1. Small Business, Entrepreneurship, and Franchises
Chapter Five
Small Business, Entrepreneurship, and Franchises
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2. Small Business Profile
A business that is independently owned and operated for profit
and is not dominant in its field
SBA “smallness” guidelines
Manufacturing—500 employees
Wholesale trade—100 employees
Agriculture—$750,000
Retail trade—$6.5 million
General and heavy construction—$31 million
Dredging—$18.5 million
Special trade construction—$13 million
Travel agencies—$3.5 million (commissions & other income)
Business and personal services—$6.5 million
Architectural, engineering, surveying, etc.—$4.5 million
Dry cleaning, carpet cleaning—$4.5 million
SBA: SMALL BUSINESS ADMINISTRATION:
SMALL BUSINESSES: ONE WHICH IS INDEPENDENDENTLY OWNED AND OPERATED FOR PROFIT AND IS NOT DOMININANT IN ITS FIELD.
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3. Copyright © Cengage Learning. All rights reserved.
Class Exercise
The SBA has developed “smallness” guidelines for various industries. Would you classify the following businesses in your community as big or small?
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4. Copyright © Cengage Learning. All rights reserved.
Class Exercise
The SBA has developed “smallness” guidelines for various industries. Would you classify the following businesses in your community as big or small?
General Motors Corporation’s assembly plant, employing 7,000 workers
A local wholesaler with 95 employees
A local department store with $1.5 million in yearly sales receipts
A travel agent whose annual sales range from $1.2 million to $2.5 million
A dry cleaning business with $175,000 in annual receipts
1 LARGE
2 SMALL
3 SMALL
4 SMALL
5 SMALL
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5. Small Business Sector
There are about 27.2 million businesses in the U.S.
They can employ more than 500 workers
In the last decade, the number of small businesses increased 49 percent
Part-time entrepreneurs have increase fivefold and account for one-third of all small businesses
Two-thirds of new businesses survive at least two years, 44 percent survive at least four years, and 31 percent survive at least seven years
Small businesses provide over 50% of the jobs in the U.S.
What does the economy have to do with this?
17000 BUSINESSES EMPLOY MORE THAN 500 WORKERS…CAN BE CONSIDERED LARGE
70% OF NEW BUSINESSES FAIL WITHEN THE FIRST 5 YEARS
USUALLY TAKES 4 DAYS AND $210 TO ESTABLISH A LEGAL ENTITY TO ESTABLISH A SMALL BUSINESS
Why so many failures?
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6. Attractive small-business industry characteristics
Low initial capital investment
Some special skill requirements
High growth and profit potential
LOW INITIAL CAPITAL INVESTMENT: START OUT SMALL THEN EXPAND AS REVENUES INCREASE
SOME SPECIAL SKILL REQIREMENTS: THE SOLE PROPRIETOR OR PARNTERS NEED TO COMINGLE THEIR SKILLS AND DO WHAT IS NESSISARY TO SATISFY THEIR CUSTOMERS AND INCREASE THEIR PROFITS
HIGH GROWTH AND PROFIT POTENTIAL: HAVE A REALLY GOOD IDEA TO SELL….PEOPLE WILL LIKE IT…PRODUCT OR SERVICE WILL SELL
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7. Industry categories where small businesses tend to cluster
Distribution—retailing, wholesaling, transportation, and communications (33% of all small businesses)
Service—medical and dental care; watch, shoe, and television repairs; hair cutting and styling; restaurant meals; dry cleaning; financial services (48% of all small businesses)
Production—construction, mining, and manufacturing (19% of all small businesses)
SERVICE: AN INCREASING NUMBER OF SELF EMPLOYED AMERICANS ARE RUNNING SERVICE BUSINESSES FROM THEIR OWN HOMES
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8. The People in Small Businesses: The Entrepreneurs
The “entrepreneurial spirit”
The desire for independence
The desire to determine one’s own destiny
The willingness to find and accept a challenge
Personal background
Age
“Had enough” of working for someone else
High-tech opportunities, especially for teens
Losing a job and deciding to start a business
An idea for a new product
An opportunity presents itself
ENTREPRENURIAL SPIRIT: THE DESIRE TO CREATE A NEW BUSINESS
OTHER PERSONAL FACTORS:
DESIRE FOR INDEPENDENCE – OPPORTUNITY PRODUCES ITSELF
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9. How Old Is the Average Entrepreneur?
Why do most people start a business in their 30-ies?
MORE ESTABLISHED…HAVE THEIR MONEY TOGETHER FROM WORKING AT A WELL ESTABLISHED CAREER. MOST PEOPLE ARE DETERMINED AT WHAT THEY WANT TO DO AT THIS STAGE IN THEIR LIVES. FINISHED SCHOOL…ACCUMULATED A GOOD AMOUNT OF SAVINGS AND ESTABLISHED CREDIT.
Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.
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10. Career Opportunities in Small Business
What does this say about career opportunities in small businesses?
GO OVER
OPENING A SMALL BUSINESS IS RISKY
Source: Robert Kreitner, Management, 9th ed. (Boston: Houghton Mifflin, 2004), p. 26.
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Lack of capital and cash-flow problems
Lack of management skills
Overexpansion
What is a good title for this slide?
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12. Why Some Entrepreneurs and Small Businesses Fail
Lack of capital and cash-flow problems
Lack of management skills
Overexpansion
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13. Copyright © Cengage Learning. All rights reserved.
Its ok to fail…you never fail as long as you have learned something. Get yourself up and try again.
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14. Survey: Biggest Problems Facing SMEs*
*Small and Medium-Sized Enterprises
Go over
Source: “Ask Not What You Can Do for Your Country….,” Small Business Monitor, 10/3/03,
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15. Providing technological innovation
Innovation among small-business workers is higher than among workers in large businesses
Small firms produce 2.5 times as many innovations as large firms relative to the number of persons employed
More than half of the major technological advances of the 20th century originated with individual inventors and small businesses
Inventions may spark new industries or contribute to established industries
INNOVATION AMOUNG SMALL BUSINESS WORKERS IS SIGNIFIGANTLY HIGHER THAN WORKERS IN LARGE BUSINESSES. 2 1/2X MORE INNOVATIVE THAN LARGE BUSINESSES DUE TO MORE FREEDOMS.
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Providing employment
Small firms hire a larger proportion of younger workers, older workers, women, and part-time workers
Small businesses provide 67% of workers with their first job and initial job skills
Small businesses represent 99.7% of all employers and employ about 50% of the private work force
Small businesses provide 2/3 of the net new jobs added to the economy
GO OVER
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17. U.S. Business Start-Ups, Closures, and Bankruptcies
What does this say about where people get the money to start new businesses?
Source: U.S. Department of Commerce, Bureau of the Census; Administrative Office of the U.S. Courts; U.S. Department of Labor,
Employment and Training Administration, Small Business Administration, Office of Advocacy, Frequently Asked Questions, September 2008, accessed October 4, 2008.
GO OVER QUESTION:
MANY BUISINESSES FAIL AND GO BANKRUPT
VENTURE CAPITALISTS…RARLY BANKS WILL LEND TO UNSTEADY AND UNESTABLISHED BUSINESSES….ESP WHEN THERE IS LITTLE ROI (RETURN ON INVESTMENT) OR COLLATERAL
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18. Providing competition
Small firms can compete with large firms, forcing the larger firm to become more efficient and responsive to customer needs
SMALL BUSINESSES CHALLENGE LARGER, MORE ESTABLISHED FIRMS IN MANY WAYS, PROMPTING THEM TO BECOME MORE EFFICIENT AND MORE RESPONSIVE TO CUSTOMER NEEDS.
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19. Filling needs of society and other businesses
Small firms can meet the special needs of smaller groups of customers
Small firms can act as specialized suppliers of goods and services to larger businesses
MANY LARGE FIRMS MAY BE UNWILLING OR UNABLE TO MEET THE PARTICULAR NEEDS OF A SMALLER GROUP OF CONSUMERS (CUSTOMIZED AND SPECIALIZED GOODS)
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20. The Pro and Cons of Smallness
ADVANTAGES
DISADVANTAGES
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21. The Pro and Cons of Small Business
ADVANTAGES
Personal relationships with customers and employees
Ability to adapt to change
Simplified recordkeeping
Independence
Advantages of sole proprietorships
Keeping all profits
Ease and low cost of going into business
Keeping business information secret
DISADVANTAGES
Risk of failure
Limited potential
Limited ability to raise capital
ADVANTAGES:
PERSONAL RELATIONSHIPS WITH CUSTOMERS AND EMPLOYEES:
OWNERS OF BUSINESSES KNOW NAMES OF THEIR CUSTOMERS…ESTABLISH PERSONAL RELATIONSHIPS …THEY GET INVOLVD WITH THE SOCIAL, CULTURAL, AND POLITICAL AFFAIRS OF THE COMMUNITY…PERSONAL SERVICE OFFERED TO CONSUMERS IS A MAJOR COMPETITIVE ADVANTAGE OF SMALL BUSINESSES
2. ABILITY TO ADAPT AND CHANGE:
THE OWNER DOESN’T NEED ANY PERMISSION TO ADAPT TO CHANGE
3. SIMPLIFIED RECORD KEEPING:
SMALL FIRMS ONLY NEED TO KEEP ONLY A SIMPLE SET OF RECORDS.
4. INDEPENDENCE:
SMALL BUSINESS OWNERS DO NOT HAVE TO PUNCH IN FOR WORK, BID FOR VACATION TIMES, TAKE ORDERS FROM SUPERVISORS, OR WORRIED ABOUT BEING FIRED OR LAID OFF
DISADVANTAGES:
RISK OF FAILURE:
2/3 OF SMALL BUSINESS FAIL WITHEN THE FIRST 6 YEARS
2. LIMITED POTENTIAL:
SMALL BUSINESS IS A SIMPLE MEANS OF MAKING A LIVING FOR THE OWNER AND THEIR FAMILY. THERE CAN BE LIMITED GROWTH AND EMPLOYEES HAVE LIMITED GROWTH OPPORTUNITIES IF THEY WERE TO WORK IN LARGE BUSINESS.
3.LIMITED ABILITY TO RAISE CAPITAL:
FINANCING COMES OUT OF OWNERS POCKET…BANKS WILL NOT LEND TOO EASILY TO SMALL BUSINESSES (SEEK OUT VENTURE CAPITILISTS) (SHARKTANK)
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22. Sources of Capital for Entrepreneurs
MOST CAPITAL COMES FROM PERSONAL SAVINGS
Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the American Express Travel Related Services Company, Inc.
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23. Components of a Business Plan
BUSINESS PLAN: CAREFULLY CONSTRUCTED GUIDE FOR THE PERSON OR GROUP OF PEOPLE STARTING A BUSINESS. POTENTIAL INVESTORS EXAMINE THE BUSINESS PLAN TO DETERMINE IF THEY WOULD LIKE TO INVEST IN OR HELP FINANCE THE NEW VENTURE IN ORDER TO INCREASE THEIR OWN ROI IN THEIR PERSONAL PORTFOLIOS.
Source: Adapted from Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 4th ed. Copyright © 2009 by Houghton Mifflin Company, pp. 93–118. Reprinted with permission.
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24. “Seven Sacred Questions” in 45 Seconds
Why do you think they call it this?
What is your product?
Who is the customer?
Who will sell it?
How many people will buy it?
How much will it cost to design and build?
What is the sales price?
When will you break even?
THESE QUESTIONS ARE THE FOUNDATION OF ANY SMALL BUSINESS.
Source: Marc Ballon, “Hot Tips,” Inc., April 1999, p. 104.
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Using the Internet
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26. The Small Business Administration
A governmental agency that assists, counsels, and protects the interests of small business in the U.S.
SBA management assistance:
Management courses and workshops
Service Core of Retired Executives (SCORE)
Help for minority-owned small businesses
Small-business institutes
Small-business development centers
SBA publications
SBA:
CREATED BY CONGRESS IN 1953
MANAGEMENT COURSES AND WORKSHOPS:
COURSES OF SBA COVER ALL FUNCTIONS, DUTIES, AND ROLES OF MANAGERS
SCORE (SERVICE CORPS OF RETIRED EXECUTIVES:
GROUP OF RETIRED BUSINESSPEOPLE WHO VOULENTEER THEIR SERVICES TO SMALL BUSINESSES.
IN THE YEAR 2007, SCORE ASSISTED BUSINESS PEOPLE
HELP FOR MINORITY OWNED SMALL BUSINESSES:
MINORITY BUSINESS DEVELOPMENT AGENCY: AWARDS GRANTS TO DEVELOP AND INCREASE BUSINESS OPPORTUNITIES FOR MEMEBERS OF ETHNIC AND RACIAL MINORITIES. THE SBA ALSO ASSISTS WOMEN TO BECOME ENTREPENEURS ALSO
SMALL BUSINESS INSTITUTES (SBI):
GROUP OF SENIOR AND GRADUATE STUDENTS IN BUSINESS ADMINISTRATION WHO PROVIDE MANAGEMENT COUNCELING TO SMALL BUSINESSES
SMALL BUSINESS DEVELOPMENT CENTERS (SBDC):
A UNIVERSITY BASED GROUP THAT PROVIDES INDIVIDUAL COUNCELING AND PRACTICAL TRAINING TO OWNERS OF SMALL BUSINESSES
SBA PUBLICATIONS:
THE SBA ISSUES MANAGEMENT, MARKETING, AND TECHNICAL PUBLICATIONS DEALING WITH HUNDREDS OF TOPICS OF INTEREST TO SMALL BUSINESS OWNERS
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27. SBA financial assistance
Regular business loans
Loans are made by private banks but are partially guaranteed by the SBA
Small-business investment companies
Venture capital: money invested in small firms that have the potential to become very successful
Small business investment companies: privately owned firms that provide venture capital to small enterprises that meet their investment standards
SHARK TANK
BC BANKS WON’T LEND TOO MUCH $ (DESIRE A STAKE IN BUISINESS BC THEY SEE THE POTENTIAL OF THE BUSINESS)
ANSWER TO HIGHLIGHT: TO STIMULATE ECONOMY AND LOWER UNEMPLOYMENT
Why does the government provide all this financial assistance and advice?
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Using the Internet
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29. Franchising Franchise Franchising Franchisor Franchisee
A license to operate an individually owned business as though it were part of a chain of outlets or stores
Franchising
Franchisor
Franchisee
FRANCHISING: ACTUAL GRANTING OF A FRANCHISE
FRANCHISOR: SUPPLIES A KNOWN AND ADVERTIZED BUSINESS NAME, MANAGEMENT SKILLS, THE REQUIRED TRAINING AND MATERIALS, AND A METHOD OF DOING BUSINESS. COLLECTS ROYALTIES FROM FRANCHISEE
FRANCHISEE: SUPPLIES LABOR AND CAPITAL, OPERATED THE FRANCHISED BUSINESS, AND AGREES TO ABIDE BY THE FRANCHISE AGREEMENT

30. Copyright © Cengage Learning. All rights reserved.
Types of Franchises
Give examples
Manufacturer
Retailer
Brand names
Techniques
Services
MANUFACTURER: AUTHORIZES A NUMBER OF RETAIL STORES TO SELL A CERTAIN BRAND NAME ITEM (IE DEWALT DRILLS AT HOME DEPOT LOWES)
RETAILER: PRODUCER LICENSES DISTRIBUTERS TO SELL A GIVEN PRODUCT (DEWALT DRILLS AVAILABLE AT HOME DEPOT)
BRAND NAME, TECHNIQUES AND SERVICES:
FRANCHISOR PROVIDES BRAND NAMES, TECHNIQUES, OR OTHER SERVICES, INSTEAD OF COMPLETE PRODUCT (IE SAP ON TV SPONSORED BY MCDONALDS) (ADS OFF THE BQE) (ASSOCIATED WITH MARKETING)
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31. The growth of franchising
the fast-food industry
more women and minority business owners
Dual-branded franchises
FRANCHISING HAS EXPERIENCED ENORMOUS GROWTH SINCE THE MID 1970S. THIS GROWTH HAS PARALLELED THE EXPANSION OF THE FAST FOOD INDUSTRY
DUAL BRANDED FRANCHISES: WHERE TWO FRANCHISES OFFER THEIR PRODUCT AND BRANDS IN THE SAME ESTABLISHMENT. (GIVE OTHER EXAMPLES)
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32. Diversity of Products and Services
Automotive
Baked Goods
Building and Construction
Business Services
Child-Related Services
Education-Related Services
Lodging
Maintenance Services
Real Estate
Travel
Sports and Recreation
Printing
GO OVER
Source:
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33. Are franchises successful?
94%
FRANCHISES ARE THE MOST SUCESSFUL ENTITY OF ANY FORM OF SMALL BUSINESS.
FRANCHISING, HOWEVER DOES NOT GAURENTEE SUCCESS FOR EITHER THE FRANCHISOR OR FRANCHISEE (STILL NEED TO BE COMMITTED TO THE BUSINESS)
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34. Entrepreneur’s Top Ten Franchises, 2008
7-Eleven
SUBWAY
Dunkin’ Donuts
Pizza Hut, Inc.
McDonald’s
Sonic Drive In Restaurants
KFC
InterContinental Hotels Group
Domino’s Pizza LLC
RE/MAX Int’l
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35. Advantages of Franchising
TO THE FRANCHISOR
TO THE FRANCHISEE
ASK STUDENTS WHAT THEY THINK THEY ARE. FRANCHISOR: OWNER OF BUSINESS
….FRANCHISEE:OPERATING BUSINESS
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36. Advantages of Franchising
TO THE FRANCHISOR
Fast and well controlled distribution of its products
No need to construct and operate its own outlets
More working capital available for expanded production and advertising
Franchising agreements maintain product and quality standards
Motivated work force of franchisees
TO THE FRANCHISEE
Opportunity to start a proven business with limited capital
Guaranteed customers
Franchisor available for advice and guidance
Materials for local promotional campaigns and participation in national campaigns
Cost savings when purchasing in cooperation with other franchisees
ADVANTAGES TO FRANCHISOR:
FAST AND SELECTIVE DISTRIBUTION OF PRODUCTS WITHOUT THE COSTS OF CONSTRUCTING AND OPERATING ITS OWN OUTLETS
FRANCHISOR IS HIGHLY MOTIVATED TO SUCCEED
MORE SALES MEANS MORE ROYALTIERS FOR THEM
MOST OF THE ADVERTISING AND CAPITAL TO OPERATE IS PROVIDED TO THEM
ADVANTAGES TO FRANCHISEE:
START A BUSINESS WITH LIMITED CAPITAL
ABLE TO GET ADVISE FROM THE FRANCHISOR.
IF THEY COMINGLE WITH OTHER FRANCHISES, THEY GAIN MORE CUSTOMERS AND SALES AS WELL AS LOWER COST IF MANAGED WELL
THERE WILL ALWAYS BE CUSTOMERS
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37. Disadvantages of Franchising
TO THE FRANCHISOR
Failure of the franchisee to operate franchise properly
Disputes with and lawsuits by franchisees over the terms of the franchise
TO THE FRANCHISEE
Franchisor retains a large amount of control over the franchisee’s activities
Franchisor opening competing franchises within the franchisee’s market
FRANCHISOR:
HIRE GOOD CONTRACT AND MEDIATION LAWYERS
FRANCHISEE:
FRANCHISOR HAS THE LAST WORD
MORE FRANCHISES ESTABLISHED BY FRANCHISOR CREATES MORE PRESSURE FROM THE FRANCHISEE TO DO BETTER
10-12 HOUR WORKDAYS PLUS WEEKENDS (NOT A GREAT LIFE BALANCE) NEED TO LIKE TO WORK
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38. Global Perspectives in Small Business
Are franchises only for the US? Explain
How has the internet helped?
FRANCHISORS HAVE A LOT OF ECONOMIC CLOUT TO EXPAND THEIR BUSINESSES GLOBALLY…THEY NEED TO ADJUST THEIR PRODUCTS TO THE SPECIFIC MARKET THEY ARE SERVING…IE MCDONALDS IN ASIA HAS MORE FISH ON THE MENU AND IN INDIA THERE ARE MORE VEGETARIAN PRODUCTS TO CATER TO THE MARKETS
THE INTERNET MAKES PEOPLE MORE AWARE AND CURIOUS OF WHAT THE FRANCHISE IS AND HAS TO OFFER.
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39. Small Business Globalization by the Numbers
Source: Allbusiness.com/Focus Magazine/Going Global, U.S. Department of Commerce, and SBA Office of Advocacy.
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40. Copyright © Cengage Learning. All rights reserved.
Chapter Quiz
Which one of the following would most likely be classified as a service industry?
Grocery store
Jewelry store
Pet shop
Dry cleaning shop
Clothing store
Roger Jones, a graduate business student, has decided to open his own consulting firm. Since he is an intelligent and hard-working student with previous management experience, Roger feels he is well prepared to succeed since more new businesses fail due to
a lack of adequate financing.
low consumer demand for their products.
hostile competition.
a lack of owner commitment.
mismanagement and lack of business know-how.
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41. Copyright © Cengage Learning. All rights reserved.
Chapter Quiz (cont’d)
A Small Business Institute may be defined as a
group of retired businesspeople who voluntarily offer their services to small businesses through the SBA.
group of active managers who voluntarily counsel small-business owners.
group of senior and graduate students in business administration who provide management counseling to small businesses.
university-based group providing individual counseling and practical training to owners of small businesses.
technical publication dealing with hundreds of topics of interest to present and prospective managers of small firms.
A license to operate an individually owned business as if it were a part of a chain of outlets or stores is called a
joint venture.
syndicate.
franchise.
SCORE.
small business development center.
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42. Copyright © Cengage Learning. All rights reserved.
Chapter Quiz (cont’d)
Jim Moniz is contemplating obtaining a franchise. He would like to purchase a franchise in an industry that has had extensive success with franchising in the past. All of the following are possible choices for Jim except
a fast-food industry.
the semiconductor industry.
filling stations.
car dealerships.
the soft-drink industry.
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43. Answers to Chapter Quiz
Which one of the following would most likely be classified as a service industry?
Grocery store
Jewelry store
Pet shop
Dry cleaning shop (Correct)
Clothing store
Roger Jones, a graduate business student, has decided to open his own consulting firm. Since he is an intelligent and hard-working student with previous management experience, Roger feels he is well prepared to succeed since more new businesses fail due to
a lack of adequate financing.
low consumer demand for their products.
hostile competition.
a lack of owner commitment.
mismanagement and lack of business know-how. (Correct)
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44. Answers to Chapter Quiz (cont’d)
A Small Business Institute may be defined as a
group of retired businesspeople who voluntarily offer their services to small businesses through the SBA.
group of active managers who voluntarily counsel small-business owners.
group of senior and graduate students in business administration who provide management counseling to small businesses. (Correct)
university-based group providing individual counseling and practical training to owners of small businesses.
technical publication dealing with hundreds of topics of interest to present and prospective managers of small firms.
A license to operate an individually owned business as if it were a part of a chain of outlets or stores is called a
joint venture.
syndicate.
franchise. (Correct)
SCORE.
small business development center.
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45. Answers to Chapter Quiz (cont’d)
Jim Moniz is contemplating obtaining a franchise. He would like to purchase a franchise in an industry that has had extensive success with franchising in the past. All of the following are possible choices for Jim except
a fast-food industry.
the semiconductor industry. (Correct)
filling stations.
car dealerships.
the soft-drink industry.
Copyright © Cengage Learning. All rights reserved.