McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Six Small Business, Entrepreneurship, and Franchising

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Entrepreneurship and Small Business Entrepreneurship The process of creating and managing a business to achieve a desired objective. Entrepreneurship The process of creating and managing a business to achieve a desired objective. Small Business Any independently owned and operated business that is not dominant in its competitive area and employs fewer than 500 people. Small Business Any independently owned and operated business that is not dominant in its competitive area and employs fewer than 500 people.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Do Entrepreneurs Go Into Business? 41% 36% 27% 25% 5% Joined family business Wanted more control over future Tired of working for someone else Wanted to fulfill longtime goal Had been downsized or laid off Source: Dun & Bradstreet 19 th Annual Small Business Survey, May 2000 from “The Rewards,” Inc. State of Small Business, vol. 23 (2001), issue 7, p. 50.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Just What Is A Small Business? Source: Small Business “Vital Statistics,” Small Business Administration from (accessed May 2,2001). Represents over 99.7% of all employers. Employs 53% of the private work force. Accounts for 47% of all sales in the U.S. Provides 51% of the private sector output. Represents 96% of all U.S. exporters of goods. Receives 35% of federal contract dollars.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Role of Small Business in the American Economy Job creation Innovation Exporting Fast Fact: 9.1 million women-owned businesses employ 27.5 million and contribute 3.6 trillion to the economy million minority-owned firms employ 4 million and account for $495 billion in revenues.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Number of Firms by Employment Size Source: US Census Bureau from (accessed July 30, 2001)

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. What are the Advantages of Owning a Small Business? Personal –Independence Business –Lower startup costs –Greater flexibility –Focus on niche markets –Easier to build a good reputation Fast Fact: 12% of Internet start-ups were launched in a garage.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Disadvantages of Small Business Ownership High stress level High failure rate Undercapitalization Managerial inexperience or incompetence Inability to cope with growth

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Do Small Businesses Fail? 39% 28% 6% 27% 20% 19% 17% 10% Outside Business Conditions Financing Inside Business Conditions Tax Problems Dispute with a Creditor Personal Reasons Calamities Other Source: Inc. State of Small Business, vol. 23 (2001), issue 7, p. 57..

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Keys to Small Business Success A comprehensive business plan The right form of ownership Adequate financing

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. How to Finance a Small Business Equity Financing –Owner’s funds –Venture capitalists Debt Financing –Loans & collateral –Lines of credit –Trade credits –Barter Fast Fact: The online lending agency is the latest trend in debt financing. Live Capital connects borrowers to American Express, GC Capital and other lenders.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Franchising Franchise: –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.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Top Ten Fastest-Growing Franchises for 2001 Source: Entrepreneur’s 22 nd Annual Franchise 500, January 2001 from ” Entrepreneur.com/Your_Business/YB_PrintArticle/0,2361, html (accessed May 2,2001) Fast Fact: Franchising grew by 13% in One of every 3 consumer dollars is spent in a franchise.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Top Ten New Franchises for 2001 Source: “Entrepreneur’s Top Ten New Franchises for 2001,” Entrepreneur.com from (accessed July 30, 3001)

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Facts about Franchising 1,500 estimated franchise systems 320,000 estimated franchise outlets 66.1% of franchisees own only 1 outlet 33.9% of franchisees own more than 1 outlet 1,500 estimated franchise systems 320,000 estimated franchise outlets 66.1% of franchisees own only 1 outlet 33.9% of franchisees own more than 1 outlet The most popular franchise types: –Fast food – 18% –Retail – 11% –Restaurants – 9% –Service – 9% –Automotive – 8% The most popular franchise types: –Fast food – 18% –Retail – 11% –Restaurants – 9% –Service – 9% –Automotive – 8% Source: State of Small Business 2001, p. 34 – 35.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. The Marketing and Communication Tools for Small Business Success address Company Web site Direct mail Toll-free number Yellow Pages ads 100% 96% 71% 60% 58% Source: “Small businesses cite successful tools,” USA Today, November 1, 2001, p. 1b.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Developing Trends Impacting Small Business Demographic Trends –Baby boomers & Echo boomers Technological Trends –Increase in Internet usage –Major breakthroughs in technology Economic Trends –Economic turbulence creates economic threats AND new opportunities

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Solve the Dilemma 1.Evaluate the idea of a low-fat cookie and muffin retail store. 2.Are there any concerns in connection with starting a small business that Jack and Bruce have not considered? 3.What advice would you give Jack and Bruce as they start up their business?

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Explore Your Career Options What are some of the key qualities required of an individual starting a new small business?

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Additional Discussion Questions and Exercises 1.Assume you wanted to go into business for yourself. What kind of business would you prefer? What would be the financial requirements for entering the business? What type of work or managerial experience would you need? 2.What should be included in a business plan? What is the importance of a business plan to the small-business entrepreneur?

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Additional Discussion Questions and Exercises 3.What are the goals of venture capitalists when they invest in new businesses? 4.Think of your local community. Can you name five new businesses that have started up recently? Would you consider these new businesses to be small businesses? Are these new businesses franchises?

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 6 Quiz 1.A license to sell another’s products or to use another’s name in business, or both, is called a.a franchise. b.a joint venture. c.a licensing agreement. d.a small business license. 2.Which of the following industries is least likely to be entered into by small-business entrepreneurs? a.services b.high technology c. mining and manufacturing d.retailing

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 6 Quiz 3.The shortest path to business failure is a.undercapitalization. b.lack of a business plan. c.stress. d.employee turnover 4.The money needed to finance regular business operations is called a.a line of credit. b.collateral. c.undercapitalization. d.working capital.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved. Multiple Choice Questions about the Video 1.Which of the following classifies Artists’ Frame Service as a small business? a.It has over 120 employees. b.It is independently owned and operated. c.It is not dominant in its competitive area. d.All of the above. 2.Which of the following does Jay Goltz emphasize was his key to success? a.lack of competition b.his business plan c.his Chicago location d.his parents’ encouragement