Chapter SixSix
Chapter
Small
SmallBusiness,
Business,
Entrepreneurship,
Entrepreneurship,
and
Franchises
and
Franchises
Small Business: Defined
• A business that is independently owned and
operated for profit & not dominant in its field
• Accounts for 99.7% of all U.S. businesses
• SBA “smallness” guidelines
– Manufacturing—a maximum of 500 employees
– Wholesaling—a maximum of 100 employees
– Retailing—maximum annual sales of $6.5 million
– Agriculture—maximum annual sales of $.75 million
The Small-Business Sector
– There are 23 million businesses in the U.S.
– Only 17,000 employ over 500 workers
– In the last decade, # of small businesses increased by 49%
– Part-time entrepreneurs have increase fivefold and account
for one-third of all small businesses
– Small businesses provide over 50% of the jobs in the U.S.
– Over 70% of new business fail within their first 5 years
WHY???
Why Small Businesses Fail
•
•
•
•
Lack of capital
Cash-flow problems
Lack of management skills
Overexpansion
Developing a Business Plan
• A carefully constructed guide for the person
starting a business
-Accuracy and realistic expectations are crucial
Need to include:
Description of the goods or services to be offered
Detailed estimate of potential customers
Current competitors
Facilities and labor force needed
Financing and cash flow required
Marketing strategy
Exit Strategy-go public, sell out, dissolve
The Small Business Administration
A governmental agency that assists,
counsels, and protects the interests of
small business in the U.S
• Types of SBA management assistance
– Management courses and workshops
– Service Core of Retired Executives (SCORE)
– SBA publications
Importance of Small Business to Economy
1) Providing employment
– hire a larger proportion of younger workers,
older workers, women, and part-time
workers
– provide 67% of workers with their first job
and initial job skills
– provide 2/3 of the new jobs added to the
economy
Importance of Small Business
2) Providing technological innovation
– Innovation among small-business workers is
higher than among workers in big business
– More than half of the major technological
advances of the 20th century originated with
individual inventors and small businesses
Importance of Small Business to Economy
3) Providing competition
– Satisfy niche markets, forcing larger firms to
become more responsive to customer needs
4) Filling needs of society & other businesses
– meet the special needs of smaller customers
– act as specialized suppliers of goods and
services to larger businesses
The Pro and Cons of Smallness
ADVANTAGES
• Personal relationships
with customers and
employees
• Ability to adapt to
change
• Independence
• Keeping all profits
• Ease and low cost of
going into business
• Keeping business
information secret
DISADVANTAGES
• Risk of failure
• Limited potential
• Limited ability to raise
capital
Franchising
• Franchise
– A license to operate an individually owned
business as though it were part of a chain
of outlets or stores
• Franchisor
– An individual or organization granting the
franchise (Avon Corp)
• Franchisee
– A person or organization purchasing a
franchise (Avon lady in your neighborhood)
Types of Franchises
• Product and trade nameDealer sells product provided by the
franchisor, but can use any sales tactics he
chooses ex-Michelin Tires
• Business FormatDealer must sell the product in the exact way
the franchisor prescribes ex-Mc Donalds
Entrepreneur’s Top Ten Franchises in 2006
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Subway
Quiznos Sub
Curves
UPS Store, The
Jackson Hewitt Tax Service
Dunkin' Donuts
Jani-King
RE/MAX Int'l. Inc.
7-Eleven Inc.
Liberty Tax Service
For updates: www.franchise500.com
Advantages of Franchising
TO THE FRANCHISOR
– Fast and well controlled distribution of its products
– No need to construct and operate its own outlets
– More working capital available for expanded
production and advertising
– Franchising agreements maintain product and
quality standards
– Motivated work force of franchisees because they
see themselves as owners
Advantages of Franchising
TO THE FRANCHISEE
– Opportunity to start a proven business with limited
capital
– Guaranteed customers
– Franchisor available for advice and guidance
– Materials for local promotional campaigns and
participation in national campaigns
– Cost savings when purchasing supplies in
cooperation with other franchisees
Disadvantages of Franchising
TO THE FRANCHISOR
– Failure of the franchisee to operate franchise
as agreed
– Disputes with franchisees over the terms of
the franchise (flat or % royalty, sphere of
influence)
Disadvantages of Franchising
TO THE FRANCHISEE
– Franchisor retains a large amount of control
over the franchisee’s activities
– Franchisor or other franchisees opening
competing outlets within the franchisee’s
market