1. Managing Small Business Start-Ups CHAPTER 6

2. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 2 Learning Objectives Describe the importance of entrepreneurship to the U.S. economy. Define the personality characteristics of a typical entrepreneur. Explain social entrepreneurship as a vital part of today’s small business environment. Outline the planning necessary to launch an entrepreneurial start-up.

3. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 3 Learning Objectives (contd.) Describe the five stages of growth for an entrepreneurial company. Explain how the management functions of planning, organizing, leading, and controlling apply to a growing entrepreneurial company.

4. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 4 Entrepreneurship ● Process of initiating a business venture ● Organizing the necessary resources ● Assumes associated risks and rewards

5. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 5 Five types of Small Business Owners Idealists 24% Optimizers 21% Hard Workers 20% Jugglers 20% Sustainers 15% Rewarded by chance to work on something new and creative Thrive on the challenge of building a larger, more profitable business Enjoy chance to balance work and personal life Get personal satisfaction from being a business owner High energy people who enjoy handling every detail of their own business SOURCE: Study conducted by Yankelovish Partners, reported in Mark Henricks, “The-Cast,” Entrepreneur (March 2000), 14-16. Exhibit 6.1

6. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 6 Entrepreneurship and the Environment Turbulence in the technology sector and the demise of many dot-com start-ups = heightened concerns about small companies competing against big business Entrepreneurship and small business – are vital, dynamic increasing important parts of U.S. economy – are booming in other countries

7. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 7 Why Small Business Today? Economic changes Globalization Advancing technology Increased competition New market niches

8. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 8 Definition of Small Business ● Definition used by SBA detailed and complex ● Independently owned and operated ● Not dominant in its field of operation ● Definition in the process of being revised

9. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 9 Examples of SBA Definition of Small Firms Exhibit 6.3

10. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 10 Impact of Entrepreneurial Companies Generate over 50 percent of nonfarm GDP 97 percent of U.S. exports 2.6 percent of export value Employ over 50 percent of nonfarm private sector Businesses with fewer than 500 employees represent 99.7 percent of all the firms with employees in the U.S.

11. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 11 Who Are Entrepreneurs? Diversity of Entrepreneurs – Often have distinguishing backgrounds and demographics – 1 st born, children of immigrants – Emerging growth companies of the next decade Women-owned businesses: in 2005, 6.5 million businesses that generated $950.6 in revenues and employ over 7 million Minority-owned businesses: growing 17% per year with African American growing the fastest

12. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 12 Characteristics of Entrepreneurs Awareness of Passing Time High Energy Level Need to Achieve Tolerance for Ambiguity Self-Confidence Entrepreneurial Personality Source: Adapted from Charles R. Kuehl and Peggy A. Lambing, Small Business: Planning and Management (Ft. Worth: The Dryden Press, 1994),45. Internal Locus of Control Exhibit 6.5

13. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 13 Hours Worked per Week by Owners of New Businesses 0 5 10 15 20 25 30 Less than 5050-5960-6970-79More than 80 Percent % of New Business Owners SOURCE: National Federation of Independent Business, Reported in Mark Robichaux, “Business First, Family Second,” The Wall Street Journal, May 12, 1989,B1. Exhibit 6.6

14. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 14 Sources of Entrepreneurial Motivation and New-Business Ideas To Control My Future To Fulfill a Dream To Be My Own Boss Downsized/Laid Off Reasons for Starting a Business In-depth Understanding of Industry/Profession Market Niche Spotted Brainstorming Copying Someone Else Hobby Other 37% 36% 7% 4 4 Source of New-Business Ideas Source: “The Rewards,” Inc. State of Small Business, 2001, May 29 2001, 50-51; and Leslie Brokaw, “How To Start an Inc. 500 Company,” Inc. 500, 1994, 51-65. Joined Family Business 41% 36% 27% 25% 5% 11% Exhibit 6.7

15. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 15 Business Plan Document specifying the business details prepared by an entrepreneur prior to opening a new business Clear vision Realistic financial projections Target market Industry and competitors Management team Critical risks that could threaten success Sources & uses of start-up funds & operating funds

16. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 16 Becoming A Business Owner ● Sole Proprietorship = unincorporated business owned by an individual for profit ● Partnership = unincorporated business owned by two or more people ● Corporation = artificial entity created by the state and existing apart from its owners. 3 Basic Legal Forms

17. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 17 Financing Resources ● Crucial concern for entrepreneurs Debt Financing – money to be repaid at a later date Equity Financing – funds invested in exchange for ownership in the company

18. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 18 Tactics  Start a New Business – Advantage – develop and design own way – Disadvantage – long time to get off ground and to make profitable  Buy an Existing Business – Advantage – shorter time and existing track record – Disadvantage – need to pay for goodwill Ways to Become a Business Owner

19. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 19 Tactics  Buy a Franchise = an agreement to sell a product or service with help from the owner – Advantage – management help is provided by owner – Disadvantage – lack of control  Participate in a Business Incubator = shared office space, management, support services, management advice Ways to Become a Business Owner

20. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 20 Five Stages of Growth For an Entrepreneurial Company Exhibit 6.10

21. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 21 Managing a Growing Business Planning – Defining goals and deciding on the tasks and use of resources needed to attain them – As organization grows, formal planning usually is not instituted until around the success stage – Business plan must be living document Planning concern – small businesses need to be Web-savvy

22. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 22 Managing a Growing Business Organizing – 1 st two stages typically very informal – At 3 rd stage, success, functional managers are hired – Rules and regulations, procedural manuals – Latter stages, delegation Outsourcing – organizing approach

23. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 23 Managing a Growing Business Leading – Early stages – leader’s vision – By success stage, must learn to motivate employees or bring in managers who can – Need for active communication Leadership is important because many small firms have a hard time hiring qualified employees

24. Copyright © 2008 by South-Western, a division of Thomson Learning. All rights reserved. 24 Managing a Growing Business Controlling – Financial control – important in each stage – Initial stages – exercised by simple accounting records and by personal supervision – By 3 rd stage, operational budgets are in place; structured control systems Control Techniques become more sophisticated as the firm matures