CHAPTER 5

Small Business, Entrepreneurship, and Franchising

Small Business...

5-2

Source: Small Business Answer Card 1998, Small BusinessAdministration Office of Advocacy, http://www.sba.gov/ADVO/stats/answer.html, August 23, 1998.

• Represents 97.3% of business establishments.

• Created more than 80% of all new jobs in fiscal 1996-97

• Accounted for 50% of GDP in 1999

• Provided over half of the employment in Canada in 1999

Small Business, Entrepreneurship, and Franchising

• Entrepreneur: person who risks his/her wealth, time, effort to develop for profit an innovative product or way of doing something

• Entrepreneurship: process of creating and managing a business to achieve desired objectives

What is Small Business?

Any independently owned and operated business that is not dominant in its competitive area and employs fewer than 500 people.

Role of Small Business….

• Job Creation

• Innovation

• Exporting

# of Firms byEmployment Size

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Source: Key Small Business Statistics, May 2003, p.12. Retrieved from www.strategis.gc.ca/statistics.

Firm Size Number of Firms (thousands)

Percentage of all Firms

1 – 4 employees 1,735 79.8%

5 – 49 employees 382 17.6%

50 - 99 employees 31 1.5%

100+ 24 1.1%

All size firms 100%

Top Five SmallBusiness Industries

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Source:Key Small Business Statistics as reported at www.strategis.gc.ca/sbstatistics..

Industry

Employment in Firms with <100 employees

Percentage of Firms with < 100 employees

Retail Trade 782,926 15.8%

Manufacturing 653,821 13.2

Accommodation and Food 655,919 13.2

Construction 476,683 9.6

Wholesale trade 412,667 8.3

Ch.6: Small Business….

• Industries attracting small business:– retail/wholesaling

– manufacturing

– services

– high tech

Advantages of Small Business

• Personal– Independence– Work-Life balance– Sense of accomplishment

• Business– Lower startup costs– flexibility and quick decision making– focus on niche markets– reputation

Disadvantages of Small Business

• High stress level– High time commitment– Personal investment– Legal liabilities

• High failure rate– Undercapitalization– Managerial inexperience or incompetence– Inability to cope with growth

Starting a Small Business• The Business Plan

• Forms of Business Ownership(chapter 4)

• Financial Resources

• Create a new business or buy an existing one?

The Business Plan

• Business Plan: A precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals

• Contains: business description; competitive analysis; marketing plan; financial plan; and Organizational plan.

The Business Plan

Purpose of the Business Plan• Sales Document to Investors and Lenders:

Is the business worth providing money too?• Management Document: Provides direction

to decision makers. Sets goals and timetables.

• Feasibility Study of the viability of the business

The Business Plan

Business Plan needs to address key questions:• What are you selling?• Who is going to buy it? Sufficient Interest?• Is anybody else doing it?• What are your goals?• What type of employees do you need?• How much is it going to cost?• How much money will you make?

Financial Resources

What does a business need money for?

• Start-Up Costs (costs incurred before revenue generated): Building, feasibility studies, inventory, equipment, etc..

• Operating Costs (costs incurred after start-up): salaries, interest on loans, inventory, heating and lighting, etc..

• Growth

Financial Resources

• Equity financing– owner’s funds– venture capitalists

• Debt financing– loans– lines of credit– trade credits

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35 Fastest Growing Companies in Atlantic Canada

How was growth financed?

• Profits: 25

• Loans: 15

• Owners: 10

• Government: 8

• Public Stock Issue: 5

• Family and Friends: 3

Approaches to Starting a Business

• Creating a new business from scratch

• Buying an existing business– existing customer base, supplier and distributor

relationships, company history

• Franchising

From Scratch or Purchase?

Scratch Purchase

Reputation None. No preconceived ideas

Yes. Is it good or bad?

From Scratch or Purchase?

Scratch Purchase

Reputation None. No preconceived ideas

Yes. Is it good or bad?

Assets None. Can avoid poor investments

Yes. Are they up-to-date, adequate, good?

From Scratch or Purchase?

Scratch Purchase

Reputation None. No preconceived ideas

Yes. Is it good or bad?

Assets None. Can avoid poor investments

Yes. Are they up-to-date, adequate, good?

Relationships Limited. Yes. Are they strong or weak?

From Scratch or Purchase?

Scratch Purchase

Reputation None. No preconceived ideas

Yes. Is it good or bad?

Assets None. Can avoid poor investments

Yes. Are they up-to-date, adequate, good?

Relationships Limited. Yes. Are they strong or weak?

Certainty Revenue and Costs not that well known.

History is available. Bad debts, deals?

From Scratch or Purchase?

Scratch Purchase

Reputation None. No preconceived ideas

Yes. Is it good or bad?

Assets None. Can avoid poor investments

Yes. Are they up-to-date, adequate, good?

Relationships Limited. Yes. Are they strong or weak?

Certainty Revenue and Costs not that well known.

History is available. Bad debts, deals?

Location To be determined. Timely and costly.

Location set, but is it appropriate?

Franchising• Franchise: A license to sell another’s products

and/or to use another’s name in business.• Franchisor: Company that sells the franchise

– Sells rights to name, logo, methods of operation, national advertising, products, etc..

• Franchisee: Purchaser of the Franchise– Initial fee, monthly fees, follow co. rules, buy

equipment, mortgage or lease,

Advantages and Disadvantages of Franchising

• Advantages– Built in name recognition

– Built in customer base

– Franchisor expertise• Management

• Accounting

• Store Design

– National Advertising

• Disadvantages– Less Flexibility and

Control

– Payment to join Franchise

– Division of Profits with Franchisor

Top 10 Fastest-Growing Franchises for 2002

Growth during 2001

1. Kumon Math & Reading Centers 2,259

2. 7-Eleven Inc 1,654

3. Curves for Women 555

4. Coverall North America Inc. 1,675

5. Subway 1,356

6. Jani-King 681

7. Jackson Hewitt Tax Service 483

8. KFC Corp 996

9. McDonald’s 895

10. Budget Rent A Car Corp. 97Source:www.entrepreneurmag.com/Franchise_Zone

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Solve the Dilemma

a. Evaluate the idea of a low-fat cookie and muffin retail store.

b. Are there any concerns in connection with starting a small business that Jack and Bruce have not considered?

c. What advice would you give Jack and Bruce as they start up their business?

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Top Ten Franchises

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Source: Entrepreneur’s Franchise 500 For 2002 as reported Feb. 25,2002 at http://www.entrepreneurmag.com/Franchise_Zone.

Top Franchises Number of outlets*

1. Subway 15,248

2. Jackson Hewitt Tax Service 3,344

3. Curves for Women 2,412

4. 7-Eleven 21,142

5. Yogen Fruz Worldwide 5,228

6. Quizno’s Franchise Co., The 1,270

7. McDonald’s 28,236

8. Management Recruiters/Sales Consult.MRI Worldwide

1,360

9. Holiday Inns Worldwide 3,176

10. Jani-King 8,685

Additional Discussion Questions and Exercises

1. Assume you wanted to go into business for yourself. What kind of business would you prefer? What would be the financial requirements for entering the business? What type of work or managerial experience would you need?

2. What should be included in a business plan? What is the importance of a business plan to the small-business entrepreneur?

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Additional Discussion Questions and Exercises

3. What are the goals of venture capitalists when they invest in new businesses?

4. Think of your local community. Can you name five new businesses that have started up recently? Would you consider these new businesses to be small businesses? Are these new businesses franchises?

6-18b