3chapter

Business Essentials, 7th EditionEbert/Griffin

© 2009 Pearson Education, Inc.

Entrepreneurship, New Ventures, and Business

Ownership

Instructor Lecture PowerPointsPowerPoint Presentation prepared by Carol Vollmer Pope Alverno College

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After reading this chapter, you should be able to:1. Define small business, discuss its importance to the U.S. economy, and

explain popular areas of small business.2. Explain entrepreneurship and describe some key characteristics of

entrepreneurial personalities and activities.3. Describe the business plan and the start-up decisions made by small

businesses and identify sources of financial aid available to such enterprises.

4. Discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.

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L E A R N I N G O B J E C T I V E SL E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to:5. Explain sole proprietorships, partnerships, and

cooperatives and discuss the advantages and disadvantages of each.

6. Describe corporations, discuss their advantages and disadvantages, and identify different kinds of corporations.

7. Explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.

L E A R N I N G O B J E C T I V E S (cont’d)L E A R N I N G O B J E C T I V E S (cont’d)

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What’s in It for Me?

• By understanding the material discussed in this chapter, you’ll be better prepared to:

1. Understand the keys to entrepreneurial success, including business planning

2. Discuss the reasons for success or failure3. Evaluate the advantages and disadvantages of

different kinds of ownership

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What Is a “Small” Business?

• Small Business Defined– A business that is independent (not part of a larger

business) and that has relatively little influence in its market.

• The Importance of Small Business in the U.S. Economy– Job creation– Innovation– Contributions to big business

• Suppliers of specialized services and raw materials• Sellers of larger firms’ products

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FIGURE 3.2: Small Business by Industry

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Entrepreneurship

• Entrepreneurship– The process of seeking business opportunities under

conditions of risk

• Entrepreneur– One who accepts the risks and opportunities of creating,

operating and growing a new business

• Small Business Owner– A person who independently owns a business that

has relatively little impact in its market

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Entrepreneurial Characteristics• Successful Entrepreneurs:

– Are resourceful.– Are concerned about good customer relations.– Desire to be their own boss.– Can deal with uncertainty and risk.– Are open-minded.– Rely on networks, business plans, and consensus.– Have different views on how to succeed, to

automate a business, and when to rely on experience or business acumen.

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Starting and Operating a New Business

• Crafting a Business Plan– Conveys a description of the business strategy for the new

venture and how it will be implemented– A business plan should address:

• The entrepreneur’s goals and objectives• The strategies that will be used to obtain them• The implementation of the chosen strategies

• Preparing a Business Plan– Setting goals and objectives– Sales forecasting– Financial planning

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Starting the Small Business

• Buying an Existing Business– Less risk in purchasing ongoing, viable business

• Franchising– Advantages

• Proven business opportunity for franchisee• Access to management expertise of franchisor

– Disadvantages• Start-up costs for franchise purchase• Ongoing payments to the franchisor• Management rules and restrictions on the franchisee

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Starting the Small Business (cont’d)• Starting from Scratch

– Disadvantage: Higher risk of business failure– Advantage: Avoids problems of an existing business

• Questions to Be Answered:– Who and where are my customers?– How much will those customers pay for my product?– How much of my product can I expect to sell?– Who are my competitors?– Why will customers buy my product rather than the

product of my competitors?

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Financing the Small Business

• Personal Resources

• Loans from Family and Friends

• Bank Loans

• Venture Capital Companies

• Small-Business Investment Companies (SBICs)

• Minority Enterprise Small-Business Investment Companies (MESBICs)

• SBA Financial Programs– Guaranteed loans and immediate loan programs

– Management advice (SCORE and SBDCs)

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Trends in Small-Business Startups

Emergence of Emergence of E-commerceE-commerce

Crossovers fromCrossovers fromBig BusinessBig Business

Opportunities for Opportunities for Minorities & WomenMinorities & Women

GlobalGlobalOpportunitiesOpportunities

BetterBetterSurvival RatesSurvival Rates

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Reasons for Failure and Success

• Failure– Poor management– Neglect– Weak control systems– Insufficient capital

• Success– Hard work, drive, and dedication– Market demand– Managerial competence– Luck!!!

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Business Ownership

• Forms of Legal Ownership– Sole proprietorship: Owned and operated by one person– Partnership: Sole proprietorship multiplied by the number

of partner-owners– Corporation

• Choice of Ownership Form– Based on the entrepreneur’s needs/desires for control,

ownership participation, financing sources, and appropriateness of the chosen form for the industry in which the firm will compete

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Sole Proprietorships

• Advantages:– Freedom– Simple to form– Low start-up costs– Tax benefits– Formation of

cooperatives

• Disadvantages:– Unlimited liability:

Owners are responsible for all debts of a business

– Limited resources– Limited fundraising

capability– Lack of continuity

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Partnerships

• Advantages:– More talent and

money– More fundraising

capability– Relatively easy to

form– Limited liability for

limited partners– Tax benefits

• Disadvantages:– Unlimited liability for

general partner– Disagreements

among partners– Lack of continuity

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Alternatives to General Partnerships

• Limited Partnership– Allows for limited partners who invest money but are

liable for debts only to the extent of their investments– Must have at least one general (or active) partner, who is

usually the person who runs the business and is responsible for its survival and growth

• Master Limited Partnership– Organization sells shares (partnership interests) to

investors on public exchange. Investors are paid back from profits

– The master partner retains at least 50 percent ownership and runs the business, while minority partners have no management voice

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Cooperatives• Combine the freedom of sole

proprietorships with the financial power of corporations

• Groups of sole proprietorships or partnerships agree to work together for their common benefit

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Corporations

• Corporation– Firms that have filed papers of incorporation

• Corporations may:– Be small or large– Sue and be sued– Buy, hold, and sell property– Make and sell products– Commit crimes and be tried and punished for them– Have limited liability for individuals who form them

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Corporations

• Advantages:– Limited liability: The

owners’ responsibility for the debts of a business is limited to their investment in a business

– Continuity– Stronger fundraising

capability

• Disadvantages:– Double taxation of

dividends– Fluid control– Complicated and

expensive to form

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Types of Corporations

• Closely Held (Private) Corporation• Publicly Held (Public) Corporation

• Subchapter S Corporation

• Limited Liability Corporation (LLC)

• Professional Corporation

• Multinational (Transnational) Corporation

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Managing a Corporation

• Corporate Governance– The roles of shareholders, directors, and other managers

in corporate decision making and accountability– Corporate governance is established by the firm’s bylaws

and involves three bodies:• Stockholders (shareholders): Investors who buy ownership shares

in the form of stock• The board of directors: Group elected by stockholders to oversee

corporate management• Corporate officers: Top managers hired by the board to run the

corporation

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Stockholders: Owners of Corporations

• Stock: A share of ownership in a corporation• Dividends: Profits distributed among stockholders

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Special Issues in Corporate Ownership

• Joint Ventures and Strategic Alliances:– Strategic alliance: Two or more organizations collaborate

on a project for mutual gain– Joint venture: Partners share ownership of a new

enterprise• Employee Stock Ownership Plans

– Allows employees to own a share of the corporation through trusts established on their behalf

• Institutional Investors– Control enormous resources and can buy huge blocks of

stock

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Special Issues in Corporate Ownership (cont’d)

• Mergers, Acquisitions, Divestitures, and Spin-Offs:– Merger: Two firms combine to create a new

company– Acquisition: One firm buys another outright– Divestiture: Strategy whereby a firm sells one or

more of its business units– Spin-off: A firm sells part of itself to raise capital

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Key Terms

acquisition board of directors business plan chief executive officer (CEO) closely held (or private) corporation cooperative corporate governance corporation divestiture double taxation employee stock ownership plan

(ESOP) entrepreneur

entrepreneurship franchise general (or active) partner general partnership institutional investor joint venture limited liability limited liability corporation (LLC) limited partner limited partnership master limited partnership merger multinational (or transnational)

corporation

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Key Terms (cont.)

officers professional corporation publicly held (or public) corporation S corporation small business Small Business Administration (SBA) Small Business Development Center

(SBDC) small-business investment company

(SBIC) sole proprietorship spin-off

stockholder (or shareholder) strategic alliance tender offer unlimited liability venture capital company

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