Business Copyright 2005 Prentice- Hall, Inc. 4-1

4-2 Chapter 4 Understanding Entrepreneurship & New Ventures

Business Copyright 2005 Prentice- Hall, Inc. 4-3 Chapter Outline What Is A “Small” Business? What Is A “Small” Business? Entrepreneurship Entrepreneurship Starting/Operating A New Business Starting/Operating A New Business Franchising Franchising Success/Failure In A Small Business Success/Failure In A Small Business Noncorporate Business Ownership Noncorporate Business Ownership Corporations Corporations

Business Copyright 2005 Prentice- Hall, Inc. 4-4 “Small” Business Small Business AdministrationSmall Business Administration –Number of Employees –Total Annual Sales Independently Owned/Managed & Does Not Dominate Its MarketIndependently Owned/Managed & Does Not Dominate Its Market

Business Copyright 2005 Prentice- Hall, Inc. 4-5 Small Business Importance

Business Copyright 2005 Prentice- Hall, Inc. 4-6 Need For Small Businesses Job CreationJob Creation InnovationInnovation –Products/Services –Processes Important To Big BusinessImportant To Big Business

Business Copyright 2005 Prentice- Hall, Inc. 4-7 Small Business Industries ServicesServices ConstructionConstruction Finance & InsuranceFinance & Insurance WholesalingWholesaling Transportation & ManufacturingTransportation & Manufacturing

Business Copyright 2005 Prentice- Hall, Inc. 4-8 Small Business Impact By Industry

Business Copyright 2005 Prentice- Hall, Inc. 4-9 Entrepreneur Accepts Risks & Opportunities In Creating/Operating A New BusinessAccepts Risks & Opportunities In Creating/Operating A New Business CharacteristicsCharacteristics –Resourceful –Good Customer Relations –Desire To Be Own Boss- Gain Control Of Life –Build For Family –Tolerance For Uncertainty/Risk

Business Copyright 2005 Prentice- Hall, Inc Entrepreneurs YesterdayToday Self-ReliantOpen-Minded Male Male or Female Quick Decisions Relies On Others

Business Copyright 2005 Prentice- Hall, Inc Non-Financial Reasons To Start A Business Source: CIBC World Markets, Economics & Strategy, “Secrets to Small Business Success”, research.cibcwm.com/economic_public/ download/sb-ssbs pdf

Business Copyright 2005 Prentice- Hall, Inc Financial Reasons To Start A Business Source: CIBC World Markets, Economics & Strategy, “Secrets to Small Business Success”, research.cibcwm.com/economic_public/ download/sb-ssbs pdf

Business Copyright 2005 Prentice- Hall, Inc Start/Operate Small Business Business Plan Start From Scratch? Financing Buying Existing?

Business Copyright 2005 Prentice- Hall, Inc Business Plan Summarizes StrategySummarizes Strategy Identifies ImplementationIdentifies Implementation Includes:Includes: –Goals and Objectives –Sales Forecast

Business Copyright 2005 Prentice- Hall, Inc Business Plan- Projected Financial Statements Cash Budget- Most ImportantCash Budget- Most Important Income StatementIncome Statement Balance SheetsBalance Sheets BreakevenBreakeven

Business Copyright 2005 Prentice- Hall, Inc Startup Business My Customers? My Customers? Where? Where? Price? Price? Quantities Will Be Bought? Quantities Will Be Bought? Competitors? Competitors? Product Differentiation? Product Differentiation?

Business Copyright 2005 Prentice- Hall, Inc Financing Small Business- Traditional Family/FriendsFamily/Friends Personal SavingsPersonal Savings LendersLenders InvestorsInvestors GovernmentGovernment

Business Copyright 2005 Prentice- Hall, Inc Credit Usage By Small Business Firms Source: Small Business Administration- Office of Advocacy, “Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finance” Sept Percentage of Small Firms Using Credit By Suppliers

Business Copyright 2005 Prentice- Hall, Inc Share of Outstanding Debt for Small Firms By Supplier of Credit 1998 Source: Small Business Administration- Office of Advocacy, “Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finance” Sept

Business Copyright 2005 Prentice- Hall, Inc Percentage of Small Business Loans From Commercial Banks Source: Small Business Administration- Office of Advocacy, “Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finance” Sept

Business Copyright 2005 Prentice- Hall, Inc Other Sources Of Financing Venture Capital CompaniesVenture Capital Companies Small-Business Investment CompaniesSmall-Business Investment Companies Small Business AdministrationSmall Business Administration –Guaranteed Loans –Immediate Participation Loans –Local Development Companies Other SBA ProgramsOther SBA Programs –SCORE –SBDCs

Business Copyright 2005 Prentice- Hall, Inc Franchise System  Franchise Agreement  Franchisor  Franchisee

Business Copyright 2005 Prentice- Hall, Inc Franchise Contract Franchisor, Inc. Franchisee Branded Product/Service PerformanceMonitoring $$$$$

Business Copyright 2005 Prentice- Hall, Inc Franchising To Franchisee + Business Ownership + Access To Mgmt. Skills + Low Failure Rate To Franchiser + Rapid Growth Using Other People’s Money To Franchisee - High start-up costs - % Of Sales To Franchiser AdvantagesDisadvantages

Business Copyright 2005 Prentice- Hall, Inc Trends In Small Business E-CommerceE-Commerce Big Business CrossoversBig Business Crossovers Minorities & WomenMinorities & Women Global Trade/SuppliersGlobal Trade/Suppliers Better Survival RatesBetter Survival Rates

Business Copyright 2005 Prentice- Hall, Inc Startups: Success & Failure

Business Copyright 2005 Prentice- Hall, Inc Growth of E-Commerce

Business Copyright 2005 Prentice- Hall, Inc Women Entrepreneurs

Business Copyright 2005 Prentice- Hall, Inc Startups: Success vs. Failure

Business Copyright 2005 Prentice- Hall, Inc Reasons For Failure Source: The Coleman Chronicles, Vol. 1 Issue 20, “The Most Common Reasons for Small Business Failure…

Business Copyright 2005 Prentice- Hall, Inc Reasons For Success Hard Work, Drive, & DedicationHard Work, Drive, & Dedication Demand For Product/ServiceDemand For Product/Service Managerial CompetenceManagerial Competence LuckLuck

Business Copyright 2005 Prentice- Hall, Inc Legal Entities of Business Ownership Sole ProprietorshipSole Proprietorship PartnershipsPartnerships –General –Limited –Master Limited CooperativesCooperatives Corporations –Closely-Held vs. Publicly- Held –S Corporation –Limited Liability –Professional –Multinational (Transnational)

Business Copyright 2005 Prentice- Hall, Inc Sole Proprietorship  Freedom  Easy To Form  Low Start-up Costs  Tax Benefits  Unlimited Liability  Lack Of Continuity  Resources of One Person AdvantagesDisadvantages

Business Copyright 2005 Prentice- Hall, Inc General Partnership  More Talent & Money  Easily Created  Partners Taxed As Individuals  Unlimited Liability  Lack Of Continuity  Difficult To Transfer Ownership AdvantagesDisadvantages

Business Copyright 2005 Prentice- Hall, Inc Corporation  Limited Liability  Continuity  Access To More Capital  Ease Of Ownership Transfer  Ease Of Ownership Transfer  Startup Cost- Legal Requirements  Double Taxation AdvantagesDisadvantages

Business Copyright 2005 Prentice- Hall, Inc Proportions of Legal Business Entities

Business Copyright 2005 Prentice- Hall, Inc Corporate Governance Shareholders Board Of Directors Officers Business Employees

Business Copyright 2005 Prentice- Hall, Inc Stock Ownership PreferredPreferred –Fixed Dividend –Priority CommonCommon –Dividend If Profitable –Last Claim –Voting Rights

Business Copyright 2005 Prentice- Hall, Inc Corporate Ownership- Special Issues Joint Ventures & Strategic AlliancesJoint Ventures & Strategic Alliances Employee Stock OwnershipEmployee Stock Ownership Institutional OwnershipInstitutional Ownership Mergers & AcquisitionsMergers & Acquisitions Divestitures & Spin-OffsDivestitures & Spin-Offs