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Chapter 5. Options for Organizing Small and Large Businesses. Learning Goals. Distinguish between small and large businesses and identify common industries for small firms. Discuss the economic and social contributions of small business. Explain why small businesses fail.

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Learning Goals

Distinguish between small and large businesses and identify common industries for small firms.

Discuss the economic and social contributions of small business.

Explain why small businesses fail.

Describe how the Small Business Administration assists small-business owners.

Explain franchising benefits for franchisors and franchisees.


Summarize the forms of business ownership and the advantages and disadvantages of each form.

Identify the levels of corporate management.

Describe recent trends in mergers and acquisitions.

Differentiate among private, public, and collective ownership.









most businesses are small businesses
Most Businesses are Small Businesses
  • 90% of firms with employees have fewer than 20 people on staff.
    • 98% have fewer than 100 employees.
  • More than 20 million people in the United States earn business income without employees.
    • Almost ½ the sales in the United States are made by small business.
  • Small businesses generate 60% - 80% of new jobs over the last decade.
  • Launching pad for entrepreneurs and prevalence of minorities.

What is Small Business?

  • The Small Business Administration defines a small business to be a firm that is independently owned and operated and is not dominant in the field.
    • Manufacturing business: fewer than 500 workers
    • Wholesalers: fewer than 100 workers
    • Retailers: less than $6 million in annual sales
    • Agricultural business: less than $750,000
  • Small Businesses size ranges from $500,000 to $25 million in sales and from 100 to 1,500 employees.

Contributions of Small Business

  • Creating New Jobs
  • Creating New Industries
  • Innovation

Small Business Failure

  • 1 in 3 businesses closes permanently within two years.
  • 50% of businesses fail after four years.
  • More than 60% of business fail within six years.
  • By the 10-year mark, 82% of all small businesses have closed permanently.

Reasons Why Small Businesses Fail

  • Management Shortcomings
  • Inadequate Financing
  • Government Regulation

Increasing the Likelihood of Small Business Success

  • Creating a Business Plan
    • Written documentation that provides orderly statement of goals, methods, and purpose.
  • Small Business Administration
    • Government agency concerned with helping small business firms.

Small Business Administration

  • Financial Assistance
    • Loan Guarantees
    • Microloans
  • Small Business Investment Companies (SBICs)
  • Active Capital

Other Specialized Assistance

  • Set-aside Programs
    • Government Contracts (over 23%)
      • 5% for women and minorities
    • Assistance in Financing Government Procurement
  • Business Incubators
    • Local community initiatives to share resources for small start-ups
      • The University of Tennessee

Opportunities for Women & Minorities

  • More than 50% of U.S. businesses are owned by women
  • The number of businesses owned by minorities outpaced the growth in the number of U.S. businesses overall
  • Women and minorities still face challenges
    • Smaller scale operations
    • Challenges finding investors
    • Access to capital

The Franchising Alternative

A contractual business agreement between a manufacturer or another supplier and a dealer to produce and market the supplier’s good or service.


The Franchising Agreement

    • 50% of all retail sales
    • 760,000 businesses
    • 18 million jobs
    • $500 billion in payroll
    • 1 out of 12 businesses is a franchise
    • Franchising overseas is a growing trend
  • Franchising agreements exist between the franchisee and franchisor.

Prior Performance Record

Recognizable Company Name

Prove Business Model

Tested Management program


Franchise Fees

Future Payments

Linked to Reputation and Management

Franchise Agreement Restrictions

Benefits and Problems of Franchising


Legal Structures to Meet Changing Needs

  • Financial Situation
  • Management Skills and Limitations
  • Management Styles and Capabilities
  • Exposure to Liability

Types of Corporations

  • Domestic Corporation
  • Foreign Corporation
  • Alien Corporation
  • Employee-Owned Corporations
  • Not-for-Profit Corporations

Corporate Management

  • Stockholders – acquire stocks in exchange for ownership.
    • Preferred Stock
    • Common Stock
  • Board of Directors – elected by stockholders to oversee corporation.
  • Corporate Officers & Management – make major corporate decisions and handle ongoing operations.

When Businesses Join Forces

  • Mergers and Acquisitions (M&A)
    • Merger - combination of two or more firms to form one company.
      • Vertical
      • Horizontal
      • Conglomerate
    • Acquisition - procedure in which one firm purchases the property and assumes the obligations of another.
  • Joint Ventures – partnership between companies for a specific purpose

Public and Collective Ownership

Public Ownership – a unit or agency of government

owns and operates an organization. Parking structures,

water systems, turnpike authority

Customer-Owned Businesses – collective ownership of a

production, storage, transportation or marketing organization

is acooperative.