Ferrell Hirt Ferrell
A CHANGING WORLD
EIGHTH EDITION
FHF
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
part
Starting and Growing
A Business
2
CHAPTER 4 Options for Organizing Business
CHAPTER 5 Small Business, Entrepreneurship, and Franchising
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Entrepreneurship
[
The process of creating and
managing a business to achieve
desired objectives
]
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5-3
What is Small Business?
 “Smallness” is relative
 Small business is any independently owned and
operated business, not dominant in its competitive
area
 Employs less than 500 people (in USA)
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Impact of Small Businesses
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Small Businesses Represent
 64% of new net jobs, annually, created in the
last 15 years
 99.7% of all businesses employ fewer than
500 people
 89% of businesses employ fewer than 19 people
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Small Business Innovation
Small businesses represent 55%
of all innovations
 Airplane
 Audio tape recorder
 Double-knit fabric
 Fiber-optic examining equipment
 Heart valve
 Optical scanner
 Personal computer
 Soft contact lenses
 Zipper … and much more
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Popular Industries for
Small Business
Especially attractive industries to entrepreneurs:
 Retailing and wholesaling
 Services
 Manufacturing
 High technology
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Retailing and Wholesaling
Selling directly to consumers
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Music stores
Sporting-goods shops
Dry cleaners
Boutiques
Drugstores
Restaurants
Hardware stores
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Services and Manufacturing
Services
Service sector is 80% of U.S. jobs
Manufacturing
Small manufacturers excel at customization
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High Technology
Businesses that depend heavily on advanced
scientific and engineering knowledge.
40% of high-tech jobs are with small businesses
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Small Business Ownership
Advantages
Disadvantages
Independence
High stress level
Costs
High failure rate
50% of all new businesses fail within the
first 5 years
Flexibility
Undercapitalization
Lack of funds to operate normally
Focus
Managerial inexperience or
incompetence
Reputation
Inability to cope with growth
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Starting a Business

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Start with a concept or general idea
Create a business plan
Devise a strategy to guide planning & development
Make decisions
•
•
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•
Form of ownership
Financing
Acquire existing business or start new business?
Buy a franchise
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The Business Plan
A precise statement of the rationale for
the 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
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Forms of Business Ownership
 Sole Proprietorship
 Partnership
 Corporation
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Financial Resources
Provide your own personal capital
 Cash money
 Obtain capital
Financing options
 Loans
 Stocks
 Equity financing
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Equity Financing
[
Selling or borrowing against the value of
an asset such as an (automobile, insurance
policy, savings account) to obtain funds to
operate a business
]
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Venture Capitalists
[
Persons/organizations that agree to
provide funding for a new business in
exchange for an ownership interest or
stock. Usually requires a sharing of
ownership/control
]
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Debt Financing
[
Borrowing financial resources typically
from a bank or lending institution– often
collateral is needed
]
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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
 Existing businesses have the advantage of a built-in network of
customers, suppliers and distributors
 Reduces guesswork
 Involves taking on any problems the business already had
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Franchise
A license to sell another’s products or to use
another’s name in business, or both
Franchiser
 The company that sells a franchise
Franchisee
 The purchaser of a franchise
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Franchises
Advantages
Disadvantages
Training & support
Fees and profit sharing
Brand name appeal
Standardized operations
National advertising
Restrictions on purchasing
Financial assistance
Limited product line
Proven products
Possible market saturation
Greater chance for success
Less freedom in decisions
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