Business

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Chapter

4
Understanding Entrepreneurship & New Ventures
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Chapter Outline
What Is A Small Business? Entrepreneurship Starting/Operating A New Business Franchising Success/Failure In A Small Business Noncorporate Business Ownership Corporations
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Business

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Small Business
Small Business Administration

Business

Number of Employees Total Annual Sales

Independently Owned/Managed & Does Not Dominate Its Market

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Small Business Importance

Business

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Need For Small Businesses

Job Creation

Business

Innovation
Products/Services Processes

Important To Big Business

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Small Business Industries

Services Construction Finance & Insurance Wholesaling Transportation & Manufacturing
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Business

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Small Business Impact By Industry

Business

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Entrepreneur

Business

Accepts Risks & Opportunities In Creating/Operating A New Business Characteristics

Resourceful Good Customer Relations Desire To Be Own Boss- Gain BossControl Of Life Build For Family Tolerance For Uncertainty/Risk
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Entrepreneurs
Yesterday Today
Open-Minded OpenMale or Female Relies On Others
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Business

SelfSelf-Reliant Male Quick Decisions

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NonNon-Financial Reasons To Start A Business

Business

9% 7% 9% 41%

Do Something I Love More Flexibility Be Key Decision Maker Change Lifestyle Spend More Time With Family Don't Know or Not Stated

13% 21%

Source: CIBC World Markets, Economics & Strategy, Secrets to Small Business Success, research.cibcwm.com/economic_public/ download/sb-ssbs-10192004.pdf Copyright 2005 Prentice- Hall, Inc.

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Financial Reasons To Start A Business

Loss of Job Or Change Of Employment

Business

27% 39%

More Income For Necessities Second Income Bridge A Gap Till Retirement Forced Into Early Retirement

13%

3% 6%

12%

Don't Know Or Not Stated

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Source: CIBC World Markets, Economics & Strategy, Secrets to Small Business Success, research.cibcwm.com/economic_public/ download/sb-ssbs-10192004.pdf Copyright 2005 Prentice- Hall, Inc.

Start/Operate Small Business

Business Plan

Business

Buying Existing?

Start From Scratch?

Financing
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Business Plan
Summarizes Strategy

Business

Identifies Implementation Includes: Goals and Objectives Sales Forecast

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Business Plan- Projected PlanFinancial Statements

Cash Budget- Most BudgetImportant Income Statement Balance Sheets Breakeven
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Business

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Startup Business
My Customers? Where? Price? Quantities Will Be Bought? Competitors? Product Differentiation?
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Business

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Financing Small BusinessBusiness- Traditional

Family/Friends Personal Savings Lenders Investors Government
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Business

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Credit Usage By Small Business Firms- 1998 FirmsCredit Union

Percentage of Small Firms Using Credit By Suppliers

Business

Thrift Comm. Bank Finance Co. Brokerage Leasing Family & Friends Other Businesses Gov't Owner Loan Personal Credit Card Business Credit Card 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Source: Small Business Administration- Office of Advocacy, Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finance Sept. 2003. www.sba.gov/advo/stats/ssbf_98.pdf Copyright 2005 Prentice- Hall, Inc.

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Share of Outstanding Debt for Small Firms By Supplier of Credit 1998

Owner Loan 10% Unknown 2% Family & Friends 3% Other 8% Thrift 3%

Business

Commerical Bank 48%

Leasing 17% Fin. Co. 9%

Source: Small Business Administration- Office of Advocacy, Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finance Sept. 2003. www.sba.gov/advo/stats/ssbf_98.pdf Copyright 2005 Prentice- Hall, Inc.

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Percentage of Small Business Loans From Commercial Banks- 1998 Banks$100$249K 7%

Business

Under $100K 87%

$250K$1M 6%

Source: Small Business Administration- Office of Advocacy, Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finance Sept. 2003. www.sba.gov/advo/stats/ssbf_98.pdf Copyright 2005 Prentice- Hall, Inc.

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Other Sources Of Financing

Business

Venture Capital Companies Small-Business Investment Companies Small Small Business Administration
Guaranteed Loans Immediate Participation Local Development Companies Loans

Other SBA Programs

SCORE SBDCs

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Franchise System
Franchise Agreement

Business

Franchisor Franchisee
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Franchise Contract
Franchisor, Inc.

Business

Branded Product/Service Performance Monitoring

$$$$$
Franchisee
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Franchising
Advantages
To Franchisee

Disadvantages
To Franchisee

Business

+ Business

Ownership + Access To Mgmt. Skills + Low Failure Rate

To Franchiser

- High start-up startcosts % Of Sales To Franchiser

+ Rapid Growth
Using Other Peoples Money
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Trends In Small Business

E-Commerce Big Business Crossovers Minorities & Women Global Trade/Suppliers Better Survival Rates
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Business

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Startups: Success & Failure

Business

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Growth of E-Commerce E-

Business

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Women Entrepreneurs

Business

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Startups: Success vs. Failure

Business

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Reasons For Failure

3% 15% 32% 11%

12% 12%

15%

Poor Financial Management Incompetence or Inexperience Bad Economic Conditions Poor Books or Records Marketing Problems Staff or Union Problems Did Not Use External Advice
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Business

Source: The Coleman Chronicles, Vol. 1 Issue 20, The Most Common Reasons for Small Business Failure http://www.coleman.bc.ca/publications/chronicles/vol1issue20.htm Copyright 2005 Prentice- Hall, Inc.

Reasons For Success

Business

Hard Work, Drive, & Dedication Demand For Product/Service Managerial Competence Luck
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Legal Entities of Business Ownership

Business

Sole Proprietorship Partnerships

General Limited Master Limited

Corporations
Closely-Held vs. CloselyPubliclyPublicly- Held S Corporation Limited Liability Professional Multinational (Transnational)

Cooperatives
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Sole Proprietorship
Advantages Disadvantages
Unlimited Liability Lack Of Continuity Resources of One Person
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Business

Freedom Easy To Form Low Start-up StartCosts Tax Benefits

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General Partnership
Advantages Disadvantages
Unlimited Liability Lack Of Continuity Difficult To Transfer Ownership
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Business

More Talent & Money Easily Created Partners Taxed As Individuals

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Corporation
Advantages
Limited Liability Continuity Access To More Capital Ease Of Ownership Transfer
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Disadvantages
Ease Of Ownership Transfer Startup CostCostLegal Requirements Double Taxation
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Business

Proportions of Legal Business Entities

Business

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Corporate Governance
Shareholders

Business

Board Of Directors Officers

Business Employees
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Stock Ownership
Preferred

Business

Fixed Dividend Priority

Common
Dividend If Profitable Last Claim Voting Rights
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Corporate OwnershipOwnershipSpecial Issues

Joint Ventures & Strategic Alliances Employee Stock Ownership Institutional Ownership Mergers & Acquisitions Divestitures & Spin-Offs SpinCopyright 2005 Prentice- Hall, Inc.

Business

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