PowerPoint Presentation by Charlie Cook The University of West Alabama Business Essentials Ronald J. Ebert Ricky W. Griffin The Contemporary Business World 11 6e © 2007 Prentice Hall, Inc. All rights reserved. ENTREPRENEURSHIP, NEW VENTURES, AND BUSINESS OWNERSHIP 3

© 2007 Prentice Hall, Inc. All rights reserved.3–2 L E A R N I N G O B J E C T I V E S After reading this chapter, you should be able to: 1. Define small business, discuss its importance to the U.S. economy, and explain popular areas of small business. 2. Explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities. 3. Describe the business plan and the start-up decisions made by small businesses and identify sources of financial aid available to such enterprises. 4. Discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.

© 2007 Prentice Hall, Inc. All rights reserved.3–3 L E A R N I N G O B J E C T I V E S (cont’d) After reading this chapter, you should be able to: 5. Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages and disadvantages of each. 6. Describe corporations, discuss their advantages and disadvantages, and identify different kinds of corporations. 7. Explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.

© 2007 Prentice Hall, Inc. All rights reserved.3–4 What’s in It for Me? By understanding the material discussed in this chapter, you’ll be better prepared to: 1. Understand the challenges and opportunities provided in new venture start-ups 2. Assess the risks and benefits of working in a new business 3. Evaluate the investment potential inherent in a new enterprise 4. Remove some of the blocks to starting your own business

© 2007 Prentice Hall, Inc. All rights reserved.3–5 Small Business Defined A business that is independent (not part of a larger business) and that has relatively little influence in its market. An independently owned and managed business that does not dominate its market. Not a real exact definition? Use number of employees Use annual sales in dollars Department of Commerce view:  Small if < 500 employees Small Business Administration view:  Very specific and varying views Very specific and varying views Very specific and varying views

Analyzing Small Business Probably better to look at a business in terms of market dominance when determining whether it falls under the ‘small business’ category Why do you care about categorizing businesses?  Think about starting your own business  Think about scoping out your ‘small business’ brethren or competitors © 2007 Prentice Hall, Inc. All rights reserved.3–6

© 2007 Prentice Hall, Inc. All rights reserved.3–7 The Importance of Small Business in the U.S. Economy  Job creation  Innovation  Contributions to big business  Suppliers of specialized services and raw materials  Sellers of larger firms’ product. Suppliers of specialized services and raw materials Sellers of larger firms’ products Cover the ‘spot’ markets for big business

© 2007 Prentice Hall, Inc. All rights reserved.3–8 The Importance of Small Business in the U.S. Economy – job creation Source of new jobs for the economy  What if you don’t ‘fit’ big business’ mold? Small firms hire at a faster rate  You might say they lead us out of recessions Small firms cut jobs at a faster rate  They can’t weather an economic storm as well as a larger business Many small business jobs are simply down- sized from their large business counterparts

© 2007 Prentice Hall, Inc. All rights reserved.3–9 The Importance of Small Business in the U.S. Economy – innovation About half of today’s innovations came from small businesses  Not all make huge bucks, and not all are deemed worthy by large businesses Far less red tape in a small business than in a large business  Makes it easier for innovations to be created Crocs example  Like you or I couldn’t have come up with that one

© 2007 Prentice Hall, Inc. All rights reserved.3–10 Popular Areas of Small-Business Enterprise Major small-business industry groups:  Services  Retailing  Construction  Wholesaling  Finance and insurance  Manufacturing and transportation

© 2007 Prentice Hall, Inc. All rights reserved.3–11 FIGURE 3.2Small Business by Industry

Victor Kiam “Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage” © 2007 Prentice Hall, Inc. All rights reserved.3–12

© 2007 Prentice Hall, Inc. All rights reserved.3–13 Entrepreneurship Entrepreneurship  The process of seeking businesses opportunities under conditions of risk Entrepreneur  One who accepts the risks and opportunities of creating, operating and growing a new business Small Business Owner  Accepts risk  Is more content to be a single store, or location  Does not always have growth of the business as a primary entrepreneurial goal

© 2007 Prentice Hall, Inc. All rights reserved.3–14 Entrepreneurial Characteristics Successful Entrepreneurs:  are resourceful.  are concerned for good customer relations.  desire to be their own boss.  can deal with uncertainty and risk.  are open-minded.  rely on networks, business plans, and consensus.  have different views on how to succeed, to automate a business, and when to rely on experience or business acumen.  Hard-working  Driven, or passionate about their work

Getting started… Come up with the idea! Think, think, think it through Write a business plan © 2007 Prentice Hall, Inc. All rights reserved.3–15

© 2007 Prentice Hall, Inc. All rights reserved.3–16 Starting and Operating a New Business Crafting a Business Plan  Conveys a description of the business strategy for the new venture and how it will be implemented  A business plan should address:  The entrepreneur’s goals and objectives  The strategies that will be used to obtain them  The implementation of the chosen strategies Preparing a Business Plan  Setting goals and objectives  Sales forecasting  Financial planning

The Business Plan This is how you will make things happen On a simple scale, it is just a document Potential investors will look at this to determine whether or not to invest in you You have to cover all their questions in detail  Yet you have to then summarize things without leaving out too many details © 2007 Prentice Hall, Inc. All rights reserved.3–17

© 2007 Prentice Hall, Inc. All rights reserved.3–18 Starting the Small Business Buying an Existing Business  Less risk when you purchase an ongoing, viable business Franchising  Advantages  Proven business opportunity for franchisee  Access to management expertise of franchisor  Disadvantages  Start-up costs for franchise purchase  Ongoing payments to the franchisor  Management rules and restrictions on the franchisee

© 2007 Prentice Hall, Inc. All rights reserved.3–19 Starting the Small Business (cont’d) Starting from Scratch  Disadvantage: Higher risk of business failure  Advantage: Avoids problems of an existing business  This is what Amy decided to do Could a local McDonald’s hold a theme night?

Think back to chapter 1 Who has a better idea of the equilibrium point:  An existing business?  A business you would start from scratch? Who has a better idea of the customer base:  An existing business?  A business you would start from scratch? © 2007 Prentice Hall, Inc. All rights reserved.3–20

Questions to Be Answered: Who and where are my customers?  Both current and potential  Are they local or global?  How do you best reach them? How much will those customers pay for my product? How much of my product can I expect to sell? Who are my competitors? Why will customers buy my product rather than the product of my competitors? © 2007 Prentice Hall, Inc. All rights reserved.3–21

© 2007 Prentice Hall, Inc. All rights reserved.3–22 Financing the Small Business Personal Resources Loans from Family and Friends Bank Loans Venture Capital Companies Small-Business Investment Companies (SBICs) Minority Enterprise Small-Business Investment Companies (MESBICs) SBA Financial Programs  Guaranteed loans and immediate loans programs  Management advice (SCORE and SBDCs)

© 2007 Prentice Hall, Inc. All rights reserved.3–23 Trends in Small-Business Startups Emergence of E-commerce Crossovers from Big Business Opportunities for Minorities & Women GlobalOpportunities Better Survival Rates

Crossovers from big business You work for a big business for awhile, then quit to form your own company Nothing wrong or unethical about this Sometimes happens when a big business lays off a division of workers  Those workers buy the business, or start their own firm that does the same thing Constance vigilance! Keep your eyes open at work for these opportunities  And put some money aside to help you through the lean times when you first get started © 2007 Prentice Hall, Inc. All rights reserved.3–24

© 2007 Prentice Hall, Inc. All rights reserved.3–25 Reasons for Success & Reasons for Failure 1. Hard work, drive, and dedication 2. Market demand 3. Managerial competence 4. Luck!!! 1.Poor management 2.Neglect 3.Weak control systems 4.Insufficient capital

What are the forms of ownership? 1. Sole proprietorship : One owner 2. Partnership: two or more 3. Corporation: shareholders or public Choice of Ownership Form  Based on the entrepreneur’s needs/desires for control, ownership participation, financing sources, and appropriateness of the chosen form for the industry in which the firm will compete © 2007 Prentice Hall, Inc. All rights reserved.3–26

© 2007 Prentice Hall, Inc. All rights reserved.3–27 Sole Proprietorships Advantages:  Freedom  Simple to form  Low start-up costs  Tax benefits  Formation of cooperatives Disadvantages:  Unlimited liability:  Unlimited liability: Owners are responsible for all debts of a business  Limited resources  Limited fundraising capability  Lack of continuity

© 2007 Prentice Hall, Inc. All rights reserved.3–28 Partnerships Advantages:  More talent and money  More fundraising capability  Relatively easy to form  Limited liability for limited partners  Tax benefits Disadvantages:  Unlimited liability for general partner  Disagreements among partners  Lack of continuity

© 2007 Prentice Hall, Inc. All rights reserved.3–29 Alternatives to General Partnerships Limited Partnership  Allows for limited partners who invest money but are liable for debts only to the extent of their investments  Must have at least one general (or active) partner, who is usually the person who runs the business and is responsible for its survival and growth Master Limited Partnership  Organization sells shares (partnership interests) to investors on public exchange. Investors are paid back from profits  The master partner retains at least 50 percent ownership and runs the business, while minority partners have no management voice

© 2007 Prentice Hall, Inc. All rights reserved.3–30 Corporations Corporation  “ Closely Held (Private) Corporation or Publicly Held (Public) Corporation  “ A firm that owned by stock holders, who hold shares in the business. Corporation managed by elected Board of Directors. Example: Microsoft, GM, GE. In UAE : Dubai Islamic Bank, Emirates Bank. Closely Held (Private) Corporation or Publicly Held (Public) Corporation Subchapter S Corporation Limited Liability Corporation (LLC) Professional Corporation Multinational (Transnational) Corporation

© 2007 Prentice Hall, Inc. All rights reserved.3–31 Corporations Advantages:  Limited liability:  Limited liability: The owners’ responsibility for the debts of a business is limited to their investment in a business  Continuity  Stronger fundraising capability Disadvantages:  Double taxation of dividends  Complicated to form  Expensive to form

© 2007 Prentice Hall, Inc. All rights reserved.3–32 Managing a Corporation Corporate Governance  The roles of shareholders, directors, and other managers in corporate decision making and accountability  Corporate governance is established by the firm’s bylaws and involves three bodies:  Stockholders (shareholders): Investors who buy ownership shares in the form of stock  The board of directors: Group elected by stockholders to oversee corporate management  Corporate officers: Top managers hired by the board to run the corporation

© 2007 Prentice Hall, Inc. All rights reserved.3–33 Special Issues in Corporate Ownership Joint Ventures and Strategic Alliances:  Strategic alliance: Two or more organizations collaborate on a project for mutual gain  Joint venture: Partners share ownership of a new enterprise Employee Stock Ownership Plans  Allows employees to own a share of the corporation through trusts established on their behalf Institutional Investors  Control enormous resources and can buy huge blocks of stock

© 2007 Prentice Hall, Inc. All rights reserved.3–34 Special Issues in Corporate Ownership (cont’d) Mergers, Acquisitions, Divestitures, and Spin- Offs:  Merger: Two firms combine to create a new company  Acquisition: One firm buys another outright  Divestiture: Strategy whereby a firm sells one or more of its business units  Spin-off: A firm sells part of itself to raise capital

© 2007 Prentice Hall, Inc. All rights reserved.3–35 K E Y T E R M S acquisition board of directors business plan chief executive officer (CEO) closely held (or private) corporation cooperative corporate governance corporationdivestiture double taxation employee stock ownership plan (ESOP) entrepreneurentrepreneurshipfranchise general (or active) partner general partnership institutional investor joint venture limited liability limited liability corporation (LLC) limited partner limited partnership master limited partnership merger multinational (or transnational) corporation

© 2007 Prentice Hall, Inc. All rights reserved.3–36 K E Y T E R M S (cont’d) officers professional corporation publicly held (or public) corporation S corporation small business Small Business Administration (SBA) Small Business Development Center (SBDC) small-business investment company (SBIC) sole proprietorship spin-off stockholder (or shareholder) strategic alliance tender offer unlimited liability venture capital company