Copyright © 2009 Pearson Education Canada4-1 Chapter 4 Starting and Financing a Small Business

Copyright © 2009 Pearson Education Canada4-2 Economic Roles of Small Business Provide new jobs Introduce new products Service large corporations Engage in specialization

Copyright © 2009 Pearson Education Canada4-3 CHARACTERISTICS OF SMALL BUSINESS Independently owned and operated Not dominate in its field Relatively small annual sales Fewer than 500 employees Limited resources, but tend to be innovative

Copyright © 2009 Pearson Education Canada4-4 Types of Small Business LifestyleHigh-Growth Run by individuals Limited products/services Limited resources Limited marketplace Run by teams Multiple products/services Investment capital Large marketplace

Copyright © 2009 Pearson Education Canada4-5 Innovation in Small Business Faster decisions Access to owners Individual expression

Copyright © 2009 Pearson Education Canada4-6 How Entrepreneurs Spend Their Time

Copyright © 2009 Pearson Education Canada4-7 Factors Contributing to Small Business Growth Technology and the Internet Women and minorities Downsizing and outsourcing

Copyright © 2009 Pearson Education Canada4-8 Women Starting Businesses

Copyright © 2009 Pearson Education Canada4-9 Characteristics of Entrepreneurs Highly disciplined Like to control their destiny Listen to their intuition Relate well with others Eager to acquire new skills Learn from their mistakes

Copyright © 2009 Pearson Education Canada4-10 Characteristics of Entrepreneurs Stay abreast of market changes Willing to exploit new opportunities Driven by ambition Think positively Prefer risk taking over security

Copyright © 2009 Pearson Education Canada4-11 Preparing a Business Plan Summarize the business Communicate goals Highlight plans Show customer benefits

Copyright © 2009 Pearson Education Canada4-12 Importance of a Business Plan Guides company operations Outlines strategy Attracts lenders and investors

Copyright © 2009 Pearson Education Canada4-13 Starting a New Business + Control your destiny + Reach your potential + Unlimited profits + Recognition + Doing what you enjoy – Uncertain income – Risk of loss – Long hours & hard work – Total responsibility – High stress levels AdvantagesDisadvantages

Copyright © 2009 Pearson Education Canada4-14 Buying an Existing Business + Customer base + Business systems + Product or service + Location + Financing – May be overpriced – Alienated customers – Obsolescence – Location – Personality clashes – Outstanding receivables AdvantagesDisadvantages

Copyright © 2009 Pearson Education Canada4-15 The Franchise Alternative FranchiseeFranchisor Types ProductManufacturingBusiness- format

Copyright © 2009 Pearson Education Canada4-16 How to Evaluate a Franchise What does the initial franchise fee cover? How are periodic royalties calculated and when are they paid? Are all trademarks and names legally protected? Who provides and pays for advertising and promotion? Who selects the location of the business?

Copyright © 2009 Pearson Education Canada4-17 How to Evaluate a Franchise Is the franchise assigned an exclusive territory? Does the franchisee have the right of first refusal on additional nearby franchises? Is the franchisee required to purchase equipment and supplies from the franchisor? How can the franchise agreement be terminated? Can the franchise be assigned to heirs?

Copyright © 2009 Pearson Education Canada4-18 The Pros and Cons of Franchising Advantages  Get a viable business  Instant name recognition  Built-in support group  Marketing & advertising Disadvantages  No guarantee of success  Expensive to obtain  High monthly royalties  Limited independence

Copyright © 2009 Pearson Education Canada4-19 Why New Businesses Fail Management incompetence Lack of industry experience Inadequate financing Poor business planning Unrealistic goals Diminished customer base Uncontrolled growth Inappropriate location Poor system of controls Lack of entrepreneurial skills

Copyright © 2009 Pearson Education Canada4-20 TheInternet Incubators BDC Sources of Small Business Assistance

Copyright © 2009 Pearson Education Canada4-21 Length of Term Short-TermLong-Term Meet financial obligations obligations Acquire buildings and equipment Acquire buildings and equipment Start-up or expand operations operations Maintain liquidity

Copyright © 2009 Pearson Education Canada4-22 The Cost of Capital Risk factors Interest rates Funding vehicles

Copyright © 2009 Pearson Education Canada4-23 Obtaining Capital Debt Financing Equity Financing Unsecured loans StockStock Initial Public Offering (IPO) Initial Public Offering (IPO) Secured loans

Copyright © 2009 Pearson Education Canada4-24 Debt Versus Equity Financing CharacteristicDebtEquity Maturity Claim on income Claim on assets Influence over management Specific Fixed cost Priority Little Non-specific Discretionary cost Residual Varies

Copyright © 2009 Pearson Education Canada4-25 CorporatefinancingCorporatefinancingPersonalAssetsPersonalAssets CreditcardsCreditcardsVenturecapitalistsVenturecapitalists BankloansBankloans Private Sources of Financing Private Sources of Financing FriendsFriends AngelinvestorsAngelinvestors

Copyright © 2009 Pearson Education Canada4-26 Financing A New Business Length of term Cost of capital Debt vs. equity Financing sources