chapter six small business, entrepreneurship, and franchises

Chapter Six

Small Business, Entrepreneurship,

and Franchises

Copyright © Houghton Mifflin Company. All rights reserved. 6 - 2

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.


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.


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—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


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 lack of $ resources and poor management stemming from a lack of business know-how

– Small businesses provide over 50% of the jobs in the U.S.


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)


The People in Small Business: The Entrepreneurs

• Why people go into business for themselves– 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– “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


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.


The People in Small Business: The Entrepreneurs, cont.

• Motivation– May develop slowly over time

• Knowledge & Ability – especially managerial – are most important


Why Small Businesses Fail

• Lack of management skills

• Lack of capital and cash-flow problems

• Overexpansion


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


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


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


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– Keeping all profits– Ease and low cost of going

into business– Keeping business information

secret

DISADVANTAGES• Risk of failure• Limited potential• Limited ability to raise

capital


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.


Developing a Business Plan

• A carefully constructed guide for the person starting a business

• Four-questions bankers and investors are most interested in

1. What is the nature and mission of the new venture?

2. Why is the new enterprise a good idea?3. What are the business person’s goals?4. How much will the new venture cost?

• Accuracy and realistic expectations are crucial


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 (SCOR

E)– Help for minority-owned small businesses– Small-business institutes– Small-business development centers– SBA publications

http://www.sba.gov/

http://www.sba.gov/managing/

http://www.sba.gov/managing/

http://www.coloradomtn.edu/sbdc/

http://web.sba.gov/list/


The Small Business Administration

• SBA financial assistance– Regular business loans

• Loans are made by private banks but are partially guaranteed by the SBA

– SBIC (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

http://www.sba.gov/INV/forentre.html


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


Types of Franchises

• A manufacturer authorizes retailers to sell a certain brand-name item (cars, gasoline)

• A producer licenses distributors to sell a product to retailers (Coca-cola bottlers)

• A franchisor supplies brand names, techniques, or services instead of a complete product (McDonald’s)


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


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


Entrepreneur’s Top Ten Franchises in 2004

1. SUBWAY2. Curves for Women3. Quizno’s Franchise Co.4. 7-Eleven, Inc.5. Jackson Hewitt Tax Service6. The UPS Store7. McDonald’s8. Jani-King9. Dunkin’ Donuts10. Baskin-Robbins USA Co.For updates: www.franchise500.com

http://www.franchise500.com/


Advantages of Franchising

TO THE FRANCHISOR

– 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

TO THE FRANCHISEE

– 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


Disadvantages of Franchising

TO THE FRANCHISOR

– Failure of the franchisee to operate franchise properly

– Disputes with and lawsuits by franchisees over the terms of the franchise

TO THE FRANCHISEE

– Franchisor retains a large amount of control over the franchisee’s activities

– Franchisor opening competing franchises within the franchisee’s market


Global Perspective 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


Additional Resources

• Textbook Website

• Course Website Readings

http://college.hmco.com/business/phk/business/8e/students/chapter/ch06.html

http://faculty.coloradomtn.edu/jtroeger/business/index.htm

chapter six small business, entrepreneurship, and franchises

Documents

smallbusiness sector

small business administration

number of small businesses

new business fail

employees wholesalinga

manufacturinga maximum

mininga maximum

growth of franchising