Entrepreneurship and

Small-Business Ownership
Chapter 3
Learning Objectives
1. Highlight the contributions small businesses make to the
economy.
2. List the most common reasons people start their own
companies and identify the common traits of successful
entrepreneurs.
3. Explain the importance of planning a new business and
outline the key elements in a business plan.
4. Identify the major causes of business failures and identify
sources of advice and support for struggling business owners.
5. Discuss the principal sources of small-business private
financing.
6. Explain the advantages and disadvantages of franchising.

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 The Big World of Small Business
 Many businesses start out with an entrepreneur, a compelling idea, and the drive to succeed.

 Defining just what constitutes a small business is surprisingly tricky, but it is vitally important
because billions of dollars are at stake when it comes to such things as employment regulations—
from which the smallest companies are often exempt—and government contracts reserved for
small businesses.
 97 per cent of Australian businesses in June 2014 were small businesses (The Australian Bureau
of Statistics, 2015).

 Small Business:
 In the states, a small business is defined as a company that is independently owned and
operated, is not dominant in its field, and employs fewer than 500 people (although this
number varies by industry).

 In Australia, small business is defined differently by regulators, for example:

 The Australian Securities and Investments Commission (ASIC) defines small business as
a business with annual revenue of less than $25 million and that employs fewer than 50
employees.
 On the other hand, the Australian Taxation Office (ATO) defines a small business as a
business with less than $2 million annual revenue turnover.
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 Economic Roles of Small Business
 They provide jobs:
 Although most small businesses have no employees, those that do, employed around 4.5
million people in 2012-13, approximately 43 per cent of private sector employment
(Australian Treasury 2014).

 They introduce new products:

 The freedom to innovate that is characteristic of many small firms continues to yield
countless advances: Among all firms that apply for patents on new inventions, on
average, small businesses receive 16 times more patents per employee than larger firms.

 They meet the needs of larger organizations:

 Many small businesses act as distributors, servicing agents, and suppliers to larger
corporations and to numerous government agencies (which often reserve a certain
percentage of their purchasing contracts for small businesses).

 They inject a considerable amount of money into the economy:

 small businesses produced $343.4 billion (around 33.1%) in 2013–14 of the Australian
nation’s economic output (Source: ABS, Australian Industry, 2013–14, Cat. No. 8155.0,
Table 5).
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Economic Roles of Small Business (cont.)
They take risks that larger companies sometimes avoid:
Entrepreneurs play a significant role in the economy as
risk takers—people willing to try new and unproven ideas.

They provide specialized goods and services:

Small businesses frequently spring up to fill niches that
aren’t being served by existing companies.

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Characteristics of Small Businesses
Regardless of their primary objectives, small
companies tend to differ from large ones in a variety of
important ways:
Most small firms have a narrow focus, offering fewer
goods and services to fewer market segments.
Small businesses have to get by with limited resources.
Small businesses often have more freedom to innovate.
Entrepreneurial firms find it easier to make decisions
quickly and react to changes in the marketplace.

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 THREE Factors Contributing to the Increase
in the Number of Small Businesses Today
E-Commerce, Social Media, and Other Technologies:
The rapid growth of e-commerce and social media in recent years has revolutionized the way many
businesses operate. Companies such as Pandora and Facebook couldn’t exist without web
technologies, of course, because their connection to customers happens entirely online.

Growing Diversity in Entrepreneurship:

Small-business growth is being fueled in part by women, minorities, immigrants, military veterans
who want to apply their leadership skills, older workers who can’t find employment to fit their interests
or skills, and young people who want alternatives to traditional employment. It’s never too early to
start.

Facebook, Google, and Dell are just a few of the significant companies started by college students.

Downsizing and Outsourcing:

Business start-ups often soar when the economy sours. During hard times, many companies
downsize or lay off talented employees, who then have little to lose by pursuing self-employment.

Outsourcing, the practice of engaging outside firms to handle either individual projects or entire
business functions, also creates numerous opportunities for small businesses and entrepreneurs.

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 The Entrepreneurial Spirit
Every professional should understand the entrepreneurial
spirit:
the positive, forward-thinking desire to create profitable,
sustainable business enterprises—and the role it can play in
every company, not just small or new firms.

The entrepreneurial spirit is vital to the health of the economy

and to everyone’s standard of living, and it can help even the
largest and oldest companies become profitable and
competitive.

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Why People Start their Own Companies
Starting a company is nearly always a difficult, risky,
exhausting endeavor that requires
significant sacrifice. Why do people do it?

More control over their future

Tired of working for someone else
Passion for new product ideas
Pursue business goals that are important to them on a
personal level
Inability to find attractive employment anywhere else.

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Exhibit 3.2 Qualities Shared by Successful
Entrepreneurs

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Exhibit 3.3 Business Start-Up Options

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 Blueprint for an Effective
Business Plan
Business plan:
A document that summarizes a proposed business venture, goals,
and plans for achieving those goals.

 Business plans can be written before the company is launched, when the
company is seeking funding, and after the company is up and running.

Preparing a business plan serves three important functions:

 First, it guides the company operations and outlines a strategy for turning an
idea into reality.
 Second, it helps persuade lenders and investors to finance your business if
outside money is required.
 Third, it can provide a reality check in case an idea just isn’t feasible.

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Blueprint for an Effective
Business Plan (cont.)
Mission and Company
Summary
objectives overview

Management
Products and Target
and key
services market
personnel

Marketing
strategy
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Blueprint for an Effective
Business Plan (cont.)
Design and
Operations Start-up
development
plan schedule
plans

Major risk Financial

Exit strategy
factors projections

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Exhibit 3.4 Why New Businesses Fail
ADVICE AND SUPPORT FOR BUSINESS OWNERS
Keeping a business going is no simple task. Fortunately, entrepreneurs can
get advice and support from a wide variety of sources:

Government Agencies and Not-for-Profit Organizations:

Numerous city, state, and federal government agencies offer business
owners advice, assistance, and even financing in some cases. For example:
Grants and Assistance Finder (www.business.gov.au) provides advice
and help finding finance for your business.

Business Partners: Banks, credit card companies, software companies,

and other firms you do business with can also be a source of advice and
support.

For example: the Australia and New Zealand Bank (ANZ) provides a small
business advice service (www.businessadvice.anz.com) and (
https://thesbhub.com.au). The service helps entrepreneurs starting a
business with finding finance, seeking legal advice and managing cash
flows.
ADVICE AND SUPPORT FOR BUSINESS OWNERS
Mentors and Advisory Boards: Many entrepreneurs and
business owners take advantage of individual mentors and
advisory boards.

Advisory Board
A team of people with subject-area expertise or vital
contacts who help a business owner review plans and
decisions

Mentoring can happen through both formal programs (such as

in Victoria: Small Business Mentoring Service and in NSW:
WorkCover Mentor Program) and informal relationships
developed in person or online (see Exhibit 2.5)

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ADVICE AND SUPPORT FOR BUSINESS OWNERS
Print and Online Media: Your local library and the Internet
offer information to help any small-business owner
face just about every challenge imaginable.

Network and support groups:In addition to local in-person

groups, social networking technology gives entrepreneurs an
endless array of opportunities to connect online (see Exhibit
3.5).

Business Incubators: Facilities that house small businesses

and provide support services during the company’s early
growth phases including various combinations of advice,
financial support, access to industry insiders and connections (
http://businessincubation.com.au/).
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Exhibit 3.5 Social Networking for
Entrepreneurs
 Financing Options for Small Businesses
Figuring out how much you’ll need in order to start a business requires
good insights into the particular industry you plan to enter. Figuring out
where to get the money is a creative challenge no matter which industry
you’re in.

Financing a business enterprise is a complex undertaking, and chances

are you’ll need to piece together funds from multiple sources, possibly
using a combination of equity (in which you give investors a share of the
business in exchange for their money) and debt (in which you borrow
money that must be repaid).

In general, financing small business can fall into two categories :

Private Financing and Public Financing

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 Financing Possibilities over
Exhibit 3.6
the Life of a Small Business

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Financing Options for Small Businesses:
Private Financing
• Seed Money:
Many firms get seed money, their very first infusion of capital used to get a
business started , through family loans. If you go this route, be sure to make the
process as formal as a bank loan would be, complete with a specified repayment
plan. Otherwise, problems with the loan can cause problems in the family.

• Banks and Microlenders:

Bank loans are one of the most important sources of financing for small business.
In most cases, banks would not lend money to a start-up that hasn’t established a
successful track record. As your company grows, a bank will usually be a good
long-term partner, helping you finance expansions and other major expenses.

Microlenders : Organizations, often not-for-profit, that lend smaller amounts of

money to business owners who might not qualify for conventional bank loans (
http://www.nab.com.au/business/loans-and-finance/business-loans/nab-microenter
prise-program
)
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 Financing Options for Small Businesses:
Private Financing
Venture Capital:
Long-term finance (usually equity finance) provided by certain institutions to small
and medium-sized businesses in order to exploit relatively high-risk opportunities.

Venture capital providers may be interested in a variety of businesses for various

purposes:
 Business start-ups: Venture capital is available to businesses that are not fully
developed and may need finance to help refine their business concept or for
product development or marketing.
 Early-stage capital: This is available for businesses ready to commence
trading.
 Expansion capital: This is additional funding provided to young, existing or
expanding businesses.
 Buy-out or buy-in capital: This is used to fund the acquisition of a business by
the existing management team (MBOs) or by a new management team (MBIs).
This often occurs when a large business wishes to divest itself of one of its
operating units, or where a family business wishes to sell because of
succession problems.
Financing Options for Small Businesses:
Private Financing
• Business Angels:
are often wealthy individuals who have been successful in business.
They are usually willing to invest, through a shareholding, , in a start-up
or developing stage of a business’s life and in smaller amounts than
Venture Capitals are willing to invest or banks are willing to lend.

They will often invest for a period of between three and five years, and
sometimes longer.

They normally have a minority stake in the business and do not

become involved in its day-to-day management. Business angels fill an
important gap in the market, as the size and nature of the investment
that they find appealing does not appeal to venture capitalists.

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 Financing Options for Small Businesses:
Private Financing
• Credit Cards and Personal Lines of Credit:
Although they tend to be extremely risky and one of the most expensive forms of
financing, credit cards are also widely available and sometimes the only source of
funding an entrepreneur has. Consequently, roughly half of all entrepreneurs and
small-business owners use their cards to get cash for start-up or ongoing expenses.

• Small Business Administration Assistance:

In the states, the SBA which offers a number of financing options for small
businesses. To get an SBA-backed loan, you apply to a regular bank or credit union,
which actually provides the money. The SBA guarantees to repay most of the loan
amount if you fail to do so. In addition to operating its primary loan guarantee program,
the SBA also manages a microloan program. Currently, Australia does not have a
comparable body to the SBA although many are demanding the government to creat
something similar in Australia.

http://www.brw.com.au/p/business/why_we_should_clone_america_small_Y2ehdTvAi
81O87SOECPr9H

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 Financing Options for Small Businesses:
Public Financing
Companies with solid growth potential may also seek funding
from the public at large, although only a small fraction of the
companies in Australia are publicly traded. Whenever a
corporation offers its shares of ownership to the public for the
first time, the company is said to be going public. The shares
offered for sale at this point are the company’s initial public
offering (IPO).

 Going public is an effective method of raising needed capital,

but it can be an expensive and time-consuming process with
no guarantee of raising the amount of money needed. Public
companies must meet a variety of regulatory requirements.
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Financing Options for Small Businesses:
• Crowdfunding
 Soliciting project funds, business investment, or business loans from
members of the public.

 Crowdfunding combines elements of public and private financing. Kickstarter (

www.kickstarter.com) is perhaps the best known of these web services that provide a
way for people and organizations to seek money from the public.

 Crowdfunding services fall into two general categories:

- Kickstarter and a number of other sites focus on individual projects or charitable endeavors, and people
provide money in exchange for the product being created or simply to help people and causes they believe
in.
- In contrast, services such as Crowdfunder (http://crowdfunder.com) help business owners raise money to
launch or expand companies, and the people who provide money are investing in or lending to the
company.

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The Franchise Alternative
An alternative to creating or buying an independent company
is to buy a franchise.

Franchise:
 A business arrangement in which one company (the franchisee)
obtains the rights to sell the products and use various elements
of a business system of another company (the franchisor)

In exchange for this right, the franchisee (the small-business

owner who contracts to sell the goods or services) pays the
franchisor (the supplier) an initial startup fee, then monthly
royalties based on sales volume.

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 TYPES OF FRANCHISES
 Franchises are of three basic types:

 A product franchise gives you the right to sell trademarked goods,

which are purchased from the franchisor and resold (example; Toyota
dealership and Shell service station).

 A manufacturing franchise, such as a soft-drink bottling plant,

gives you the right to produce and distribute the manufacturer’s
products, using supplies purchased from the franchisor.

 A business-format franchise gives you the right to open a business

using a franchisor’s name and format for doing business. This format
includes many well-known chains, including MacDonald's, Pizza Hut,
etc.
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Advantages of Franchising
• Combines at least some of the freedom of working for
yourself with many of the advantages of being part of a
larger, established organization. You can be your own boss,
hire your own employees, and benefit directly from your
hard work.

• Name recognition, national advertising programs,

standardised quality of goods and services, and a
proven formula for success.

• Buying a franchise also gives you access to a

support network and in many cases a ready-made
blueprint for building a business.
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 Disadvantages of Franchising
• Perhaps the biggest disadvantage is the relative lack of control, at several levels. First,
when you buy into a franchise system, you typically agree to follow the business format,
and franchisors can prescribe virtually every aspect of the business, from the colour of the
walls to the products you can carry. In fact, if your primary purpose in owning a business is
the freedom to be your own boss, franchising probably isn’t the best choice because you
don’t have a great deal of freedom in many systems.

• Second, as a franchisee, you usually have little control over decisions the franchisor makes
that affect the entire system. Disagreements and even lawsuits have erupted in recent
years over actions taken by franchisors regarding product supplies, advertising, and
pricing.

• Third, if the fundamental business model of the franchise system no longer works—or
never worked in the first place—or if customer demand for the goods and services you sell
declines, you don’t have the option of independently changing your business in response.

• Finally, Cost of buying a franchise can vary widely, based on the complexity and popularity
of the franchise.

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