Part 2 Starting and Growing a Business
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-2
CHAPTER 4 Options for Organizing Business
CHAPTER 5 Small Business, Entrepreneurship, and Franchising
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-3
Learning Objectives LO 5-1 Define entrepreneurship and small business.
LO 5-2 Investigate the importance of small business in the U.S. economy and why certain fields attract small business.
LO 5-3 Specify the advantages of small-business ownership.
LO 5-4 Summarize the disadvantages of small-business ownership, and analyze why many small businesses fail.
LO 5-5 Describe how you go about starting a small business and what resources are needed.
LO 5-6 Evaluate the demographic, technological, and economic trends that are affecting the future of small business.
LO 5-7 Explain why many large businesses are trying to “think small”.
LO 5-8 Assess two entrepreneurs’ plans for starting a small business. © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-4
The Nature of Entrepreneurship
Entrepreneurship • The process of creating and managing a business
to achieve desired objectives Entrepreneurship movement is accelerating, and many
new small businesses are emerging Technology is now easier to obtain by a small business
o Websites, podcasts, online videos, social media, cellular phones, and expedited delivery services
Growing trend among small businesses is social entrepreneurship o Social entrepreneurs are individuals who use
entrepreneurship to address social problems
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-5
Great Entrepreneurs of Innovative Companies
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-6
What Is a Small Business?
Small Business • Any independently owned and operated business
that is not dominant in its competitive area
“Smallness” is relative Employs less than 500 people
Small Business Administration (SBA)
• An independent agency of the federal government that offers managerial and financial assistance to small businesses
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-7
The Role of Small Business in the American Economy
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-8
Women- and Minority-Owned Businesses
• Are responsible for employing 7.7 million workers
• Contribute $1.3 trillion in sales • Woman own more than 8
million businesses nationwide
Women-owned Businesses
• Growing faster than other classifiable firms
• Represent 21.3 percent of all small businesses
Minority-owned Businesses
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-9
Innovation o Small firms make up 52 percent of home-based
businesses and 2 percent of franchises o Entrepreneurs provide fresh ideas and usually have
greater flexibility to change than do large firms
Jeffrey Lubell founded premium apparel company True Religion in 2002. It has gone on to be listed among Forbes’ best publicly traded small companies in America.
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-10
UniKey One of the most significant strengths of small businesses is their ability to innovate and to bring significant benefits to customers Founder and CEO of the small firm UniKey, Phil Dumas,
invented a new way for consumers to keep their doors locked
Dumas invented Kevo, a motorized deadbolt lock that links to users’ iPhones With just a touch of a finger, consumers can lock and unlock
their doors from remote locations UniKey distributes products in major retailers such as
Lowe’s and Home Depot Just one example of a small company with the ability to
innovate and contribute to the benefit of customers © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-11
Found in Nearly Every Industry
Small businesses are found in nearly every industry, but these are some of the most attractive: Retailing and wholesaling Services Manufacturing High technology
Relatively easy to enter and require low initial financing
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-12
Industries that Attract Small Business
Retailing and Wholesaling • Retailers acquire goods from producers or wholesalers
and sell them to consumers Services
• Service sector includes businesses that do not actually produce tangible goods (80 percent of U.S. jobs)
Manufacturing • Manufacturing goods can provide unique opportunities for
small businesses (like customizing products for customers) High Technology
• High technology is a broad term used to describe businesses that depend heavily on advanced scientific and engineering knowledge
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-13
Types of Stores that Attract Small Businesses
Retailing and wholesaling stores include independent: Music stores Sporting-goods stores Dry cleaners Boutiques Drugstores Restaurants Caterers Service stations Hardware stores
Service sector businesses includes: Real-estate Insurance/personnel agencies Barbershops Banks TV/computer repair shops Copy centers Dry cleaners Accounting firms
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-14
Small-Business Ownership
Advantages Disadvantages Independence High stress level Costs High failure rate Flexibility Undercapitalization Focus Managerial inexperience or
incompetence Reputation Inability to cope with growth
10 Successful Traits of Young Entrepreneurs
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-15
Advantages Independence and Costs
• To do better for themselves than they could do by remaining with their current employer or by changing jobs
• To choose whom they work with, the flexibility of where/when to work, and the option to work in a family setting
Independence
• Spend less money on wages/salaries, rent, utilities, and other expenses
• Use external firms to handle accounting, advertising, and legal counseling
• Friends and family may volunteer time to work on projects
Costs
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-16
Advantages Flexibility, Focus, and Reputation
• Small size allows flexibility to adapt to changing market demands
• Usually only one layer of management (the owner) so decisions can be made and executed quickly
Flexibility
• Focus efforts on a precisely defined market niche (a specific group of customers
Focus
• Because of their capacity to focus on narrow niches, can develop enviable reputations for quality and service
Reputation
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-17
Hampton Creek Hampton Creek, based in San Francisco, focuses on using technology to produce sustainable protein products Developed a new type of egg substitute made from
plant materials ♦ Concept is likely to attract vegetarians and consumers
concerned with sustainability Founder and CEO Josh Tetrick has bigger plans
♦ Concept is not to focus solely on a niche industry ♦ Believes the solutions discovered at Hampton Creek will
eventually help solve food shortages through alternatives that do not place a strain on the environment
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-18
Disadvantage High Stress Level
• Likely to provide a living for its owner, but not much more
• Ongoing worries about competition, employee problems, new equipment, expanding inventory, rent increases, or changing market demand
• Small-business person is often the owner, manager, sales force, shipping and receiving clerk, bookkeeping, and custodian
• Multitasking can result in long hours for most owners
High Stress Level
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-19
Disadvantage High Failure Rate
High Failure Rate (half fail within first 5 years)
Undercapitalization: The lack of funds to operate a business
normally
Too many entrepreneurs
think that all they need is enough money to get
started
Managerial inexperience or incompetence
Just because entrepreneur has a brilliant vision does
not mean he/she has the knowledge
or experience to manage
Inability to cope with growth
Growth requires the owner to give up an amount of direct authority (frequently hard
for owners to give up control)
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-20
Starting a Business
Start with a concept or general idea Create a business plan Devise a strategy to guide planning & development
• Form of ownership • Financing • Acquiring existing business or
start new business • Buy a franchise
Make Decisions
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-21
The Business Plan
Business Plan • A precise statement of the rationale for a business and
a step-by-step explanation of how it will achieve its goals
Acts as a guide and reference document: Explanation of the business Analysis of competition Income/expense estimates Establish strategy for acquiring sufficient funds to keep
the business going Revised periodically to ensure the firm’s goals and
strategies adapt to changes in the environment
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-22
Forms of Business Ownership
After developing a business plan, the entrepreneur has to decide on an appropriate legal form of
business ownership
Sole Proprietorship Partnership Corporation
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-23
Financial Resources
Often, the small-business owner has to put up a significant percentage of the necessary capital Cash money Obtain capital
Financing options: Equity financing Debt Financing
Small-business owners often use debt
financing from banks or the Small Business Administration to start their own organization
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-24
Equity Financing
Referred to as equity financing because the owner uses real personal assets
rather than borrowing funds from outside sources to get started in a new business
Can also obtain equity financing by finding investors for their operations and selling stock in the business to family members, friends, employees, or other investors
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-25
Venture Capitalists
Venture Capitalists • Persons or organizations that agree to provide some
funds for a new business in exchange for an ownership interest or stock
Venture capitalists hope to purchase the stock of a small business at a low price and then sell the stock for a profit after the business has grown successful
Although this form of equity financing has helped many small businesses, they require that the small-business owner share the profits of the business (and sometimes the control, as well) with the investors
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-26
Venture Capitalists and Angel Investors
Venture capitalists (VCs) are usually experienced and successful business people and investors who find businesses in which to invest The money with which VCs invest is a pool of money from a
fund so there are certain standards a startup has to meet before they will be considered for investment
If a startup does not have sales or any real evidence of having been successful, VCs will most likely be reluctant to invest their money because the business poses a high level of risk
Angel investors tend to be affluent people who invest their own money and may or may not have business or investing experience They tend to judge a startup less harshly than a VC, and may
be prone to invest because they believe in the business © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-27
Debt Financing
New business sometimes borrow more than half of their financial resources
$ Banks are the main suppliers of external financing $ Federal level: the Small Business Administration
(SBA) offers financial assistance to qualifying business
$ Look to family and friends as sources for long-term loans or other assets for an ownership interest in the business $ If lending money to a friend or family member for a
venture should state the agreement clearly in writing before money changes hands
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-28 Collateral, Mortgage, Line of Credit, Trade Credit and Bartering
Collateral • A financial interest in the property or fixtures of the business, to
guarantee payment of the debt Mortgage
• May have to provide personal property as collateral, if the business fails then they may eventually claim/sell the collateral
Line of Credit • An agreement by which a financial institution promises to lend a
business a predetermined sum on demand Trade Credit
• Suppliers allow the business to take possession of the needed goods and services and pay for them at a later date/installments
Bartering • Trading their own products for the goods and services offered by
other businesses
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-29
Starting from Scratch vs. Buying an Existing Business
Starting from scratch can be expensive and will require a lot of promotional efforts to familiarize customers with the business
• Reduces some of the
guesswork inherent in starting a new business
• Entrepreneur who buys an existing business also takes on any problems the business already has
Existing businesses have the advantage of a built-in network
of customers, suppliers, and
distributors
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-30
Franchising
• A license to sell another’s products or to use another’s name in business, or both
Franchise
• The company that sells a franchise
Franchiser
• The purchaser of a franchise
Franchisee
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-31
Franchises Advantages Disadvantages Training & support Fees and profit sharing Brand-name appeal Standardized operations Standardized quality of goods & services
Restrictions on purchasing
National/local advertising Limited product line Financial assistance Possible market saturation Proven products/format Less freedom in decisions Centralized buying power Site selection & territorial protection Greater chance for success
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-32
Fastest Growing and Hottest New Franchises
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-33
Help for Small-Business Managers
☼ Organizations and programs exist to help small-business managers o National publications such as Inc. and Entrepreneur
share statistics, advice, tips, and success/failure stories o Small Business Administration (SBA)
• Small Business Development Centers (SBDCs) • Service Corps of Retired Executives (SCORE) • Active Corps of Executives (ACEs)
o Small Business Institutions (SBIs) o U.S. and Local Departments of Commerce o Other small businesses
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-34
Demographic Trends
• Baby boomer generation represents 26 percent of Americans • Wealthy, but many small businesses do not
actively pursue it • Travel, financial planning, and health care will
continue to grow as boomers age
• Millennials/Generation X number around 75 million and are not solely concerned about money • Concerned with advancement, recognition,
improved capabilities, and need direct, timely feedback
Demographic Trends
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-35
An Untapped Market for Small Businesses
Another growing trend is the growing number of immigrants living in the U.S. and provides another untapped market for small businesses
The Latino population is the biggest and fastest growing minority segment in the United States—and a lucrative market for businesses looking for ways to meet the segment’s many needs
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-36
Technological and Economic Trends
• Internet usage continues to provide new opportunities
• Increase in service exports • Creates new opportunities to expand
operations abroad • Economic turbulence provides both
opportunities and threats • Can react quickly to change and can
stay close to their customers • Deregulation of the energy market &
alternative fuels • Worldwide energy markets are valued in
the hundreds of billions of dollars
Technological and
Economic Trends
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-37
Imgur Photo-Sharing
Imgur is a photo-sharing hub filled with trivial and humorous photos (company only has 11 employees) Popular as a meme site Company generates income by posting display
advertisements from movie studios and videogame publishers
It charges users of the site $24/year if they want features like unlimited data storage Users do not have to register to show approval or
disapproval of a photo
Users upload 1.5 million images every day and is becoming one of the most visited sites in the world
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-38
Making Big Businesses Act “Small”
The continuing success and competitiveness of small businesses through rapidly changing conditions in the business world have led many large corporations to take a closer look at what their smaller rivals tick Large firms emulate smaller ones to improve their bottom line Downsizing (rightsizing) – To reduce management layers,
corporate staff, and work tasks in order to make the firm more flexible, resourceful, and innovative
Intrapreneurs • Individuals in large firms who take responsibility for the
development of innovations within the organizations © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-39
Solve the Dilemma The Small-Business Challenge
Jack Gray and his best friend, Bruce McVay, decided to start their own small business
♦ Jack had developed recipes for fat-free and low-fat cookies and muffins to satisfy his personal health needs
♦ Bruce had extensive experience in managing food-service establishments
► They knew that a startup company needs a quality product, adequate funds, a written business plan, some outside financial support, and a good promotion program
► Each had $35,000 to invest and with their homes and other resources, they had borrowing power of an additional $125,000
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-40
Solve the Dilemma The Small-Business Challenge (cont.)
Remaining decisions
• What form of organization to use
• How to market their product • How to determine exactly
what products to sell • Just cookies and muffins
or additional products
Discussion Questions • Evaluate the idea of a low-
fat cookie and muffin retail store.
• Are there any concerns in connection with starting a small business that Jack and Bruce have not considered?
• What advice would you give Jack and Bruce as they start up their business?
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5-41
Discussion
? What demographic, technological, and economic trends are influencing the future of small businesses?
? Why do large corporations want to become more like small businesses?
? What are the advantages of starting a small business? The disadvantages?
? What types of financing do small entrepreneurs typically use? What are some of the pros and cons of each?
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.