Small Business, Entrepreneurship, and Franchises. Chapter 5. Small Business: A Profile. A business that is independently owned and operated for profit and is not dominant in its field. Industry Group-Size Standards. Small Business: A Profile (cont.). Important facts
Small Business: A Profile • A business that is independently owned and operated for profit and is not dominant in its field
Small Business: A Profile (cont.) • Important facts • In the last decade, the number of small businesses increased 49%. • 70% of new businesses survive at least two years, about 50% survive at least five years, and 31% 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.
The Entrepreneurs • Characteristics • 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-most are 24-44 years old • Motivation • “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
The People in Small Businesses: The Entrepreneurs (cont.) • Women • Owned at least 50% of small businesses in 2008 • Women have less risk of failure than average • Teenagers • High-tech entrepreneurship is exploding • Face unique pressures juggling schoolwork, social lives, business workload • Need skills for planning, persistence, patience, people management, generating profit • Successful entrepreneurs under age 30
The Pros and Cons of Smallness Disadvantages • Risk of failure • Limited potential • Limited ability to raise capital • Guy Kawasaki from Apple • “Make Meaning” 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
Developing a Business Plan • Business plan—a carefully constructed guide for the person starting a business • Three basic purposes • Communication • Management • Planning • Banking officials’ and investors’ questions • What is the nature and mission of the new venture? • Why is it a good idea? • What are the goals? • How much will it cost?
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 Corps of Retired Executives (SCORE) • Help for minority-owned small businesses • Small-business institutes (SBIs) • Small-business development centers (SBDCs) • SBA publications
The Small Business Administration (cont.) • SBA financial assistance • Regular business loans • Loans made by private banks but partially guaranteed by the SBA • Small-business investment companies • Venture capital: money invested in small firms that have the potential to become very successful
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 a franchise • Franchisee • A person or organization purchasing a franchise
What Is Franchising? Franchise Agreement Franchisor Franchisee John Q. Look at Dunkin’ Donuts Franchise Agreement
The Growth of Franchising • 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 franchising, in which two franchisors offer their products together, is a new trend. • Example: Taco Bell and KFC
The Growth of Franchising (cont.) • Are franchises successful? • The success rate for franchises is significantly higher than that for other small businesses. • The vast majority, 94%, 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 Ten Franchises in 2011 Source: http://www.entrepreneur.com/franchise500/index.html (accessed March 15, 2011).
Advantages of Franchising 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 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
Disadvantages of Franchising To the franchisee • Franchisor retains a large amount of control over the franchisee’s activities • Franchisor opening competing franchises within the franchisee’s market To the franchisor • Failure of the franchisee to operate franchise properly • Disputes with and lawsuits by franchisees over the terms of the franchise
Chapter Quiz • Which one of the following would most likely be classified as a service industry? • Grocery store • Jewelry store • Pet shop • Dry cleaning shop • Clothing store
Chapter Quiz • 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 lack of adequate financing. • low consumer demand for their products. • hostile competition. • a lack of owner commitment. • mismanagement and lack of business know-how.
Chapter Quiz • A license to operate an individually owned business as if it were part of a chain of outlets or stores is called a • joint venture. • syndicate. • franchise. • SCORE. • small-business development center.
Chapter Quiz • 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 fast-food industry. • the semiconductor industry. • filling stations. • car dealerships. • the soft-drink industry.