3e FERRELL | HIRT | FERRELL Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

CHAPTER 4 Small Business, Entrepreneurship, and Franchising 5-2

Entrepreneurship The process of creating and managing a business to achieved desired objectives 5-3

What is Small Business?  “Smallness” is relative  Small business is any independently owned and operated business, not dominant in its competitive area 5-4

Women in Small Business  Women play a vital role in the economy As consumers, employees and business owners  Women own over 10 million businesses in the U.S. Employ 13 million people Annual sales of $2 trillion 5-5

Impact of Small Businesses 5-6

What People in the U.S. Say is Their Idea of the American Dream 5-7

Small Business Innovation Small businesses represent 55% of all innovations Airplane Audio tape recorder Double-knit fabric Fiber-optic examining equipment Heart valve Optical scanner Personal computer Soft contact lenses … and much more 5-8

Traits of Successful Entrepreneurs 5-9

Popular Industries for Small Business Especially attractive industries to entrepreneurs:  Retailing and wholesaling  Services  Manufacturing  High technology 5-10

Retailing and Wholesaling Selling directly to consumers  Music stores  Sporting-goods shops  Dry cleaners  Boutiques  Drugstores  Restaurants  Hardware stores 5-11

Services and Manufacturing Services Service sector is 80% of U.S. jobs  Attracts individuals whose skills are not required by large firms Manufacturing Small manufacturers excel at customization  The Malcolm Baldridge National Quality Award rewards innovative small manufacturing firms 5-12

High Technology Businesses that depend heavily on advanced scientific and engineering knowledge.  40% of high-tech jobs are with small businesses  Government offers small business grants for high-tech companies through Small Business Innovation Research 5-13

Small Business Ownership AdvantagesDisadvantages Independence High stress level CostsHigh failure rate 50% of all new businesses fail within the first 5 years Flexibility Undercapitalization Lack of funds to operate normally Focus Managerial inexperience or incompetence Reputation Inability to cope with growth 5-14

Top 5 Biggest Challenges, Concerns & Goals of Small Businesses 5-15

Starting a Business  Start with a concept or general idea  Create a business plan  Devise a strategy to guide planning & development  Make decisions Form of ownership Financing Acquire existing business or start new business? Buy a franchise 5-16

The Business Plan A precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals. Acts as a guide and reference document. Explanation of the business Analysis of competition Income/Expense estimates 5-17

Forms of Business Ownership  Sole Proprietorship  Partnership  Corporation 5-18

Financial Resources Provide your own personal capital  Cash money  Obtain capital Financing options  Loans  Stocks  Equity financing 5-19

Equity Financing Selling or borrowing against the value of an asset such as an (automobile, insurance policy, savings account) to obtain funds to operate a business 5-20

Venture Capitalists Persons/organizations that agree to provide funding for a new business in exchange for an ownership interest or stock. Usually requires a sharing of ownership/control 5-21

Debt Financing Borrowing financial resources typically from a bank or lending institution – often collateral is needed 5-22

Line of Credit An agreement by which a financial institution promises to lend a business a predetermined sum on demand 5-23

Starting from Scratch vs. Buying an Existing Business Starting from scratch can be expensive and will require a lot of promotional efforts to familiarize customers with the business  Existing businesses have the advantage of a built-in network of customers, suppliers and distributors  Reduces guesswork  Involves taking on any problems the business already had 5-24

Franchising A license to sell another’s products or to use another’s name in business, or both  Franchiser  The company that sells a franchise  Franchisee  The purchaser of a franchise 5-25

Franchises AdvantagesDisadvantages Training & supportFees and profit sharing Brand name appealStandardized operations National advertisingRestrictions on purchasing Financial assistanceLimited product line Proven productsPossible market saturation Greater chance for successLess freedom in decisions 5-26

Popular Franchises One of the most popular franchises in the world  The world’s largest restaurant chain  Over 33,300 restaurants in nearly 100 countries  Requires less start-up capital than many other franchises  Reputation for healthy food has improved Subway’s image 5-27

Fastest Growing Franchises 5-28

The Future for Small Business Demographic Trends The Baby Boomers Generation Y (Millennials) Immigrants and shifting demographics 5-29

The Future for Small Business Technological & Economic Trends Internet usage continues to increase Increase in service exports Economic turbulence Deregulation of the energy market & alternative fuels 5-30

Big Businesses Acting Small Common Approaches  Large firms emulate smaller ones to improve bottom line  Downsizing ( Rightsizing ) Acting small from inception – Southwest Airlines  Intrapreneurs Individuals in large firms who take responsibility for the development of innovations within the organization 5-31