3. After reading this chapter, you should be able to:
1. Define small business, discuss its importance to the U.S. economy, and
explain popular areas of small business.
2. Explain entrepreneurship and describe some key characteristics of
entrepreneurial personalities and activities.
3. Describe the business plan and the start-up decisions made by small
businesses and identify sources of financial aid available to such
enterprises.
4. Discuss the trends in small business start-ups and identify the main
reasons for success and failure among small businesses.
2009 Pearson Education, Inc.
L E A R N I N G O B J E C T I V E S
In this chapter we will examine entrepreneurship, new ventures and types of business ownership. We will define small business, discuss its importance to the U.S. economy, and explain popular areas of small business. We will explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities.
Additionally, we will describe the business plan and the start-up decisions made by small businesses and identify sources of financial aid available to such enterprises. We will discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.
Teaching Tips:
Ask the class to engage in the following way with the each objective:
Objective 1: Define small business, discuss its importance to the U.S. economy, and explain popular areas of small business.
Please take out a piece of paper and write down one example of a small business that you visit frequently. Then write down why you think it is important for this small business and others like it to be part of the U.S. economy. Now join with another student and share your response. Each pair of students will share their responses with the class.
Responses will vary.
Objective 2: Explain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activities.
Please remain in your teams from Objective 1. I would like each team to provide a description of entrepreneurship and make a list of 5 key characteristics of an entrepreneur. Once you have completed your description and five examples, join with another team and share your answers with your combined team. Each team will then tell the class its best example of a characteristic of an entrepreneur and why this characteristic is important.
Answers will vary. You can reserve judgment on characteristics until you have completed reviewing the chapter with the students.
Objective 3: Describe the business plan and the start-up decisions made by small businesses and identify sources of financial aid available to such enterprises.
Please form new pairs of two students. Each pair will write down its answer to the following question, “What is the purpose of a business plan?”.
Answers should include:
It is needed to obtain financing.
It is needed to plan how the small business will operate.
It is needed to decide how the small business will sell its products or services.
Other answers may also apply.
Objective 4: Discuss the trends in small business start-ups and identify the main reasons for success and failure among small businesses.
Please combine with another pair of students. Take a moment and answer the following questions:
What are two main reasons for success and failure among small businesses?
How does a recession affect a small business?
Once you have completed your answers, please share them with your team. Each team will them report their answers to the entire class.
Answers will vary and could include such areas as web-based businesses, small restaurants, etc. Reasons for the success and failure could include not enough business planning or an inappropriate business plan, inadequate financing for the business, etc. You can also tell the students that they need to review their answers after you have completed review of the entire chapter.
We will also explain types of companies that businesses can form and the advantages and disadvantages of each. These include sole proprietorships, partnerships and cooperatives, corporations, and different types of corporations.
We will also explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.
Teaching Tips
Objective 5: Explain sole proprietorships, partnerships, and cooperatives and discuss the advantages and disadvantages of each.
In your teams, please choose one of the three types of small businesses in Objective 5. Please list two advantages and disadvantages of each.
Answers will vary. If you choose, you can hold off on providing the right answers until later in the class when you review this material.
Objective 6: Describe corporations, discuss their advantages and disadvantages, and identify different kinds of corporations.
In your student teams, please think of two types of corporations and write down one advantage and one disadvantage of each. We will share our answers with the class.
Answers will vary but should include the major types of corporations such as C corporation, sub chapter S and others. You can wait to see if their advantages and disadvantages are correct once you get to that point in the chapter.
Objective 7: Explain the basic issues involved in managing a corporation and discuss special issues related to corporate ownership.
In your student teams, discuss what you think is one of the basic issues involved in managing a corporation. We will share these with the class.
Answers will vary.
What’s in this for you?
By understanding the material discussed in this chapter, you’ll be better prepared to:
Understand the keys to entrepreneurial or small business success, including the elements of business planning.
Discuss the reasons for the success or failure of a small business.
Evaluate the advantages and disadvantages of different kinds of ownership.
Teaching Tips:
Which of these three points will be most interesting to you and why? Discuss in your teams, and we will share with the class.
Answers will vary.
First, let’s define a small business:
A small business is one that is independent or not part of a larger business, and that has relatively little influence in its market.
There are a number of reasons why small business is important in the U.S. economy. Let’s see if the points you discussed earlier are among these reasons:
Job creation: Did you know that more than half of all new jobs created in the U.S. are by small businesses?
Innovation: Most new innovative product or service ideas come from small businesses.
Contributions to big business: Small businesses are suppliers of specialized services and raw materials to big business. They are also retailers or distributors of the larger firms’ products or services.
Teaching Tips:
Please return to your student team and the list you prepared of the types of small businesses you discussed. Please review your response as to why you believe your small business example is important to the U.S. economy. Please provide a connection to the three key reasons from our review of the chapter. We will share the answers with the class.
Answers will vary.
Let’s take a look at the number of small businesses by industry in this graph.
Services represent 50.07% of all small businesses.
Retail stores represent 13.06%.
Construction firms represent 12.70%.
Wholesalers represent 6%.
Finance and insurance businesses represent 4.11%.
Manufacturing represents 4.4%.
Transportation represents 2.76%.
Other types of small business make up the remaining 6.90%.
Teaching Tips:
In your student teams, please think of three examples of small businesses that provide services.
Answers will vary.
Let’s define some terms relating to entrepreneurship:
Entrepreneurship is the process of seeking business opportunities under conditions of risk.
An entrepreneur is someone who accepts the risks and opportunities of creating, operating and growing a new business.
A small business owner is a person who independently owns a business that has relatively little impact in its market .
Teaching Tips:
In your student teams, please give an example of each one of the three definitions we just reviewed.
Answers will vary.
A successful entrepreneur has a number of characteristics that make him or her successful. Let’s review some of these. Successful entrepreneurs:
Are resourceful.
Are concerned about good customer relationships.
Desire to be their own boss.
Can deal with uncertainty and risk.
Are open-minded.
Rely on networks, business plans and consensus.
Have different views on how to succeed, to automate a business, and when to rely on experience or business acumen.
Teaching Tips:
Please join with another class member. In your team please review the list you made earlier of entrepreneurial characteristics, when we were discussing learning objectives for this chapter. First, see how on target you were. Second, prepare a list of the characteristics that apply to you. Let’s share our examples with the class.
Answers will vary but can build upon examples presented earlier in the discussion of the chapter learning objectives and from the list on this slide.
Now we will turn our attention to starting and operating a new business. The first step is to craft a business plan. A business plan conveys a description of the business strategy for the new venture and how it will be implemented. It should also address three key areas:
The entrepreneur’s goals and objectives.
The strategies that will be used to obtain them.
The implementation of the chosen strategies.
How do we prepare a business plan?
We set goals and objectives.
We forecast sales of our products or services.
We undertake financial planning.
In addition, there are three key questions every business plan should answer. These will be easy for you to remember:
Where is the business now? How did it get to this point?
Where do we want to go with the business? (This addresses the first item we discussed earlier.)
How are we going to get where we want to go? (These address the second and third items we reviewed earlier.)
Teaching Tips:
In your same team, please think of an idea for a new business. In your team, please answer the three questions—where are we now (or where is the idea now), where do we want to go with this new business (what are our objectives) and how are we going to get there (what strategies will we use). Please share your example with the class.
Answers will vary.
Let’s examine different ways of starting a small business. One way is to buy an existing business. This provides for less risk because it is an ongoing, viable business.
Another method is franchising. Franchising involves either buying an existing franchise, such as a fast food restaurant or store, etc., or buying the franchise to start a new branch or site for an existing franchise. Let’s look at the advantages and disadvantages of franchising. Advantages include:
A franchise is a proven business opportunity for the franchisee.
The franchise provides access to the management expertise of the franchisor.
Disadvantages include:
Start-up costs for the purchase of the franchise. These can run from $50,000 to the hundreds of thousands of dollars.
Ongoing payments must be made to the franchisor.
Management of the franchise places rules and restrictions on the franchisee.
Teaching Tips:
In your student teams, pick a common franchise that you frequent and discuss either advantages or disadvantages of owning that particular franchise.
Answers will vary but should reflect on the advantages and disadvantages just discussed.
Let’s review starting a business from scratch. First, the disadvantage is that there is a higher risk of business failure than if we purchase an existing business or franchise. Second, starting from scratch avoids problems that may be inherent in an existing business that we might purchase.
There are a number of questions that need to be answered when starting a business from scratch:
1. Who and where are my customers?
2. How much will those customers pay for my product?
3. How much of my product can I expect to sell?
4. Who are my competitors?
5. Why will customers buy my product rather than the product of my competitors?
Teaching Tips:
In your same student teams, remember the idea you came up with for a new business a few minutes back. Now please answer the questions we just asked about your new business idea. These of course will only include your own ideas and best estimate.
Answers will vary.
Once we’ve decided to start or buy a small business, we need to determine how we are going to finance the business. Here are some sources from which we can potentially obtain loans:
Personal resources (i.e., our own money)
Loans from family and friends
Bank loans
Venture Capital Companies
Small Business Investment Companies
Minority Enterprise Small-Business Investment Companies
The Small Business Administration (SBA) and its financial programs. These include guaranteed loans and immediate loan programs, as well as management advice through its team of retired business executives (called SCORE) and from Small Business Development Corporations (SBDCs).
Teaching Tips:
What is the first thing you need in order to obtain most of these types of financing?
A business plan!
Now we will focus on five largest growth trends for new small business startups.
The first is the emergence of e-commerce. The Internet provides new ways of doing business, and entrepreneurs are jumping on board. Internet sales have increased from $55.7 billion in 2003 to $125.1 billion in 2007.
Crossovers from big business is another big trend. What does this mean? It means that more people than ever are leaving big business to start their own small business with much success. Our text offers the example of John Chambers who turned Cisco into a huge Internet connectivity firm, after first spending years working for IBM and Wang.
Opportunities for minorities and women within the small business market have grown rapidly. For example, African American small business owners own 1.2 million small businesses, an increase of 48% over the last five years. Hispanic American small business owners own 1.6 million small businesses, an increase of 31% over the last five years. Asian American small business ownership has grown 24% and Asian Pacific Islander American small business ownership has grown 64% both in the last five years. Nearly 11 million small businesses are now owned by women. Added together, these businesses generate $2.5 trillion in revenues each year.
Women cited a number of reasons for starting their own small business. Let’s review them:
46% of the women started their own business to better control their own schedule.
24% of the women saw a market opportunity and decided to pursue it.
23% of the women were frustrated by the “glass ceiling” in wages at big companies.
And the remaining 7% cited other reasons.
Global opportunities represent another new market for small business owners, such as software development companies, consulting firms and higher education.
44% of small businesses will succeed and remain in operation after 4 years, offering better survival rates than in the 1970s when nearly half of all new businesses failed.
Teaching Tips:
In your student teams, think of a new idea for an e-commerce or Internet-based business. Discuss why you believe your business idea could succeed. Then we will share our ideas with the class.
Answers will vary.
There are a number of key reasons for the failure or success of any new business. Many new businesses fail due to:
Poor management.
Neglect.
Weak control systems.
Insufficient capital.
Reasons why new businesses succeed include:
Hard work, drive, and dedication. Many small business owners spend 12 to 15 hours a day in the initial stages of their new business start up working to market, manage and promote their offerings.
Market demand. You need to have a market to whom you can sell your product or service, and you need to add value to your product or service for it to be accepted in the marketplace.
Managerial competence. If you don’t understand why your general ledger accounting software does not balance, you have a problem!
Luck!!!!
Teaching Tips:
In your student teams, take one of the new business ideas you have discussed today and choose one of the small business failure reasons. Please discuss what you as the owner could do to make your business succeed if your firm were suffering from one of the elements of failure. We will share our ideas with the class.
Poor Management: Join a local chamber of commerce and its CEO small-business roundtable to share with other managers. Or take classes at a local university or community college or the SBA.
Neglect: Pay attention to your business during each and every day.
Weak control systems: Attend seminars on business controls. Hire a consultant to evaluate your control systems. Get help from the SBA by working with a SCORE retired executive.
Insufficient capital: Cut back expenses, look at and focus only on your core business.
Answers will vary.
There are a number of ways to structure and own a business.
There are three main forms of legal ownership:
The first is sole proprietorship, which is owned and operated by one person.
The second is a partnership, where there is more than one partner-owner, but the business the same status as a sole proprietorship.
The third is a corporation.
Why choose one over the other?
The type of ownership a small business owner chooses is based on the entrepreneur’s needs/desires for control, ownership participation, financing sources and appropriateness of the chosen form for the industry in which the firm will compete.
Teaching Tips:
In your student teams, refer back to your new internet business idea. What form of ownership would you choose? Please discuss this and we will share with the class.
Answers will vary.
Let’s examine the advantages and disadvantages of each type of ownership. We will start by looking at sole proprietorships. The advantages of a sole proprietorship include:
Freedom. There are only the rules of the sole owner to follow.
It is simple to form.
There are low start-up costs.
There are tax benefits, since income and expenses for a sole proprietorship flow through your personal income tax.
The formation of cooperatives, meaning the ability to work with other sole proprietors.
There are also disadvantages of operating your small business as a sole proprietorship.
The biggest disadvantage is that there is unlimited liability; in other words, the owners are responsible for all the debts or liabilities of a business.
In addition, sole proprietors have limited resources unless, of course, they are millionaires!
They have limited fundraising capability.
There is also a lack of continuity, since they are the only person who knows the business.
Teaching Tips:
In your same student teams, please revisit your example we just discussed. Please discuss which advantages or disadvantages would apply to your new internet business.
Answers will vary, but should address the advantages and disadvantages just discussed.
Let’s examine the advantages and disadvantages of partnerships. The advantages include:
There is more talent and more money available when there is more than one person working in a business.
There are more fundraising capabilities.
Partnerships are relatively easy to form.
There is limited liability for limited partners.
There are also tax benefits.
The disadvantages of partnerships include:
Once again, unlimited liability for any general partner in the firm.
There may be disagreements among partners.
There can also be lack of continuity.
Teaching Tips:
Continue to address the same Internet business you have been discussing in your student teams. Please discuss whether a partnership would be a better form of organization for your new business than a sole proprietorship. Why or why not? We will share our answers with the class.
Answers will vary but should focus on the advantages and disadvantages noted above.
There are also alternatives to general partnerships. We will discuss two of these here: the Limited Partnership and the Master Limited Partnership.
The Limited Partnership:
Allows for limited partners who invest money and who are liable for debts, but only to the extent of their investments.
Must have at least one general or active partner, who is usually the person who runs the business and is responsible for its survival and growth.
The Master Limited Partnership differs in that:
The organization sells shares or partnership interests to investors on a public exchange. Investors are paid back from the profits.
The master partner retains at least 50% ownership and runs the business, while minority partners have no management voice.
Teaching Tips:
Which form of partnership do you think is best for your new Internet business example if you had to choose? Why? Please discuss in your teams and then share with the class.
Answers will vary but should be based on the information on partnerships just presented.
Now let’s look at cooperatives as a form of business. Cooperatives combine the freedom of sole proprietorships or partnerships with the financial power of corporations.
Cooperatives are groups of sole proprietorships or partnerships that agree to work together for their common benefit.
In the U.S., these are usually agricultural in nature.
Teaching Tips:
Please think of one example of a cooperative.
Ocean Spray cranberry growers, Florida citrus growers, and Wisconsin dairy cooperatives are some examples.
Now we will examine corporations. First, let’s define a corporation. A corporation is a firm that has filed papers of incorporation. There are 4.93 million corporations in the U.S. that account for 20% of all U.S. businesses, but generate 85% of all revenue.
Corporations may:
Be small or large.
Sue and be sued.
Buy, hold and sell property.
Make and sell products.
Commit crimes and be tried and punished for them.
Have limited liability for individuals who form them, but as we know from the past few years, CEOs of corporations can and do go to jail for committing fraud.
Teaching Tips:
In your student teams, discuss the possibility of incorporating your new Internet business. Please share your discussion with the class.
Answers may vary, but could address the issues of limited liability for the individuals forming the new internet corporation.
Let’s examine the advantages and disadvantages of forming a corporation. The advantages of incorporating include:
Limited liability: The owners’ responsibility is limited to their investment in a business.
Continuity.
Stronger fundraising capability.
The disadvantages of incorporating include:
Double taxation of dividends.
Fluid control: The corporation will generally have a board of directors you need to serve.
Corporations are complicated and expensive to form.
Teaching Tips:
In your student teams, please choose a corporation with which you are familiar. Please discuss why you think this firm chose to incorporate. Then we will discuss our examples with the class.
Answers will vary based on the corporation chosen, but should address advantages and disadvantages just discussed.
There are many types of corporations. These can include both closely held, or what is called private corporations, and they can also include publicly held companies whose shares of stock are traded on a stock exchange.
Within these two types of corporations there are four other types of organization:
Subchapter S Corporation: These firms are corporations and they are organized like a corporation but they are treated like partnerships for tax purposes. There are strict rules for eligibility.
Limited Liability Corporation (LLC): This is a popular form of incorporation because owners are taxed like partners but have the limited liability of a corporation.
Professional Corporation: These are usually doctors, lawyers, etc. Their corporate status provides limited liability, but an individual’s negligent performance can make an individual within the firm liable.
Multinational or Transnational Corporation: The stock of these corporations may be traded in stock markets in multiple countries and they may be managed in more than one country.
Teaching Tips:
Please join with another class member. In your team, please come up with one example of a privately held corporation and a publicly held corporation. Let’s share our answers.
Answers will vary.
Managing a corporation involves what is called corporate governance. This includes the roles of shareholders, directors, and other managers in corporate decision making and accountability.
Corporate governance is established by the firm’s bylaws and involves three bodies:
Stockholders or shareholders: These are investors who buy ownership shares in the form of stock.
The board of directors: This is a group elected by stockholders to oversee corporate management.
Corporate officers: These are a group of top managers hired by the board to run the corporation.
Teaching Tips:
Do you think small, privately held corporations or small businesses issues shares of stock and have these three forms of corporate governance? Why or why not?
Yes, any small business can incorporate as a C corporation and must then have bylaws and must issue shares of stock to the key investors, which may be only one or two people. In addition, they must have a board of directors and top managers, and they must meet and keep minutes of their board meetings.
If you are not familiar with stocks and their dividends, let’s define them briefly:
Stock is a share of ownership in a corporation.
Dividends are profits distributed among stockholders.
Teaching Tips:
Please take a minute and share with your student partner whether you own any stock or have owned it in the past and if you have received dividends.
Answers vary.
There are some special issues in corporate ownership that we will discuss. The first of these is the concept of joint ventures and strategic alliances.
A strategic alliance is the collaboration of two or more organizations on a project for mutual gain. A joint venture is a new enterprise in which partners share ownership.
The second of these are Employee Stock Ownership Plans or sometimes called ESOPs. An ESOP allows employees to own a share of the corporation through trusts established on their behalf.
The third issue is institutional investors. Institutional investors control enormous resources and can buy huge blocks of stock.
Teaching Tips:
In your student teams, please choose one of the three special issues we have just reviewed. Then please give two examples of the type of special issue, for example, the name of two organizations that fit that form.
Answers will vary.
Mergers, acquisitions, divestitures and spin-offs are another special issue in corporate ownership.
Let’s look at each one:
A merger is achieved when two firms combine to create a new company.
An acquisition occurs when one firm buys another outright.
A divestiture is a strategy used whereby a firm sells one or more of its business units.
A spin-off occurs when a firm sells part of itself to raise capital.
Teaching Tips:
Please work with a student partner and choose one form of this last special issue we have just reviewed. In your team, please come up with two examples of the type of issue your team chose. We will share our answers with the class.
Answers will vary.
Examples could include:
Merger: Miller-Coors.
Acquisition: When Coors purchased all of The Stroh Brewing Company.
Divestiture: When Pepsi sold off the Doritos brand.
Spin-off: Johnson Diversy, which was spun off of S.C. Johnson Company because it was in the industrial and not personal sector of the business.
There are many key terms that we learned in this chapter.
Teaching Tips:
Please form teams of two students. Each team will be assigned a number of terms. Your team should write an appropriate sentence using the key terms assigned to your group, which we will share with the class.
There are many key terms that we learned in this chapter.
Teaching Tips:
Please form teams of two students. Each team will be assigned a number of terms. Your team should write an appropriate sentence using the key terms assigned to your group, which we will share with the class.
