Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
Chapter 6
Putting Yourself in Charge:
Entrepreneurs and Small Business Owners
Learning Objectives
1.
2.
3.
4.
5.
6.
7.
Highlight the major contributions small businesses make to the U.S. economy
Identify the key characteristics (other than size) that differentiate small businesses from
larger ones
Discuss three factors contributing to the increase in the number of small businesses, and
name three small-business ownership options
Cite the key characteristics common to most entrepreneurs and list the reasons that
they start their own small businesses.
List three ways of going into business for yourself
Identify four sources of small-business assistance
Discuss the principal sources of small-business private financing
Summary of Learning Objectives
1.
Highlight the major contributions small businesses make to the U.S. economy.
Small businesses bring new ideas, processes, and vigor to the marketplace. They
generate about 51 percent of private sector output. They provide about 67 to 75 percent
of all new jobs and employ over half of the private nonfarm U.S. workforce. Small
businesses introduce new goods and services, provide specialized products, and supply
the needs of large corporations. Additionally, they spend almost as much as big
businesses in the economy each year.
2.
Identify the key characteristics (other than size) that differentiate small
businesses from larger ones.
In general, small businesses tend to sell fewer products and services to a more targeted
group of customers. They have closer contact with their customers and many tend to be
more open-minded and innovative because they have less to lose than established
companies. Small-business owners generally make decisions faster and give employees
more opportunities for individual expression and authority. Because they have limited
resources, however, small-business owners often must work harder and perform a
variety of job functions.
3.
Discuss three factors contributing to the increase in the number of small
businesses, and name three small-business ownership options.
One factor is the advancement of technology and the Internet, which makes it easier to
start a small business, compete with larger firms, or work from home. A second factor is
the increase in the number of minority and women entrepreneurs. Finally, corporate
downsizing has made self-employment or small-business ownership an attractive and
viable option. When starting a small business, you have three options: you can start a
new company from scratch, you can buy a going concern, or you can invest in a
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Part 2: Starting and Organizing a Business
franchise. Each option has its advantages and disadvantages when it comes to cost,
control, certainty, support, and independence.
4.
Cite the key characteristics common to most entrepreneurs and list the
reasons that they start their own small businesses.
Successful entrepreneurs are highly disciplined, intuitive, innovative, ambitious
individuals who are eager to learn and like to set trends. They enjoy the thrill of being in
business and are willing to take calculated risks to reap the rewards. Few start
businesses with the sole purpose of making money.
5.
List three ways of going into business for yourself.
You can start a new company from scratch, you can buy a going concern, or you can
invest in a franchise. Each option has its advantages and disadvantages when it comes
to cost, control, certainty, support and independence.
6.
Identify four sources of small-business assistance.
One source for small-business assistance is SCORE—an organization staffed by retired
executives and active small-business owners who provide counseling and mentoring for
free. Incubators are another source. They provide facilities, business resources, and all
types of start-up support. The Internet is an excellent resource for product and market
research, business leads, advice, and contacts. And many small-business owners try to
take advantage of mentors and advisory boards.
7.
Discuss the principal sources of small-business private financing.
Bank loans are a principal source of private financing, although they may be difficult for
many small businesses to obtain; new mini-lenders offer opportunities for companies
that need small amounts. Microlenders fill the need for smaller loans and grants in
many cases. Family and friends are another. Other alternatives include big businesses,
venture capitalists, angel investors and credit cards. Finally the Small Business
Administration, though not an actual source, can assist entrepreneurs by partially
guaranteeing small bank loans.
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Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
Brief Chapter Outline
I.
Understanding the World of Small Business
A.
Development
1.
Historical
2.
Current
B.
Economic Roles of Small Businesses
C.
Characteristics of Small Businesses
D.
Factors contributing to the Increase in the Number of Small Businesses
1.
E-Commerce and the Internet
2.
Growing Diversity in Entrepreneurship
3.
Downsizing and Outsourcing
II.
Starting a Business
A.
Characteristics of Entrepreneurs
B.
Importance of Preparing a Business Plan
C.
Small-Business Ownership Options
1.
Start-up Companies
2.
Buying an existing business
D.
The Franchise Alternative
1.
Franchisee – the small-business owner who contracts to sell the goods or
services
2.
Franchisor – the supplier
3.
Types of Franchises
4.
Advantages of Franchising
5.
Disadvantages of Franchising
E.
Why New Businesses Fail
F.
Sources of Small-Business Assistance
1.
SCORE – the Service Corp of Retired Executives
2.
Incubators – provide “newborn” businesses with just about everything
needed to get started
3.
The Internet
III.
Financing a New Business
A.
Seeking Private Funding
1.
Banks and Microlenders
2.
Venture Capitalists (VCs)
3.
Angel Investors
4.
Credit Cards
5.
Small Business Administration Assistance
B.
Going Public
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Part 2: Starting and Organizing a Business
Detailed Chapter Outline:
I.
4
Understanding the World of Small Business
A.
Defining what constitutes a small business
1.
Different definitions are held by different groups
2.
The distinction is important because employee regulations and
government benefits are different between small and large companies
3.
The U.S. Small Business Administration (SBA) defines a small business as
a firm that:
a.
is independently owned and operated
b.
is not dominant in its field
c.
is relatively small in terms of annual sales
d.
has fewer than 500 employees – although specific numbers differ
from industry to industry
4.
By the SBA’s definition:
a.
the US has approximately 23-million small businesses
b.
80% of all U.S. companies have annual sales of less than $1
million
c.
about 60% of the nation’s employees have fewer than five
workers
B.
Economic Roles of Small Businesses
1.
They provide jobs
a.
create about 65 – 75% of new jobs
b.
employ about half the private-sector workforce in the US
2.
They introduce new products
a.
the innovation may be a new way of looking at a marketing
opportunity
b.
innovators can develop new technologies and build a growth
company around it or sell the entire business to a larger company
3.
They supply the needs of large corporations
a.
basic job training for new workers just entering workforce
b.
are distributors, servicing agents and suppliers to larger
corporations
4.
They inject a considerable amount of money into the economy
5.
They take risks that larger companies sometimes avoid
6.
They provide specialized good and services
C.
Characteristics of Small Businesses
1.
Two distinct types of small businesses
a.
Lifestyle business

Modest operations with little grown potential

Built around the personal and financial needs of an
individual or a family
b.
High-growth ventures

Usually run by a team rather than one individual

Expand rapidly by obtaining sizable supply of investment
capital and introducing new products

Quick-flip Start-Up – built to be sold within a couple of
years or even less
2.
Small businesses generally have fewer products or services
Seminar 4
D.
II.
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
3.
Usually focus on a narrow group of customers
4.
Remain in close contact with their markets
5.
Tend to be more open-minded and willing to try new things
6.
Tend to make decisions more quickly than large businesses
7.
Give employees more opportunity for individual expression
8.
Have more limited resources
9.
Owner tends to perform a variety of job functions
Factors contributing to the Increase in the Number of Small Businesses
1.
E-commerce and Other Technological Advances
2.
The Growing Diversity in Entrepreneurship
a.
Women

women now own 10-million U.S. business; one of every 11
women owns a business

businesses owned by women are increasing both revenue
and employment faster than the national average

starting small businesses for a number of reasons,
including:

to enjoy a more flexible working arrangement

because of barriers in corporate advancement; the
glass ceiling

seek a greater degree of financial independence
and security
b.
Minorities and People of Color

between 1987 and 1997, number of firms owned by
minorities grew 168%

now own 15% of all U.S. businesses

often can do a better job of marketing to specific
segments of the population

tradition of immigrants starting businesses stretches back
to the first days of the US
c.
Young People

those born between 1965 and 1980 (Gen X) now start
70% of all new business

many young entrepreneurs start before they finish college
3.
Downsizing and Outsourcing
a.
Business startups soar when the economy sours
b.
Companies downsize or layoff talented employees
c.
To make up for layoffs of permanent staff, some companies
outsource special projects to experts outside the company
d.
Other companies use outsourcing as a way to eliminate entire
departments permanently
Starting a Business
A.
Characteristics of Entrepreneurs
1.
A person who creates a new business in the face of risk for the purpose
of achieving profit, growth and other opportunities
2.
Usually starts with nothing more than an idea and then organizes the
necessary resources
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Part 2: Starting and Organizing a Business
3.
4.
5.
6.
7.
Tend to have these traits:
a.
Highly disciplined
b.
Have a high degree of confidence
c.
Like to control their destiny.
d.
Relate well to others and have a talent for organizing team efforts
in pursuit of a common goal.
e.
Eager to learn whatever skills are necessary to reach their goal.
f.
Learn from their mistakes.
g.
Stay abreast of market changes.
h.
Willing to exploit new opportunities.
i.
Are driven by a passion to succeed – but they often don’t measure
success in strictly financial terms.
j.
Think positively and are able to overcome failure and adversity
k.
Are tenacious in pursuit of their goals.
m.
Embrace moderate risk when it is coupled with the potential for
significant rewards.
Entrepreneurs start their own businesses for a number of reasons
Most start with relatively small amount of money
There are no common background traits among entrepreneurs, such as
education levels or business expertise
Often plan and develop their products quickly
Suggestion – Students Research:
Ask students to interview the owner of a small business. What were the challenges he or
she faced? What sources did the owner turn to for assistance? What was most helpful
during the start-up phase of the business? What challenges does the small business owner
face now?
B.
6
Importance of Preparing a Business Plan
1.
A written document that summarizes an entrepreneur’s proposed
business venture
2.
Serves two functions:
a.
Guides the company operations and outlines a strategy for turning
an idea into reality
b.
Services as a vehicle to attract lenders and investors

Without a business plan many investors won’t even
consider working with you

A solid business plan is written proof that an entrepreneur
has performed the necessary research and studied the
business opportunity

Demonstrates that the entrepreneur has considered both
positive and negative factors
Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
Suggestion – Small Group Discussion:
Have students work in groups of three to four students. Ask them to identify a list of
characteristics that they would want to see in a business- plan proposal if they were
considering funding a new start-up.
Have small groups share their ideas with the entire class and list characteristics on the
board.
C.
D.
Small-Business Ownership Options
1.
Start-up Companies
a.
Start from scratch rather than buying an existing operation or
inheriting the family business
b.
Most common route to starting a business
2.
Buying an existing business
a.
This approach tends to reduce the risks
b.
Generally purchase

An established customer base

An established supplier base

A proven product or service

A known location
c.
Don’t have to build a reputation
d.
Financing is often easier
f.
There are disadvantages, including:

Business may be overpriced

Inventories and equipment may be obsolete

Location may no longer be satisfactory

May be ill will created by previous owner

Personality clashes between you and existing managers
and employees

Outstanding bills
3.
Franchising
The Franchise Alternative
1.
Franchisee – the small-business owner who contracts to sell the goods or
services
2.
Franchisor – the supplier
3.
Types of Franchises
a.
Product franchise – gives the right to sell trademarked goods,
which are purchases from the franchisor and resold
b.
Manufacturing franchise – gives the right to produce and
distribute the manufacturer’s products, using supplies purchased
from franchisor
c.
Business-format franchise – gives the right to open a business
using a franchisor’s name and format for doing business
4.
How to Evaluate a Franchise – study the opportunity carefully before
committing
a.
Study the opportunity carefully before you commit
b.
Since 1978, the Federal Trade Commission has required
franchisors to disclose operations information
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Part 2: Starting and Organizing a Business
c.
d.
e.
f.
g.
Determine the financial condition of the franchisor
Ascertain whether the company has been involved in lawsuits with
franchisees
Consult an attorney
Evaluate the franchisor

Talk to other franchisees

Perhaps spend a few month working for someone else who
already owns a franchise you are interested in
Consider market saturation
Teaching Suggestion – Additional Information to Provide Class:
TEN QUESTIONS TO ASK BEFORE
SIGNING A FRANCHISE AGREEMENT
1. What does the initial franchise fee cover? Does it include a starting inventory of supplies and
products?
2. How are the periodic royalties calculated and when are they paid?
3. Are all trademarks and names legally protected?
4. Who provides and pays for advertising and promotional items?
5. Who selects the location of your business?
6. Are you assigned an exclusive territory?
7. If the territory is not exclusive, does the franchisee have the right of first refusal on additional
franchises established in nearby locations?
8. Is the franchisee required to purchase equipment and supplies from the franchisor or other
suppliers?
9. Under what conditions can the franchisor and/or the franchisee terminate the franchise agreement?
10. Can the franchise be assigned to heirs?
5.
8
Advantages of Franchising
a.
Know you are getting a viable business
b.
Instant name recognition
c.
National advertising program
d.
Standardized quality of goods and services
e.
A proven formula for success
f.
For an initial investment get these services

Site-location studies

Market research

Training

A support network

Technical assistance

Assistance with building or leasing your structure

Decorating the building

Purchasing supplies

Operating the business

Financial assistance, sometime
Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
6.
Disadvantages of Franchising
a.
No guarantee of wealth
b.
When a chain loses its cutting edge in the marketplace, so does
your individual business
c.
Bound by contracts to sell only authorized goods
d.
Those good often supplied by the franchisor itself at the price they
set
e.
Monthly payment or royalty
f.
Loss of independence
g.
At times, limited voice in how advertising funds are used
Teaching Suggestion – For Discussion:
Ask students to name some franchises, and consider the effect that franchises have on their
view of businesses. For example, has McDonald’s set the standard for fast-food
hamburgers?
E.
F.
Understanding Why New Businesses Fail
1.
Statistics
a.
Changes of success = one in three
b.
Others claim the odds are even worse, stating that 85% fail within
10 years
c.
Actual statistics show that only about 1 in 7 fail in terms of going
out of business without outstanding, unpaid debt
d.
Some say the true rate is much lower, if you remove those that
aren’t “genuine businesses,” for example a freelance writer who
returns to a traditional position after selling one story
2.
Reasons for Failures
a.
Lack of management skills
b.
Lack of experience
c.
Lack of proper financing
d.
Straying too far from the original product or market
e.
Not exiting the business quickly enough when problems become
evident
f.
Uncontrolled growth

The entrepreneurial skills needed to get a business going
are different from those needed to transform into a stable
business

Inventive minds can become bored with daily managing

Puts tremendous pressure no every aspect of the company

Often find themselves butting heads with the much larger
firms, without the resources to compete on that level
3.
Failure not always negative, can often lead to different, more effective
ventures
Sources of Small-Business Assistance
1.
SCORE – the Service Corp of Retired Executives
a.
SBA Resource Partner
b.
Comprised of over 12,000 volunteers
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Part 2: Starting and Organizing a Business
c.
d.
Offer advice on a number of topics, including:

Developing a business plan

Securing financing

Managing business growth
To date, more than 4.5 million clients have been helped by SCORE
Teaching Suggestion – Reflection and Discussion:
Have students spend about five minutes preparing a list of reasons that individuals might
want to serve as SCORE volunteers.
Have students share their ideas with the entire class.
2.
C.
III.
10
Incubators
a.
Provide “newborn” businesses with just about everything needed
to get started, including:

Office space

Expert advice

Legal and accounting services

Clerical services

Marketing support

Contacts
b.
Some open to all business; others specialize in a particular
industry
c.
The goal is to convert tenant firms into “graduates” so many set
time limits
d.
Firms that started in incubators typically increase sales by more
than 400% from time they enter to time they leave
e.
80% of businesses nurtured in incubators succeed
The Internet
Financing a New Business
A.
Many first-time business owners underestimate the amount of money it takes to
start a business and finance it until profits can be generated
a.
overestimate number of sales
b.
overestimate how quickly money will come in from sales
c.
underestimating expenses
B.
Have to determine where the money will come from
1.
equity – give investors a share of the business in exchange for their
money
2.
debt – borrow money that must be repaid
C.
Seeking Private Financing
1.
Banks and Microlenders
a.
Won’t finance any start-ups that seem to risky
b.
Will typically only finance if they have payment guarantees from
other sources
c.
Microlenders offer loans or grants ranging from several hundred
to several thought to help very small operations get started
Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
2.
3.
Venture Capitalists (VCs)
a.
Investment specialists who raise pools of capital from large
private and institutional sources
b.
Fund start-ups that have high, rapid growth potential and a need
for a large amount of capital
c.
Don’t lend money as a bank would – more selective than banks;
provide money and fairly aggressive managerial expertise and
oversight
d.
Expect a sizeable ownership interest in return
e.
VCs reap financial reward by selling their ownership to other longterm investors once business is well established
f.
Typically will only finance firms that need $10 million or more
Angel Investors
a.
Usually invest their own money
b.
Goal is to sell their interest for a large profit after start-up is
established
c.
Willing to loan smaller amounts of money than VCs
d.
Typically stay involved a longer period of time than VCs
Teaching Suggestion – Classroom Discussion:
Ask students to imagine that they have the financial ability to be an angel investor. Ask them to
discuss what kinds of businesses they would be interested in funding and why?
4.
B.
Credit Cards
a.
Approximately one-third of small businesses use personal credit
cards to finance their new ventures
b.
Credit card companies don’t care what the money is spent for, as
long as debt is repaid
c.
Sometimes the only source of funding available
d.
But high penalties, fees and interest rates can make this approach
very risky
Going Public
1.
Achieved by selling shares of a company’s stock
2.
Going public
a.
Offering to the public for the first time shares of ownership
b.
IPO – Initial Public Offering
c.
While it can be an effective method for raising money, can be
expensive and time-consuming
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Part 2: Starting and Organizing a Business
Potential Difficulties and Suggestions Solutions
1.
Students may not realize the time and effort necessary to start your own business.
Small business owners have to be extremely dedicated and committed in order to be
successful. While there are many benefits of owning your own business, there are some
evident drawbacks. To be successful, small business owners often have to spend a great
deal of time working, including nights, weekends, and holidays. For students to get a
real-world perspective on the world of small business, you may ask them to do the
following:

Interview a small business owner in your community. Inquire about the benefits

and drawbacks of owning your own business.

Locate information on the Internet about small-business owners. Ask students
to

identify what they can learn about the personality characteristics and work habits
of these

individuals.
2.
Likewise, students may think that investing in a franchise is an easy way of owning your
own business. The commitment and dedication factors remain the same here, as
franchisees have to spend a great deal of time working to start and ensure success of
the business. In order for students to understand the dedication and commitment that
are necessary for success, you may ask them to do the following:

Interview a franchisee in your community. Inquire about the benefits and
disadvantages of obtaining a franchise. Also, ask about details of the franchise
agreement (specifically, how much flexibility does the franchisee have?).
3.
Students may also have difficulty understanding why retired business executives would
want to serve as SCORE volunteers.

Invite SCORE volunteers to attend your class to discuss their motivations.

Have students learn more about SCORE volunteers on the Internet at:
http://www.score.org and then click on “Meet at Volunteer.”
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Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
Answers to End-of-Chapter Questions
Test Your Knowledge
Questions for Review
1.
What are two essential functions of a business plan?
The two essential functions of a business plan are:
1.
Guides the company operations and outlines a strategy for turning an idea into
reality
2.
Helps persuade lenders and investors to finance your business.
2.
What are the advantages of buying a business rather than starting one from
scratch?
When you buy a business, you generally purchase an established customer base,
functioning business systems, a proven product or service, and a known location. You
don’t have to go through the painful period of building a reputation, establishing a
clientele, finding suppliers, and hiring and training employees.
3.
What are the advantages and disadvantages of owning a franchise?
Advantages of Franchising
a.
Know you are getting a viable business
b.
Instant name recognition
c.
National advertising program
d.
Standardized quality of goods and services
e.
A proven formula for success
f.
For an initial investment get these services

Site-location studies

Market research

Training

A support network

Technical assistance

Assistance with building or leasing your structure

Decorating the building

Purchasing supplies

Operating the business

Financial assistance, sometime
Disadvantages of Franchising
a.
No guarantee of wealth
b.
When a chain loses its cutting edge in the marketplace, so does your
individual business
c.
Bound by contracts to sell only authorized goods
d.
Those good often supplied by the franchisor itself at the price they set
e.
Monthly payment or royalty
f.
Loss of independence
g.
At times, limited voice in how advertising funds are used
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Part 2: Starting and Organizing a Business
3.
What are the key components of a business plan?
The key components of a business plan are:
1.
Guides the company operations and outlines a strategy for turning an
idea into reality
2.
Helps persuade lenders and investors to finance your business.
A Business Plan should cover these points:
1.
Summary – of business concept, describing product or service and its
market potential
2.
Mission and objectives
3.
Company and industry
4.
Products or services
5.
Market and competition
6.
Management
7.
Marketing strategy
8.
Design and development plans
9.
Operations plan
10.
Overall schedule
11.
Critical risks and problems
12.
Financial forecasts and requirements
13.
Exit strategy
4.
What are the key reasons for most small businesses failures?
There are many reasons that small businesses fail, including:

Lack of management skills

Lack of experience

Lack of proper financing

Uncontrolled growth

Straying too far from the original product or market

Not exiting the business quickly enough when problems become evident
However, remember that failure not always negative. Such short-term outcomes can
often lead to different, more effective ventures in the long run.
5.
What is a business incubator?
A business incubator is a facility where new businesses can:

Lease space at bargain rates

Share secretaries and support staff

Share telephone equipment

Obtain financial and accounting advice

Get marketing support

Receive credit-checking services.

Many incubators serve as mentors for fledging businesses. Some specialize in
specific industries.
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Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
Questions for Analysis
6.
Why is writing a business plan an important step in starting a new business?
Most people think the sole purpose of a business plan is to secure financing. The truth
is that the primary beneficiary of writing a business plan is the business owner. By
writing a plan, you force yourself to think things through, plan ahead, understand your
market, know your competition, find your weaknesses, build on your strengths, and
make decisions that are financially sound. Also, a good plan will force you to narrow
your focus and not spread yourself too thin—a trap that most new businesses fall into.
7.
Why is it important to establish a time limit for a new business to generate
profit?
Even with a winning business plan, success is not guaranteed. Without an established
time limit, entrepreneurs may just end up exhausting financial resources that might
have been saved had they known when to call it quits.
8.
What things should you consider when evaluating a franchise agreement?
Before signing an agreement you should learn about the financial condition of the
franchisor, whether it has been involved in any lawsuits, the franchisor’s plans for
expansion, the quality of the training and support offered by the franchisor, the depth
and experience of their management team, whether they offer financial assistance to
franchisees, and the “word on the street” about the franchisor and its industry.
9.
What factors should you consider before selecting financing alternatives for a
new business?
Have to determine where the money will come from
1.
equity – give investors a share of the business in exchange for their
money
2.
debt – borrow money that must be repaid
Have to answer these three questions:
1.
the amount of money needed – VCs tend to only work with start-ups that
are in need of large sums of money
2.
the amount of time available to locate the funding – going public tends to
be a time-consuming process
3.
the amount of risk involved in starting your business – angle investors are
typically willing to be involved with riskier businesses than the other two
funding sources.
10.
Ethical Considerations: You’re thinking of starting your own hotdog and
burger stand. You’ve got the perfect site in mind, and you’ve analyzed the
industry and all the important statistics. It looks like all systems are go.
Uncle Pete is even going to back you on this one. You really understand the
fast-food market. In fact, you’ve become a regular at a competitor’s
operation (down the road) for over a month. The owner thinks you’re his
best customer. He even wants to name a sandwich creation after you. But
you’re not there because you love Frannie’s fancy fries. No, you’re actually
spying. You’re learning everything you can about the competition so you can
outsmart them. Is this behavior ethical? Explain your answer.
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Part 2: Starting and Organizing a Business
Student’s answers will vary. To lead them back to the chapter objectives, the instructor
might want to ask them what they’ve learned from this and how they would apply it to
their future business careers.
Questions for Application
11.
Briefly, describe an incident in your life pertaining to a particular failure.
What was it and what did you learn from this experience?
Students’ answers will vary.
12.
Lack of industry experience is one of the most common reasons for failure of
new businesses. If you wanted to start a new business that provides catering
and other services for corporate events (office parties, executive retreats,
public open houses, and so on), how might you gain the experience needed to
succeed in such a venture?
One way to gain the experience needed to succeed in starting a business is to work for
someone else running the same kind of experience. Another is to seek the insights to
be gained from the Small Business Administration and SCORE.
13.
Integrated: Entrepreneurs are one of the five factors of production discussed
in Chapter 1. Review that material plus Exhibit 1.1 (Rags to Riches), and
explain why entrepreneurs are an important factor for economic success.
Through the five factors of production—natural resources, human resources, capital,
entrepreneurs, and knowledge—business can create profit. Entrepreneurs are an
important factor for success because it is through them (and through intrapreneurs) that
innovation occurs. The examples listed in the text also demonstrate that a weakness in
capital can be counterbalanced by one of the strengths of entrepreneurs—their
ingenuity.
Entrepreneurs are an important factor for economic success because:
1.
They provide jobs
a.
create about 65 – 70% of new jobs
b.
some 22 millions small businesses employ more than 51% of the private,
nonfarm U.S. workforce
c.
generate more than 50% of U.S. gross domestic product
2.
They introduce new products – 55% of U.S. product innovation
3.
They supply the needs of large corporations
a.
basic job training for new workers just entering workforce
b.
are distributors, servicing agents and suppliers to larger corporations
4.
They provide specialized good and services
5.
Spend about $2.2 trillion annually (compared to $2.6 trillion spent by large
companies)
14.
16
Integrated: Pick a local small business or franchise that you visit frequently
and discuss whether that business competes on price, speed, innovation,
convenience, quality, or any combination of these factors. Be sure to provide
some examples.
Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
The question can serve the chapter’s goals in several ways. By examining a “real-life”
small business, the student can start applying some the concepts discussed in the
chapter, including the 12 issues covered in a business plan, the ways entrepreneurs can
get into small businesses for themselves, and the things they should know before
starting. Recognizing how a small business competes can emphasize the vital role of
small businesses in the economy.
Practice Your Knowledge
Handling Difficult Situations on the Job: Getting the Inside Scoop on a
Franchise
Responses to “Your Task”
Considering all you’ve learned in this chapter about franchise advantages and
disadvantages, and small businesses in general, what questions will be most
pertinent for your meeting with Jones? Jot them down as you think of them so you’ll
be prepared. Remember that you won’t want to waste Jones’s time with questions
you can get answered from other sources, so focus on eliciting her unique insights
as a franchisee.
Student responses will vary. However, with each question they raise, ask them what other
sources of information they could use to find the answer that same question. Students should
also be encouraged to review the Subway Headquarters’ Website to comprehend the amount of
information available online. That web address is: www.subway.com, where they can then click
on “Franchise Opportunities.”
Students should also be encouraged to call the Franchising Home Office and ask to arrange for
a telephone interview with a manager. The students should explain their assignment and ask
for assistance in securing information. That phone number is:
Subway Franchise Headquarters
325 Bic Drive
Milford, CT 06460 USA
Tel. (203) 877-4281 / (800) 888-4848
Building Your Team Skills
The 10 questions shown in Exhibit 6.5 cover major legal issues you should explore before
plunking down money for a franchise. In addition, however, there are many more questions you
should ask in the process of deciding whether to buy a particular franchise.
With your team, think about how to investigate the possibility of buying a Papa John’s
franchise. First, brainstorm with your team to draw up a list of sources (such as printed sources,
Internet sources, and any other suitable sources) where you can locate basic background
information about the franchisor. Also list at least two sources you might consult for detailed
information about buying and operating a Papa John’s franchise. Next, generate a list of at least
10 questions any interested buyer should ask about this potential business opportunity.
Choose a spokesperson to present your team’s ideas to the class. After all the teams have
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Part 2: Starting and Organizing a Business
reported, hold a class discussion to analyze the lists of questions generated by all the teams.
Which questions were on most teams’ lists? Why do you think those questions are so
important? Can your class think of any additional questions that were not on any teams’ lists
but seem important?
Students’ lists will vary, but should include questions regarding such issues as the franchise’s
fees and expenses, training programs, marketing services, and expected return on investment.
In addition, potential franchisees should establish which services (property taxes, advertising,
payroll, insurance, audits, etc.) are covered by the franchisor and which are covered by the
franchisee.
Expand Your Knowledge
Discovering Career Opportunities
Would you like to own and operate your own business? Whether you plan to start a new
business from scratch or buy an existing business or a franchise, you will need certain qualities
to be successful. Start your journey to entrepreneurship by reviewing this chapter’s section on
entrepreneurs. Now you are ready to delve deeper into the career opportunities of owning and
running a small business.
1.
Which of the entrepreneurial characteristics mentioned in the chapter
describe you? Which of these characteristics can you develop more fully in
advance of running your own business?
Students’ answer will vary, but should be drawn from the characteristics discussed in the
chapter: diligence, enthusiasm, persistence, and sociability; eagerness to learn new
skills; tolerance for uncertainty; willingness to work hard and to take risks. Through
work for big companies and other small businesses, many of these qualities can be
developed prior to running a business of one’s own.
2.
Using library sources, find a self-test on entrepreneurial qualities or use the
entrepreneurial test at the website http://www.onlinewbc.org/docs/
starting/test.html. Analyze the test’s questions. Which of the characteristics
discussed in this chapter are mentioned or suggested by questions included in
this test?
The online test contains a series of statements to which the test-taker may respond
“yes,” “maybe,” or “no.” The statements include “When there's something I want, I keep
my goal clearly in mind,” “I am adaptable,” and “I'm willing to undergo sacrifices to gain
possible long term rewards.” (See the site for a complete list.) Most (if not all) of the
statements in the test are clearly related to the individual characteristics discussed in the
chapter.
3.
Answer all the questions in the self-test you have selected. Which of these
questions seem the most critical for entrepreneurial success? How did you
score on this self-test—and on the questions you think are most critical?
Before you go into business for yourself, which characteristics will you need
to work on?
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Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
Students’ assessments will vary. To encourage them to examine their choices and
assumptions in more depth, the instructor may want to ask the students to explain why
they have determined one question or another to be most critical.
Developing Your Research Skills
Scan issues of print or online editions of business journals or newspapers for articles describing
problems or successes faced by small businesses in the United States. Clip or copy three or
more articles that interest you and then answer the following questions.
1.
What problem or opportunity does each article present? Is it an issue faced
by many businesses, or is it specific to one industry or region?
Students’ answers will vary depending on the articles chosen.
2.
What could a potential small-business owner learn about the risks and
rewards of business ownership from reading these articles?
Students’ answers will vary depending on the articles chosen
3.
How might these articles affect someone who is thinking about starting a
small business?
Students’ answers will vary depending on the articles chosen
Exploring the Best of the Web
URLs for all Internet exercises are provided at the website for this book,
www.prenhall.com/bovee. When you log on to the text website, select Chapter 5, then select
Student Resources, click on the name of the featured website, and follow the detailed
navigational directions to complete these exercises.
Explore these chapter-related websites, review their content, and answer the following
questions for each website you visit:
1.
What is the purpose of this website?
2.
What kinds of information does this website contain? Please be specific.
3.
How is the information provided at this website useful for businesspeople? Consumers?
4.
How did you expand your knowledge of starting and financing a small business by
reviewing the material at this website? What new things did you learn about this topic?
Guide Your Way to Small Business Success
Inc.com has an outstanding selection of articles and advice on buying, owning, and running a
small business that you won’t want to miss. If you’re considering a franchise, the tools and tips
at this site will help you find your ideal business. Concerned about financing? Check out the
articles on raising start-up capital, finding an angel, or attracting venture capital. You can also
find information on how to create or spruce up a website, set up your first office, develop
entrepreneurial savvy, and overcome burnout. Running a small business is no easy feat, so get
a head start by reading the Inc.com guides online.
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Part 2: Starting and Organizing a Business
www.inc.com/guides
1.
What is the purpose of this website?
To provide resources on specific business-management issues.
2.
What kinds of information does this website contain? Please be specific.
Student answers may vary, but may include any of the following:
This website contains information on the following: writing a business plan; leadership
and strategy; starting a business; information technology; running a one-person
business; human resources; buying a business or franchise; personal and professional
growth; sales; finance and capital; office and operation; e-commerce; marketing and
advertising; customer service; law and taxation; Internet and business.
3.
How is the information provided at this website useful for businesspeople?
Consumers?
Student answers may vary, but may include any of the following:
For businesspeople, this website provides information on all of the above. All of the
topics listed above are essential to successful business operations.
For consumers, the website provides a place for consumers to locate businesses of their
choice and information concerning online degrees.
4.
How did you expand your knowledge of starting and financing a small
business by reviewing the material at this website? What new things did you
learn about this topic?
Students’ responses will depend, in large part, on the material currently posted on the
website.
Start a Small Business
Thinking about starting your own business? The U.S. Small Business Administration (SBA)
website puts you in touch with a wealth of resources to assist you in your start-up. Perhaps you
would like some professional business counseling, financial assistance, or advice on developing
a business plan. Starting a new business or buying an existing one can be an overwhelming
process. But you can increase your chances of success by taking your first steps with the SBA’s
Startup Kit. So log on to find out if entrepreneurship is for you. Then do your research and
discover some of the secrets of success.
www.sba.gov
1.
What is the purpose of this website?
To provide a resource for potential and current small business owners to access. It is
designed to help you help customers and constituencies, small business owners and
potential entrepreneurs to start or continue successful and legal business operations.
2.
What kinds of information does this website contain? Please be specific.
Student answers may vary, but may include any of the following:
The website provides information on the following: starting a small business; financing
your business; business opportunities; offices and services; laws and regulations, etc…
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Seminar 4
3.
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
How is the information provided at this website useful for businesspeople?
Consumers?
Student answers may vary, but may include any of the following:
Businesspeople can use this website as a resource to learn about small business
ownership and potential solutions to problems that may arise. A listing of laws and
regulations that impact small business owners is available as well as options to access
SBA publications. Information on obtaining loans and financial management of a
growing business is also provided on this website.
The SBA publishes “SBA Programs and Services,” which is readily made available to
customers. Outside resources and great business hotlinks are also provided on this
website for potential use of customers.
4.
How did you expand your knowledge of starting and financing a small
business by reviewing the material at this website? What new things did you
learn about this topic?
Students’ responses will depend, in large part, on the material currently posted on the
website.
Learn the ABCs of IPOs
Taking a company public is not for the faint of heart. But like a Broadway opening, a successful
debut can launch a relatively unknown company into stardom—or allow it to quietly disappear
from the public eye. Even today’s largest corporations were at some point small startups looking
for public financing. Which company is the next AOL, Xerox, or Microsoft? How do IPOs work?
How does a young company play the IPO game? You can find the answer to these questions
and more by checking out the Beginners Guide to IPOs at Hoover’s IPO Central.
www.hoovers.com/ipo
1.
What is the purpose of this website?
Hoover's wants to be the homepage of the business world. The company provides
proprietary online business information through the Internet, wireless devices, and cobranding agreements with more than 30 other online services. Its Web site, Hoover's
Online, features a database of information on more than 12 million corporations and
organizations (more than 18,000 are profiled by Hoover's in-house editorial staff).
Offering both free and for-pay information, the company focuses primarily on selling
subscriptions (about 67% of revenue) to marketing, sales, and business development
professionals. It also publishes books and CD-ROMs. AOL Time Warner owns 17% of
Hoover's; Media General owns 15%.
The firm has shifted its focus to developing Hoover's Online as the lowest-cost business
information tool on the Web for professionals. It had been trying to make inroads into
the content syndication market through its Hoover's Media Technologies subsidiary
(formerly Powerize).
2.
What kinds of information does this website contain? Please be specific.
Student answers may vary, but may include any of the following:
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Part 2: Starting and Organizing a Business
Hoover's, Inc. (NASDAQ: HOOV) delivers comprehensive company, industry, and market
intelligence that drive business growth. Hoover’s provides sales, marketing, business
development, and recruiting professionals with the global business intelligence they
need to prospect and prepare for client meetings, sales presentations, vendor and
partner negotiations, and other business opportunities. Hoover’s, Inc. provides businessinformation products and services of the highest quality, accuracy, and readability. It
provides market news, industry news, and information on specific companies. It also
details the latest pricings and filings of IPOs and IPO updates. It provides a Beginners
Guide to IPOs at Hoover’s IPO Central.
3.
How is the information provided at this website useful for businesspeople?
Consumers?
Student answers may vary, but may include any of the following:
This website provides a place for businesspeople to obtain industry and market
information. Businesspeople can also sign up to receive free newsletters about current
business topics/trends via e-mail. Hoover’s provides sales, marketing, business
development, and recruiting professionals with the global business intelligence they
need to prospect and prepare for client meetings, sales presentations, vendor and
partner negotiations, and other business opportunities.
The website provides the latest business headlines so consumers can remain informed.
It also has a link to explore potential job opportunities.
4.
How did you expand your knowledge of starting and financing a small
business by reviewing the material at this website? What new things did you
learn about this topic?
Students’ responses will depend, in large part, on the material currently posted on the
website.
A Case for Critical Thinking
Why Is Papa John’s Rolling in Dough?
Critical Thinking Questions
1.
22
What steps did John Schnatter take to turn Papa John’s into a successful
pizza chain?
John Schnatter started learning the pizza business early on in his life. He gained
knowledge of every facet of the pizza business. He then started a single pizza store in
his father’s tavern. John Schnatter did a remarkable job of expanding from this single
pizza store. Three years after Schnatter opened his first Papa John’s, he expanded
outside the Louisville, Kentucky area. He knew the grass roots of the pizza business, he
had an intuitive grasp on what customers wanted, and he knew how to make pizzas
taste a little bit better than competition. Moreover, he had the qualities of an
entrepreneur: driven, intense, willing to make things happen, visionary, and very
competitive.
Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
2.
If you were drafting Papa John’s initial business plan, what would you need
to know about competition?
Student answers may vary; however, below is a possible response.
I would need to know if the industry is highly competitive or not. I would need to know
what other businesses in the industry were doing for comparison purposes. I would
need to study the way in which others conducted business to see if benchmarking
efforts are appropriate. I would also need to identify my toughest competitors and
decide what competitive advantage I wanted my company to have and use this to
obtain growth at the expense of a competitor’s existing business.
3.
Why would Papa John’s rely on franchising to grow its concept?
With franchising, John can maintain some level of control as to how these businesses
are run. He trains managers how to forecast product demand. Stores project demand
one to two weeks in advance. They factor in anything from forthcoming promotions to
community events to the next big high-school football game. If a big game is on TV,
Schnatter wants to make sure the storeowners are ready for the surge in deliveries.
These games and community events, etc. are just a few things that are specific to a
certain area. John knows that the areas managers are more apt to be knowledgeable
about these things. Franchising allows John to maintain some level of control in terms
of training, advertisement, and quality (just to name a few), while utilizing the
advantage of hometown managers to deliver personal service to the customers.
4.
Go to Chapter 6 of this text’s website at www.prenhall.com/mescon. Click on
the Papa John’s link to read about Papa John’s franchise system.
What kind of assistance does Papa John’s provide new franchisees?
The following is taken directly from
http://www.papajohns.com/franchise_opps/us_franchise.html
We provide a franchise support system designed to support all of your business needs. Papa John's is committed to
providing a superior level of service to our franchise family.
Franchise Services
Papa John’s strives to constantly improve the support we provide to our franchise family. Highly specialized teams
partnering resources with functional expertise in business consulting, marketing, operations and training, support our
franchisees. The United States is divided into four regions. A Regional Franchise Director supported by Area Franchise
Directors, Regional Franchise Training Consultants, Regional Franchise Marketing Consultants, Regional Marketing
Directors, and the Constant Improvement Team (CIT) support each region.
The Regional and Area Franchise Directors of each region provide complete business consulting support for franchise
groups. Area Franchise Directors act as Business Development Managers. Their primary focus is to analyze evaluation
results, marketing data and training information and then work with franchisees to create tactics and business
strategies to help improve an organization’s operations, local store marketing, people development, financial
opportunities and training effectiveness and efficiencies.
The Regional Franchise Training Consultants assist franchisees by delivering training and development solutions that
solve business needs. Our Training Team assists with new product and equipment deployments, development of
trainers and training systems, and facilitates training, group discussions and developmental activities for specific
franchise groups or an entire region.
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Part 2: Starting and Organizing a Business
The Regional Franchise Marketing Consultants provide support and assistance to franchisees in marketing plan
development, assist with local store marketing efforts, evaluate and analyze marketing effectiveness and, in general,
are a resource for franchisees for all marketing and advertising needs. The Regional Marketing Directors work closely
with co-ops to help align regional marketing efforts with our national plan. They also assist with media planning,
purchasing, and analysis.
The Constant Improvement Team is a resource for evaluating the efficiency of restaurant operations. The CIT conducts
comprehensive restaurant evaluations. The results are then provided to the Area Director as one means of reviewing a
franchisee’s business and selecting tactics to help restaurants perform more effectively. Once these tactics are
identified, the resource teams provide support in those efforts.
Franchise Services is a partnership. Both corporate and franchise support is imperative to the success of the Papa
John’s team. The two must form relationships with the support resources, participating in efforts to identify and address
business issues and following through on agreed upon plans. As part of this partnership, Papa John’s and the
franchisees formed the Franchise Advisory Council. Elected franchise representatives and corporate representatives
meet quarterly to discuss operational issues, the business environment, company standards, growth strategies, etc.
The franchise representatives then communicate these important issues to their fellow franchisees.
Restaurant Openings
Papa John’s Development team provides customized assistance to our franchisees for restaurant openings. Our Real
Estate Directors help franchisees determine the ideal site for their restaurants, working with them to review and
evaluate market trade areas and site criteria. Once the proper site has been selected and approved, our Equipment
Coordinators and Construction Managers lead franchisees through the build-out of the restaurant and ordering of
equipment. Our Restaurant Opening Team provides hands-on assistance and training to teach franchisees and their
team members all the skills they need to run a flourishing business operation.
PJ Food Service
PJ Food Service provides one-stop shopping for virtually all of the ingredients and supplies used in Papa John’s
restaurants. Our traditional fresh pizza dough is made at PJ Food Service’s eleven U.S. Quality Control Centers and is
delivered (along with other ingredients, paper items, smallwares and even cleaning supplies) twice a week to each
restaurant. The PJ Food Service team is committed to providing the entire Papa John’s family of restaurants with
superior service and the finest quality ingredients at the best possible prices.
The Mission of PJ Food Service: “To consistently exceed customer expectations in production and distribution to the
Papa John’s International family.”
Support Services
Papa John’s commitment to quality extends well beyond the “better ingredients” that make our “better pizza.” To
ensure superiority in every aspect of our business, Papa John’s Support Services team offers print and promotional
items as well as uniforms and training materials to franchisees. Free-standing inserts (glossy inserts generally
delivered via mail or inserted into newspapers), box-top coupons, door-hangers and ingredients flyers are just a few of
the many items available through the Support Services Print Team. The Support Services Promotions Team stocks
logo clothing items as well as banners, magnets and a variety of promotional items such as key chains, cups, balloons
and much more that franchisees may purchase for use in their restaurant(s). Our new direct mail system, in which a
restaurant operator can request that certain coupons be mailed to specific marketing zones or customers, is another
unique service provided by Support Services. In addition, our Support Services Customer Relations Team works
closely with franchisees needing special, customized print or promotional pieces as well as custom embroidery and
awards.
Information Systems Services
Papa John’s Information Systems (I.S.) department offers a wealth of technological resources to our franchise family.
We employ the same in-store technology, the Papa John’s PROFIT System™ , systemwide, providing a solid, state-ofthe-art system platform for pizza restaurant management. The I.S. team installs and provides training on the Papa
John’s PROFIT System™ in each restaurant and also offers ongoing support through the Papa John’s Help Desk. The
Help Desk 800 hotline is staffed 24 hours a day, seven days a week.
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Seminar 4
Chapter 6: Putting Yourself in Charge: Entrepreneurs and Small Business Owners
The I.S. team also offers an Information Exchange Toolkit that consolidates personal key indicators and financial
transactions from the PROFIT System™ into either a personal computer or web- based application. Information is
retrieved daily from the PROFIT System™ by the I.S. team; then, the Toolkit enables restaurant operators to analyze
the PROFIT System™ data for use in financial reporting, payroll, food and labor management, marketing and many
other operations functions.
Other Information Systems services available to franchisees include: Field Maintenance Support, Automated
Commissary Order System, Online Ordering, Customer Opportunity Desk and Geographic Mapping Services.
Risk Services
Papa John’s requires franchisees to maintain insurance coverage. For the convenience of our franchise family, Risk
Services Corp., a wholly-owned subsidiary of Papa John’s International, offers a property and casualty insurance
program. The Risk Services team acts as a resource to all Papa John's franchisees to assist in insurance related
matters. Currently, 80% of Papa John’s franchisees are enrolled in the Risk Services insurance program. For more
information, contact the RSC team at 800-267-4876.
Quality Management
Papa John’s Quality Management department is made up of three functional teams: Research and Development
(R&D), Quality Assurance (QA); and Quality Control (QC).
The R&D team is focused on developing quality products worldwide. This includes developing ways to make existing
products better, developing new suppliers to meet our international growth, and developing new products that are on
strategy with the Papa John’s brand.
The QA team is responsible for maintaining that product quality worldwide. This is accomplished through our supplier
audit program and monthly compliance program, where chemical and bake evaluations are performed in our corporate
lab for adherence to specifications.
The QC team is on-site in our dough manufacturing facilities. They ensure all incoming raw ingredients and dough
produced meet all specifications before they are shipped to our restaurants.
What are Papa John’s minimum requirements for new franchisees?
Papa John’s net worth and capital requirements for new franchisees are as follows:
1-3 units
4-10 units
11 or more

Minimum net worth of $250,000; and $250,000 per restaurant in cash, liquid assets,
available financing, or a combination thereof.

Minimum net worth of $1,000,000; and $250,000 per restaurant in cash, liquid assets,
available financing, or a combination thereof.

Minimum net worth of $2,000,000; and $250,000 per restaurant in cash, liquid assets,
available financing, or a combination thereof.
These are minimum requirements and do not represent the total potential costs to open and operate one or more Papa
John’s units.
Additional franchisee qualifications and requirements include:
 The prospective franchise group should have at least one partner with a successful business management
background and one partner who qualifies as the Principal Operator.
 The Principal Operator must live in the area to be developed throughout the term of the franchise group’s
existence.
 The Principal Operator must have prior fast food general management experience relative to the number of
units to be developed and must own or have the right to acquire at least 5% equity in the business within 12
months of hire date.
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Part 2: Starting and Organizing a Business

A Personal Financial Statement and resume must be submitted for each member of the proposed franchise
group; a resume must be submitted for the Principal Operator candidate.
How much does it cost to open a Papa John’s restaurant?
Franchise Fees



The initial franchise fee is $25,000 per restaurant.
An ongoing royalty fee of 4% of net sales is due on a monthly basis.
Papa John’s requires that a minimum of 7.5% of net monthly sales be spent by each franchisee for marketing
purposes*, as follows: 2.25% national fund, 5.25% co-op and/or local marketing initiatives.
*Papa John’s Franchise Offering Circular includes more detailed information regarding marketing and advertising fees.
*These franchise requirements do not constitute an offer to award a franchise. Such an offer may be made only in
compliance with applicable disclosure laws, if any.
Click here to view our U.S. Potential Franchisee Request for Consideration.
In the event that we are experiencing an abnormally high volume of inquiries, please understand that it may
take several days for you to receive a response. On those occasions, we sincerely appreciate your patience.
Pizza facts can be obtained at www.chicagostylepizzainc.com/ pizzafacts.shtml link.
Answers to Boxed Features
Box 2: Minding Your Own Business – Blueprint for an Effective Business Plan
Questions for Critical Thinking
1.
Why is it important to identify critical risks and problems in a business plan?
Identifying critical risks and problems in a business plan is essential for two primary
reasons. First, carefully considering such issues beforehand will better prepare the
business plan writer, and thus the soon-to-be business owner to appreciate fully the
magnitude of such potential obstacles and to plan how to maneuver around them should
they occur. In addition, such careful planning ensures investors that the writer has not
been naïve about the business plan, but is fully cognizant of potential upcoming issues.
2.
Many experts suggest that you write the business plan yourself, rather than
hiring a consultant to write it for you. Why is this approach a good idea?
When the business plan is prepared and written by the soon-to-be owner, that individual
grasps more fully the nuances of the business in which he or she is about to embark. A
hired consultant typically performs much of the market research and could leave the
upcoming owner lacking the knowledge that will be necessary to ensure success.
Additionally, that level of preparation ensures that the upcoming owner will be best
prepared to handle the questions to be raised by potential investors.
26