours Worked by Small Business Owners Source: Inc. Magazine, “It’s Good to Be King,” December 2003, p. 32. 43% 19% 38% Fewer Than 35 35 to 50 More Than 50

Figure 5.2: Sources of Capital for Entrepreneurs Small businesses get financing from various sources; the most important is personal savings. Source: Data developed and provided by the National Federation of Independent Business Foundations and sponsored by the American Express Travel Related Services Company, Inc..

…a carefully constructed guide for the person starting a business. Business Plan …a carefully constructed guide for the person starting a business.

Business Plan Purposes Communication ─ helps potential investors decide whether to invest in new venture Management ─ helps track, monitor, evaluate progress Planning ─ guides businessperson through business phases

Table 5.4: Components of Business Plan Source: Adapted from Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 3d ed. (Boston: Houghton Mifflin, 2006), pp. 108–120.

Business Plan Should Answer What is the nature/mission of new venture? Why is it a good idea? What are the businessperson’s goals? How much will it cost?

Table 5.5: Business Plan Checklist Source: Kathleen R. Allen, Launching New Ventures: An Entrepreneurial Approach, 4th ed. (Boston: Houghton Mifflin, 2006), p. 197.

Small Business Administration (SBA) …a government agency that assists, counsels, and protects the interests of small businesses in the United States.

SBA Management Assistance Free individual counseling Courses Conferences Workshops Publications

SBA Resources Management courses/workshops Service Corps of Retired Executives (SCORE) Help for minority-owned businesses Small Business Institutes Small Business Development Centers Publications

SBA Financial Assistance Regular business loans Small-business investment companies

Venture Capital …money that is invested in small (sometimes struggling) firms that have the potential to become very successful.

Franchise …a license to operate an individually owned business as though it were part of a chain of outlets or stores.

What Is Franchising? Franchise Agreement Franchisor Franchisee Franchisor John Q.

Types of Franchising Manufacturer authorizes retail store to sell brand-name item Producer licenses distributors to sell given product to retailers Franchisor supplies brand names, techniques, or other services instead of complete product

Table 5.7: Entrepreneur’s Top Ten Franchises (2009) Source: http://www.entrepreneur.com/franchises/printthis/282570.html, accessed May 11, 2009, with permission of Entrepreneur.com, Inc. @ 2009 by Entrepreneur.com, Inc. All rights reserved.

Dual-Branded Franchise …two franchisors offer their product together...

Advantages of Franchising Franchisor Fast/well-controlled distribution of products No high cost of construction/ operation Highly motivated franchisee Franchisee Ability to start business with limited capital Access to others’ business experience Nationally recognized name Local and national advertising

Disadvantages of Franchising Franchisee Contract dictating every aspect of business Lawsuit by franchisor for violation of contract

Qualities Franchisors Seek in Franchisee Entrepreneur, “The 28th Annual Franchise 500- Top 10 Franchises for 2007”, January 2007, p. 128. 47

Global Perspectives in Small Business Internet most favored growth strategy = 50+% Technology gives reach/power U.S. Commercial Service ─ aids small and medium-sized businesses in selling overseas Businesses must adapt to demographic/economic changes in world marketplace

Chapter Quiz 1. A government agency that was created to assist, counsel, and protect the interests of small businesses in the United States is called Small Business Institutes. Small Business Investment Companies. the Small Business Administration. Small Business Development Centers. Small Business Guidance Centers.

Chapter Quiz (cont.) 2. Small businesses cluster in which of the following industries? Service industries Distribution industries Production industries Financial industries All of the above

Chapter Quiz (cont.) 3. A group of retired businesspeople who volunteer their time to help small-business owners is known as SCORE. ACE. SBDC. SBI. SBIC.

Chapter Quiz (cont.) 4. A privately owned company that provides venture capital to small firms is a(n) small-business association. small-business investment company. small-business institute. active corps of executives. small-business development center.

Chapter Quiz (cont.) 5. One advantage of a small business is no risk of failure. unlimited potential for employers. personal relationships with customers and employees. unlimited potential for employees. limited ability to raise capital.