Part 2
Starting and
Growing Your
Business
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Chapter 5
Options for
Organizing Small
and Large
Businesses
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Chapter Objectives
1. Distinguish between small and large businesses and
identify the industries in which most small firms are
established.
2. Discuss the economic and social contributions of small
business.
3. Compare the advantages and disadvantages of small
businesses.
4. Describe how the Small Business Administration assists
small-business owners.
5. Explain how franchising can provide opportunities for
both franchisors and franchisees.
6. Summarize the three basic forms of business ownership
and the advantages and disadvantages of each form.
5-3
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Chapter Objectives
7. Identify the levels of corporate management.
8. Describe recent trends in mergers and acquisitions.
9. Differentiate among private ownership, public
ownership, and collective ownership (cooperatives).
5-4
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Chapter Overview
 Variables affecting the organization of your
business include:
How easily can you set up this type of
organization?
How much financial liability can you afford
to accept?
What financial resources do you have?
What strengths and weaknesses do you
see in others?
What are your own strengths and
weaknesses?
5-5
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Most Businesses Are Small Businesses
 What is a Small Business?
A firm that is independently owned and
operated, not dominant in its field, and
meets industry-specific size standards for
income or number of employees.
98 percent have fewer than 100 employees
Over 14 million people in the U.S. are
earning business income without any
employees
Almost half the sales in U.S. are made by
small businesses
5-6
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Most Businesses Are Small Businesses
 Most nonfarming small businesses have been
concentrated in retailing in the service
industries
 Typical Small-Business Ventures
Dentists
Home Builders
Florists, etc
 Almost half of small businesses in the U.S.
are home based businesses (firms operated
from the residence of the business owner)
5-7
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 David vs. Goliath: Business Sectors Most
Dominated and Least Dominated by Small Firms
5-8
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 Major Industries Dominated by Small Businesses
5-9
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Contributions or Small Business
to the Economy
 Creating New Jobs
 Creating New Industries
 Attracting New Industries
5-10
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Advantages of a Small Business
 Small businesses differ greatly in:
Forms of organization
Market positions
Staff capabilities
Managerial styles
Organizational structures
Financial resources
 These differences usually seem like
advantages to small-business owners
5-11
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 Advantages of Small-Business Ownership
5-12
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Advantages of a Small Business
 Innovation
Example: Start-up business to offer online
bookstore shopping and delivery.
Typically develop twice as many product
innovations per employee as larger firms
Also obtain the more patents per sales
dollar than larger businesses
Key innovations developed by small
businesses include the airplane, audio tape
recorder, double-knit fabrics, optical
scanner, PC, soft contact lenses, and the
zipper
5-13
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Advantages of a Small Business
 Lower Costs
Example: Small retailer who can prepare
sales flyers on a PC.
Small firms may be able to provide goods
and services at prices that large firms
cannot match
Overhead costs are usually minimized
Typically, organizations are lean -- with the
smallest staffs and few support personnel
5-14
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Advantages of a Small Business
 Superior Customer Service
Example: Free alterations on clothing
purchases from a small boutique.
Small firms can operate with greater
flexibility
This allows tailoring of product lines and
services to the needs of customers
5-15
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Advantages of a Small Business
 Filling Isolated Niches
Example: Retail store that specializes in
selling products designed for left-handed
consumers.
Large businesses tend to focus on the
large segments of the overall market
Growth prospects of market niches are too
limited, and expenses involved in serving
them to great, for large firms
This creates opportunity for small firms
5-16
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Disadvantages of a Small Business
 In addition to being vulnerable to economic
downturns, primary disadvantages include:
Management Shortcomings
Inadequate Financing
Government Regulation
5-17
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Disadvantages of a Small Business
 Management Shortcomings
People often go into business with little, if
any, business training
Owners often hesitate to turn to
consultants for advice in areas were they
lack knowledge or experience
Frequently struggle with “rose-coloredglasses syndrome”
5-18
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Disadvantages of a Small Business
 Inadequate Financing
Too often, new business owners assume a
that they will generate enough funds in the
first few weeks or months to finance
continuing operations
Provisions must be made for uneven cash
flows
Banks often very reluctant to make small
business loans
5-19
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 Sources of Small-Business Financing
5-20
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Disadvantages of a Small Business
 Government Regulation
Small-business owners often complain
bitterly of excessive government regulation
and red tape
Paperwork costs account for billions of
small-business dollars each year
Taxes are another burdensome expense
for small businesses
5-21
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Increasing the Likelihood of
Business Success
 Creating a Business Plan
Business plan—written document that provides
an orderly statement of a company’s goals, the
methods by which it intends to achieve those
goals, and standards by which it will measure
achievements.
Typically includes following components:
Executive summary
Introduction
Marketing
Financials
Resumes of principles
5-22
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Increasing the Likelihood of
Business Success
 Small Business Administration
(SBA)—federal agency that assists small
businesses by providing management
training and consulting, financial advice,
and support in securing government
contracts.
5-23
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Increasing the Likelihood of
Business Success
 Small Business Administration
Financial Assistance
Guarantees loans
Other Specialized Assistance
Government procurement set-aside
programs
Information and advice
5-24
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Increasing the Likelihood of
Business Success
 Business Incubators
Business incubator—organization that
provides low-cost, shared facilities on a
temporary basis to small start-up ventures.
5-25
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Increasing the Likelihood of
Business Success
 Large Corporations Assisting Small
Businesses
Corporations often devise special
programs aimed at solving small-business
problems
Recognition of the size of the smallbusiness market, its growth rate and
buying power, and the financial rewards of
supporting small businesses
5-26
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Small-Business Opportunities for
Women and Minorities
 Women-Owned Businesses
 Minority-Owned Businesses
 Women-owned and minority-owned
businesses are growing much faster than the
overall growth in U.S. businesses
5-27
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Small-Business Opportunities for
Women and Minorities
 Women-Owned Businesses
Over 9 million women-owned firms
Almost 40 percent of U.S. businesses
Provide employment for almost 28 million
people
1 of every 8 owned by minority women
5-28
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Small-Business Opportunities for
Women and Minorities
 Minority-Owned Businesses
Growth in number of businesses owned via
a African-Americans, Hispanics, and Asian
Americans has far out past the growth in
number of U.S. businesses overall recently
5-29
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 Types of Businesses Owned by Racial and
Ethnic Minorities
5-30
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The Franchising Alternative
 The Franchising Sector
Franchising—contractual agreement that
specifies the methods by which a dealer
can produce and market a supplier’s good
or service.
Franchising growing rapidly
U.S. franchises generate $1 trillion in sales
annually and employing over 8 million
people
Franchising is also popular overseas
5-31
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The Franchising Alternative
 Franchising Agreements
Franchisee: small business owner who
contracts to sell the goods or service of the
franchisor in exchange for some payment
Franchisor: owner of the franchise
Franchisor typically provides name
recognition, building plans, site selection
help, accounting systems, and other
services
5-32
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The Franchising Alternative
 Benefits and Problems of Franchising
 Advantages include:
A prior performance record
Recognizable company name
Business model that has proven successful
Tested management program
Business training
5-33
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The Franchising Alternative
 Benefits and Problems of Franchising
 Disadvantages include:
Expensive franchise fees and future
payments
The fact that the franchisee is linked to the
reputation and management of the
franchise
The potential unsuitability of the franchisee
5-34
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 The Latest Trends in Franchising by Industry
5-35
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Small Business Goes Global
 Global Environment for Entrepreneurs
 Growth Strategies
Global reach of the Internet allows
companies to reach international markets
quickly
5-36
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Alternatives for Organizing a Business
 Forms of Business Ownership
5-37
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 Comparing the Three Major Forms of Private
Ownership
5-38
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Alternatives for Organizing a Business
 Sole Proprietorships
Sole proprietor—form of business
ownership in which the company is owned
and operated by one person.
5-39
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Alternatives for Organizing a Business
 Partnerships
Partnership—form of business ownership
in which the company is operated by two or
more people who are co-owners by
voluntary legal agreement.
5-40
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Alternatives for Organizing a Business
 Corporations
Corporations—business that stands as a
legal entity with assets and liabilities
separate from those of its owner(s).
S corporations
5-41
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 Double Taxation: A Disadvantage of the
Corporate Form of Organization
5-42
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Alternatives for Organizing a Business
 Changing Legal Structures to Meet
Changing Needs
 Considerations of the appropriate legal
structure include:
Personal financial situations and the need
for additional funds
Management skills and limitations
Management styles and capabilities for
working with others
Concerns about exposure to personal
liability
5-43
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Organizing and Operating a Corporation
 Types of Corporations
Domestic—A firm is considered a
domestic corporation in the state where it
is incorporated
Foreign—When company does business
in a state other than the one where it has
filed incorporation papers, it is registered
as a foreign corporation in each of those
states
Alien—A firm incorporated in one nation
that operates in another is known as an
alien corporation where it operates
5-44
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Organizing and Operating a Corporation
 The Incorporation Process
Where to Incorporate
The Corporate Charter
Articles of Incorporation
5-45
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Organizing and Operating a Corporation
 Levels of Management in a Corporation
5-46
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Organizing and Operating a Corporation
 Corporate Management
Stockholders—person or organization
who has bought shares of stock in a
corporation and is entitled to some of its
profits.
Closed or Closely Held
Publicly Held
5-47
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Organizing and Operating a Corporation
 Corporate Management
Stock Ownership and Stockholder Rights
Preferred stock owners have limited
voting rights; receive dividends before
others
Common stock owners have voting
rights but only residual claims on assets
and are the last to receive any income
distributions
5-48
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Organizing and Operating a Corporation
 Corporate Management
Board or Directors—elected governing
body of a corporation.
Sets policy, authorizes major
transactions, and hires and supervises
the CEO
Corporate Officers and Managers
Make most major corporate decisions
5-49
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Organizing and Operating a Corporation
 Employee-Owned Corporations
Employee ownership: where workers buy
shares of stock in the company that
employees them
Corporate organization stays the same
Most stockholders are also employees
5-50
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Organizing and Operating a Corporation
 Not-for-Profit Corporations
Organizations that pursue objectives other
than returning profits to owners
Include:
Museums
Libraries
Religious and human-service
organizations
Zoos
Thousands of other groups
5-51
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When Businesses Join Forces
 Mergers and Acquisitions (M&A)
Merger—combination of two or more firms
to form one company.
Acquisition—procedure in which one firm
purchases the property and assumes the
obligations of another.
Vertical Merger
Horizontal Merger
Conglomerate Merger
5-52
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When Businesses Join Forces
 Joint Ventures: Specialized Partnerships
Joint Venture: a partnership between
companies formed for a specific
undertaking
5-53
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Public and Collective Ownership
 Public Ownership
When a unit or agency of government
owns and operates an organization
 Government-Owned Corporations
Used When:
Private investors are not willing to invest
in high-risk projects
When private ownership has failed
Operating public companies can be
used to foster competition
5-54
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Public and Collective Ownership
 Customer-Owned Businesses:
Cooperatives
Cooperative: an organization whose
owners join forces to collectively operate
all or part of the functions in their industry
5-55
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