Chapter Five
Small Business,
Entrepreneurship,
and Franchises
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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 (cont’d)
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 the
advantages and disadvantages of
franchising.
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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
– Manufacturing—500 employees
– Wholesale trade—100 employees
– Agriculture—$750,000
– Retail trade—$6.5 million
– General and heavy construction—$31 million
– Dredging—$18.5 million
– Special trade construction—$13 million
– Travel agencies—$3.5 million (commissions & other income)
– Business and personal services—$6.5 million
• Architectural, engineering, surveying, etc.—$4.5 million
• Dry cleaning, carpet cleaning—$4.5 million
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Small Business: A Profile (cont’d)
• Small-business sector
– There are about 27.2 million businesses in the U.S.
– Just over 17,000 employ more than 500 workers
– In the last decade, the number of small businesses
increased 49 percent
– Part-time entrepreneurs have increase fivefold and account
for one-third of all small businesses
– Two-thirds of new businesses survive at least two years, 44
percent survive at least four years, and 31 percent survive
at least seven years
– The primary reason for these failures is 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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Industry Group-Size Standards
Source: http://www.sba.gov/services/contractingopportunities/sizestandardstopics/summarywhatis/,
accessed October 3, 2008.
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Industries that Attract Small Businesses
• Attractive small-business industry characteristics
– Low initial capital investment
– Some 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 Businesses:
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
Age
“Had enough” of working for someone else
High-tech opportunities, especially for teens
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 Some Entrepreneurs and Small
Businesses Fail
• Lack of capital and cash-flow problems
• Lack of management skills
• Overexpansion
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Survey: Biggest Problems Facing SMEs*
*Small and Medium-Sized Enterprises
Supply Shortages
Other
Cash Flow
Turnover
Exchange Rates
Competition
Tax Burden
Unskilled Labor
Regulation
0%
5%
10%
15%
20%
25%
Source: “Ask Not What You Can Do for Your Country….,” Small Business Monitor, 10/3/03,
http://www.nationalbank.co.nz/business/banking/information/publications/monitor/031001/default.htm
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The Importance of Small Businesses
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 half 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 99.7% of all
employers and employ about 50% of the
private work force
– Small businesses provide 2/3 of the net new
jobs added to the economy
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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.
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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
• Business plan—A carefully constructed guide
for the person starting a business
• Three basic purposes
– Communication
– Management
– Planning
• Accuracy and realistic expectations are
crucial
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Writing a Business Plan
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Components of a Business Plan
Source: Adapted from Timothy S. Hatten, Small Business Management: Entrepreneurship and Beyond, 4th ed. Copyright © 2009 by
Houghton Mifflin Company, pp. 93–118. Reprinted with permission.
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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.
2.
3.
4.
5.
6.
7.
What is your product?
Who is the customer?
Who will sell it?
How many people will buy it?
How much will it cost to design and build?
What is the sales price?
When will you break even?
Source: Marc Ballon, “Hot Tips,” Inc., April 1999, p. 104.
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The Small Business Administration
• A governmental agency that assists, counsels, and
protects the interests of small business in the U.S.
• SBA management assistance
– Management courses and
workshops
– Service Core of Retired Executives (SCORE)
– Help for minority-owned small businesses
– Small-business institutes
– Small-business development centers
– SBA publications
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The Small Business Administration (cont’d)
• SBA financial assistance
– Regular business loans
• Loans are made by private banks but are
partially guaranteed by the SBA
– Small-business investment companies
• Venture capital: money invested in small firms
that have the potential to become very
successful
• Small business investment companies:
privately owned firms that provide venture
capital to small enterprises that meet their
investment standards
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Using the Internet
• The Small Business Administration offers a
wide variety of assistance—both
management and financial—to small
businesses. It also offers a wealth of statistics
about small business. For answers to
frequently asked questions about numbers
related to small business, visit its website.
http://www.sba.gov/advo/stats/sbfaq.html
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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 has expanded with the growth 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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Diversity of Products
and Services
• The International Franchise Association lists more
than 75 different franchise categories
• Some industry categories:
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Automotive
Baked Goods
Building and Construction
Business Services
Child-Related Services
Education-Related Services
Lodging
Maintenance Services
Real Estate
Travel
Sports and Recreation
Printing
Source: www.franchise.org.
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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, 2008
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
7-Eleven
SUBWAY
Dunkin’ Donuts
Pizza Hut, Inc.
McDonald’s
Sonic Drive In Restaurants
KFC
InterContinental Hotels Group
Domino’s Pizza LLC
RE/MAX Int’l
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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
• 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.
NO
• 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. Besides 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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Global Perspectives in Small Business
• Growing interdependence of national and international
economies as trade barriers diminish
• Instant communications shrinks distances and expands
business opportunities
• The Internet is the favored strategy for growth for small
businesses
• The SBA offers counseling on how and where to market
overseas
• Small businesses must adapt to demographic and
economic changes in the world marketplace
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Small Business Globalization
by the Numbers
Source: Allbusiness.com/Focus Magazine/Going Global, U.S. Department of Commerce, and SBA Office of Advocacy.
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Chapter Quiz
1. Which one of the following would most likely be classified as a
service industry?
a) Grocery store
b) Jewelry store
c) Pet shop
d) Dry cleaning shop
e) Clothing store
2. Roger Jones, a graduate business student, has decided to open his
own consulting firm. Since he is an intelligent and hard-working
student with previous management experience, Roger feels he is
well prepared to succeed since more new businesses fail due to
a) a lack of adequate financing.
b) low consumer demand for their products.
c) hostile competition.
d) a lack of owner commitment.
e) mismanagement and lack of business know-how.
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Chapter Quiz (cont’d)
3.
4.
A Small Business Institute may be defined as a
a) group of retired businesspeople who voluntarily offer their
services to small businesses through the SBA.
b) group of active managers who voluntarily counsel smallbusiness owners.
c) group of senior and graduate students in business
administration who provide management counseling to small
businesses.
d) university-based group providing individual counseling and
practical training to owners of small businesses.
e) technical publication dealing with hundreds of topics of interest
to present and prospective managers of small firms.
A license to operate an individually owned business as if it were a
part of a chain of outlets or stores is called a
a) joint venture.
b) syndicate.
c) franchise.
d) SCORE.
e) small business development center.
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Chapter Quiz (cont’d)
5.
Jim Moniz is contemplating obtaining a franchise. He would like to
purchase a franchise in an industry that has had extensive success
with franchising in the past. All of the following are possible choices
for Jim except
a) a fast-food industry.
b) the semiconductor industry.
c) filling stations.
d) car dealerships.
e) the soft-drink industry.
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Answers to Chapter Quiz
1. Which one of the following would most likely be classified as a
service industry?
a) Grocery store
b) Jewelry store
c) Pet shop
d) Dry cleaning shop (Correct)
e) Clothing store
2. Roger Jones, a graduate business student, has decided to open his
own consulting firm. Since he is an intelligent and hard-working
student with previous management experience, Roger feels he is
well prepared to succeed since more new businesses fail due to
a) a lack of adequate financing.
b) low consumer demand for their products.
c) hostile competition.
d) a lack of owner commitment.
e) mismanagement and lack of business know-how. (Correct)
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Answers to Chapter Quiz (cont’d)
3.
4.
A Small Business Institute may be defined as a
a) group of retired businesspeople who voluntarily offer their
services to small businesses through the SBA.
b) group of active managers who voluntarily counsel smallbusiness owners.
c) group of senior and graduate students in business
administration who provide management counseling to small
businesses. (Correct)
d) university-based group providing individual counseling and
practical training to owners of small businesses.
e) technical publication dealing with hundreds of topics of interest
to present and prospective managers of small firms.
A license to operate an individually owned business as if it were a
part of a chain of outlets or stores is called a
a) joint venture.
b) syndicate.
c) franchise. (Correct)
d) SCORE.
e) small business development center.
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Answers to Chapter Quiz (cont’d)
5.
Jim Moniz is contemplating obtaining a franchise. He would like to
purchase a franchise in an industry that has had extensive success
with franchising in the past. All of the following are possible choices
for Jim except
a) a fast-food industry.
b) the semiconductor industry. (Correct)
c) filling stations.
d) car dealerships.
e) the soft-drink industry.
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