Part 2 Starting and Growing a Business © 2015 McGraw-Hill Education.

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

Learning Objectives LO 5-1Define entrepreneurship and small business. LO 5-2 Investigate the importance of small business in the U.S. economy and why certain fields attract small business. LO 5-3 Specify the advantages of small-business ownership. LO 5-4 Summarize the disadvantages of small-business ownership, and analyze why many small businesses fail. LO 5-5 Describe how you go about starting a small business and what resources are needed. LO 5-6 Evaluate the demographic, technological, and economic trends that are affecting the future of small business. LO 5-7 Explain why many large businesses are trying to “think small”. 5-3

What Is a Small Business? 5-4 Small Business Any independently owned and operated business that is not dominant in its competitive area Small Business Administration (SBA) An independent agency of the federal government that offers managerial and financial assistance to small businesses Entrepreneurship The process of creating and managing a business to achieve desired objectives Are responsible for more than 23 million American jobs Contribute almost $3 trillion to the national economy Woman own more than 8 million businesses nationwide Women-owned Businesses

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

Advantages/Disadvantages of Small-Business Ownership 5-6 Some of the advantages of small businesses include:  Flexibility  Lowers start-up costs  Ability to be your own boss Disadvantages…  Entrepreneurs experience a great deal of independence but also a great deal of stress  Many fail

Starting a Business 5-7 Form of ownership Financing Acquiring existing business or start new business Buy a franchise Make Decisions Business Plan A precise statement of the rationale for a business and a step-by-step explanation of how it will achieve its goals

Forms of Business Ownership 5-8 After developing a business plan, the entrepreneur has to decide on an appropriate legal form of business ownership Sole Proprietorship PartnershipCorporation

Equity Financing 5-9 Referred to as equity financing because the owner uses real personal assets rather than borrowing funds from outside sources to get started in a new business The owner may bring useful personal assets (such as a computer, desks, and other furniture, a car or truck) as part of his or her ownership interest in the firm

Venture Capitalists 5-10  Although this form of equity financing has helped many small businesses, they require that the small- business owner share the profits of the business (and sometimes the control, as well) with the investors Venture Capitalists Persons or organizations that agree to provide some funds for a new business in exchange for an ownership interest or stock

Starting from Scratch vs. Buying an Existing Business 5-11  Starting from scratch can be expensive and will require a lot of promotional efforts to familiarize customers with the business Reduces some of the guesswork inherent in starting a new business Entrepreneur who buys an existing business also takes on any problems the business already has Existing businesses have the advantage of a built-in network of customers, suppliers, and distributors

Franchising 5-12 A license to sell another’s products or to use another’s name in business, or both Franchise The company that sells a franchise Franchiser The purchaser of a franchise Franchisee

Franchises 5-13 AdvantagesDisadvantages Training & supportFees and profit sharing Brand-name appealStandardized operations Standardized quality of goods & services Restrictions on purchasing National advertisingLimited product line Financial assistancePossible market saturation Proven productsLess freedom in decisions Centralized buying power Site selection & territorial protection Greater chance for success

The Future for Small Business 5-14 Internet usage continues to increase Increase in service exports Economic turbulence Deregulation of the energy market & alternative fuels Technological and Economic Trends

Making Big Businesses Act “Small” 5-15 The continuing success and competitiveness of small businesses through rapidly changing conditions in the business world have led many large corporations to take a closer look at what their smaller rivals tick  Large firms emulate smaller ones to improve their bottom line  Downsizing (rightsizing) – To reduce management layers, corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative Intrapreneurs Individuals in large firms who take responsibility for the development of innovations within the organizations