McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved. Entrepreneurship and Starting a Small Business CHAPTER 6

NAME that COMPANY 6-2 While I was an employee at a big company, I developed a product that has become a staple on most office supply lists. I needed something to mark the pages of a hymnal without falling out or damaging the book. What started as a simple, yellow piece of paper with a new adhesive evolved into many different versions – now there are Super Sticky, recycled, Pop-Up and electronic versions of my inventions. Who am I, who did I work for, and what did I invent?

WHAT is ENTREPRENEURSHIP? 6-3 Entrepreneurship -- Accepting the risk of starting and running a business.

NOTABLE ENTREPRENEURS 6-4 French immigrant Élruthère Irènèe du Pont de Nemours started Du Pont in 1802.Du Pont David McConnell borrowed $500 from a friend to start Avon.Avon George Eastman started Kodak with a $3,000 investment in 1880.Kodak Jeff Bezos started Amazon.com with investments from his family and friends.Amazon.com

ANNE BEILER Auntie Anne’s 5-5 Started selling pretzels when her family was living paycheck to paycheck. Now Auntie Anne’s has over 1,200 locations and brings in over $410 million! Beiler sold the company in 2005 to start focusing on charity work.

YOU’RE NEVER TOO YOUNG to be an ENTREPRENEUR 6-6 Four reasons to start your business right away: 1. You don’t have a mortgage or kids to take care of. 2. You can survive on little funds and work long hours. 3. No disruption to your career path. It hasn’t started yet! 4. Use your alma mater for resources. Source: Entrepreneur, accessed November

YOU’RE NEVER TOO OLD to be an ENTREPRENEUR EITHER! 6-7 The highest rate of entrepreneurship activity is in the age group! Since 1996, older Americans have opened businesses at a higher rate than year olds. Older entrepreneurs have greater experience and more financial resources. Source: U.S. News and World Report, accessed October

WHY TAKE the RISK? 6-8 Opportunity Profit Independence Challenge

Source: Forbes, accessed November BIG TIME PROFIT 6-9 Michael Dell could buy 1,100 new laptops for every student at the University of Texas at Austin! Dietrich Mateschitz could buy himself a can of Red Bull every day for the next 11 million years! Liliane Bettencourt could buy a box of L’Oreal hair color for every woman in the world! Photo Credit: Emran Kassim

WHAT DOES IT TAKE to be an ENTREPRENEUR? 6-10 Self-directed Self-nurturing Action-oriented Highly energetic Tolerant of uncertainty

An IDEA is a GOOD OPPORTUNITY IF… 6-11 LO 6-1 It fills customers’ needs. You have the skills and resources to start a business. You can sell the product or service at a reasonable price and still profit. You can get your product or service to customers before the window of opportunity closes. You can keep the business going.

ENTREPRENEURIAL TEAMS 6-12 Entrepreneurial team -- A group of experienced people from different areas of business who join to form a managerial team with the skills to develop, make and market a new product. An entrepreneurial team (Steve Jobs, Steve Wozniak and Mike Markkula) was key to Apple’s success. Apple

MICROPRENEURS 6-13 LO 6-1 Micropreneurs -- Entrepreneurs willing to accept the risk of starting and managing a business that remains small, lets them do the work they want to do, and offers a balanced lifestyle. About half of U.S. micropreneurs are home-based business owners – writers, consultants, video producers, architects, bookkeepers, etc.

Computer technology has leveled the playing field. Corporate downsizing has led many to venture on their own. HOME-BASED BUSINESS GROWTH 6-14 LO 6-1 Social attitudes have changed. New tax laws have loosened restrictions on deducting expenses for home offices.

HOME-BASED BUSINESS ISN’T EASY 6-15 Getting new customers is difficult. Managing your time requires self-discipline. Work and family tasks are sometimes not separated. Government ordinances may restrict your business. Homeowner’s insurance may not cover business-related claims.

BENEFITS of HOME-BASED BUSINESSES 6-16 Ability to start your business immediately Minimal start-up capital needed No rent or excessive set-up charges Comfortable working conditions Reduced wardrobe expenses No commuting Tax benefits Elimination of office politics Low risk for trial and error

DOWNSIDES of HOME-BASED BUSINESSES 6-17 LO 6-1 Difficult to establish work habits Limited support system Isolation Work space may be limited Clients may be uncomfortable coming to your home Zoning restrictions Success is based 100% on your efforts

ONLINE BUSINESS 6-18 Online sales reached $262 billion in 2013, about 8% of all retail sales. All retail sales were up 2.5% in However, online retail sales grew 13%.

AFFILIATE MARKETING 6-19 Affiliate Marketing -- An online marketing strategy in which a business rewards individuals or other businesses for each visitor or customer the affiliate sends to its website.

Source: Entrepreneur, accessed November BOOSTING YOUR BUSINESS’S ONLINE PRESENCE 6-20 Photo Credit: Marc Wathieu LO 6-1 Establish an identity. Be easy to find. Steal good ideas and make them your own. Look out for opportunities. Remember other forms of marketing. Be friendly!

Art Fry of 3M developed Post-Its when he was trying to mark pages of his hymnal without damage.3M INTRAPRENEURS 6-21 Intrapreneur -- A creative person who works as an entrepreneur within a corporation. Intrapreneurs use a company’s existing resources to launch new products for the company.

GOVERNMENT and ENTREPRENEURSHIP 6-22 EB-5 Immigrant Investor Program Immigration Act passed in 1990 created a category of “investor visas” that encourage entrepreneurs to come to the U.S. Under this program, entrepreneurs (and their spouses and unmarried children under 21) are eligible to apply for a green card (permanent residence) if they: a) Make the necessary investment in a commercial enterprise in the United States; and b) Plan to create or preserve 10 permanent full-time jobs for qualified U.S. workers.

GOVERNMENT and ENTREPRENEURSHIP 6-23 Enterprise Zones -- Specific geographic areas to which governments attract private business investment by offering lower taxes and other government support. Incubators -- Offer new businesses low-cost offices with basic services.

TEST PREP 6-24 Why are people willing to take the risks of entrepreneurship? What are the advantages of entrepreneurial teams? How do micropreneurs differ from other entrepreneurs? What does the government do to promote entrepreneurship?

SMALL BUSINESSES 6-25 LO 6-2 Small Business -- Independently owned and operated, not dominant in its field of operation and meets certain standards of size. Businesses are “small” in relation to other businesses in their industries.

Source: Inc., accessed November WORK-LIFE BALANCING ACT 5-26 % of small business owners Work over 80 hours per week Work over 40 hours per week

SMALL BUSINESS STATISTICS 6-27 LO 6-2 There are 28 million small businesses in the U.S. Of all nonfarm businesses in the U.S., almost 97% are considered small. Small businesses have generated 65% of new jobs since About 80% of U.S. workers’ first jobs were in small business.

ADVANTAGES of SMALL OVER BIG BUSINESS 6-28 Photo Credit: Elliot Brown LO 6-2 More personal customer service. The ability to respond quickly to opportunities.

BUSINESS FAILURES are LOWER THAN the REPORTS BECAUSE… 6-29 LO 6-2 Owner closing a business to start another is reported as a “failure.” Changing forms of ownership is reported as a “failure.” Retirement is reported as a “failure.”

Source: World Features Syndicate. Tommy Hilfiger – First store went bankrupt Milton Hershey – First confectionery failed H.J. Heinz – Company went bankrupt six years after start THEY DID WHAT? Famous Business Failures 6-30 LO 6-2 Walt Disney – First film company went bankrupt Henry Ford – First two car companies failed L.L. Bean – Almost went bankrupt in first year

CAUSES of SMALL BUSINESS FAILURES 6-31

INCREASING SMALL BUSINESS SUCCESSES 6-32

LEARNING ABOUT SMALL BUSINESS 6-33 Learn from Others – Investigate your local colleges for classes on small business and entrepreneurship; talk to and work for successful local entrepreneurs. Get Some Experience – Gain three years experience in the field; then start a part-time small business. Take Over a Successful Firm – Serve as an apprentice and eventually take over once the owner steps down.

MAJOR BUSINESS FUNCTIONS 6-34 Planning Financing Knowing customers Managing employees Keeping records

MAJOR BUSINESS FUNCTIONS 6-35 LO 6-4 Planning

BUSINESS PLANS 6-36 LO 6-4 Business Plan -- A detailed written statement that describes the nature of the business, the target market, the advantages the business will have over competition, and the resources and owners’ qualifications. A business plan forces potential owners to be specific about what they will offer. A business plan is mandatory for talking with bankers or investors.

A good plan takes a long time to prepare. A good executive summary catches interest and tempts potential investors to read on. WRITING a BUSINESS PLAN 6-37 LO 6-4 Getting the plan into the right hands is almost as important as getting the right information in it.

Source: Bloomberg Businessweek, accessed November A FAMILY AFFAIR What to Consider Before Starting a Family Business 6-38 LO 6-4 Clarify Expectations – What will each person contribute? Discuss Work/Family Boundaries – What is the line that separates work from personal relationships? Develop Good Communication – Agree about types of decisions you’ll make jointly and on your own. Clarify Long-Term Intentions – Discuss how long everyone will work full time and goals for the business. Have an Escape Hatch – Have a Plan B.

MAJOR BUSINESS FUNCTIONS 6-39 LO 6-4 Financing

SOURCES of CAPITAL 6-40 LO 6-4 Personal savings Relatives Banks & finance companies Government agencies Angel investors Crowdfunding (Kickstarter, Kiva, Lending Club, e.g.) Venture capitalists -- Individuals or companies that invest in new businesses in exchange for partial ownership.

The SMALL BUSINESS ADMINISTRATION 6-41 LO 6-4 Small Business Administration (SBA) -- A U.S. government agency that advises and assists small businesses by providing management training and financial advice. SBA started a microloan program in 1991 that provides very small loans to small business owners.SBA Program judges worthiness based on the borrowers’ integrity and soundness of their business ideas.

The SMALL BUSINESS INVESTMENT COMPANY 6-42 Small Business Investment Company (SBIC) -- A program through which private investment companies licensed by the SBA lend money to small businesses. SBICs are able to identify a business’s trouble spots early, giving entrepreneurs advice, and in some cases rescheduling loan payments.

SMALL BUSINESS DEVELOPMENT CENTERS 6-43 Small Business Development Centers (SBDC) are funded jointly by the federal government and individual states.Small Business Development Centers (SBDC) SBDCs are able to evaluate the feasibility of your idea, develop your business plan and complete your funding application – for no charge.

HELP PLEASE! More SBA Resources and Other Helpful Groups 6-44 Small Business Investment CompaniesSmall Business Investment Companies The Office of Innovation & EntrepreneurshipThe Office of Innovation & Entrepreneurship SCORE Entrepreneurship.org

MAJOR BUSINESS FUNCTIONS 6-45 LO 6-4 Knowing customers

KNOWING the MARKET 6-46 Market -- Consumers with unsatisfied wants and needs who have resources, authority and willingness to buy. (MAD) Set out to fill the market’s needs by offering top quality and great service at a fair price. One of the great advantages of small businesses is the ability to know the market and quickly adapt to market needs.

BEYOND KNOWING WHAT YOUR CUSTOMERS NEED 6-47 Quirky allows customers to take part in designing products. Anyone in the community can take part in design, style, naming, packaging, and pricing. Products are sold through the site and can even be found in brick and mortar stores.

MAJOR BUSINESS FUNCTIONS 6-48 LO 6-4 Managing employees

MANAGING EMPLOYEES 6-49 Hiring, training and motivating employees is critical. Employees of small companies are often more satisfied with their jobs – they feel challenged and respected. Entrepreneurs best serve themselves and the business if they recruit and groom employees for management positions.

MAJOR BUSINESS FUNCTIONS 6-50 Keeping records

ACCOUNTING ASSISTANCE 6-51 Computers simplify the process by helping with inventory control, customer records and payroll. A good accountant can help in:  Deciding whether to buy or lease equipment.  Deciding whether to own or rent a building.  Tax planning.  Financial forecasting.  Choosing sources of financing.  Writing requests for funds.

LEGAL HELP 6-52 Owners need outside consulting advice early in the process. Small and medium-sized firms cannot afford to hire experts as employees. A competent lawyer can help with:  Leases  Contracts  Partnership agreements  Protection against liabilities

MARKETING RESEARCH 6-53 Marketing decisions need to be made long before introducing a product or opening a store. A marketing research study can help you:  Determine where to locate.  Whom to select as your target market.  What is an effective strategy for reaching the market.

OTHER FORMS OF HELP 6-54 A commercial loan officer can help: - Design an acceptable business plan. - Give financial advice. - Lend money. An insurance agent can help you: - Know the risks associated with the business. - How to cover risks with insurance. - How to prevent risks with safety devices. Service Corps of Retired Executives -More than 13,000 volunteers from industry, trade associations, and education who counsel small business at no cost.

WHAT WENT WRONG? Five Mistakes Business Owners Make They’re too afraid to take the leap! 2. They hire the wrong people. 3. They don’t want to give up control. 4. They become complacent. 5. They fail to see new opportunities. Source: Alan Hughes, accessed September

TEST PREP 6-56 A business plan is probably the most important document a small business owner will ever create. There are nine sections in the business plan outline. Can you describe at least five sections of a business plan?

SMALL BUSINESS PROSPECTS ABROAD 6-57 Small- and medium-sized businesses accounted for 99% of recent export growth. Advantages of global trade for small businesses:  Overseas buyers enjoy dealing with individuals.  Small companies can usually begin shipping much faster.  They provide a wide variety of suppliers.  They can give more personal service and attention.

TEST PREP 6-58 Why do many small businesses avoid doing business globally? What are some of the advantages small businesses have over large businesses in selling in global markets?