CHAPTER 6
Entrepreneurship
and
Starting a
Small Business
McGraw-Hill/Irwin
Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.
NAME that COMPANY
While I was an employee at a big company, I
developed a product that has become a staple
on most office supply lists. I needed something
to mark the pages of a hymnal without falling out
or damaging the book. What started as a simple,
yellow piece of paper with a new adhesive
evolved into many different versions – now there
are Super Sticky, recycled, Pop-Up and
electronic versions of my inventions.
Who am I, who did I work for, and what did I invent?
6-2
WHAT is ENTREPRENEURSHIP?
• Entrepreneurship -Accepting the risk of starting
and running a business.
6-3
NOTABLE ENTREPRENEURS
• French immigrant Élruthère Irènèe du Pont de
Nemours started Du Pont in 1802.
• David McConnell borrowed $500 from a friend to
start Avon.
• George Eastman started Kodak with a $3,000
investment in 1880.
• Jeff Bezos started Amazon.com with investments
from his family and friends.
6-4
ANNE BEILER
Auntie Anne’s
• Started selling pretzels when
her family was living paycheck
to paycheck.
• Now Auntie Anne’s has over
1,200 locations and brings in
over $410 million!
• Beiler sold the company in
2005 to start focusing on
charity work.
5-5
YOU’RE NEVER TOO YOUNG
to be an ENTREPRENEUR
Four reasons to start your business right away:
1. You don’t have a mortgage or kids to take care of.
2. You can survive on little funds and work long hours.
3. No disruption to your career path. It hasn’t started yet!
4. Use your alma mater for resources.
Source: Entrepreneur, www.entrepreneur.com, accessed November 2014.
6-6
YOU’RE NEVER TOO OLD to be
an ENTREPRENEUR EITHER!
• The highest rate of
entrepreneurship activity is in
the 55-64 age group!
• Since 1996, older Americans
have opened businesses at
a higher rate than 20-34 year
olds.
• Older entrepreneurs have
greater experience and more
financial resources.
Source: U.S. News and World Report, www.usnews.com, accessed October 2014.
6-7
WHY TAKE the RISK?
• Opportunity
• Profit
• Independence
• Challenge
6-8
BIG TIME PROFIT
• Michael Dell could buy 1,100
new laptops for every
student at the University of
Texas at Austin!
• Dietrich Mateschitz could
buy himself a can of Red Bull
every day for the next 11
million years!
• Liliane Bettencourt could buy
a box of L’Oreal hair color for
every woman in the world!
Source: Forbes, www.forbes.com, accessed November 2014.
Photo Credit: Emran Kassim
6-9
WHAT DOES IT TAKE to be an
ENTREPRENEUR?
• Self-directed
• Self-nurturing
• Action-oriented
• Highly energetic
• Tolerant of uncertainty
6-10
An IDEA is a
GOOD OPPORTUNITY IF…
LO 6-1
• It fills customers’ needs.
• You have the skills and resources to start a
business.
• You can sell the product or service at a
reasonable price and still profit.
• You can get your product or service to customers
before the window of opportunity closes.
• You can keep the business going.
6-11
ENTREPRENEURIAL TEAMS
• Entrepreneurial team -- A
group of experienced people from
different areas of business who
join to form a managerial team
with the skills to develop, make
and market a new product.
• An entrepreneurial team
(Steve Jobs, Steve Wozniak
and Mike Markkula) was key to
Apple’s success.
6-12
MICROPRENEURS
LO 6-1
• Micropreneurs -- Entrepreneurs willing to accept
the risk of starting and managing a business that
remains small, lets them do the work they want to do,
and offers a balanced lifestyle.
• About half of U.S. micropreneurs are home-based
business owners – writers, consultants, video
producers, architects, bookkeepers, etc.
6-13
HOME-BASED BUSINESS
GROWTH
LO 6-1
• Computer technology has leveled the playing
field.
• Corporate downsizing has led many to venture on
their own.
• Social attitudes have
changed.
• New tax laws have
loosened restrictions on
deducting expenses for
home offices.
6-14
HOME-BASED BUSINESS
ISN’T EASY
• Getting new customers is difficult.
• Managing your time requires self-discipline.
• Work and family tasks are sometimes not
separated.
• Government ordinances may restrict your
business.
• Homeowner’s insurance may not cover
business-related claims.
6-15
BENEFITS of HOME-BASED
BUSINESSES
•
Ability to start your business
immediately
•
Minimal start-up capital needed
•
No rent or excessive set-up
charges
•
Comfortable working conditions
•
Reduced wardrobe expenses
•
No commuting
•
Tax benefits
•
Elimination of office politics
•
Low risk for trial and error
6-16
DOWNSIDES of HOME-BASED
BUSINESSES
•
Difficult to establish work
habits
•
Limited support system
•
Isolation
•
Work space may be limited
•
Clients may be uncomfortable
coming to your home
•
Zoning restrictions
•
Success is based 100% on
your efforts
LO 6-1
6-17
ONLINE BUSINESS
• Online sales reached
$262 billion in 2013,
about 8% of all retail
sales.
• All retail sales were up
2.5% in 2013. However,
online retail sales grew
13%.
6-18
AFFILIATE MARKETING
• Affiliate Marketing -- An online marketing strategy
in which a business rewards individuals or other
businesses for each visitor or customer the affiliate
sends to its website.
6-19
BOOSTING YOUR BUSINESS’S
ONLINE PRESENCE
LO 6-1
• Establish an identity.
• Be easy to find.
• Steal good ideas and
make them your own.
• Look out for
opportunities.
Photo Credit: Marc Wathieu
• Remember other forms
of marketing.
• Be friendly!
Source: Entrepreneur, www.entrepreneur.com, accessed November 2014.
6-20
INTRAPRENEURS
• Intrapreneur -- A creative person who works as an
entrepreneur within a corporation.
• Intrapreneurs use a company’s existing
resources to launch new products for the
company.
• Art Fry of 3M developed
Post-Its when he was
trying to mark pages of
his hymnal without
damage.
6-21
GOVERNMENT and
ENTREPRENEURSHIP
EB-5 Immigrant Investor Program
• Immigration Act passed in 1990 created a category of
“investor visas” that encourage entrepreneurs to come
to the U.S.
• Under this program, entrepreneurs (and their spouses
and unmarried children under 21) are eligible to apply
for a green card (permanent residence) if they:
a) Make the necessary investment in a commercial
enterprise in the United States; and
b) Plan to create or preserve 10 permanent full-time
jobs for qualified U.S. workers.
6-22
GOVERNMENT and
ENTREPRENEURSHIP
• Enterprise Zones -- Specific geographic areas to
which governments attract private business
investment by offering lower taxes and other
government support.
• Incubators -- Offer new businesses low-cost offices
with basic services.
6-23
TEST PREP
• Why are people willing to take the risks of
entrepreneurship?
• What are the advantages of entrepreneurial
teams?
• How do micropreneurs differ from other
entrepreneurs?
• What does the government do to promote
entrepreneurship?
6-24
SMALL BUSINESSES
LO 6-2
• Small Business -Independently owned and
operated, not dominant in its
field of operation and meets
certain standards of size.
• Businesses are “small” in
relation to other businesses
in their industries.
6-25
WORK-LIFE BALANCING ACT
% of small business owners
Work over 80 hours per week
Source: Inc., www.inc.com, accessed November 2014.
Work over 40 hours per week
5-26
SMALL BUSINESS STATISTICS
LO 6-2
• There are 28 million small businesses in the U.S.
• Of all nonfarm businesses in the U.S., almost
97% are considered small.
• Small businesses have generated 65% of new
jobs since 1995.
• About 80% of U.S. workers’ first jobs were in
small business.
6-27
ADVANTAGES of SMALL OVER
BIG BUSINESS
LO 6-2
• More personal customer service.
• The ability to respond quickly to opportunities.
Photo Credit: Elliot Brown
6-28
BUSINESS FAILURES are LOWER
THAN the REPORTS BECAUSE…
LO 6-2
• Owner closing a business
to start another is reported
as a “failure.”
• Changing forms of
ownership is reported as a
“failure.”
• Retirement is reported as
a “failure.”
6-29
THEY DID WHAT?
LO 6-2
Famous Business Failures
• Tommy Hilfiger – First store went bankrupt
• Milton Hershey – First confectionery failed
• H.J. Heinz – Company went bankrupt six years after
start
• Walt Disney – First film company
went bankrupt
• Henry Ford – First two car
companies failed
• L.L. Bean – Almost went bankrupt in
first year
Source: World Features Syndicate.
6-30
CAUSES of SMALL BUSINESS
FAILURES
6-31
LEARNING ABOUT
SMALL BUSINESS
• Learn from Others – Investigate your local
colleges for classes on small business and
entrepreneurship; talk to and work for successful
local entrepreneurs.
• Get Some Experience – Gain three years
experience in the field; then start a part-time small
business.
• Take Over a Successful Firm – Serve as an
apprentice and eventually take over once the owner
steps down.
6-33
MAJOR BUSINESS FUNCTIONS
• Planning
• Financing
• Knowing customers
• Managing employees
• Keeping records
6-34
MAJOR BUSINESS FUNCTIONS
LO 6-4
• Planning
6-35
BUSINESS PLANS
LO 6-4
• Business Plan -- A detailed written statement that
describes the nature of the business, the target
market, the advantages the business will have over
competition, and the resources and owners’
qualifications.
• A business plan forces potential owners to be
specific about what they will offer.
• A business plan is mandatory for talking with
bankers or investors.
6-36
WRITING a BUSINESS PLAN
LO 6-4
• A good plan takes a long time to prepare.
• A good executive summary catches interest and
tempts potential investors to read on.
• Getting the plan into
the right hands is
almost as important
as getting the right
information in it.
6-37
A FAMILY AFFAIR
LO 6-4
What to Consider Before Starting a Family Business
• Clarify Expectations – What will each person
contribute?
• Discuss Work/Family Boundaries – What is the
line that separates work from personal relationships?
• Develop Good Communication – Agree about
types of decisions you’ll make jointly and on your own.
• Clarify Long-Term Intentions – Discuss how long
everyone will work full time and goals for the business.
• Have an Escape Hatch – Have a Plan B.
Source: Bloomberg Businessweek, www.businessweek.com, accessed November 2014.
6-38
MAJOR BUSINESS FUNCTIONS
LO 6-4
• Financing
6-39
SOURCES of CAPITAL
LO 6-4
• Personal savings
• Relatives
• Banks & finance companies
• Government agencies
• Angel investors
• Crowdfunding (Kickstarter, Kiva, Lending Club, e.g.)
• Venture capitalists -- Individuals or companies
that invest in new businesses in exchange for partial
6-40
ownership.
The SMALL BUSINESS
ADMINISTRATION
LO 6-4
• Small Business Administration (SBA) -- A U.S.
government agency that advises and assists small
businesses by providing management training and
financial advice.
• SBA started a microloan program in 1991 that
provides very small loans to small business
owners.
• Program judges worthiness based on the
borrowers’ integrity and soundness of their
business ideas.
6-41
The SMALL BUSINESS
INVESTMENT COMPANY
• Small Business Investment Company (SBIC) -A program through which private investment
companies licensed by the SBA lend money to small
businesses.
• SBICs are able to identify a business’s trouble
spots early, giving entrepreneurs advice, and in
some cases rescheduling loan payments.
6-42
SMALL BUSINESS
DEVELOPMENT CENTERS
• Small Business Development Centers (SBDC) are
funded jointly by the federal government and
individual states.
• SBDCs are able to evaluate the feasibility of your
idea, develop your business plan and complete
your funding application – for no charge.
6-43
HELP PLEASE!
More SBA Resources and Other Helpful Groups
•
Small Business
Investment Companies
•
The Office of Innovation
& Entrepreneurship
•
SCORE
•
Entrepreneurship.org
6-44
MAJOR BUSINESS FUNCTIONS
LO 6-4
• Knowing customers
6-45
KNOWING the MARKET
• Market -- Consumers with unsatisfied wants and
needs who have resources, authority and willingness
to buy. (MAD)
• Set out to fill the market’s needs by offering top
quality and great service at a fair price.
• One of the great advantages of small businesses
is the ability to know the market and quickly
adapt to market needs.
6-46
MAJOR BUSINESS FUNCTIONS
LO 6-4
• Managing employees
6-48
MANAGING EMPLOYEES
•
Hiring, training and motivating employees is
critical.
•
Employees of small companies are often more
satisfied with their jobs – they feel challenged
and respected.
•
Entrepreneurs best serve themselves and the
business if they recruit and groom employees
for management positions.
6-49
MAJOR BUSINESS FUNCTIONS
• Keeping records
6-50
ACCOUNTING ASSISTANCE
• Computers simplify the process by helping with
inventory control, customer records and payroll.
• A good accountant can help in:
-
Deciding whether to buy or lease equipment.
-
Deciding whether to own or rent a building.
-
Tax planning.
-
Financial forecasting.
-
Choosing sources of financing.
-
Writing requests for funds.
6-51
LEGAL HELP
• Owners need outside consulting advice early in
the process.
• Small and medium-sized firms cannot afford to
hire experts as employees.
• A competent lawyer can help with:
-
Leases
-
Contracts
-
Partnership agreements
-
Protection against liabilities
6-52
MARKETING RESEARCH
• Marketing decisions need to be made long before
introducing a product or opening a store.
• A marketing research study can help you:
-
Determine where to locate.
-
Whom to select as your target market.
-
What is an effective strategy for reaching the
market.
6-53
OTHER FORMS OF HELP
• A commercial loan officer can help:
-
Design an acceptable business plan.
Give financial advice.
Lend money.
• An insurance agent can help you:
-
Know the risks associated with the business.
How to cover risks with insurance.
How to prevent risks with safety devices.
• Service Corps of Retired Executives
-
More than 13,000 volunteers from industry, trade
associations, and education who counsel small business at
no cost.
6-54
WHAT WENT WRONG?
Five Mistakes Business Owners Make
1. They’re too afraid to take the leap!
2. They hire the wrong people.
3. They don’t want to give up control.
4. They become complacent.
5. They fail to see new opportunities.
Source: Alan Hughes, www.blackenterprise.com, accessed September 2014.
6-55
TEST PREP
• A business plan is probably the most important
document a small business owner will ever
create. There are nine sections in the business
plan outline. Can you describe at least five
sections of a business plan?
6-56
SMALL BUSINESS PROSPECTS
ABROAD
• Small- and medium-sized businesses accounted
for 99% of recent export growth.
• Advantages of global trade for small businesses:
-
Overseas buyers enjoy dealing with individuals.
-
Small companies can usually begin shipping
much faster.
-
They provide a wide variety of suppliers.
-
They can give more personal service and
attention.
6-57
TEST PREP
• Why do many small businesses avoid doing
business globally?
• What are some of the advantages small
businesses have over large businesses in selling
in global markets?
6-58