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

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

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3-1

Copyright © 2006 Pearson Education Canada Inc.

Chapter 3Chapter 3

Understanding Entrepreneurship, Small Business, and BusinessOwnership

3-2 Copyright © 2006 Pearson Education Canada Inc.

Learning Objectives

Define small business and explain its importance to the Canadian economyExplain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activitiesDescribe the business plan and the start-up decisions made by small businesses

3-3 Copyright © 2006 Pearson Education Canada Inc.

Learning Objectives

Identify the main reasons for success and failure in small businessesExplain sole proprietorships and partnerships and discuss the advantages and disadvantages of eachDescribe corporations, and discuss their advantages and disadvantagesIdentify recent trends in business ownership

3-4 Copyright © 2006 Pearson Education Canada Inc.

What Is a “Small” Business

Management of the firm is independentAn individual or a small group supplies the capital and holds the ownershipThe area of operations is usually local

3-5 Copyright © 2006 Pearson Education Canada Inc.

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

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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

3-7 Copyright © 2006 Pearson Education Canada Inc.

The Importance of Small Business

Job creation InnovationImportance to big businessDominant in the construction and retailing industries

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Job Creation

Small business is creating jobsImportant source of new (and often well-paid) jobsSmall firms often hire at a faster rate but are likely to cut jobs at a far higher rate when they encounter difficultiesFirst to hire in times of economic recovery

3-9 Copyright © 2006 Pearson Education Canada Inc.

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

3-10 Copyright © 2006 Pearson Education Canada Inc.

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

3-11 Copyright © 2006 Pearson Education Canada Inc.

Popular Areas of Small-Business Enterprise

Retailing

Construction

Manufacturing

Service

3-12 Copyright © 2006 Pearson Education Canada Inc.

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 ownershipAccepts risks to pursue opportunitiesThose who are not truly entrepreneurial are content to stay small and manage their existing business

3-13 Copyright © 2006 Pearson Education Canada Inc.

Entrepreneurial Characteristics

Drive to achieve business success and be their own bossNeed to control their own timePerceived market opportunity

Freedom to work in their own wayAdventure, independence, & challengeProfit opportunityNeed to make a living

3-14 Copyright © 2006 Pearson Education Canada Inc.

Starting and Operating a Small Business

Crafting a business plan Setting goals and objectives

Sales forecasting

Financial planning

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Elements of the Business PlanCover PageTable of ContentsExecutive SummaryBackground/History of the EnterpriseManagementMarketing AssessmentProduction AssessmentFinancial AssessmentResearch and DevelopmentBasic DataAppendices

3-16 Copyright © 2006 Pearson Education Canada Inc.

Starting and Operating a Small Business

Buying an existing business Take over a family business

Start a business from scratch

Buy a franchise

3-17 Copyright © 2006 Pearson Education Canada Inc.

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

3-18 Copyright © 2006 Pearson Education Canada Inc.

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

3-19 Copyright © 2006 Pearson Education Canada Inc.

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 costsNo profits until firm becomes established

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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

3-21 Copyright © 2006 Pearson Education Canada Inc.

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 paymentA quick way to establish a business

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Benefits of Franchising for the Franchiser

Attain rapid growthShare advertising costIncreased investment moneyTeam approach creates more efficient advertising deliveryIncreased sales revenues

Development of a motivated sales teamNo need to deal with local business issues (managed by franchise owners)

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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 suppliesFinancial assistanceHelp with getting external financingBe your own bossKeep most of the profits

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Franchise Problems

Franchisers may impose policy changes without consulting franchiseesLocal market may be saturatedPayments to franchiser are required even if profits are lowFranchiser controls how business is run and how product is madeFranchiser could be financially strapped and unable to help individual franchisee

3-25 Copyright © 2006 Pearson Education Canada Inc.

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

3-26 Copyright © 2006 Pearson Education Canada Inc.

Financing the Small Enterprise

Debt sources Entrepreneur, who may lend money

to enterprise Private lenders Financial institutions Trade credit Government agencies

3-27 Copyright © 2006 Pearson Education Canada Inc.

Financing the Small Enterprise

Equity sources The entrepreneur’s personal funds Partners Family and friends Venture capitalists Governments Selling shares to the public

3-28 Copyright © 2006 Pearson Education Canada Inc.

Survival of Small Business

13% to 15% of small businesses disappear each year50% of small businesses don’t make it through the first 3 years25% of small businesses are still in existence after 10 yearsAverage life span of small enterprises is 7.25 yearsFemale-owned businesses have a survival rate twice as high as male-owned businesses

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Causes of Small Business Failure

Poor management skills

Inadequate marketing capabilities

Inadequate financial capabilities

Inadequate production capabilities

Personal reasons

Disasters

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Forms of Business Organizations

Sole proprietorship

Partnership

Corporation

Cooperatives

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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

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Partnerships

Advantages

Larger talent pool

Larger money pool

Ease of formation

Tax benefits

Disadvantages

Unlimited liability

Lack of continuity

Ownership

transfer difficult

Potential conflict

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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

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Corporations

Advantages

Limited liability

Continuity

Professional

management

Easier to raise money

Disadvantages

Start-up costs

Double taxation

Regulations

Stockholder

revolts

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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 surplusesEach member has one vote

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Trends in Business Ownership

Acquisitions and mergers

Divestitures and spin-offs

Employee-owned corporations

Strategic alliances

Subsidiary and parent corporations