1. Copyright © 2006 Pearson Education Canada Inc. 3-1 Chapter 3 Understanding Entrepreneurship, Small Business, and Business Ownership

2. Copyright © 2006 Pearson Education Canada Inc. 3-2 Learning Objectives Define small business and explain its importance to the Canadian economy Explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities Describe the business plan and the start-up decisions made by small businesses

3. Copyright © 2006 Pearson Education Canada Inc. 3-3 Learning Objectives Identify the main reasons for success and failure in small businesses Explain sole proprietorships and partnerships and discuss the advantages and disadvantages of each Describe corporations, and discuss their advantages and disadvantages Identify recent trends in business ownership

4. Copyright © 2006 Pearson Education Canada Inc. 3-4 What Is a “Small” Business Management of the firm is independent An individual or a small group supplies the capital and holds the ownership The area of operations is usually local

5. Copyright © 2006 Pearson Education Canada Inc. 3-5 What Is a “Small” Business Markets are usually local, but may be regional, national, or international The enterprise is smaller than others in the industry The enterprise qualifies for the small business income tax rate Characterize every industry, particularly the retail trade

6. Copyright © 2006 Pearson Education Canada Inc. 3-6 What Is a “Small” Business Small business is the dominant type of business in Canada Over half (58%) provide self- employment, while the remainder employ under 50 persons

7. Copyright © 2006 Pearson Education Canada Inc. 3-7 The Importance of Small Business Job creation Innovation Importance to big business Dominant in the construction and retailing industries

8. Copyright © 2006 Pearson Education Canada Inc. 3-8 Job Creation Small business is creating jobs Important source of new (and often well-paid) jobs Small firms often hire at a faster rate but are likely to cut jobs at a far higher rate when they encounter difficulties First to hire in times of economic recovery

9. Copyright © 2006 Pearson Education Canada Inc. 3-9 Innovation Small businesses create many innovations Characterized by autonomy and freedom Move rapidly Small business are responsible for the following innovations: Personal computer Jet engine Helicopter Automatic transmission

10. Copyright © 2006 Pearson Education Canada Inc. 3-10 Importance to Big Business Most of the products made by big business are sold to consumers by small business Automobiles (dealers are small businesses) Software Most big businesses outsource business services to small firms

11. Copyright © 2006 Pearson Education Canada Inc. 3-11 Popular Areas of Small- Business Enterprise Retailing Construction Manufacturing Service

12. Copyright © 2006 Pearson Education Canada Inc. 3-12 Entrepreneurship Entrepreneur A business person who accepts both the risks and the opportunities involved in creating and operating a new business venture Embraces the challenge of business ownership Accepts risks to pursue opportunities

13. Copyright © 2006 Pearson Education Canada Inc. 3-13 Entrepreneurial Characteristics Drive to achieve business success and be their own boss Need to control their own time Perceived market opportunity Freedom to work in their own way Adventure, independence, & challenge Profit opportunity Need to make a living

14. Copyright © 2006 Pearson Education Canada Inc. 3-14 Starting and Operating a Small Business Crafting a business plan Setting goals and objectives Sales forecasting Financial planning

15. Copyright © 2006 Pearson Education Canada Inc. 3-15 Elements of the Business Plan

16. Copyright © 2006 Pearson Education Canada Inc. 3-16 Starting and Operating a Small Business Buying an existing business Take over a family business Start a business from scratch Buy a franchise

17. Copyright © 2006 Pearson Education Canada Inc. 3-17 Buying an Existing Enterprise Pros Established clientele Ease of financing Experienced employees Established lines of credit and supply Less risky than starting from scratch Cons uncertainty about actual financial health of the firm location, reputation may be poor pricing strategy may need revisiting

18. Copyright © 2006 Pearson Education Canada Inc. 3-18 Family-owned Business Challenges Ongoing Management: Succession: Managing spouse’s contribution Recognizing spouse’s contribution Managing the “in-laws” Managing non-family managers Managing the Board of Directors Managing outside advisers Selecting a successor Timing succession Training the successor Assuring economic security for retiring leader and spouse

19. Copyright © 2006 Pearson Education Canada Inc. 3-19 The Downside of Starting from Scratch All variables are unknown no existing operation or demand no track record to evaluate no financial or supplier relationships Start-up costs No profits until firm becomes established

20. Copyright © 2006 Pearson Education Canada Inc. 3-20 Microenterprise Owner is self-employed on a part-time basis still holding onto the “day job” Provides the entrepreneur time to build the business and test the idea before committing to it full time

21. Copyright © 2006 Pearson Education Canada Inc. 3-21 Buying a Franchise An agreement that gives franchisees (buyers) the right to sell the product of the franchiser (seller) Stipulates how the product or service will be sold, and the amount and type of payment A quick way to establish a business

22. Copyright © 2006 Pearson Education Canada Inc. 3-22 Benefits of Franchising for the Franchiser Attain rapid growth Share advertising cost Increased investment money Team approach creates more efficient advertising delivery Increased sales revenues Development of a motivated sales team No need to deal with local business issues (managed by franchise owners)

23. Copyright © 2006 Pearson Education Canada Inc. 3-23 Benefits of Franchising for the Franchisee Access to management expertise Do not need to build a business from scratch Lower failure rates Well-developed brand Training provided Expert advice Economies of scale in buying supplies Financial assistance Help with getting external financing Be your own boss Keep most of the profits

24. Copyright © 2006 Pearson Education Canada Inc. 3-24 Franchise Problems Franchisers may impose policy changes without consulting franchisees Local market may be saturated Payments to franchiser are required even if profits are low Franchiser controls how business is run and how product is made Franchiser could be financially strapped and unable to help individual franchisee

25. Copyright © 2006 Pearson Education Canada Inc. 3-25 Financing the Small Enterprise Debt Money borrowed from others Equity Money raised by selling ownership in the business Retained earnings Profits earned by the firm

26. Copyright © 2006 Pearson Education Canada Inc. 3-26 Financing the Small Enterprise Debt sources Entrepreneur, who may lend money to enterprise Private lenders Financial institutions Trade credit Government agencies

27. Copyright © 2006 Pearson Education Canada Inc. 3-27 Financing the Small Enterprise Equity sources The entrepreneur’s personal funds Partners Family and friends Venture capitalists Governments Selling shares to the public

28. Copyright © 2006 Pearson Education Canada Inc. 3-28 Survival of Small Business 13% to 15% of small businesses disappear each year 50% of small businesses don’t make it through the first 3 years 25% of small businesses are still in existence after 10 years Average life span of small enterprises is 7.25 years Female-owned businesses have a survival rate twice as high as male-owned businesses

29. Copyright © 2006 Pearson Education Canada Inc. 3-29 Causes of Small Business Failure Poor management skills Inadequate marketing capabilities Inadequate financial capabilities Inadequate production capabilities Personal reasons Disasters

30. Copyright © 2006 Pearson Education Canada Inc. 3-30 Forms of Business Organizations Sole proprietorship Partnership Corporation Cooperatives

31. Copyright © 2006 Pearson Education Canada Inc. 3-31 Sole Proprietorships Advantages Freedom Simplicity Low start-up costs Tax benefits Disadvantages Unlimited liability Lack of continuity Difficult to raise money Reliance on one individual

32. Copyright © 2006 Pearson Education Canada Inc. 3-32 Partnerships Advantages Larger talent pool Larger money pool Ease of formation Tax benefits Disadvantages Unlimited liability Lack of continuity Ownership transfer difficult Potential conflict

33. Copyright © 2006 Pearson Education Canada Inc. 3-33 Corporations Regardless of the size or industry corporations have the following rights and characteristics Legal status as a separate entity Property rights and obligations Indefinite lifespan

34. Copyright © 2006 Pearson Education Canada Inc. 3-34 Corporations Advantages Limited liability Continuity Professional management Easier to raise money Disadvantages Start-up costs Double taxation Regulations Stockholder revolts

35. Copyright © 2006 Pearson Education Canada Inc. 3-35 Cooperatives Types of cooperatives Consumer goods Financial services Insurance Marketing Service Housing An organization formed to benefit its owners in the form of reduced prices and the distribution of surpluses Each member has one vote

36. Copyright © 2006 Pearson Education Canada Inc. 3-36 Trends in Business Ownership Acquisitions and mergers Divestitures and spin-offs Employee-owned corporations Strategic alliances Subsidiary and parent corporations