FHF Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

part CHAPTER 5 Small Business, Entrepreneurship, and Franchising 2 CHAPTER 4 Options for Organizing Business FHF 5-2

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

FHF What is Small Business?  “Smallness” is relative  Small business is any independently owned and operated business, not dominant in its competitive area  Employs less than 500 people 5-4

FHF Impact of Small Businesses 5-5

FHF Small Businesses Represent  64% of new net jobs, annually, created in the last 15 years  99.7% of all businesses employ fewer than 500 people  89% of businesses employ fewer than 19 people 5-6

FHF 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 Zipper … and much more 5-7

FHF Traits of Successful Entrepreneurs 5-8

FHF Popular Industries for Small Business Especially attractive industries to entrepreneurs:  Retailing and wholesaling  Services  Manufacturing  High technology 5-9

FHF Retailing and Wholesaling Selling directly to consumers  Music stores  Sporting-goods shops  Dry cleaners  Boutiques  Drugstores  Restaurants  Hardware stores 5-10

FHF 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 5-11

FHF High Technology Businesses that depend heavily on advanced scientific and engineering knowledge.  40% of high-tech jobs are with small businesses  The government offers small business grants for high-tech companies 5-12

FHF Small Business Ownership 5-13 AdvantagesDisadvantages IndependenceHigh stress level CostsHigh failure rate 50% of all new businesses fail within the first 5 years FlexibilityUndercapitalization Lack of funds to operate normally FocusManagerial inexperience or incompetence ReputationInability to cope with growth

FHF 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 5-14

FHF 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 5-15

FHF Forms of Business Ownership  Sole Proprietorship  Partnership  Corporation 5-16

FHF Financial Resources Provide your own personal capital  Cash money  Obtain capital Financing options  Loans  Stocks  Equity financing 5-17

[] FHF 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 5-18

[] FHF 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 5-19

[] FHF Debt Financing Borrowing financial resources typically from a bank or lending institution– often collateral is needed 5-20

[] FHF Line of Credit An agreement by which a financial institution promises to lend a business a predetermined sum on demand 5-21

FHF 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 5-22

FHF FranchisingFranchising 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 5-23

FHF FranchisesFranchises 5-24 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

FHF Help for Small Business Managers  Organizations and programs exist to help small businesses  Small Business Administration Small Business Development Centers Service Corps of Retired Executives Active Corps of Executives  Small Business Institutes  U.S. and Local Departments of Commerce  Other small businesses 5-25

FHF The Future for Small Business Demographic Trends The Baby Boomers Generation Y (Millennials) Immigrants and shifting demographics 5-26 …continued on next page

FHF 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 5-27

FHF 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 5-28