Part 2

Starting and
Growing a
Business

McGraw-Hill/Irwin

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

CHAPTER 4

Options for Organizing Business

CHAPTER 5

Small Business, Entrepreneurship, and

Franchising

5-2

Learning Objectives
LO 5-1

Define entrepreneurship and small business

LO 5-2

Investigate the importance of small business in the U.S.

economy and why certain fields attract small business

LO 5-3

Specify the advantages of small-business ownership

LO 5-4

Summarize the disadvantages of small-business ownership, and

analyze why many small businesses fail

LO 5-5

Describe how you go about starting a small business and what

resources are needed

LO 5-6

Evaluate the demographic, technological, and economic

trends that are affecting the future of small business

LO 5-7

Explain why many large businesses are trying to think small

LO 5-8

Assess two entrepreneurs plans for starting a small business

5-3

Enter the World of Business

Five Guys Builds Their Business on a Simpler Concept
Five Guys embrace a simple concept: sell high-quality food
(use fresh meat, no frozen products, and keep the
preparation process simple)
Franchising would require providing a license to other
entrepreneurs and could jeopardize the company culture

Has no drive-thru, refuses to delivery, and relies on word-ofmouth communication rather than advertising
? What were some of the risks involved with turning Five Guys into a
franchise?
? What differentiates Five Guys products from other fast-food burger
franchises?
? Describe some of the ways in which Murrell and his family retain
control over the Five Guys franchise.
5-4

The Nature of Entrepreneurship

Entrepreneurship
The process of creating and managing a
business to achieve desired objectives
Entrepreneurship movement is accelerating, and many
new small businesses are emerging
Technology is now easier to obtain by a small business
Websites, podcasts, online videos, social media, cellular
phones, and expedited delivery services

5-5

Great Entrepreneurs of Our Time

5-6

What Is a Small Business?

Small Business
Any independently owned and operated business
that is not dominant in its competitive area
Smallness is relative

Employs less than 500 people

Small Business Administration (SBA)

An independent agency of the federal government that
offers managerial and financial assistance to small
businesses

5-7

Importance of
Small Businesses to Our Economy

5-8

Women in Small Business

Women-owned
Businesses

Are responsible for more than

23 million American jobs
Contribute almost $3 trillion to
the national economy
Woman own more than 8
million businesses nationwide

5-9

Minorities in Small Business

Minority-owned businesses have been growing faster
than other classifiable firms
Represents 21.3% of all small businesses
Number of minority-owned businesses is increasing at a
rate of 30%
Minority

Small Business Ownership

Hispanics

8.3 %

African-Americans

7.1 %

Asian

5.7 %

American Indian & Native Alaskan

0.9 %

Native Hawaiian & other Pacific Islander

0.1 %
5-10

Number of Firms by Employment Size

5-11

Small Business Innovation

o Small businesses produce more than half of all
innovations:
Airplane

Audio tape recorder

Fiber-optic examining equipment

Heart valve

Optical scanner

Personal computer

Soft contact lenses

Internet

Zipper

5-12

Innovation
While Buffalo Wild Wings
did not create Buffalostyle chicken wings, it
became known for its
tasty chicken wings
smothered with the
franchises own signature
spices and sauces

Today the franchises has

more than 800 locations
worldwide
5-13

Popular Industries for

Small Business
Especially attractive industries to entrepreneurs:
Retailing and wholesaling
Services

Manufacturing
High technology

5-14

Retailing and Wholesaling

Selling directly to consumers:
Music stores

Sporting-goods stores

Dry cleaners

Boutiques

Drugstores

Restaurants

Caterers

Service stations

Hardware stores

5-15

Services and Manufacturing

Services

Service sector is 80% of U.S. jobs

Attracts individuals whose skills are not
required by large firms

Small manufacturers excel at

customization
Manufacturing The Malcolm Baldrige National Quality
Award rewards innovative small
manufacturing firms

5-16

High Technology
Businesses that depend
heavily on advanced
scientific and engineering
knowledge

43% of high-tech
jobs are with small
businesses

High-technology
businesses require
greater capital and
have higher initial
startup costs than
do other small
businesses

Many of the
biggest firms
started out in
garages,
basements,
kitchens, and dorm
rooms

5-17

10 Successful Traits of Young Entrepreneurs

5-18

Small-Business Ownership
Advantages

Disadvantages

Independence

High stress level

Costs

High failure rate 50% of all

new businesses fail within the
first 5 years

Flexibility

Undercapitalization Lack of
funds to operate a business
normally

Focus

Managerial inexperience or
incompetence

Reputation

Inability to cope with growth

5-19

Advantages of Small-Business Ownership

Some of the advantages
of small businesses
include:
Flexibility

Lowers start-up costs

Ability to be your own
boss

5-20

10 Common Mistakes that Startup and

Small Companies Make

5-21

Disadvantages of Small-Business Ownership

Entrepreneurs
experience a
great deal of
independence
but also a
great deal of
stress

Many fail

5-22

Going Green
EcoScraps Blends Profit with Sustainability

After realizing how much was wasted at restaurants and groceries,

three college students began experimenting with ways to turn food
waste into compost

The founders approached businesses and offered to pick up their

food waste at a discounted rate; they also partnered with garbage

haulers to drop off waste at their facilities for free

After composting the waste, EcoScraps resells it as organic potting

soil to nurseries and stores like Whole Foods and Costco
?

Why did the three entrepreneurs decide to found EcoScraps?

How has EcoScraps proprietary process contributed to its

success?

Why is EcoScraps partnership with garbage haulers so

beneficial?
5-23

Starting a Business
Start with a concept or general idea
Create a business plan
Devise a strategy to guide planning & development

Make
Decisions

Form of ownership
Financing
Acquiring existing business or
start new business
Buy a franchise

5-24

The Business Plan

Business Plan
A precise statement of the rationale for a business and a
step-by-step explanation of how it will achieve its goals

Acts as a guide and reference document:

Explanation of the business
Analysis of competition
Income/expense estimates

5-25

Forms of Business Ownership

After developing a business
plan, the entrepreneur has to
decide on an appropriate legal
form of business ownership

Sole
Proprietorship

Partnership

Corporation

5-26

Financial Resources
Often, the small-business owner has to put up a
significant percentage of the necessary capital
Cash money
Obtain capital

Financing options:
Loans
Stocks
Equity financing

5-27

Equity Financing
Referred to as equity financing because
the owner uses real personal assets
rather than borrowing funds from outside
sources to get started in a new business

The owner may bring useful personal

assets (such as a computer, desks, and
other furniture, a car or truck) as part of
his or her ownership interest in the firm

5-28

Venture Capitalists
Venture Capitalists
Persons or organizations that agree to provide some
funds for a new business in exchange for an ownership
interest or stock

Although this form of equity financing has helped many

small businesses, they require that the small-business
owner share the profits of the business (and sometimes
the control, as well) with the investors

5-29

Debt Financing
Borrowing financial resources typically from a bank or
lending institution

Banks often require the entrepreneur to put up

collateral, a financial interest in the property or fixtures
of the business

Small-business owner may have to provide personal

property as collateral, such as his or her home, in which
case the loan is call a mortgage

Line of credit An agreement by which a financial

institution promises to lend a business a predetermined
sum on demand
5-30

Debt Financing
Small businesses may obtain funding from their
suppliers in the form of a trade credit
Suppliers allow the business to take possession of the
needed goods and services and pay for them at a later
date or in installments

Occasionally, small businesses engage in bartering

Trading their own products for the goods and services
offered by other businesses

5-31

Debt Financing
Franson Nwaeze and Paula Merrell wanted to open a restaurant, but
most lenders were skeptical about their lack of experience and
money

Learned that banks were

much more willing to loan
them money to buy a gas
station, they purchased a
Conoco station

Opened up a successful
restaurant in one-half of it.

Their motto is filler-up

outside, filler-up inside.

5-32

Starting from Scratch vs.

Buying an Existing Business
Starting from scratch can be expensive and will require
a lot of promotional efforts to familiarize customers
with the business
Existing
businesses have
the advantage of
a built-in network
of customers,
suppliers, and
distributors

Reduces some of the guesswork

inherent in starting a new
business
Entrepreneur who buys an
existing business also takes on
any problems the business
already has

5-33

Franchising
Franchise
A license to sell anothers products or to use
anothers name in business, or both

Franchiser
The company that sells a franchise

Franchisee
The purchaser of a franchise

5-34

Franchises
Advantages

Disadvantages

Training & support

Fees and profit sharing

Brand-name appeal

Standardized operations

Standardized quality of
goods & services

Restrictions on purchasing

National advertising

Limited product line

Financial assistance

Possible market saturation

Proven products

Less freedom in decisions

Centralized buying power

Site selection & territorial

protection
Greater chance for success
5-35

Fastest Growing and Hottest New Franchises

5-36

Consider Ethics and Social Responsibility

Are Healthy Vending Machines Set to Take Over?

Fresh Healthy Vending, launched in 2010 by Jolly Backer, sells

vending machines that contain organic and natural foods with few
or no preservatives to franchisees

The franchisee is responsible for servicing and restocking the

machines about twice a week

In its first four months the company earned $3.8 million via
franchise sales
? It often takes years before entrepreneurs achieve success. Why
do you think Fresh Healthy Vending has become successful so
quickly?
? Why is a franchise model beneficial for Fresh Health Vending?
? Which businesses do you think would be most accepting of
vending machines stocked with health food?
5-37

Help for Small-Business Managers

o Organizations and programs exist to help small
businesses

Small Business Administration (SBA)

o Small Business Development Centers (SBDCs)

o Service Corps of Retired Executives (SCOREs)
o Active Corps of Executives (ACEs)

o
o

Small Business Institutions (SBIs)

Other small businesses

U.S. and Local Departments of

Commerce

5-38

The Future for Small Business

Demographic Trends:
The Baby Boomers
Generation Y (Millennials)
Immigrants and shifting
demographics
The Latino population is the biggest
and fastest growing minority segment
in the United Statesand a lucrative
market for businesses looking for ways
to meet the segments many needs.

5-39

The Future for Small Business

Technological
and
Economic
Trends

Internet usage continues to increase

Increase in service exports
Economic turbulence
Deregulation of the energy market &
alternative fuels

5-40

Technology and Economic Trends

Jack Dorsey founded the
idea for Twitter on a
sketchpad

The idea was based on how

dispatched vehicles (such as
cabs) communicate with one
another

Via radio, they are constantly

squawking to each other
about where they are and
what they are doing

5-41

Top Cities to Launch a Small Business

5-42

Making Big Businesses Act Small

The continuing success and competitiveness of small
businesses through rapidly changing conditions in the
business world have led many large corporations to take a
closer look at what their smaller rivals tick
Large firms emulate smaller ones to improve their bottom line

Downsizing (rightsizing) To reduce management layers,

corporate staff, and work tasks in order to make the firm more
flexible, resourceful, and innovative

Intrapreneurs
Individuals in large firms who take responsibility for the
development of innovations within the organizations
5-43

Solve the Dilemma

The Small Business Challenge

Jack Gray and his best friend, Bruce McVay, decided to start their
own small business

Jack had developed recipes for fat-free and low-fat cookies and
muffins; Bruce had extensive experience in managing food-service
establishments

Each had $35,000 to invest and had borrowing power of an

additional $125,000

They still had many decisions to make including how to market

their product and whether they should offer additional products

? Evaluate the idea of a low-fat cookie and muffin retail store.

? Are there any concerns in connection with starting a small
business that Jack and Bruce have not considered?
? What advice would you give Jack and Bruce as they start up their
business?

5-44