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3. ENTREPRENEURSHIP, NEW VENTURES, AND BUSINESS OWNERSHIP. Practice Quiz. Describe ‘small business’ Describe the importance of small business to the U.S. economy Describe the difference between entrepreneurship and small business Describe the start-up decisions faced by small businesses

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ENTREPRENEURSHIP, NEW VENTURES, AND BUSINESS OWNERSHIP

© 2007 Prentice Hall, Inc. All rights reserved.

practice quiz
Practice Quiz
  • Describe ‘small business’
  • Describe the importance of small business to the U.S. economy
  • Describe the difference between entrepreneurship and small business
  • Describe the start-up decisions faced by small businesses
  • Describe a sole proprietorship
  • Describe the differences between partnerships, sole proprietorships and corporations.

© 2007 Prentice Hall, Inc. All rights reserved.

l e a r n i n g o b j e c t i v e s
L E A R N I N G O B J E C T I V E S

After reading this chapter, you should be able to:

  • Define small business, discuss its importance to the U.S. economy, and explain popular areas of small business.
  • Explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities.
  • Describe the business plan and the start-up decisions made by small businesses and identify sources of financial aid available to such enterprises.
  • Discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.

© 2007 Prentice Hall, Inc. All rights reserved.

l e a r n i n g o b j e c t i v e s cont d
L E A R N I N G O B J E C T I V E S (cont’d)

After reading this chapter, you should be able to:

  • Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages and disadvantages of each.
  • Describe corporations, discuss their advantages and disadvantages, and identify different kinds of corporations.
  • Explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.

© 2007 Prentice Hall, Inc. All rights reserved.

what s in it for me
What’s in It for Me?
  • By understanding the material discussed in this chapter, you’ll be better prepared to:
    • Understand the challenges and opportunities provided in new venture start-ups
    • Assess the risks and benefits of working in a new business
    • Evaluate the investment potential inherent in a new enterprise
    • Remove some of the blocks to starting your own business

© 2007 Prentice Hall, Inc. All rights reserved.

someone give me a definition of a small business
Someone give me a definition of a ‘small business’
  • How do we see if a business qualifies as a small business?
  • Then, why do we care?

© 2007 Prentice Hall, Inc. All rights reserved.

small business defined
Small Business Defined
  • A business that is independent (not part of a larger business) and that has relatively little influence in its market.
  • An independently owned and managed business that does not dominate its market.
  • Not a real exact definition, eh?

© 2007 Prentice Hall, Inc. All rights reserved.

analyzing small business
Analyzing Small Business
  • Use number of employees
  • Use annual sales in dollars
  • Department of Commerce view:
    • Small if < 500 employees
  • Small Business Administration view:
    • Very specific and varying views

© 2007 Prentice Hall, Inc. All rights reserved.

analyzing small business9
Analyzing Small Business
  • Probably better to look at a business in terms of market dominance when determining whether it falls under the ‘small business’ category
  • Why do you care about categorizing businesses?
    • Think about starting your own business
    • Think about scoping out your ‘small business’ brethren or competitors

© 2007 Prentice Hall, Inc. All rights reserved.

what is the importance of small business to the u s economy
What is the importance of small business to the U.S. economy?
  • Three major areas

© 2007 Prentice Hall, Inc. All rights reserved.

the importance of small business in the u s economy
The Importance of Small Business in the U.S. Economy
  • Job creation
  • Innovation
  • Contributions to big business
    • Suppliers of specialized services and raw materials
    • Sellers of larger firms’ products

© 2007 Prentice Hall, Inc. All rights reserved.

the importance of small business in the u s economy job creation
The Importance of Small Business in the U.S. Economy – job creation
  • Source of new jobs for the economy
    • What if you don’t ‘fit’ big business’ mold?
  • Small firms hire at a faster rate
    • You might say they lead us out of recessions
  • Small firms cut jobs at a faster rate
    • They can’t weather an economic storm as well as a larger business
  • Many small business jobs are simply down-sized from their large business counterparts

© 2007 Prentice Hall, Inc. All rights reserved.

the importance of small business in the u s economy innovation
The Importance of Small Business in the U.S. Economy – innovation
  • About half of today’s innovations came from small businesses
    • Not all make huge bucks, and not all are deemed worthy by large businesses
  • Far less red tape in a small business than in a large business
    • Makes it easier for innovations to be created
  • Crocs example
    • Like you or I couldn’t have come up with that one

© 2007 Prentice Hall, Inc. All rights reserved.

the importance of small business in the u s economy contribution to big business
The Importance of Small Business in the U.S. Economy – contribution to big business
  • Suppliers of specialized services and raw materials
  • Sellers of larger firms’ products
  • Cover the ‘spot’ markets for big business

© 2007 Prentice Hall, Inc. All rights reserved.

so where should you position your business
So where should you position your business?
  • In which industry sector?
    • Kind of forces you to know the industry sectors

© 2007 Prentice Hall, Inc. All rights reserved.

popular areas of small business enterprise
Popular Areas of Small-Business Enterprise
  • Major small-business industry groups:
    • Services
    • Retailing
    • Construction
    • Wholesaling
    • Finance and insurance
    • Manufacturing and transportation

© 2007 Prentice Hall, Inc. All rights reserved.

practice quiz question
Practice Quiz Question
  • So what are the two most popular industry areas for small business?

© 2007 Prentice Hall, Inc. All rights reserved.

figure 3 2 small business by industry
FIGURE 3.2 Small Business by Industry

© 2007 Prentice Hall, Inc. All rights reserved.

victor kiam
Victor Kiam
  • “Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage”

© 2007 Prentice Hall, Inc. All rights reserved.

practice quiz question20
Practice Quiz Question
  • What is the difference between an entrepreneur and a small business owner?

© 2007 Prentice Hall, Inc. All rights reserved.

entrepreneurship
Entrepreneurship
  • Entrepreneurship
    • The process of seeking businesses opportunities under conditions of risk
  • Entrepreneur
    • One who accepts the risks and opportunities of creating, operating and growing a new business
  • Small Business Owner
    • Accepts risk
    • Is more content to be a single store, or location
    • Does not always have growth of the business as a primary entrepreneurial goal

© 2007 Prentice Hall, Inc. All rights reserved.

should you be an entrepreneur or a small business owner
Should you be an entrepreneur or a small business owner?

© 2007 Prentice Hall, Inc. All rights reserved.

do you have what it takes
Do you have what it takes?
  • What are the characteristics of an entrepreneur?

© 2007 Prentice Hall, Inc. All rights reserved.

entrepreneurial characteristics
Entrepreneurial Characteristics
  • Successful Entrepreneurs:
    • are resourceful.
    • are concerned for good customer relations.
    • desire to be their own boss.
    • can deal with uncertainty and risk.
    • are open-minded.
    • rely on networks, business plans, and consensus.
    • have different views on how to succeed, to automate a business, and when to rely on experience or business acumen.
    • Hard-working
    • Driven, or passionate about their work

© 2007 Prentice Hall, Inc. All rights reserved.

so how do we get started
So how do we get started?
  • What are the first few steps?

© 2007 Prentice Hall, Inc. All rights reserved.

getting started
Getting started…
  • Come up with the idea!
  • Think, think, think it through
  • Write a business plan

© 2007 Prentice Hall, Inc. All rights reserved.

starting and operating a new business
Starting and Operating a New Business
  • Crafting a Business Plan
    • Conveys a description of the business strategy for the new venture and how it will be implemented
    • A business plan should address:
      • The entrepreneur’s goals and objectives
      • The strategies that will be used to obtain them
      • The implementation of the chosen strategies
  • Preparing a Business Plan
    • Setting goals and objectives
    • Sales forecasting
    • Financial planning

© 2007 Prentice Hall, Inc. All rights reserved.

the business plan
The Business Plan
  • This is how you will make things happen
  • On a simple scale, it is just a document
  • Potential investors will look at this to determine whether or not to invest in you
  • You have to cover all their questions in detail
    • Yet you have to then summarize things without leaving out too many details

© 2007 Prentice Hall, Inc. All rights reserved.

two major options
Two major options
  • Purchase an existing business
  • Start your own from scratch
  • Quick video….

© 2007 Prentice Hall, Inc. All rights reserved.

slide30

WEAR

LONG

video
Video
  • What (general) types of decisions did they make?

© 2007 Prentice Hall, Inc. All rights reserved.

practice quiz question32
Practice Quiz Question
  • What are the pros/cons of purchasing an existing business/franchise?

© 2007 Prentice Hall, Inc. All rights reserved.

starting the small business
Starting the Small Business
  • Buying an Existing Business
    • Less risk when you purchase an ongoing, viable business
  • Franchising
    • Advantages
      • Proven business opportunity for franchisee
      • Access to management expertise of franchisor
    • Disadvantages
      • Start-up costs for franchise purchase
      • Ongoing payments to the franchisor
      • Management rules and restrictions on the franchisee

© 2007 Prentice Hall, Inc. All rights reserved.

starting the small business cont d
Starting the Small Business (cont’d)
  • Starting from Scratch
    • Disadvantage: Higher risk of business failure
    • Advantage: Avoids problems of an existing business
    • This is what Amy decided to do
  • Could a local McDonald’s hold a theme night?

© 2007 Prentice Hall, Inc. All rights reserved.

think back to chapter 1
Think back to chapter 1
  • Who has a better idea of the equilibrium point:
    • An existing business?
    • A business you would start from scratch?
  • Who has a better idea of the customer base:
    • An existing business?
    • A business you would start from scratch?

© 2007 Prentice Hall, Inc. All rights reserved.

questions to be answered
Questions to Be Answered:
  • Who and where are my customers?
    • Both current and potential
    • Are they local or global?
    • How do you best reach them?
  • How much will those customers pay for my product?
  • How much of my product can I expect to sell?
  • Who are my competitors?
  • Why will customers buy my product rather than the product of my competitors?

© 2007 Prentice Hall, Inc. All rights reserved.

financing the small business
Financing the Small Business
  • Personal Resources
  • Loans from Family and Friends
  • Bank Loans
  • Venture Capital Companies
  • Small-Business Investment Companies (SBICs)
  • Minority Enterprise Small-Business Investment Companies (MESBICs)
  • SBA Financial Programs
    • Guaranteed loans and immediate loans programs
    • Management advice (SCORE and SBDCs)

© 2007 Prentice Hall, Inc. All rights reserved.

practice quiz question38
Practice Quiz Question
  • Describe the five trends in small business start-ups

© 2007 Prentice Hall, Inc. All rights reserved.

trends in small business start ups
Trends in small business start-ups
  • Think about:
    • What should you be aware of?
    • How will knowing this help you?

© 2007 Prentice Hall, Inc. All rights reserved.

trends in small business startups
Trends in Small-Business Startups

Emergence of

E-commerce

Crossovers from

Big Business

Opportunities for Minorities & Women

Global

Opportunities

Better

Survival Rates

© 2007 Prentice Hall, Inc. All rights reserved.

the emergence of e commerce
The emergence of E-commerce
  • What the heck does this mean to you?
  • It will probably help you to have a web presence as part of your business
  • More people are getting comfortable shopping online, so the online customer base is building

© 2007 Prentice Hall, Inc. All rights reserved.

crossovers from big business
Crossovers from big business
  • You work for a big business for awhile, then quit to form your own company
  • Nothing wrong or unethical about this
  • Sometimes happens when a big business lays off a division of workers
    • Those workers buy the business, or start their own firm that does the same thing
  • Constance vigilance! Keep your eyes open at work for these opportunities
    • And put some money aside to help you through the lean times when you first get started

© 2007 Prentice Hall, Inc. All rights reserved.

crossovers watch out
Crossovers – WATCH OUT!
  • Don’t go into debt
    • Live like a student for two years
  • Concentrate on improving your credit rating
  • Don’t get too comfortable
    • Keep focused on your goal of starting your own business

© 2007 Prentice Hall, Inc. All rights reserved.

on the internet nobody knows you re a dog
On the Internet, nobody knows you’re a dog

© 2007 Prentice Hall, Inc. All rights reserved.

opportunities for minorities women
Opportunities for minorities / women
  • “On the internet, no one knows you’re a dog”
  • Famous cartoon from the New Yorker emphasizes the ability of the internet to reduce the effects of stereotypes

© 2007 Prentice Hall, Inc. All rights reserved.

global opportunities
Global opportunities
  • Someone explain how this trend helps
  • Easier access to customers
  • Easier access to employees
  • Easier access to suppliers
  • Of course, it does the same for your competition

© 2007 Prentice Hall, Inc. All rights reserved.

better survival rates
Better survival rates
  • Good news indeed
  • However, it doesn’t mean you can ignore all the hard work that must be done

© 2007 Prentice Hall, Inc. All rights reserved.

practice quiz question48
Practice Quiz Question
  • Describe the reasons why small businesses become successful

© 2007 Prentice Hall, Inc. All rights reserved.

reasons for success
Reasons for Success
  • Hard work, drive, and dedication
  • Market demand
  • Managerial competence
  • Luck!!!
    • Someone give me an example of this

© 2007 Prentice Hall, Inc. All rights reserved.

slide50

CAST

CAST

CAST

CAST

practice quiz question51
Practice Quiz Question
  • Describe the reasons small businesses may fail
  • Knowing these, or being aware of them, can help you avoid them

© 2007 Prentice Hall, Inc. All rights reserved.

reasons for failure
Reasons for Failure
  • Poor management
  • Neglect
  • Weak control systems
  • Insufficient capital

© 2007 Prentice Hall, Inc. All rights reserved.

ok you re going to form your business
OK, you’re going to form your business
  • What ‘form’ will your business take?
  • What goes into this decision?
  • What is the downside to screwing this up?

© 2007 Prentice Hall, Inc. All rights reserved.

what are some non corporate forms
What are some NON-corporate forms?
  • Sole proprietorship
  • Partnership
  • Cooperative

© 2007 Prentice Hall, Inc. All rights reserved.

noncorporate business ownership
Noncorporate Business Ownership
  • Forms of Legal Ownership
    • Sole proprietorship: Owned and operated by one person
    • Partnership: Sole proprietorship multiplied by the number of partner-owners
    • Cooperative
  • Choice of Ownership Form
    • Based on the entrepreneur’s needs/desires for control, ownership participation, financing sources, and appropriateness of the chosen form for the industry in which the firm will compete

© 2007 Prentice Hall, Inc. All rights reserved.

what does this knowledge give you
What does this knowledge give you?
  • You should be able to explain all the benefits and disadvantages of each form of ownership

© 2007 Prentice Hall, Inc. All rights reserved.

benefits of a sole proprietorship
Benefits of a sole proprietorship?
  • You get all the cash!
  • You are the big kahuna, you set the rules, you set the hours, you make the decisions
  • It is easy to set up
  • It is inexpensive to set up
  • You get some tax breaks

© 2007 Prentice Hall, Inc. All rights reserved.

disadvantages of a sole proprietorship
Disadvantages of a sole proprietorship?
  • Limited knowledge
  • You assume all the risk
  • Limited resources
  • A bit tougher to raise funds
  • If you die, the business dies as well

© 2007 Prentice Hall, Inc. All rights reserved.

things to evaluate for each form of business
Things to evaluate for each form of business
  • Ease of start-up
  • Liability issues
  • Continuity issues
  • Management issues
  • Funding sources

© 2007 Prentice Hall, Inc. All rights reserved.

sole proprietorships
Advantages:

Freedom

Simple to form

Low start-up costs

Tax benefits

Formation of cooperatives

Disadvantages:

Unlimited liability: Owners are responsible for all debts of a business

Limited resources

Limited fundraising capability

Lack of continuity

Sole Proprietorships

© 2007 Prentice Hall, Inc. All rights reserved.

partnerships
Advantages:

More talent and money

More fundraising capability

Relatively easy to form

Limited liability for limited partners

Tax benefits

Disadvantages:

Unlimited liability for general partner

Disagreements among partners

Lack of continuity

Partnerships

© 2007 Prentice Hall, Inc. All rights reserved.

alternatives to general partnerships
Limited Partnership

Allows for limited partners who invest money but are liable for debts only to the extent of their investments

Must have at least one general (or active) partner, who is usually the person who runs the business and is responsible for its survival and growth

Master Limited Partnership

Organization sells shares (partnership interests) to investors on public exchange. Investors are paid back from profits

The master partner retains at least 50 percent ownership and runs the business, while minority partners have no management voice

Alternatives to General Partnerships

© 2007 Prentice Hall, Inc. All rights reserved.

cooperatives
Combine the freedom of sole proprietorships with the financial power of corporations

Groups of sole proprietorships or partnerships agree to work together for their common benefit

Cooperatives

© 2007 Prentice Hall, Inc. All rights reserved.

corporations
Corporations
  • Corporation
    • “An artificial being, invisible, intangible, and existing only in contemplation of the law”
  • Corporations may:
    • Sue and be sued
    • Buy, hold, and sell property
    • Make and sell products
    • Commit crimes and be tried and punished for them

© 2007 Prentice Hall, Inc. All rights reserved.

corporations66
Advantages:

Limited liability: The owners’ responsibility for the debts of a business is limited to their investment in a business

Continuity

Stronger fundraising capability

Disadvantages:

Double taxation of dividends

Complicated to form

Expensive to form

Corporations

© 2007 Prentice Hall, Inc. All rights reserved.

types of corporations
Types of Corporations
  • Closely Held (Private) Corporation
  • Publicly Held (Public) Corporation

Subchapter S Corporation

Limited Liability Corporation (LLC)

Professional Corporation

Multinational (Transnational) Corporation

© 2007 Prentice Hall, Inc. All rights reserved.

running these types of businesses
Running these types of businesses
  • How do you run a sole proprietorship?
    • Remember, you are the boss
  • How do you run a partnership?
  • How do you run a corporation?

© 2007 Prentice Hall, Inc. All rights reserved.

managing a corporation
Managing a Corporation
  • Corporate Governance
    • The roles of shareholders, directors, and other managers in corporate decision making and accountability
    • Corporate governance is established by the firm’s bylaws and involves three bodies:
      • Stockholders (shareholders): Investors who buy ownership shares in the form of stock
      • The board of directors: Group elected by stockholders to oversee corporate management
      • Corporateofficers: Top managers hired by the board to run the corporation

© 2007 Prentice Hall, Inc. All rights reserved.

stockholders owners of corporations
Stockholders: Owners of Corporations
  • Stock: A share of ownership in a corporation
  • Dividends: Profits distributed among stockholders

© 2007 Prentice Hall, Inc. All rights reserved.

special issues in corporate ownership
Special Issues in Corporate Ownership
  • Joint Ventures and Strategic Alliances:
    • Strategic alliance: Two or more organizations collaborate on a project for mutual gain
    • Joint venture: Partners share ownership of a new enterprise
  • Employee Stock Ownership Plans
    • Allows employees to own a share of the corporation through trusts established on their behalf
  • Institutional Investors
    • Control enormous resources and can buy huge blocks of stock

© 2007 Prentice Hall, Inc. All rights reserved.

special issues in corporate ownership cont d
Special Issues in Corporate Ownership (cont’d)
  • Mergers, Acquisitions, Divestitures, and Spin-Offs:
    • Merger: Two firms combine to create a new company
    • Acquisition: One firm buys another outright
    • Divestiture: Strategy whereby a firm sells one or more of its business units
    • Spin-off: A firm sells part of itself to raise capital

© 2007 Prentice Hall, Inc. All rights reserved.

k e y t e r m s
acquisition

board of directors

business plan

chief executive officer (CEO)

closely held (or private) corporation

cooperative

corporate governance

corporation

divestiture

double taxation

employee stock ownership plan (ESOP)

entrepreneur

entrepreneurship

franchise

general (or active) partner

general partnership

institutional investor

joint venture

limited liability

limited liability corporation (LLC)

limited partner

limited partnership

master limited partnership

merger

multinational (or transnational) corporation

K E Y T E R M S

© 2007 Prentice Hall, Inc. All rights reserved.

k e y t e r m s cont d
officers

professional corporation

publicly held (or public) corporation

S corporation

small business

Small Business Administration (SBA)

Small Business Development Center (SBDC)

small-business investment company (SBIC)

sole proprietorship

spin-off

stockholder (or shareholder)

strategic alliance

tender offer

unlimited liability

venture capital company

K E Y T E R M S (cont’d)

© 2007 Prentice Hall, Inc. All rights reserved.

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