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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.

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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.

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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.

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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


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Great Entrepreneurs of Innovative Companies


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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


http://www.sba.gov/

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The Role of Small Business in the American Economy


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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


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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.


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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,


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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


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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


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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


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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


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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


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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


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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


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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


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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)


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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


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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,


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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


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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


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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


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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


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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,


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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


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


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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


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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


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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


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Fastest Growing and Hottest New Franchises


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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


http://www.sba.gov/

http://www.sba.gov/content/small-business-development-centers-sbdcs

http://www.score.org/

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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


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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


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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


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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


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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,


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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


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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?


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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,


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