1. PowerPoint Presentation by Charlie Cook Copyright © 2005 Prentice Hall, Inc. All rights reserved. Chapter 3 Entrepreeurship, New Ventures, and Business Ownership “Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage.” —Victor Kiam, Remington

2. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–2 Business 44: Intro to Business Ownership/Management Practical Focus Organizing & Managing a successful small business enterprise How to finance your new business Specific business profiles Business Operations

3. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–3 Key Topics Small business and its importance in the economy Entrepreneurship versus small business Starting and funding a small business Sole proprietorships, partnerships, and corporations Creating and managing corporations Corporate trends and issues

4. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–4 Agricultural Manufacturing Service Industries Future??? Evolution of American Business

5. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–5 Looking to the Future Four Major Forces: The information revolution continues evolving. Technological breakthroughs will create new industries. Increasing globalization will create larger markets and tougher competition. Increasing instability in energy costs create danger and opportunity

6. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–6 What Is “Small Business”? Independently owned and managed business that does not dominate its market # of employees varies Sales dollars varies - Link to SBA definition

7. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–7 Job Creation InnovationInnovation Importance to Big Businesses Small business plays a critical role in the U.S. economy.

8. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–8 Most businesses are small businesses, and they employee most U.S. Workers 86.02 9.161.50 0.150.22 Percentage of All U.S. Businesses Total Employees Under 20 20- 99 100- 499 500- 1000 1000 or more 25.6029.1025.50 7.10 12.70 Percentage of All U.S. Workers Total Employees Under 20 20- 99 100- 499 500- 1000 1000 or more Figure 3–2

9. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–9 Small business produces about 40% of the US GDP. See the data for yourself:  http://www.census.gov/epcd/www/smallbus.html http://www.census.gov/epcd/www/smallbus.html  Use table 2b. At 40% of gdp, the USA small business sector is tremendously valuable. Still, at 60% of GDP, the relatively few large firms account for far more production per firm than the little guys do.

10. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–10 Small Businesses by Industry Can you explain the differences? Figure 3–3

11. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–11 Degrees of Competition (p16) Table 1–1

12. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–12 Small business advantages over larger businesses  Personalized Service/ Personal Contact especially in niche markets  Flexibility  Lower Cost structure  Freedom to innovate

13. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–13 Small Business disadvantages versus big business - Limited Experience / Resources - Long Work Hours Required - Insufficient Capital - High Failure Rate - Economies of scale lacking

14. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–14 Key Topics Small business and its importance in the economy Entrepreneurship versus small business Starting and funding a small business Sole proprietorships, partnerships, and corporations Creating and managing corporations Corporate trends and issues

15. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–15 Entrepreneurship vs. Small Business Entrepreneur: Accepts the risks and opportunities of creating, operating and growing a new business. Small Business Owner: Does not have plans for extensive growth nor the stomach for the risks involved in the growth. Craves

16. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–16 Take over your parents laundromat and keep it as-is. Start a business offering vacations to the moon. Build a chain of Burger Kings Entrepreneur or Small Business Owner? Entrepreneur Small Business Own a Burger King

17. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–17 Entrepreneurial Attributes A.Self-Directed & Self- Disciplined B.Self-Nurturing C.Action-Oriented Not a perfectionist D.Highly Energetic E.Tolerant of Uncertainty ** Balance vs. extremes?**

18. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–18 Motivations to start a business Figure 3–5

19. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–19 Trends in Small Business Start-ups Emergence of Emergence of E-commerce Crossovers From Crossovers From Big Business Big Business Retiree Entrepreneurs Opportunities for Minorities & Women Opportunities for Minorities & Women Global Opportunities Increased Survival Rates

20. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–20 Startups: Success and Failure Is a business a failure if: The founders execute their planned exit strategy? Closure as a proxy for failure overstates the number of unsuccessful businesses. SBA.gov figures: 66% survive two years or more, 50% four years or more, 40% 6 years or more 30% of owners viewed their firm as successful at closure

21. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–21 Key Topics Small business and its importance in the economy Entrepreneurship versus small business Starting and funding a small business Sole proprietorships, partnerships, and corporations Creating and managing corporations Corporate trends and issues

22. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–22 The mechanics of starting it up Seeing the opportunity (product, timing, connections) The plan (reconcile with p81)  The reasons your firm should exist  How it is going to happen – people, organization, structure  The financial projections – quantify the dream  Business Plan Pro – leveraging a knowledge base. Business Plan Pro Execution  Get funding  Get going: quickly, cheaply, effectively Controls  Measurable goals, personal responsibility, follow up

23. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–23 Keys to Small Business Success  Work, lots of hard work  Plan, execute, drive, contingency plan  Know your market  Know your customers (p77)  Managerial Competence  Seek Advice & Assistance  Secure sufficient funding  Manage resources – be cheap  Maintain records & controls  Luck?  “Hard work and preparation breed luck”  Or,  “Sometimes it is better to be lucky than to be good”  Live by it, dye by it

24. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–24 Start-Up Success and Failure Reasons Failure  Poor management  Neglect (golfing)  Weak control systems  Insufficient capital Success Hard work, drive, dedicationHard work, drive, dedication Market demandMarket demand Strong managementStrong management Luck?Luck?Success Hard work, drive, dedicationHard work, drive, dedication Market demandMarket demand Strong managementStrong management Luck?Luck? Three Overarching Factors  Planning  Solid Information  Entrepreneurial leadership Three Factors, from The Small Business Start Up Guide, Robert Sullivan

25. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–25 A choice: Start From Scratch Instead Buy an Existing Business Will your insight add value to the business? Does the business have a successful and predictive track record? Are the relationships valuable? Are you more of a small business person? Is the business’s success due solely to the owner’s unique knowledge? Is the business involved in poor relationships? Suspicious or skimpy financial reporting? Are you more of an entrepreneur?

26. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–26 Mini-Recap & Bump Start To start your own business or get a job?  Risk, opportunity, control, responsibility, plan, drive Small business is widespread in USA  Small business employs many more than big business  Trends: Longer survival, Corporate crossover, Non- traditional advantages, Going Global Getting Started  Planning, New/Existing, Franchise?, Funding, Formation

27. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–27 advantages & disadvantages Franchising: advantages & disadvantages FranchiseAdvantages  Proven business opportunity  Access to managementexpertise  Many services performed by corporate FranchiseAdvantages  Proven business opportunity  Access to managementexpertise  Many services performed by corporate Franchise Disadvantages  Start-up costs  On-going payments  Management rules and restrictions Franchise Disadvantages  Start-up costs  On-going payments  Management rules and restrictions 99¢

28. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–28 Financing the Small Business Your financial projections  Detailed & justified  Practical – aligned with industry normsaligned with industry norms Personal resources Loans Venture capital firms Small-business investment companies Small Business Association (SBA)  Funding advice and resources to help

29. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–29 Reasons for Funding Sources to Say “No” $Insufficient planning and/or information. $Fluff vs. real information $You haven’t clearly stated why you need the money. $How you will use it - budget $Your numbers don’t support the loan request. $Don’t match industry norms $Lack of collateral or real business prospects

30. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–30 Key Topics Small business and its importance in the economy Entrepreneurship versus small business Starting and funding a small business Sole proprietorships, partnerships, and corporations Creating and managing corporations Corporate trends and issues

31. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–31 Comparative Summary: Three basic forms of business (p 86) Table 3–1

32. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–32 Sole Proprietorships Advantages: Freedom Simple to form Low start up costs Tax benefits Disadvantages: Unlimited Liability Limited resources Limited fundraising capability Lack of continuity Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business

33. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–33 Partnerships Advantages: More talent and money More fundraising capability Relatively easy to form Tax benefits Disadvantages: Unlimited liability Disagreements among partners Lack of continuity Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business Unlimited Liability Legal principle holding owners responsible for paying off all debts of a business

34. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–34 Existence is separate from owners. An entity created by law. Has rights and privileges. Privately, or Closely, Held Publicly Held Ownership can be Corporations

35. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–35 Stockholders elect board of directors.

36. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–36 Stockholders own the company. Rights ¶ Vote for board of directors. · Proportionate distribution of dividends. ¸ Proportionate distribution of assets in a liquidation. Stockholders purchased shares of capital stock to become part owners

37. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–37 Overall responsibility for managing the company. Selected by a vote of the stockholders

38. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–38 Limited personal liability for stockholders. Transferability of ownership. Access to capital Continuity of existence. The good side of Incorporation

39. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–39 Double taxation Greater regulation Cost of formation Separation of ownership and management The dark side of Incorporation Stringent government oversight

40. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–40 Corporate Payout Preference Lenders have first priority  Workers who haven’t been paid yet  Supplier of product to the corporation  Banks, bond holders, and other lenders Preferred shareholders are subordinate to Lenders  Stated (fixed) dividend paid only if debt obligations are met  A “hybrid” between debt (lenders) and ownership (equity) Common shareholders are subordinate to preferred shareholders  No fixed (capped) dividend payouts  Dividends are purely discretionary as determined by the Board of Directors

41. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–41 Types of Corporations – summary p90 Table 3–2

42. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–42 Types of Corporations Closely Held (Private) Corporation Publicly Held (Public) Corporation C Corporation S Corporation Limited Liability Corporation (LLC) Professional Corporation Multinational or Transnational Corporation

43. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–43 You are a doctor with your own practice You have tremendous growth plans and need millions in funding You own a small skateboard park To incorporate or not? Incorporate Sole Proprietorship or Partnership You own & manage a small fruit-stand

44. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–44 The importance of corporations to the US economy Figure 3–6 Number of Businesses Total Sales Revenue

45. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–45 Basic Forms of Ownership Sole Proprietorship Partnership Corporation Number of Firms Total Sales $ 73%5% 7%6% 20%89%

46. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–46 The 80 20 Rule This rule of thumb applies across many topics:  80% of output is caused by 20% of inputs: Examples:  In many firms the 80% of sales revenue comes from 20% of its products.  80% of a sales representatives revenue comes from 20% of their clients.  Does 80% of your learning come from 20% of your time studying?  What percentage of your discussion team did 80% of the work on the last group project?  The biggest 20% of US businesses produce 80% of the output.

47. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–47 Joint Ventures and Strategic Alliances Special Issues in Corporate Ownership Employee Stock Ownership Programs (ESOPS) Institutional Ownership Institutional Ownership

48. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–48 Mergers & Acquisitions (M&As) Special Issues in Corporate Ownership Divestitures & Spin-offs Mergers and Acquisitions (M&As) Divestitures & Spin-offs Divestitures and Spin-offs

49. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–49 Video Case: Watch it with the questions on your mind During the show jot down notes to answers for use in group discussion Group differently than last time, Execute the group discussion process as before. The formal write up will include the answers to the 5 questions, including detailed exploration of question number 5. Also due next time: Chapter 4 questions!!

50. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–50 Three Forms of Business Business Form LiabilityContinuity Management Investment Sources Personal, unlimited Ends with death or decision of owner Personal, unrestrictedPersonal Personal, unlimited Ends with death or decision of any partner Unrestricted or depends on partnership agreement Personal by partner(s) Capital invested As stated in charter, perpetual or for specified period of years Under control of board of directors, which is selected by stockholders Purchase of stock Proprietorship General Partnership Corporation Copyright ©2003 Prentice Hall, Inc. 4 - 50

51. Copyright © 2005 Prentice Hall, Inc. All rights reserved.3–51 Chapter Review Define small business and explain its importance to the U.S. economy. Distinguish between entrepreneurship and small business. Describe the start-up decisions made by small businesses and the potential sources of financial aid and management advice. Describe sole proprietorships, partnerships, and corporations, and explain the advantages and disadvantages of each. Identify the different types of corporations.