small business, entrepreneurship, and franchises

© 2013 South-Western, a part of Cengage Learning. All rights reserved. Chapter 2 | Slide 1

Small Business, Entrepreneurship, and Franchises

Chapter

5


A business that is independently owned and operated for profit and is not dominant in its field

Small Business: A Profile


Industry Group-Size Standards


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.

Small Business: A Profile (cont.)


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 Entrepreneurs


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 People in Small Businesses: The Entrepreneurs (cont.)

http://www.retireat21.com/top-young-entrepreneurs


The Pros 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

Guy Kawasaki from Apple “Make Meaning”

http://youtu.be/lQs6lpJQWXc


Sources of Capital for Entrepreneurs


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?

Developing a Business Plan


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


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

The Small Business Administration (cont.)


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

Franchising


What Is Franchising?

FranchiseAgreement

Franchisee

Franchisor

John Q. Look at Dunkin’ Donuts Franchise Agreement


Basic Rights & Obligations Delineated in a Franchise Agreement


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


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.

The Growth of Franchising (cont.)


Entrepreneur’s Ten Franchises in 2011

Source: http://www.entrepreneur.com/franchise500/index.html (accessed March 15, 2011).


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


Qualities FranchisorsSeek in Franchisee


Chapter Quiz

1. Which one of the following would most likely be classified as a service industry?

A. Grocery storeB. Jewelry storeC. Pet shopD. Dry cleaning shopE. Clothing store


Chapter Quiz

2. 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. a lack of adequate financing.B. low consumer demand for their products.C. hostile competition.D. a lack of owner commitment.E. mismanagement and lack of business know-how.


Chapter Quiz

3. A license to operate an individually owned business as if it were part of a chain of outlets or stores is called a

A. joint venture.B. syndicate.C. franchise.D. SCORE.E. small-business development center.


Chapter Quiz

4. 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. a fast-food industry.B. the semiconductor industry.C. filling stations.D. car dealerships.E. the soft-drink industry.

small business, entrepreneurship, and franchises

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