Chapter 5
Small Business,
Entrepreneurship,
and Franchises
Learning Objectives
1. Define what a small business is and recognize the
fields in which small businesses are concentrated.
2. Identify the people who start small businesses and the
reasons why some succeed and many fail.
3. Assess the contributions of small businesses to
our economy.
4. Judge the advantages and disadvantages of operating
a small business.
5. Explain how the Small Business Administration helps
small businesses.
6. Appraise the concept and types of franchising.
7. Analyze the growth of franchising and franchising’s
advantages and disadvantages.
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Chapter 5 | Slide 2
Small Business
…one that is independently owned
and operated for profit and is not
dominant in its field.
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Chapter 5 | Slide 3
Table 5.1: Industry Group
Size Standards
Small-business size standards are usually stated in number of
employees or average annual sales. In the United States, 99.7
percent of all businesses are considered small.
Source: http://www.sba.gov/services/contractingopportunities/owners/basics/GC_SMALL_BUSINESS.html, accessed
May 4, 2009.
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Chapter 5 | Slide 4
Establish a Small Business
 4 days and $210
 Steps
 Register name
 Apply for tax IDs
 Set up insurance
-
Unemployment
Workers’ compensation
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Chapter 5 | Slide 5
Table 5.2: Establishing a
Business Around the World
Source: World Bank (2004); as found in Inside the Vault, Federal Reserve Bank of St. Louis, Fall 2004, p. 1.
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Chapter 5 | Slide 6
U.S. Small Business in Last Decade
 Number up 49%
 Record-breaking new-business formation in
last few years
 Nearly 637,000 new incorporations
 Part-time entrepreneurs up 5-fold
(equal 1/3 of small businesses)
 Provides more than 50% of jobs
 56% of new businesses fail in first 4 years
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Chapter 5 | Slide 7
Industries That Are and Are Not Attractive to
Small Business
 Attractive: Growing industries with profit
potential (such as outpatient-care facilities)
 Not attractive: Industries requiring a huge
investment
• Auto manufacturing
• Machinery
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Chapter 5 | Slide 8
Small-Business Dominance
 Real estate, rental, leasing = 74%
 Arts, entertainment, recreational services = 76%
 Construction = 90%
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Chapter 5 | Slide 9
Top Small Business Categories
 Distribution: 33% small business




Retailing
Wholesaling
Transportation
Communications
 Service: 48% small business






Medical/dental
Watch/TV/shoe repair
Haircutting/styling
Restaurants
Dry cleaning
Financial services
 Production: 19% small business
 Construction
 Mining
 Manufacturing
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Chapter 5 | Slide 10
Percent of People Who
Would Prefer Being an Entrepreneur
 U.S.A. = 70%
 Western Europe = 46%
 Canada = 58%
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Chapter 5 | Slide 11
Entrepreneurial Spirit
“Desire to create a new business”
 Small businesses are managed by people who
start and own them
 Owners could be employed elsewhere if they
wanted
 Owners would rather take risk of starting and
operating ─ even if they’ll make less money
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Chapter 5 | Slide 12
Other Factors Driving Entrepreneurs
 Independence
 Desire to determine own destiny
 Willingness to find/accept challenge
 Coming from family of entrepreneurs
 Age = 24 – 44
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Chapter 5 | Slide 13
Figure 5.1: How Old Is
the Average Entrepreneur?
People in all age groups become entrepreneurs, but more than 70 percent are
between 24 and 44 years of age.
Source: Data developed and provided by the National Federation of Independent Business Foundations
and sponsored by the American Express Travel Related Services Company, Inc.
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Chapter 5 | Slide 14
5 P’s of Entrepreneurship
Planning
Persistence
Patience
People
Profit
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Chapter 5 | Slide 15
Motivation to Start a Business
 “Enough” of
working/earning profit for
someone else
 Loss of job
 New idea for product or
sales
 Sudden opportunity
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Chapter 5 | Slide 16
Table 5.3: U.S. Business Start-ups, Closures,
and Bankruptcies
Source: U.S. Department of Commerce, Bureau of the Census; Administrative Office of the U.S. Courts; U.S.
Department of Labor, Employment and Training Administration, Small Business Administration, Office of Advocacy,
Frequently Asked Questions, September 2008, www.sba.gov/advo, accessed October 4, 2008,
http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24; and SBA
Quarterly Indicators, First Quarter 2009, released May 8, 2009, p. 1.
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Chapter 5 | Slide 17
Women-Owned Businesses

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
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


Population = 51%
Small businesses = 50%
Home-based businesses = 66%
Businesses = 10.4 million
Jobs = 7.1 million
Sales = $941 billion
Payroll = $174 billion
In business 12+ years = 40%
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Chapter 5 | Slide 18
Entrepreneur Must
Manage
 Finances
 Personnel
 Day-to-day
operations
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Handle





Sales
Advertising
Purchasing
Pricing
Other
Chapter 5 | Slide 19
Why Small Businesses Fail
 Lack of capital
 Lack of
management skills
 Lack of planning
 Overexpansion
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Chapter 5 | Slide 20
Technical Innovation
 New ways to do a job with less effort for
less money
 Small business vs. large:
• 2.5 times innovation per employee
• 41% of high-tech workers
• 13–14 times more patents
 Many inventions that sparked new
industries
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Chapter 5 | Slide 21
Small Firms and Employment
 U.S. economy created 3+ million jobs
•
•
70% in small-business-dominated industries
Business services = leisure, hospitality, special
trade contractors
 Small firms hire greater proportion of
•
•
•
Younger/older workers
Women
Part-time employees
 Worker’s first job = 67%
 Initial on-the-job training
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Chapter 5 | Slide 22
SBA Statistics on Small Businesses
 Employers = 99.7%
 Private work force = 50%
 Net new jobs = 60–80%
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Chapter 5 | Slide 23
Small Businesses Provide Competition
 Challenge large firms
 Force big firms to be
• More efficient
• More responsive
to customer
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Chapter 5 | Slide 24
Small Businesses Fill Needs
 Satisfy niche consumers
 Provide variety of goods/services to
other businesses (outsourcing)
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Chapter 5 | Slide 25
Advantages of Smallness
 Personal relationships
 Ability to adapt to change
 Simplified record keeping
 Independence
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Chapter 5 | Slide 26
Disadvantages of Small Business
 Risk of failure
 Limited potential
 Limited ability to raise capital
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Chapter 5 | Slide 27
Weekly Hours Worked by
Small Business Owners
19%
Fewer Than 35
43%
35 to 50
More Than 50
38%
Source: Inc. Magazine, “It’s Good to Be King,” December 2003, p.
32.
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Chapter 5 | Slide 28
Figure 5.2: Sources of
Capital for Entrepreneurs
Small businesses get financing from various sources;
the most important is personal savings.
Source: Data developed and provided by the National Federation of Independent Business
Foundations and sponsored by the American Express Travel Related Services Company, Inc..
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Chapter 5 | Slide 29
Business Plan
…a carefully constructed guide for
the person starting a business.
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Chapter 5 | Slide 30
Business Plan Purposes
1. Communication ─ helps potential
investors decide whether to invest in new
venture
2. Management ─ helps track, monitor,
evaluate progress
3. Planning ─ guides businessperson through
business phases
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Chapter 5 | Slide 31
Table 5.4: Components
of Business Plan
Source: Adapted from Timothy S. Hatten, Small Business Management: Entrepreneurship and
Beyond, 3d ed. (Boston: Houghton Mifflin, 2006), pp. 108–120.
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Chapter 5 | Slide 32
Business Plan Should Answer
1. What is the nature/mission of new venture?
2. Why is it a good idea?
3. What are the businessperson’s goals?
4. How much will it cost?
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Chapter 5 | Slide 33
Table 5.5: Business Plan Checklist
Source: Kathleen R. Allen, Launching New Ventures: An Entrepreneurial Approach, 4th ed. (Boston: Houghton Mifflin, 2006), p. 197.
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Chapter 5 | Slide 34
Small Business Administration (SBA)
…a government agency that assists,
counsels, and protects the interests of
small businesses in the United States.
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Chapter 5 | Slide 35
SBA Management Assistance
 Free individual counseling
 Courses
 Conferences
 Workshops
 Publications
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Chapter 5 | Slide 36
SBA Resources
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Management courses/workshops
Service Corps of Retired Executives (SCORE)
Help for minority-owned businesses
Small Business Institutes
Small Business Development Centers
Publications
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Chapter 5 | Slide 37
SBA Financial Assistance
 Regular business loans
 Small-business investment companies
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Chapter 5 | Slide 38
Venture Capital
…money that is invested in small
(sometimes struggling) firms that have the
potential to become very successful.
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Chapter 5 | Slide 39
Franchise
…a license to operate an individually
owned business as though it were part of
a chain of outlets or stores.
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Chapter 5 | Slide 40
What Is Franchising?
Franchise
Agreement
Franchisor
Franchisee
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John Q.
Chapter 5 | Slide 41
Types of Franchising
 Manufacturer authorizes retail store to sell
brand-name item
 Producer licenses distributors to sell given
product to retailers
 Franchisor supplies brand names, techniques,
or other services instead of complete product
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Chapter 5 | Slide 42
Table 5.7: Entrepreneur’s Top
Ten Franchises (2009)
Source: http://www.entrepreneur.com/franchises/printthis/282570.html, accessed May 11, 2009, with
permission of Entrepreneur.com, Inc. @ 2009 by Entrepreneur.com, Inc. All rights reserved.
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Chapter 5 | Slide 43
Dual-Branded Franchise
…two franchisors offer their
product together...
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Chapter 5 | Slide 44
Advantages of Franchising
Franchisor
 Fast/well-controlled
distribution of
products
 No high cost of
construction/
operation
 Highly motivated
franchisee
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



Franchisee
Ability to start
business with limited
capital
Access to others’
business experience
Nationally recognized
name
Local and national
advertising
Chapter 5 | Slide 45
Disadvantages of Franchising
Franchisee
 Contract dictating every aspect of business
 Lawsuit by franchisor for violation of contract
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Chapter 5 | Slide 46
Qualities Franchisors
Seek in Franchisee
0.17
0.23
0.29
0.76
0.84
0.86
0.87
94%
0%
20%
40%
60%
80%
100%
Entrepreneur, “The 28th Annual Franchise 500- Top 10 Franchises for 2007”, January 2007, p. 128.
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Chapter 5 | Slide 47
Global Perspectives
in Small Business
 Internet most favored growth strategy = 50+%
 Technology gives reach/power
 U.S. Commercial Service ─ aids small and
medium-sized businesses in selling overseas
 Businesses must adapt to
demographic/economic changes in world
marketplace
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Chapter 5 | Slide 48
Chapter Quiz
1.
A government agency that was created to assist, counsel,
and protect the interests of small businesses in the United
States is called
a)
b)
c)
d)
e)
Small Business Institutes.
Small Business Investment Companies.
the Small Business Administration.
Small Business Development Centers.
Small Business Guidance Centers.
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Chapter 5 | Slide 49
Chapter Quiz (cont.)
2. Small businesses cluster in which of the following industries?
a)
b)
c)
d)
e)
Service industries
Distribution industries
Production industries
Financial industries
All of the above
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Chapter 5 | Slide 50
Chapter Quiz (cont.)
3. A group of retired businesspeople who volunteer their time to
help small-business owners is known as
a)
b)
c)
d)
e)
SCORE.
ACE.
SBDC.
SBI.
SBIC.
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Chapter 5 | Slide 51
Chapter Quiz (cont.)
4.
A privately owned company that provides venture
capital to small firms is a(n)
a)
b)
c)
d)
e)
small-business association.
small-business investment company.
small-business institute.
active corps of executives.
small-business development center.
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Chapter 5 | Slide 52
Chapter Quiz (cont.)
5. One advantage of a small business is
a)
b)
c)
d)
e)
no risk of failure.
unlimited potential for employers.
personal relationships with customers and employees.
unlimited potential for employees.
limited ability to raise capital.
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Chapter 5 | Slide 53