Chapter Six
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.
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Learning Objectives
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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Small Business: A Profile
• A business that is independently owned and
operated for profit and is not dominant in its field
• SBA “smallness” guidelines
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–
–
–
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Manufacturing—a maximum of 500 to 1,000 employees
Wholesaling—a maximum of 100 employees
Retailing—maximum annual sales of $6 to $24.5 million
Mining—a maximum of 500 employees
General construction—average annual receipts of $12 to
$28.5 million
– Special trade construction—annual sales up to $12 million
– Agriculture—maximum annual receipts of $0.75 to $5
million
– Services—maximum annual receipts of $6 to $29 million
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Class Exercise
• The SBA has developed “smallness” guidelines for
various industries. Would you classify the
following businesses in your community as big or
small?
– General Motors Corporation’s assembly plant, employing 7,000
workers
– A local wholesaler with 95 employees
– A local department store with $1.5 million in yearly sales receipts
– A home builder with annual receipts of $2.8 million
– A shopping mall developer with a $50 million construction contract
– A farmer with annual sales of $3 million
– A farmer with annual sales of $500,000
– A travel agent whose annual sales range from $1.2 million to $2.5
million
– A dry cleaning business with $175,000 in annual receipts
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Small Business: A Profile (cont’d)
• The Small-Business Sector
– There are 23 million businesses in the U.S.
– Only about 17,000 employ more than 500 workers
– In the last decade, the number of small
businesses increased by 49%
– Part-time entrepreneurs have increase fivefold
and account for one-third of all small businesses
– Over 70% of new business fail within their first 5
years, primarily due to poor management
stemming from a lack of business know-how
– Small businesses provide over 50% of the jobs in
the U.S.
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Industries That Attract Small Businesses
• Attractive small-business industry characteristics
– Low initial capital investment
– Special skill requirements
– High growth and profit potential
• Industry categories where small businesses tend
to cluster
– Distribution—retailing, wholesaling, transportation, and
communications (33% of all small businesses)
– Service—medical and dental care; watch, shoe, and
television repairs; hair cutting and styling; restaurant
meals; dry cleaning; financial services (48% of all
small businesses)
– Production—construction, mining, and manufacturing
(19% of all small businesses)
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The People in Small Business: The
Entrepreneurs
• Why people go into business for themselves
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–
–
–
–
–
–
–
–
–
The “entrepreneurial spirit”
The desire for independence
The desire to determine one’s own destiny
The willingness to find and accept a challenge
Personal background
High-tech opportunities, especially for teens
“Had enough” of working for someone else
Losing a job and deciding to start a business
An idea for a new product
An opportunity presents itself
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How Old Is the Average Entrepreneur?
Source: Data developed from and provided by the National Federation of Independent Business Foundation and sponsored by the
American Express Travel Related Services Company, Inc.
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Career Opportunities in Small Business
Source: Robert Kreitner, Management, 9th ed. (Boston: Houghton Mifflin, 2004), p. 26.
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Why Small Businesses Fail
• Lack of capital and cash-flow problems
• Lack of management skills
• Overexpansion
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The Importance of Small Business in Our
Economy
• Providing technological innovation
– Innovation among small-business workers is
higher than among workers in large businesses
– Small firms produce 2.5 times as many
innovations as large firms relative to the number of
persons employed
– More than ½ of the major technological advances
of the 20th century originated with individual
inventors and small businesses
– Inventions may spark new industries or contribute
to established industries
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The Importance of Small Business in Our
Economy (cont’d)
• Providing employment
– Small firms hire a larger proportion of
younger workers, older workers, women,
and part-time workers
– Small businesses provide 67% of workers
with their first job and initial job skills
– Small businesses represent 99% of all
employers and employ 50% of the private
work force
– Small businesses provide 2/3 of the net
new jobs added to the economy
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The Importance of Small Business in Our
Economy (cont’d)
• Providing competition
– Small firms can compete with large firms,
forcing the larger firm to become more
efficient and responsive to customer needs
• Filling needs of society and other
businesses
– Small firms can meet the special needs of
smaller groups of customers
– Small firms can act as specialized
suppliers of goods and services to larger
businesses
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The Pro and Cons of Smallness
ADVANTAGES
• Personal relationships with
customers and employees
• Ability to adapt to change
• Simplified recordkeeping
• Independence
• Advantages of sole
proprietorships
DISADVANTAGES
• Risk of failure
• Limited potential
• Limited ability to raise
capital
– Keeping all profits
– Ease and low cost of going
into business
– Keeping business information
secret
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Sources of Capital for Entrepreneurs
Source: Data developed from and provided by the National Federation of Independent Business Foundation and
sponsored by the American Express Travel Related Services Company, Inc.
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Developing a Business Plan
• A carefully constructed guide for the
person starting a business
• Four questions bankers and investors
are most interested in
– What is the nature and mission of the new
venture?
– Why is the new enterprise a good idea?
– What are the business person’s goals?
– How much will the new venture cost?
• Accuracy and realistic expectations are
crucial
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“Seven Sacred Questions”
in 45 Seconds
• According to one new-venture expert,
entrepreneurs who are trying to raise
venture capital should be able to
answer these questions in 45 seconds
1. What is your product?
2. Who is the customer?
3. Who will sell it?
4. How many people will buy it?
5. How much will it cost to design and build?
6. What is the sales price?
7. When will you break even?
Source: Marc Ballon, “Hot Tips,” Inc., April 1999, p. 104.
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Franchising
• Franchise
– A license to operate an individually owned
business as though it were part of a chain of
outlets or stores
• Franchising
– The actual granting of a franchise
• Franchisor
– An individual or organization granting the
franchise
• Franchisee
– A person or organization purchasing a franchise
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Types of Franchises
• A manufacturer authorizes retailers to sell a
certain brand-name item
• A producer licenses distributors to sell a
product to retailers
• A franchisor supplies brand names,
techniques, or services instead of a
complete product
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Franchising (cont’d)
• The growth of franchising
– Franchising accounts for more than 40% of
all U.S. retail sales and provides over 8
million jobs
– Franchising has expanded with the
expansion of the fast-food industry
– Franchising is attracting more women and
minority business owners than ever before
– Dual-branded franchises, in which two
franchisors offer their products together,
are a new trend
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Franchising (cont’d)
• Are franchises successful?
– The success rate for franchises is higher
than that for other small businesses
– 94 percent of franchise owners report that
they are successful
– Too rapid expansion, inadequate capital or
management skills, or other problems can
cause franchises to fail
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Entrepreneur’s Top Ten Franchises in 2004
1. SUBWAY
2. Curves for Women
3. Quizno’s Franchise Co.
4. 7-Eleven, Inc.
5. Jackson Hewitt Tax Service
6. The UPS Store
7. McDonald’s
8. Jani-King
9. Dunkin’ Donuts
10. Baskin-Robbins USA Co.
For updates: www.franchise500.com
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Advantages of Franchising
TO THE
FRANCHISOR
TO THE
FRANCHISEE
– Fast and well controlled
distribution of its products
– No need to construct and
operate its own outlets
– More working capital
available for expanded
production and advertising
– Franchising agreements
maintain product and quality
standards
– Motivated work force of
franchisees
– Opportunity to start a proven
business with limited capital
– Guaranteed customers
– Franchisor available for
advice and guidance
– Materials for local
promotional campaigns and
participation in national
campaigns
– Cost savings when
purchasing in cooperation
with other franchisees
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Disadvantages of Franchising
TO THE
FRANCHISOR
TO THE
FRANCHISEE
– Failure of the franchisee
to operate franchise
properly
– Disputes with and
lawsuits by franchisees
over the terms of the
franchise
– Franchisor retains a
large amount of control
over the franchisee’s
activities
– Franchisor opening
competing franchises
within the franchisee’s
market
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Debate Issue: Is franchising the
best way to own a business?
YES
NO
• The advantages of franchising
far outweigh the disadvantages.
The franchisee can start the
business with limited capital but,
at the same time, make use of
the business experience of
others. This experience usually
means the franchise name is
widely recognized. Therefore,
franchised outlets are generally
more successful than
independently owned
businesses. A franchisee usually
receives important training
regarding operations
management.
• A true entrepreneur desires
ultimate control over business
operations. Franchising does
not allow for such independence
and, in many cases, franchisees
are not allowed to make crucial
decisions. Beside the lack of
control, the franchisee is, in
effect, working for the franchisor.
The more successful the
franchisee, the greater the
royalties paid to the franchisor.
Owning any business is hard
work but, with franchising, the
franchisee is never justly
compensated for the franchise’s
success.
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Chapter Quiz
1. Which one of the following is the most likely example of a
production industry?
a)
b)
c)
d)
e)
Wholesale outlet
Retail outlet
Financial enterprise
Subassembly plant
Transportation company
2. Small businesses are typically managed by
a)
b)
c)
d)
e)
family members.
professional managers.
friends.
a board of directors.
the people who start and own them.
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Chapter Quiz
3. The fact that the ball-point pen and the zipper both
originated with individual inventors and small companies is
testimony to the power of small business as providers of
a)
b)
c)
d)
e)
employment.
competition.
technical innovation.
capital.
quality products.
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Chapter Quiz
4. As a business person planning to open a new small
business, you know that the business plan should not
contain
a) a discussion of the nature and mission of the new business.
b) information about how much it will cost to open and operate the
new business.
c) pages and pages of detailed facts and figures.
d) any mention of the business person’s goals; financial institutions
just aren’t interested in these.
e) an explanation of why opening a business of this type makes good
business sense.
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Chapter Quiz (cont’d)
5. University-based groups providing individual counseling
and practical training to owners of small businesses are
known as
a)
b)
c)
d)
e)
the Small Business Administration.
Small Business Development Centers.
Small Business Institutes.
Special Task Force.
None of these responses is correct.
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Answers to Chapter Quiz
1. Which one of the following is the most likely example of a
production industry?
a)
b)
c)
d)
e)
Wholesale outlet
Retail outlet
Financial enterprise
Subassembly plant
Transportation company
2. Small businesses are typically managed by
a)
b)
c)
d)
e)
family members.
professional managers.
friends.
a board of directors.
the people who start and own them.
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6 - 35
Answers to Chapter Quiz
3. The fact that the ball-point pen and the zipper both
originated with individual inventors and small companies is
testimony to the power of small business as providers of
a)
b)
c)
d)
e)
employment.
competition.
technical innovation.
capital.
quality products.
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6 - 36
Answers to Chapter Quiz
4. As a business person planning to open a new small
business, you know that the business plan should not
contain
a) a discussion of the nature and mission of the new business.
b) information about how much it will cost to open and operate the
new business.
c) pages and pages of detailed facts and figures.
d) any mention of the business person’s goals; financial institutions
just aren’t interested in these.
e) an explanation of why opening a business of this type makes good
business sense.
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6 - 37
Answers to Chapter Quiz (cont’d)
5. University-based groups providing individual counseling
and practical training to owners of small businesses are
known as
a)
b)
c)
d)
e)
the Small Business Administration.
Small Business Development Centers.
Small Business Institutes.
Special Task Force.
None of these responses is correct.
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6 - 38