Chapter 5: Small Business, Entrepreneurship, and Franchising – Vocabulary Flashcards
The Nature of Entrepreneurship and Small Business (LO 5-1)
Key definitions
Entrepreneur: a person who risks money, time, and effort to develop for profit an innovative product or way of doing something.
Entrepreneurship: the process of creating and managing a business to achieve desired objectives.
Small business: independently owned and operated, not dominant in its competitive area, and employing not more than ~500 people.
Microentrepreneurs: entrepreneurs with five or fewer employees.
Social entrepreneurs: use entrepreneurship to address social problems; may operate nonprofit or for-profit entities.
Why small businesses matter
Many large firms began as small businesses (e.g., Mattel, YouTube, Spanx).
Small businesses often identify and capitalize on emerging trends and new markets.
Examples illustrating entrepreneurship concepts
Amazon: leverage of technology to create new markets.
Starbucks: improved or unique retail environments for a familiar product.
Porch: connects homeowners with licensed professionals; exemplifies gig/sharing economy.
The entrepreneurial movement and global context
Entrepreneurial spirit growing worldwide (e.g., Russia, China, India, Germany, Brazil, Mexico).
Healthy entrepreneurship ecosystems include the United States, Canada, Australia, the United Kingdom, and Switzerland.
What makes entrepreneurship successful (brief preface)
Requires creativity, innovation, and entrepreneurship; often involves learning, skill-building, and independent thinking.
Table reference (Table 5.1): Examples of Entrepreneurs of Innovative Companies
Hewlett-Packard: Bill Hewlett, David Packard
Walt Disney Productions: Walt Disney
Starbucks: Howard Schultz
Amazon: Jeff Bezos
Dell: Michael Dell
Microsoft: Bill Gates
23andMe: Anne Wojcicki
Goodr: Jasmine Crowe
Google: Larry Page, Sergey Brin
Pampered Chef: Doris Christopher
FUBU: Daymond John
General Electric: Thomas Edison
Essentials of entrepreneurial success
Creativity, innovation, and entrepreneurship are needed in combination with ongoing learning and independent thinking.
Not all successful entrepreneurs are college graduates; some dropped out of college (e.g., Steve Jobs, Bill Gates, Mark Zuckerberg).
The entrepreneurship movement and microbusiness growth
Many startups have five or fewer employees (microentrepreneurs).
Access to technology (websites, podcasts, social media, smartphones) enables small firms to compete with large corporations.
Alliances between small and larger firms can spur growth and job creation.
Social and economic impact notes
Social entrepreneurship addresses social problems; Thrive Causemetics (Karissa Bodnar) distributes products and funds to nonprofit partners with each purchase.
The Role of Small Business in the American Economy (LO 5-2)
How small business is defined in practice
SBA definition: independently owned, not dominant in its competitive area, and employing not more than 500 people.
Smallness is relative; a local restaurant may be small even if successful locally.
Why small businesses are vital
They are a large share of private-sector employment; contribute to innovation and job creation.
They represent a major share of exporters (approx. 97\% of U.S. exporters).
Key statistics (Table 5.2)
Small firms represent 99.9% of all employer firms.
They employ about 66.9% of workers in real estate, rental, and leasing.
Small firms with fewer than 100 employees have the largest share of small-business employment.
Women own about 11 million+ small businesses; representation in professional services, retail, and related areas.
Racial and ethnic minorities own more than 9 million small businesses.
Nearly 2 million small businesses are veteran-owned.
Economic impact and job creation
Small-business owners generate about 1.6\text{ million} net new jobs annually.
Examples and case highlights
José de Jesús Legaspi: real estate investor targeting inner-city Hispanic consumers; La Gran Plaza mall occupancy increased from 20% to 80% by repositioning the mall as a cultural hub.
Key terms (glossary highlights)
microentrepreneurs: five or fewer employees.
social entrepreneurs: use entrepreneurship to address social issues.
SBA: Small Business Administration; offers managerial and financial assistance.
The Advantages of Small-Business Ownership (LO 5-3)
Personal advantages
Independence: control over decisions, schedule, and who you work with.
Focus: capacity to concentrate on a defined market niche.
Reputation: ability to build strong quality and service reputations in narrow markets.
Business advantages
Flexibility: quick decision-making due to fewer management layers; example: independent snack shop can launch new products faster than a national chain.
Focus and niche specialization allow targeting specific customer groups (e.g., Megan Tamte’s Evereve for young mothers with stroller-friendly stores).
Directly measurable feedback and customer-driven improvements via social listening and rapid response.
Traits of successful entrepreneurs (Table 5.3)
Independence traits: intuitive, innovative, productive, risk-taker, resourceful, persistent, charismatic, friendly.
Strategic advantages in markets
Ability to focus on a niche can reduce competitive pressure from large firms and help build a strong brand in a specific segment.
The Disadvantages of Small-Business Ownership (LO 5-4)
Common challenges
High stress levels: multitasking across roles (owner, manager, salesperson, bookkeeper, etc.); long hours; ongoing worries about competition, employees, inventory, rent, market demand.
High failure rate: about half of all businesses fail within the first five years.
Notable sector vulnerability: restaurants often have higher failure rates; pandemic-related closures amplified risk.
Major causes of small-business failure (Table 5.4)
Undercapitalization: lack of sufficient startup and operating funds; seasonal variation in sales; insufficient working capital.
Poor management or inexperience: brilliant product ideas do not guarantee effective management in hiring, finance, and operations.
Inability to cope with growth: founders may struggle to relinquish control or acquire needed managerial skills; growth requires specialized capabilities (credit analysis, promotion).
Additional contributing factors listed (10 items):
Underfunded startup capital; misalignment with competitive niche; poor use of web and social media; lack of marketing/business plan; poor site selection (retail); pricing errors; underestimating time commitment; missing complementary partners; hiring/training issues; lack of legal/ethical understanding.
Micropreneurs and scale considerations
92% of small businesses are microbusinesses (≤5 employees).
For many, the path involves staying small to manage risk and maintain flexibility.
Starting a Small Business (LO 5-5)
From idea to plan
Begin with a general idea; search for a strategy to guide planning and development; decide form of ownership and financing; consider buying an existing business or starting anew or buying a franchise.
The Business Plan
A concise statement of rationale and a step-by-step plan to achieve goals.
Include: business description, competitive analysis, income/expense estimates, funding plan, and growth strategy.
The SBA outlines a plan framework used to obtain financing; a good plan acts as a guide and should be revisable as conditions change (Netflix example: DVD-by-mail to streaming).
Financing the venture (Overview of capital sources)
Equity financing: owner’s own assets (home, savings), reinvested profits, or non-cash contributions; selling equity to family, friends, employees, or external investors.
Venture capital: investors receive ownership in exchange for funds; e.g., FreightWaves raised >90\text{ million} from venture capitalists.
Debt financing: bank loans; SBA loans; lines of credit; trade credit from suppliers; bartering arrangements.
Shark Tank examples (Table 5.5): shows successful equity deals with entrepreneurs and investors (e.g., Scrub Daddy, Squatty Potty, The Original Comfy, Simply Fit Board, Bombas).
The role of equity investors and venture capitalists
VC investment often comes with ownership and potential influence on decisions; requires sharing profits and sometimes control.
Practical financing details
Banks and financial institutions assess likelihood of success and repayment ability; collateral or mortgages may be required to secure loans.
Lines of credit provide flexible, on-demand funding for opportunities.
Trade credit and bartering can help with cash flow when traditional funding is tight.
Case examples of entrepreneurship financing and growth
Handshake: seed funding, Series A/B bonds to support growth; serves 1,400 schools, 12 million students, and 750,000 employers.
Substantial examples in Shark Tank illustrate how startups attract funding and scale rapidly.
Forms of Business Ownership and Franchising (Part of LO 5-5 and LO 5-7)
Buying vs. starting from scratch
Starting from scratch allows full control but requires heavy planning and capital.
Buying an existing business provides a built-in network but may inherit problems.
Franchising basics
Franchising: a license to sell another’s products or use another’s name; franchiser vs. franchisee.
Advantages for franchisees: management training and support; brand-name recognition; standardized quality; national/local advertising; financial assistance; proven products and formats; centralized buying; site selection and territorial protection; higher odds of success.
Disadvantages for franchisees: ongoing franchise fees and profit sharing; strict adherence to standardized operations; limited product lines; potential market saturation; less freedom in decision-making.
Notable franchise examples and market dynamics
Subway: large global footprint (>42,000 shops); initial flexibility in location choice but faced cannibalization and menu shifts; typical franchise economics include initial franchise fee, ongoing royalties (~12.5% of sales) and advertising contributions; Subway responded with store remodels and menu innovations; average initial franchise cost around 2.2\text{ million} for some brands.
Richard details on franchising economics and market dynamics are provided in Table 5.6 (Top 10 fastest growing franchises).
Granville Island Public Market (Granville Island, BC) as a platform for small businesses:
Provides a low-overhead retail format; supports local vendors; Lee’s Donuts is expanding via franchising within the Market framework; market features include entertainment and family activities, and a long public walkway and waterfront attractions.
Franchise-specific considerations
Franchise vs. independent start-up: franchisees gain brand equity, training, and support but surrender some autonomy and pay ongoing fees.
Franchise arrangements involve site selection and territorial protection; often include ongoing support and access to supplier networks.
Additional industry notes
500-employee cap remains a defining feature of small business size; many franchises operate at scale but still enable small business ownership via franchising.
Top 10 fastest-growing franchises include 7-Eleven, Century 21 Real Estate, KFC, Stratus Building Solutions, McDonald’s, RE/MAX, Jan-Pro Cleaning and Disinfecting, Sign Gypsies, Goosehead Insurance, F45 Training.
Support for Small-Business Managers (LO 5-6)
How to get help
SBA and numerous programs provide management assistance, counseling, and training for owners and managers.
Small Business Development Centers (SBDCs): free counseling and low-cost training, often located on college campuses.
SCORE and ACE: volunteer organizations with experienced mentors to assist small firms.
Networking and incubators: building relationships with peers, suppliers, and customers; incubators help accelerate growth with potential capital and networking.
Local Chambers of Commerce and government agencies (e.g., U.S. Department of Commerce) provide information and resources.
Practical networking utilities
Incubators often provide access to capital and capital pathways for startups.
Virtual conferencing and online platforms have expanded opportunities for learning and networking.
The Future for Small Business (LO 5-6)
Demographic trends
Baby boomers (born 1946–1964): ~72\text{ million} Americans; aging population; opportunities in travel, financial planning, and health care as boomers age.
Generation X (born 1965–1980): a large, prime-consumer demographic with buying power.
Millennials (Generation Y, born 1981–1996): ~72\text{ million}; value advancement, recognition, feedback; prefer training that blends entertainment with learning.
Gen Z (born 1996–2010): ~67\text{ million}; values flexibility and remote work; comfortable with virtual communication.
Immigrant workforce: more than 17\% of the U.S. workforce; retail and educational/health sectors are major employers for immigrants; multilingual/bi-cultural services are a growing niche.
Technological and economic trends
Advances in technology expand opportunities (e.g., AI tools like OpenAI’s ChatGPT and DALL-E for content, research, and automation).
Home-based businesses grow; approximately 50\% of small businesses operate from home.
E-commerce platforms (Shopify, Wix, Squarespace) enable online storefronts with relatively low setup costs.
Global trade considerations: free trade agreements and alliances enable international expansion; tariffs and restrictions can limit access and raise costs.
Environmental and energy market trends: deregulation and interest in sustainable fuels spur new small-business opportunities (e.g., wind turbines by Southwest Windpower).
Economic volatility and opportunities
Economic downturns can both threaten and spur opportunity: lower tech costs and internet access can help startups survive and scale.
Service exports and global markets open new channels for service-based small businesses.
Regional business climate indicators
Forbes top states for business (Table 5.7): North Carolina, Texas, Utah, Virginia, Florida, Georgia, Tennessee, Washington, Colorado, Idaho.
The enduring advantage of small firms
Small businesses can adapt quickly to changing conditions and customer demands, often outpacing large firms in responsiveness.
Large companies increasingly seek to emulate small-business agility through downsizing, autonomous units, or intrapreneurship.
Making Big Businesses Act “Small” (LO 5-7)
Downsizing and right-sizing in large firms
1980s–present trend toward fewer management layers, leaner staff, and more agile operations.
Large firms (e.g., IBM, Ford, Apple, GE, Coca-Cola, 3M) have adopted downsizing strategies to stay competitive.
Intrapreneurs
Large firms increasingly empower employees to act as intrapreneurs—taking responsibility for developing innovations within the organization.
The goal is to capture the entrepreneurial benefits of smaller firms while leveraging the resources of a large organization.
Overall implication
Small-business success models serve as a benchmark and blueprint for larger firms seeking increased flexibility, innovation, and market responsiveness.
Starting Your Own Business: Soft Skills and Practical Exercises (Activity notes)
Essential soft skills for aspiring entrepreneurs
Three key soft skills to develop: communication, leadership, self-management (with time management and people skills).
Reflection prompts: identify the three most critical soft skills for your dream business and plan how to build them if they are not yet strong.
Practical exploration: global franchises
Task: research three successful franchises on their official websites to identify requirements for applying and what franchisers provide.
Expect to compare each group’s findings; consider franchisee responsibilities (e.g., Subway: initial franchise fee, location selection, store setup, ongoing royalties around ~12.5% of sales, and advertising fees) and franchiser supports (e.g., formulas, operational systems, store design, training, on-site support, ongoing publications).
Real-world case prompts and takeaways
Use the Subway example to illustrate the balance between franchisee control and franchiser support.
Use Granville Island Public Market as a platform case showing how a market supports small businesses with low overhead and collaborative ecosystems.
Recognize how modern franchising combines brand leverage with operational standards to accelerate break-even timelines for franchisees.
Critical Thinking Questions (sample prompts from the chapter)
From the Beauty Bakerie case ( Nicole ):
How has Nicole contributed to the American economy?
What struggles did she face as a small-business owner?
What financing resources did she obtain?
Subway case prompts:
Describe factors contributing to Subway’s growth and its attractiveness to franchisees.
What factors have contributed to Subway’s struggles and recent adjustments?
Granville Island and Lee’s Donuts case prompts:
How do small businesses benefit from venues like Granville Island Public Market?
What are the advantages of becoming a franchisee at Lee’s Donuts versus starting an independent business?
Additional Key References and Concepts (recap for exam prep)
Definitions to remember
Microentrepreneurs: five or fewer employees.
Social entrepreneurs: address social problems through entrepreneurial methods.
SBA: provides guidance, financing, training to small businesses.
Core topics to review for LO-specific questions
LO 5-1: Define entrepreneurship and small business.
LO 5-2: Importance of small business in the economy and field attractiveness.
LO 5-3: Advantages of small-business ownership.
LO 5-4: Disadvantages and common failure causes.
LO 5-5: How to start a small business and needed resources, including business plans and funding.
LO 5-6: Trends affecting the future of small business (demographic, tech, economic).
LO 5-7: Why large firms “think small” and emulate entrepreneurial practices.
Quick Reference of Key Numbers and Concepts (LaTeX-friendly)
Small business employment and share metrics
Small firms represent 99.9\% of employer firms.
Small firms employ 66.9\% of workers in real estate, rental, and leasing.
Small firms with fewer than 100 employees have the largest share of small-business employment.
Women own 43.2\% of small businesses.
Small firms employ 80\% of construction workers.
Export and job metrics
Small businesses represent 97\% of U.S. exporters of goods.
Net new jobs annually from small-business ownership: 1.6\times 10^6.
Financing and ownership costs
Franchise initial costs vary; ongoing royalty and advertising fees can be around 12.5\% of sales (example for some franchises).
Initial startup capital commonly ranges from tens of thousands to millions depending on the business model; examples include Subway’s high-cost entry around 2.2\text{ million} (for some setups).
Growth and capital figures
FreightWaves raised over 90\text{ million} from venture capitalists.
Substantial Shark Tank products have raised varying equity stakes, e.g., Scrub Daddy: 200{,}000 for 20% equity; Bombas: 200{,}000 for 17.5% equity.
Demographic groups (population estimates)
Baby boomers: 72 million Americans.
Millennials: about 72 million.
Gen Z: about 67 million.
Top growth franchises (illustrative list)
7-Eleven, Century 21 Real Estate, KFC, Stratus Building Solutions, McDonald’s, RE/MAX, Jan-Pro Cleaning and Disinfecting, Sign Gypsies, Goosehead Insurance, F45 Training.
If you’d like, I can tailor these notes further to emphasize specific LO questions, add more explicit cross-references to figures and tables, or format certain sections (e.g., more concise cheat-sheet style or more in-depth case study analyses).