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Chapter 3 Notes: Small Business & Entrepreneurship

What Is a Small Business?

  • Small business defined as independent (not part of a larger business) with relatively little influence in its market
  • Small Business Administration (SBA) — government agency charged with assisting small businesses

Importance of Small Business in the U.S.

  • 85\% of businesses have <20\,\text{employees}
  • 23\% of the workforce
  • 97\% of businesses have <100\,\text{employees}
  • Over half of the workforce is employed by small businesses
  • Only about a quarter of a percent of all businesses employ >500\,\text{people}
  • 20\% of the workforce is associated with small businesses

Popular Areas of Small-Business Enterprise

  • Service businesses account for over half of all small businesses
  • Retail stores and construction companies also represent substantial portions of small businesses

Entrepreneurship

  • An Entrepreneur: accepts both the risks and the opportunities involved in creating and operating a new business venture
    • Resourceful
    • Concern for good customer relations
    • Strong desire to be their own boss
    • Willingness to deal with uncertainty and risk
  • Entrepreneurship: process of seeking business opportunities under conditions of risk

Understanding Distinctive Competencies

  • Established Market: a market with many competitors and well-defined criteria
    • It’s hard for a new company to enter and stand out
  • Strategies to compete:
    • Option 1 — Find a Niche: a segment of a market that is currently untapped
    • Option 2 — Be the First-Mover: advantages of pursuing an opportunity first

Starting a New Business

  • Business plan: describes the business strategy and how it will be implemented
    • Executive Summary: snapshot of your business as a whole
    • Company Overview: mission statement, location, key employees, and competitive advantage
    • Market Analysis: industry, projected growth rates, target market, competition
    • Products or Services: what you are selling and how it meets customer needs
    • Marketing and Sales: how you will identify potential customers and your marketing efforts
    • Financial Projections: how you will maintain cash flow, forecasted accounting statements

Business Plan Continued

  • Additional sections:
    • Products or services details
    • Marketing and sales strategies
    • Financial projections and cash-flow management

Types of “New Businesses” and Ownership Structures

  • The entry could be:
    • Starting a New Business from Scratch
    • Purchasing an Existing Business
    • Opening a Franchising (Franchise)
  • Ownership structures:
    • Sole Proprietorship
    • General Partnership
    • Limited Partnership

Starting from Scratch

  • Lots of Unknowns to resolve:
    • Who and where are my customers?
    • How much will they pay for my product?
    • How much can I expect to sell?
    • Why will customers buy my product rather than competitors’ product?

Pros and Cons of Entry Type: Starting From Scratch vs. Purchase an Existing Business

  • Starting From Scratch — PROS:
    • Freedom to Choose (location, suppliers, employees)
    • Ability to Select (equipment, inventory, etc.)
    • Established Relationships (customers, lenders, suppliers)
    • Easier to obtain financing
  • (Note: the slide also lists these points; use them as the basis for evaluating entry type.)
  • Purchase an Existing Business — PROS:
    • Existing relationships and customer base
    • Established operations and possibly faster start
  • Franchising — A distinctive entry option with its own set of advantages and drawbacks

Franchising

  • Advantages:
    • Proven business opportunity
    • Access to management expertise
    • Nationwide advertising
    • Initial training and support
  • Disadvantages:
    • Start-up costs
    • Ongoing royalty payments
    • Management rules and restrictions
  • Definition:
    • Franchise: arrangement in which a buyer (franchisee) purchases the right to sell the good or service of the seller (franchiser)

Financing a Small Business

  • Sources include:
    • Personal resources
    • Loans from family and friends
    • Bank loans
    • SBA loans and financial programs
    • Venture Capital Companies (VCs)

Ownership — Sole Proprietorship

  • Sole Proprietorship: business owned and usually operated by one person who is responsible for all debts
  • Advantages:
    • Individual freedom
    • Simple to form
    • Lower start-up costs
    • Tax benefits
  • Disadvantages:
    • Unlimited liability (financial responsibility)
    • Limited resources & capabilities

Ownership — Partnerships

  • General Partnership: two or more owners who share in the operation; both partners equally share financial responsibility for debts (unlimited liability)
  • Limited Partnership: active partner operates the business with unlimited liability; the limited partner invests money and is liable only to the extent of their investments

Partnership Pros & Cons

  • Advantages:
    • More talent and money
    • More financing capabilities
    • Still relatively easy to form
    • Limited liability for limited partners
    • Tax benefits
  • Disadvantages:
    • Unlimited liability for general partners
    • Disagreements among partners

Proportions of U.S. Firms in Terms of Organization Structure and Sales Revenue

  • (Note: This slide presents proportions but does not provide specific figures in the transcript.)

The Corporate Entity

  • Corporation: a business legally considered an entity separate from its owners; the corporation is liable for its own debts
  • Owners’ liability extends to the limits of their investments
  • Double taxation: corporate income tax for the business and personal income tax for shareholders
  • Hybrids to avoid double taxation:
    • Limited Liability Company (LLC)
    • S Corporation
    • These are hybrids of a corporation and a partnership