Part 2
Starting and
Growing a
Business
© 2015 McGraw-Hill Education.
5-2
CHAPTER 4
Options for Organizing Business
CHAPTER 5
Small Business, Entrepreneurship, and
Franchising
5-3
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”.
5-4
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
 Websites, podcasts, online videos, social media,
cellular phones, and expedited delivery services
5-5
Great Entrepreneurs of Our Time
5-6
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
5-7
Importance of Small Businesses to Our
Economy
5-8
Economic Cycles and Entrepreneurship
Many companies begin in times of economic recession
due to high unemployment and the tendency for people to
become less risk averse


Hewlett Packard, Revlon, and IHOP are just a few
examples of companies that began in suboptimal economic
conditions and survived to become large, profitable, and
long-lasting
The Great Recession of 2008 is no exception:
 Groupon, founded in 2008, has since become publicly traded

and valued at near $10 billion
Playdom, a social game developer, was founded in 2008 and
sold for $500 million in 2010
SOURCES: Matt Rosoff “Born From the Ashes: Big Tech Companies Founded During Busts and Recessions”.
http://www.businessinsider.com/great-tech-companies-that-started-in-terrible-economic-times-2011-8?op=1; gbravo. “Famous Companies
Founded During an Economic Recession”. http://www.resourcenation.com/blog/famous-companies-that-were-founded-in-an-economicrecession/3265/. (accessed September 18, 2013).
5-9
Women in Small Business
Women-owned
Businesses
• Are responsible for more
than 23 million American jobs
• Contribute almost $3 trillion
to the national economy
• Woman own more than 8
million businesses
nationwide
5-10
Minorities in Small Business
 Minority-owned businesses have been growing
faster than other classifiable firms
 Represents 21.3% of all small businesses
 Number of minority-owned businesses is increasing
at a rate of 30%
Minority
Small Business Ownership
Hispanics
8.3 %
African-Americans
7.1 %
Asian
5.7 %
American Indian & Native Alaskan
0.9 %
Native Hawaiian & other Pacific Islander
0.1 %
5-11
Number of Firms by Employment Size
5-12
Small Business Innovation
o Small businesses produce more than half of all
innovations:
Airplane
Audio tape recorder
Fiber-optic examining equipment
Heart valve
Optical scanner
Personal computer
Soft contact lenses
Internet
Zipper
5-13
Innovation
 While Buffalo Wild
Wings did not create
Buffalo-style chicken
wings, it became
known for its tasty
chicken wings
smothered with the
franchise’s own
signature spices and
sauces
 Today the franchises
has more than 800
locations worldwide
5-14
Popular Industries for Small Business
Especially attractive industries to entrepreneurs:
 Retailing and wholesaling
 Services
 Manufacturing
 High technology
5-15
Retailing and Wholesaling
Selling directly to consumers:
Music stores
Sporting-goods stores
Dry cleaners
Boutiques
Drugstores
Restaurants
Caterers
Service stations
Hardware stores
5-16
Services and Manufacturing
Services
• Service sector is 80% of U.S. jobs
• Attracts individuals whose skills are
not required by large firms
• Small manufacturers excel at
customization
Manufacturing • The Malcolm Baldrige National Quality
Award rewards innovative small
manufacturing firms
5-17
High Technology
Businesses that depend
heavily on advanced
scientific and engineering
knowledge
43% of high-tech
jobs are with small
businesses
High-technology
businesses require
greater capital and
have higher initial
startup costs than
do other small
businesses
Many of the
biggest firms
started out in
garages,
basements,
kitchens, and dorm
rooms
5-18
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 a business
normally
Focus
Managerial inexperience or
incompetence
Reputation
Inability to cope with growth
5-19
Advantages of Small-Business Ownership
Some of the advantages
of small businesses
include:
 Flexibility
 Lowers start-up costs
 Ability to be your own
boss
5-20
Disadvantages of Small-Business Ownership
 Entrepreneurs
experience a
great deal of
independence
but also a
great deal of
stress
 Many fail
5-21
Starting a Business
 Start with a concept or general idea
 Create a business plan
 Devise a strategy to guide planning & development
Make
Decisions
• Form of ownership
• Financing
• Acquiring existing business or
start new business
• Buy a franchise
5-22
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
5-23
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
5-24
Financial Resources
 Often, the small-business owner has to put up a
significant percentage of the necessary capital
 Cash money
 Obtain capital
 Financing options:
 Loans
 Stocks
 Equity financing
5-25
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
The owner may bring useful personal
assets (such as a computer, desks, and
other furniture, a car or truck) as part of
his or her ownership interest in the firm
5-26
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
 Although this form of equity financing has helped
many small businesses, they require that the smallbusiness owner share the profits of the business
(and sometimes the control, as well) with the
investors
5-27
Debt Financing
Borrowing financial resources typically from a bank or
lending institution
$
May lead to
inflationoften
–a
Banks
require the entrepreneur to put up
continuing rise
collateral,
a financial interest in the property or
in prices
fixtures of the business
$
$
May lead to
Small-business
owner may have to provide
recession – a
personal
property
as collateral, such as his or her
decline
in
home,production,
in which case the loan is call a mortgage
employment
andcredit
income
of
Line
– An agreement by which a financial
institution promises to lend a business a
predetermined sum on demand
5-28
Debt Financing
 Small businesses may obtain funding from their
suppliers in the form of a trade credit
 Suppliers allow the business to take possession of
the needed goods and services and pay for them at
a later date or in installments
 Occasionally, small businesses engage in
bartering
 Trading their own products for the goods and
services offered by other businesses
5-29
Debt Financing
 Franson Nwaeze and Paula Merrell wanted to open a
restaurant, but most lenders were skeptical about their lack
of experience and money
 Learned that banks were
much more willing to loan
them money to buy a gas
station, they purchased a
Conoco station
 Opened up a successful
restaurant in one-half of it.
 Their motto is “fill’er-up
outside, fill’er-up inside.”
5-30
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
5-31
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 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
5-32
Franchising
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
5-33
Franchises
Advantages
Disadvantages
Training & support
Fees and profit sharing
Brand-name appeal
Standardized operations
Standardized quality of
goods & services
Restrictions on purchasing
National advertising
Limited product line
Financial assistance
Possible market saturation
Proven products
Less freedom in decisions
Centralized buying power
Site selection & territorial
protection
Greater chance for success
5-34
Fastest Growing and Hottest New Franchises
5-35
Help for Small-Business Managers
o Organizations and programs exist to help small
businesses
o
Small Business Administration (SBA)
o Small Business Development Centers (SBDCs)
o Service Corps of Retired Executives (SCOREs)
o Active Corps of Executives (ACEs)
o Small Business Institutions (SBIs)
o U.S. and Local Departments of
Commerce
o
Other small businesses
5-36
The Future for Small Business
Demographic Trends:
 The Baby Boomers
 Generation Y (Millennials)
 Immigrants and shifting
demographics
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.
5-37
The Future for Small Business
Technological
and
Economic
Trends
• Internet usage continues to
increase
• Increase in service exports
• Economic turbulence
• Deregulation of the energy market
& alternative fuels
5-38
Technology and Economic Trends
 Jack Dorsey founded the
idea for Twitter on a
sketchpad
 The idea was based on
how dispatched vehicles
(such as cabs)
communicate with one
another
 Via radio, they are
constantly squawking to
each other about where
they are and what they are
doing
5-39
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
5-40
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?