Small Business,

Entrepreneurship,
and Franchising

Chapter 5

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 Learning Objectives
5-1 Define entrepreneurship and small business.
5-2 Investigate the importance of small business in the U.S.
economy and why certain fields attract small business.
5-3 Specify the advantages of small-business ownership.
5-4 Summarize the disadvantages of small-business ownership
and analyze why many small businesses fail.
5-5 Describe how you go about starting a small business and what
resources are needed.
5-6 Evaluate the demographic, technological, and economic trends
that are affecting the future of small business.
5-7 Explain why many large businesses are trying to “think small.”
5-8 Assess two entrepreneurs’ plans for starting a small business.

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 The Nature of Entrepreneurship and
Small Business 1
An entrepreneur is a person who risks his or her
wealth, time, and effort to develop for profit an
innovative product or way of doing something
• Entrepreneurship
• Microentrepreneurs
• Social entrepreneur

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 POLLING QUESTION The founder and owner of Tom Shoes is an
example of which type of entrepreneur?

A. Micro entrepreneur
B. Social entrepreneur
C. Small business entrepreneur
D. Socially responsible entrepreneur

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 The Nature of Entrepreneurship and
Small Business 2
What Is a Small Business?
• Any independently owned and operated business that
is not dominant in its competitive area
• Does not employ more than 500 people
Small Business Administration (SBA)
• An independent agency of federal government
• Offers management and financial assistance to small
businesses

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 Table 5.2 Importance of Small Business
to Our Economy
1. Small firms represent 99.7% of all employer firms.
2. Small firms have generated 62% of net new jobs.
3. Small firms hire approximately 37% of high-tech workers (such as
scientists, engineers, computer programmers, and others).
4. Small firms produce 16 times more patents per employee than large
patenting firms.
5. Small firms employ nearly half of all private-sector employees.
6. Small firms pay 42% of the total U.S. private payroll.

Source: “How Many Jobs Do U.S. Small Businesses Create? 2017,” Small Business, December 1, 2017, https://smallbusiness.com/ about-
small-businesses/how-many-jobs-small-business-create/ (accessed April 21, 2018); Small Business Administration Department of Advocacy,
“Frequently Asked Questions,” March 2014, www.sba.gov/sites/default/files/FAQ_March_2014_0.pdf (accessed April 21, 2018).

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 The Nature of Entrepreneurship and
Small Business 3
Job Creation
• 63% of net new jobs annually are created by small
businesses
• 82.2% of all businesses employ fewer than 500
people
• 66.8% of all businesses employ 19 or fewer people
• Big company/small company alliances also create
jobs

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 The Nature of Entrepreneurship and
Small Business 4
Innovation
• Small firms produce more than half of all innovations
• Artificial intelligence creating new opportunities for
innovation
• Many of today’s largest businesses started off as
small firms that used innovation to achieve success

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 The Nature of Entrepreneurship and
Small Business 5
Industries That Attract Small Business
• Retailing
• Nonstore retailing
• Direct selling

• Wholesaling
• Can assist customers with almost every business function
• If eliminated, their functions must be passed on to another
intermediary

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 The Nature of Entrepreneurship and
Small Business 6
Industries That Attract Small Business continued
• Services
• Includes businesses that do not actually produce tangible
goods
• Accounts for 80% of U.S. jobs

• Manufacturing
• Can provide unique opportunities for small business
• Can customize products to meet specific consumer needs

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 The Nature of Entrepreneurship and
Small Business 7
Industries That Attract Small Business continued
• Technology
• High technology

• Sharing economy
• Involves the sharing of underutilized resources
• Gig economy

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 Table 5.4 Successful Traits of Young Entrepreneurs

Trait Definition
Using one’s intuition to derive what’s true without conscious
Intuitive
reasoning
Being able to produce large amounts of something during a
Productive
specific time period
Resourceful Understanding how to use and spend resources wisely
Charismatic Having the ability to inspire others behind a central vision
Innovative Being able to come up with new and creative ideas
Having the ability to pursue risky endeavors despite the
Risk-taker
possibility of failure
Persistent Continuing in a certain action in spite of obstacles
Friendly Being able to have mutually beneficial interactions with people

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 Advantages of Small-Business Ownership
Independence
Costs
Flexibility
Focus
Reputation

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 POLLING QUESTION In your opinion, the most important advantage
of owning a small business is _____.

A. Independence – easier decision making

B. Costs – low startup costs
C. Flexibility – resources can easily be adapted to meet
new needs in the market
D. Focus – niche market

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 Disadvantages of Small-Business Ownership
High Stress Level
High Failure Rate
• Undercapitalization
• Managerial inexperience or incompetence
• Inability to cope with growth

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 Table 5.5 Challenges in Starting a New Business
1. Underfunded (not providing adequate startup capital)
2. Not understanding your competitive niche
3. Lack of effective utilization of websites and social media
4. Lack of a marketing and business plan
5. If operating a retail store, poor site selection
6. Pricing mistakes–too high or too low
7. Underestimating the time commitment for success
8. Not finding complementary partners to bring in additional experience
9. Not hiring the right employees and/or not training them properly
10. Not understanding legal and ethical responsibilities

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 Starting a Small Business 1
The Business Plan
• Statement of the rationale for the business
• Step-by-step explanation of how to achieve goals
Forms of Business Ownership
• Sole proprietorship
• Partnership
• Corporation

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 Starting a Small Business 2
Financial Resources
• Owner puts up a significant percentage of capital
needed
• Equity financing
• Use of personal assets rather than borrowing funds
• Venture capitalists

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 Starting a Small Business 3
Financial Resources continued
• Debt financing
• Loans obtained from banks or the Small Business
Administration (SBA)
• Collateral
• Mortgage
• Line of credit
• Trade credit
• Bartering

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 Starting a Small Business 4
Approaches to Starting a Small Business
• Starting from scratch versus buying an existing
business
• Advantage of built-in network of customers, suppliers,
distributors
• Disadvantage of inheriting any problems the business already
has

• Franchising
• Franchise, franchiser, franchisee

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 POLLING QUESTION Lucy is a middle-aged woman with a long track
record in the café industry. She wants to open
her own bakery, but she has limited funding. In
your opinion, what’s her best option for
starting her business?
A. Purchase an existing business
B. Form a new business
C. Purchase a franchise

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 Starting a Small Business From Scratch

Some entrepreneurs choose to start their businesses from scratch so

they can run their businesses as they see fit. While they might start off
small and struggle to attract customers, they are not limited by the
restrictions of a franchise agreement.

©McGraw-Hill Education. ©Arina P Habich/Shutterstock

 Starting a Small Business 5
Approaches to Starting a Small Business continued
• Advantages of franchises
• Management training and support
• Brand-name appeal
• Standardized quality of goods and services
• National and local advertising programs
• Financial assistance
• Proven products/business formats
• Centralized buying power
• Site selection and territorial power
• Greater chance for success

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 Starting a Small Business 6
Approaches to Starting a Small Business continued
• Disadvantages of franchises
• Franchise fees and profit sharing with franchiser
• Strict adherence to standardized operations
• Restrictions on purchasing
• Limited product line
• Possible market saturation
• Less freedom in business decisions

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 Table 5.6 Top 10 Fastest Growing Franchises
1. Dunkin’ Donuts
2. 7-Eleven Inc.
3. Planet Fitness
4. Jan-Pro Franchising International Inc.
5. Taco Bell
6. Orangetheory Fitness
7. Great Clips
8. Mac Tools
9. Cruise Planners
10. Jazzercise Inc.

©McGraw-Hill Education. Source: “2018 Fasted-Growing Franchises Ranking,” Entrepreneur, https://www.entrepreneur.com/franchises/fastestgrowing (accessed Aril 21, 2018).
 Starting a Small Business 7
Help for Small-Business Managers
• U.S. and local chambers of commerce
• National publications such as Inc. and Entrepreneur
• Small Business Administration (SBA)
• Small Business Development Centers (SBDCs)
• Service Core of Retired Executives (SCORE)
• Active Corps of Executives (ACE)
• Small Business Institutes (SBIs)

• Other small businesses

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 The Future for Small Business 1
Demographic Trends
• Baby boomer generation
• Millennials
• Immigrants

The Latino population is the biggest and fastest growing minority

segment in the U.S.—and a lucrative market for businesses looking for
ways to meet the segment’s many needs.
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 The Future for Small Business 2
Technological and Economic Trends
• Internet
• Increase in service exports
• Economic turbulence provides both opportunities and
threats
• Deregulation of the energy market and alternative
fuels

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 POLLING QUESTION The are several demographic trends that may
impact the growth of small businesses. One of
these groups is called _____, born between
1981 and 1997.
A. Gen X
B. iGen
C. Millennials
D. Gen Z

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 Making Big Businesses Act “Small”
The success and competitiveness of small
businesses have led large corporations to
reevaluate their business formats
• Many larger firms are emulating smaller firms to
improve their bottom line
• Downsizing or right-sizing
• Intrapreneurs

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 Solve the Dilemma
The Small-Business Challenge 1
Jack Gray and Bruce McVay decide to start their own small
business
• Jack had developed recipes for fat-free and low-fat cookies and
muffins to satisfy his personal health needs
• Bruce had extensive experience in managing food-service
establishments

They know that startups need quality products, adequate

funds, a written business plan, outside financial support,
and a good promotion program
Each one has $35,000 to invest, and with their homes and
other resources, they have borrowing power of an
additional $125,000

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 Solve the Dilemma
The Small-Business Challenge 2

Remaining Decisions
• What form of organization to use
• How to market their product
• How to determine what products to sell
• Just cookies and muffins, or additional products too?

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 Solve the Dilemma
The Small-Business Challenge 3

Critical Thinking Questions

1. Evaluate the idea of a low-fat cookie and muffin retail
store.
2. Are there any concerns in connection with starting a
small business that Jack and Bruce have not
considered?
3. What advice would you give Jack and Bruce as they
start up their business?

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