1. Entrepreneurship and Small-Business Ownership
Business in Action
Eighth Edition
Chapter 6
Entrepreneurship and Small-Business Ownership
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2. Learning Objectives (1 of 2)
6.1 Highlight the contributions small businesses make to the U.S. economy. 6.2 List the most common reasons people start their own companies, and identify the common traits of successful entrepreneurs. 6.3 Explain the importance of planning a new business, and outline the key elements in a business plan.

3. Learning Objectives (2 of 2)
6.4 Identify the major causes of business failures, and identify sources of advice and support for struggling business owners. 6.5 Discuss the principal sources of small-business private financing. 6.6 Explain the advantages and disadvantages of franchising.

4. The Big World of Small Business
A company that is independently owned and operated, is not dominant in its field, and employs fewer than 500 people (although this number varies by industry)
Defining just what constitutes a small business is surprisingly tricky, but it is vitally important because billions of dollars are at stake when it comes to such things as employment regulations—from which the smallest companies are often exempt—and government contracts reserved for small businesses. Roughly speaking, a small business is an independently owned and operated company that employs fewer than 500 people and “is not dominant in its field of operation,” in the words of the U.S. Small Business Administration (SBA). Beyond that general starting point, the SBA defines the maximum size of “small” through either annual revenue or number of employees, and the limits vary by industry.

5. Economic Roles of Small Business
They provide jobs.
They introduce new products.
They meet the needs of larger organizations.
They inject a considerable amount of money into the economy.
They take risks that larger companies sometimes avoid.
They provide specialized goods and services.
From employing millions of people to creating essential products, small businesses play a vital role in the U.S. economy. Here are some of the major contributions small firms make.

6. Exhibit 6.1 The Impact of Small Business on the U.S. Economy (1 of 2)
As these selected statistics show, small businesses are a major force in employment, economic activity, and global exports.

7. Exhibit 6.1 The Impact of Small Business on the U.S. Economy (2 of 2)

8. Characteristics of Small Businesses
Most small firms have a narrow focus.
Small businesses have to get by with limited resources.
Small businesses often have more freedom to innovate.
Entrepreneurial firms find it easier to make decisions quickly and react to changes in the marketplace.
Regardless of their primary objectives, small companies tend to differ from large ones in a variety of important ways. First, most small firms have a narrow focus, offering fewer goods and services to fewer market segments. Second, unless they are launched with generous financial backing, which is rare, small businesses have to get by with limited resources. Third, smaller businesses often have more freedom to innovate and move quickly. As they grow larger, companies tend to get slower and more bureaucratic. In contrast, entrepreneurial firms usually find it easier to operate “on the fly,” making decisions quickly and reacting to changes in the marketplace.

9. Factors Contributing to the Increase in the Number of Small Businesses
E-commerce
Social media
Technological advances
Growing diversity in entrepreneurship
Corporate downsizing and outsourcing
Three factors are contributing to the increase in the number of small businesses today: e-commerce, social media, and other technological advances; the growing diversity in entrepreneurship; and corporate downsizing and outsourcing.

10. The Entrepreneurial Spirit
The positive, forward-thinking desire to create profitable, sustainable business enterprises
Every professional should understand the entrepreneurial spirit—the positive, forward-thinking desire to create profitable, sustainable business enterprises—and the role it can play in every company, not just small or new firms. The entrepreneurial spirit is vital to the health of the economy and to everyone’s standard of living, and it can help even the largest and oldest companies become profitable and competitive.

11. Why People Start Their Own Companies
More control over their futures
Tired of working for someone else
Passion for new product ideas
Pursue business goals that are important to them on a personal level
Inability to find attractive employment anywhere else
Starting a company is nearly always a difficult, risky, exhausting endeavor that requires significant sacrifice. Why do people do it? Some want more control over their future; others are simply tired of working for someone else. Another reason, and one that becomes more common during tough job markets, is the inability to find attractive employment anywhere else.

12. Exhibit 6.2 Qualities Shared by Successful Entrepreneurs
Although no single personality profile fits all successful entrepreneurs, here are the qualities that entrepreneurs tend to have.

13. Exhibit 6.3 Business Start-Up Options (1 of 3)
Strategy
Financial Outlay
at Start-Up
Possibilities
for Borrowing
Start-Up Capital
or Getting
Investors
Owner’s
Freedom and
Flexibility
Business
Processes and
Systems
Support
Networks
Workforce
Customer
Base, Brand
Recognition, and Sales
Create a new,
independent
business
Some businesses
can be started
with very little
cash; others,
particularly in
manufacturing,
may require a lot of capital
Usually very
limited; most
lenders and many investors want evidence that
the business can generate revenue
before they’ll offer funds; venture
capitalists invest in new firms, but only in a few industries
Very high, particularly
during
early phases,
although low
capital can
severely restrict
the owner’s ability to maneuver
Must be
designed and
created from
scratch, which
can be time consuming
and
expensive
Suppliers, bankers,
and other
elements of the network must be selected; the good news is
that the owner can select and
recruit ones that he or she specifically
wants
Must be hired and trained at the owner’s
expense
None; must be built from the ground
up, which can put serious strain on
company finances
until sales volume
builds

14. Exhibit 6.3 Business Start-Up Options (2 of 3)
Strategy
Financial Outlay
at Start-Up
Possibilities
for Borrowing
Start-Up Capital
or Getting
Investors
Owner’s
Freedom and
Flexibility
Business
Processes and
Systems
Support
Networks
Workforce
Customer
Base, Brand
Recognition, and Sales
Buy an existing
independent
business
Can be
considerable;
some companies
sell for multiples of their annual
revenue, for example
Banks are more willing to lend to “going concerns,”
and investors
are more likely to invest in them
Less than when
creating a new business because
facilities,
workforce, and other assets are already in
place—more
than when buying a franchise
Already in place, which can be a plus or minus,
depending on how well they work
Already in place; may need to be
upgraded
Already in
place, which
could a positive
or a negative,
but at least
there are staff to operate the
Assuming that the business is at least somewhat
successful, it has a customer base with ongoing sales and some brand
reputation (which could be positive or negative)
Creating an all-new, independent business can be an exciting prospect, but this brief comparison highlights how much work it requires and how many risks are involved.

15. Exhibit 6.3 Business Start-Up Options (3 of 3)
Strategy
Financial Outlay
at Start-Up
Possibilities
for Borrowing
Start-Up Capital
or Getting
Investors
Owner’s
Freedom and
Flexibility
Business
Processes and
Systems
Support
Networks
Workforce
Customer
Base, Brand
Recognition, and Sales
Buy into a
franchise
system
Varies widely,
from a few thousand
to several
hundred thousand
dollars
Varies, but many franchisors do not allow franchisees
to buy a franchise
with borrowed
funds, so they
must have their own capital
Low to very low; most franchisors
Require rigid adherence
to company
policies and
Processes
One of the key
advantages
of buying a
franchise is that it comes with an established
business system
Varies; some
franchise companies
Specify which suppliers a franchisee can
use
Must be hired and trained,
but a franchisor
usually
provides training
or training
support
Customer base and
repeat sales must be built up, but one
of the major advantages
of a franchise
is established
brand recognition
Creating an all-new, independent business can be an exciting prospect, but this brief comparison highlights how much work it requires and how many risks are involved.

16. Blueprint for an Effective Business Plan (1 of 3)
A document that summarizes a proposed business venture, goals, and plans for achieving those goals
A business plan summarizes a proposed business venture, communicates the company’s goals, highlights how management intends to achieve those goals, and shows how customers will benefit from the company’s goods or services. Preparing a business plan serves three important functions. First, it guides the company operations and outlines a strategy for turning an idea into reality. Second, it helps persuade lenders and investors to finance your business if outside money is required. Third, it can provide a reality check in case an idea just isn’t feasible.

17. Blueprint for an Effective Business Plan (2 of 3)
Summary
Mission and objectives
Company overview
Products and services
Management and key personnel
Target market
Marketing strategy
• Summary. In one or two paragraphs, summarize your business concept, particularly the business model, which defines how the company will generate revenue and produce a profit.
• Mission and objectives. Explain the purpose of your business and what you hope to accomplish.
• Company overview. Give full background information on the origins and structure of your venture.
• Products or services. Concisely describe your products or services, focusing on their unique attributes and their appeal to customers.
• Management and key personnel. Summarize the background and qualifications of the people most responsible for the company’s success.
• Target market. Provide data that will persuade an investor that you understand your target market. Be sure to identify the strengths and weaknesses of your competitors.
• Marketing strategy. Provide projections of sales volume and market share; outline a strategy for identifying and reaching potential customers, setting prices, providing customer support, and physically delivering your products or services.

18. Blueprint for an Effective Business Plan (3 of 3)
Design and development plans
Operations plan
Start-up schedule
Major risk factors
Financial projections
Exit strategy
• Design and development plans. If your products require design or development, describe the nature and extent of what needs to be done, including costs and possible problems.
• Operations plan. Provide information on facilities, equipment, and personnel requirements.
• Start-up schedule. Forecast development of the company in terms of completion dates for major aspects of the business plan.
• Major risk factors. Identify all potentially negative factors and discuss them honestly.
• Financial projections and requirements. Include a detailed budget of start-up and operating costs, as well as projections for income, expenses, and cash flow for the first three years of business. Identify the company’s financing needs and potential sources.
• Exit strategy. Explain how investors will be able to cash out or sell their investment, e.g., through a public stock offering, sale of the company, or a buyback of the investors’ interest.

19. Exhibit 6.4 Why New Businesses Fail
Leadership Issues
Marketing and Sales Issues
Financial Issues
Systems and Facilities Issues
Managerial incompetence:
Owner doesn’t know how to plan, lead, control, or organize.
Lack of strategic planning:
Owner didn’t think through all the variables needed to craft a viable business strategy.
Lack of relevant experience:
Owner may be experienced in Business but not in the particular markets or technologies that are
vital to the new firm’s success.
Inability to make the transition from corporate employee to entrepreneur:
Owner can’t juggle the multiple and diverse responsibilities or survive the lack of support that comes with going solo.
Ineffective marketing: Small companies—especially new small companies—face a tremendous challenge getting recognition in crowded markets.
Uncontrolled growth: Company may add customers faster than it
can handle them, leading to chaos, or may even “grow its way into bankruptcy” if it spends wildly to capture and support customers.
Overreliance on a single Customer: One huge customer can disappear overnight, leaving the company in dire straits.
Inadequate financing: Being undercapitalized can prevent a company from building the scale required to be successful or sustaining operations until sales revenues increase enough for the firm to be self-funding.
Poor cash management: A company may spend too much on nonessentials, fail to balance expenditures with incoming revenues, fail to use loan or investment funds wisely, or fail to budget enough to pay its bills.
Too much overhead: Company creates too many fixed expenses that aren’t directly related to creating or selling products, leaving it vulnerable to any slowdown in the economy.
Poor location: Being in the wrong place will doom a retail operation and can raise costs for other types of business as well.
Poor inventory control: Company may produce or buy too much inventory, raising costs too high— or it may do the opposite and be unable to satisfy demand.
You may have heard some frightening “statistics” about the failure rate of new businesses, with various sources saying that 70, 80, or even 90 percent of new business ventures fail. Unfortunately, calculating a precise figure that represents all types of businesses across all industries is probably impossible.
These 12 blunders are among the most common reasons for the failure of new businesses.

20. Government Agencies and Not-for-Profit Organizations
Small Business Administration
Minority Business Development Agency
SCORE
U.S. Chamber of Commerce
Keeping a business going is no simple task, to be sure. Fortunately, entrepreneurs can get advice and support from a wide variety of sources.
At the federal level, small businesses can apply for loans backed by the Small Business Administration (SBA), get management and financing advice, and learn about selling to the federal government. The Minority Business Development Agency offers advice and programs to minority owned businesses. Many state agencies also have offices to help small firms compete.
Some of the best advice available to small businesses is delivered by thousands of volunteers from the Service Corps of Retired Executives (SCORE), a resource partner of the SBA. These experienced business professionals offer free advice and one-on-one counseling to entrepreneurs.
Many colleges and universities also offer entrepreneurship and small-business programs. Check with your college’s business school to see whether resources are available to help you launch or expand a company. The U.S. Chamber of Commerce and its many local chambers offer advice and special programs for small businesses as well.

21. Mentors and Advisory Boards
A team of people with subject-area expertise or vital contacts who help a business owner review plans and decisions
An advisory board is a form of “group mentoring” in which you assemble a team of people with subject-area expertise or vital contacts to help review plans and decisions.
Unlike a corporate board of directors, an advisory board does not have legal responsibilities, and you don’t have to incorporate to establish an advisory board. In some cases, advisors will agree to help for no financial compensation. In other cases, particularly for growth companies that want high-profile experts, advisors agree to serve in exchange for either a fee or a small portion of the company’s stock (up to 3 percent is standard).

22. Print and Online Media www.entrepreneurship.org Inc.www.inc.com
Business 2.0
Bloomberg Business Week business
Fortune and Money
Your local library and the Internet offer information to help any small-business owner face just about every challenge imaginable. For instance, blogs written by business owners, investors, and functional specialists such as marketing consultants can offer valuable insights. Websites such as entrepreneurship.org provide free advice on every aspect of managing an entrepreneurial organization. Also, the websites affiliated with these well-known business magazines should be on every small-business owner’s regular reading list:
• Inc.
• Business 2.0
• Bloomberg Businessweek
• Fortune and Money

23. Exhibit 6.5 Social Networking for Entrepreneurs (1 of 2)
Special Features
URL
Startup Nation
Provides articles, forums, blogs, seminars, and podcasts
LinkedIn
So many business professionals and corporate managers are members of this popular network that most entrepreneurs should have a presence as well
Xing
Similar to LinkedIn, with a European focus
Face book
Not specifically for entrepreneurs or small business owners but has become a major marketing platform for
many small businesses

24. Exhibit 6.5 Social Networking for Entrepreneurs (2 of 2)
Special Features
URL
The Funded
Lets entrepreneurs share information on venturecapitalists and angel investors, including the amounts
and terms they’ve been offered
Young Entrepreneur
For active entrepreneurs and those considering entrepreneurship
Young Entrepreneurs
Twitter
Not specifically for entrepreneurs or small business owners, but many use it to build connections and
conduct research
Pinterest
Many consumers use Pinterest to search for product ideas, so it can be a great promotional platform for
businesses
Here are just a few of the many online networks that provide advice and vital connections for entrepreneurs.

25. Business Incubators Business incubators
Facilities that house small businesses and provide support services during the company’s early growth phases
Business incubators are centers that provide “newborn” businesses with various combinations of advice, financial support, access to industry insiders and connections, facilities, and other services a company needs to get started. Some incubators are not-for-profit organizations affiliated with the economic development agencies of local or state governments or universities, some are for-profit enterprises, some are run by venture capitalists, and some companies have internal incubators to encourage new ventures.

26. Financing Options for Small Businesses (1 of 4)
Seed money
The first infusion of capital used to get a business started
Micro lenders
Organizations, often not-for-profit, that lend smaller amounts of money to business owners who might not qualify for conventional bank loans
Private financing covers every source of funding except selling stocks and bonds. Nearly all companies start with private financing, even those that eventually “go public.” The range of private financing options is diverse, from personal savings to investment funds set up by large corporations looking for entrepreneurial innovations. Many firms get seed money, their very first infusion of capital, through family loans. If you go this route, be sure to make the process as formal as a bank loan would be, complete with a specified repayment plan. Otherwise, problems with the loan can cause problems in the family.
In response to the needs of entrepreneurs who don’t qualify for standard bank loans or who don’t need the amount of a regular loan, hundreds of organizations now serve as microlenders, offering loans up to $35,000 or so.

27. Financing Options for Small Businesses (2 of 4)
Venture capitalists (VCs)
Investors who provide money to finance new businesses or turnarounds in exchange for a portion of ownership, with the objective of reselling the business at a profit
At the other end of the funding scale are venture capitalists (VCs), investment specialists who raise pools of capital from large private and institutional sources (such as pension funds) to finance ventures that have high growth potential and need large amounts of capital. VC funding provides a crucial stimulus to the economy by making risky, early stage investments in firms that are likely to become major employers if their products succeed in the marketplace. Because one-third of VC-funded start-ups don’t succeed, those that do succeed need to really pay off to compensate. VCs are therefore extremely focused and selective; they invest in only a few thousand companies in the United States every year.

28. Financing Options for Small Businesses (3 of 4)
Angel investors
Private individuals who invest money in start-ups, usually earlier in a business’s life and in smaller amounts than VCs are willing to invest or banks are willing to lend
Initial public offering (IPO)
A corporation’s first offering of shares to the public
Start-up companies that can’t attract VC investment (perhaps because they are too early in their product development) often look for angel investors, private individuals who put their own money into start-ups, with the goal of eventually selling their interest for a profit. These individuals are willing to invest smaller amounts than VCs and often stay involved with the company for a longer period of time. Many of these investors join angel networks or angel groups that invest together in chosen companies. Angel investing tends to have a more local focus than venture capitalism, so you can search for angels through local business contacts and organizations.
Companies with solid growth potential may also seek funding from the public at large, although only a small fraction of the companies in the United States are publicly traded. Whenever a corporation offers its shares of ownership to the public for the first time, the company is said to be going public. The shares offered for sale at this point are the company’s initial public offering (IPO). Going public is an effective method of raising needed capital, but it can be an expensive and time-consuming process with no guarantee of raising the amount of money needed.

29. Financing Options for Small Businesses (4 of 4)
Crowd funding
Soliciting project funds, business investment, or business loans from members of the public
Crowdfunding is an intriguing twist to funding that combines elements of public and private financing. Kickstarter is perhaps the best known of these web services that provide a way for people and organizations to seek money from the public. Crowdfunding services fall into two general categories. Kickstarter and a number of other sites focus on individual projects or charitable endeavors, and people provide money in exchange for the product being created or simply to help people and causes they believe in. In contrast, services such as Crowdfunder and SoMoLend help business owners raise money to launch or expand companies, and the people who provide money are investing in or lending to the company.

30. Exhibit 6.6 Financing Possibilities Over the Life of a Small Business
The potential funding sources available to a business owner vary widely, depending on where the business is in its life cycle. Note that this is a general map and covers only the most common funding sources. Individual lending opportunities depend on the specific business owner(s), the state of the economy, and the type of business and its potential for growth. For example, venture capital is available only to firms with the potential to grow rapidly and only in a few industries.

31. The Franchise Alternative (1 of 2)
A business arrangement in which one company (the franchisee) obtains the rights to sell the products and use various elements of a business system of another company (the franchisor)
An alternative to creating or buying an independent company is to buy a franchise, which enables the buyer to use a larger company’s trade name and sell its goods or services in a specific territory.

32. The Franchise Alternative (2 of 2)
Franchisee
A business owner who pays for the rights to sell the products and use the business system of a franchisor
Franchisor
A company that licenses elements of its business system to other companies (franchisees)
In exchange for this right, the franchisee (the small-business owner who contracts to sell the goods or services) pays the franchisor (the supplier) an initial startup fee, then monthly royalties based on sales volume. Franchises are a large and growing presence in the U.S. economy, accounting for roughly 10 percent of all employer businesses (those that hire employees).

33. Advantages of Franchising
Combines at least some of the freedom of working for yourself with many of the advantages of being part of a larger, established organization
Name recognition, national advertising programs, standardized quality of goods and services, and a proven formula for success

34. Disadvantages of Franchising
Typically agree to follow the business format
Little control over decisions the franchisor makes that affect the entire system
Don’t have the option of independently changing your business in response to market changes

35. Exhibit 6.7 Key Questions to Ask Before Signing a Franchise Agreement
1. What are the total start-up costs? What does the initial franchise fee cover? Does it include a starting inventory of supplies and products?
2. Who pays for employee training?
3. How are the periodic royalties calculated, and when must they be paid?
4. Who provides and pays for advertising and promotional items? Do you have to contribute to an advertising fund?
5. Are all trademarks and names legally protected?
6. Who selects or approves the location of the business?
7. Are you restricted to selling certain goods and services?
8. Are you allowed to sell online?
9. How much control will you have over the daily operation of the business?
10. Is the franchise assigned an exclusive territory?
11. If the territory is not exclusive, does the franchisee have the right of first refusal on additional franchises established in nearby locations?
12. Is the franchisee required to purchase equipment and supplies from the franchisor or other suppliers?
13. Under what conditions can the franchisor or the franchisee terminate the franchise agreement?
14. Can the franchise be assigned to heirs?
A franchise agreement is a legally binding contract that defines the relationship between a franchisee and a franchisor. Before signing a franchise agreement, be sure to read the disclosure document and consult an attorney.

36. Applying What You’ve Learned (1 of 2)
Highlight the contributions small businesses make to the U.S. economy.
List the most common reasons people start their own companies, and identify the common traits of successful entrepreneurs.
Explain the importance of planning a new business, and outline the key elements in a business plan.

37. Applying What You’ve Learned (2 of 2)
Identify the major causes of business failures, and identify sources of advice and support for struggling business owners.
Discuss the principal sources of small-business private financing.
Explain the advantages and disadvantages of franchising.

38. Copyright