Ch 6&7 Entrepreneurship and Starting a Small Business
Foundations of Entrepreneurship
Defining Entrepreneurship: Entrepreneurship is the act of accepting the challenge of starting and running a business. In a commercial context, it refers specifically to the initiation of a business entity.
Entrepreneurial Statistics in Canada: There are approximately self-employed individuals in Canada.
Distinguishing Entrepreneurial Ventures from Small Businesses: While the terms are often used interchangeably, entrepreneurial ventures differ from general small businesses in four specific dimensions:
Amount of wealth creation: High potential for significant wealth.
Speed of wealth creation: Rapid growth and scaling.
Risk: Higher levels of investment and personal/financial uncertainty.
Innovation: Focus on new ideas, processes, or products.
Motivations for the Entrepreneurial Challenge
New Innovation: Some entrepreneurs are driven by an obsession or firm belief that they can develop a superior product, or produce an existing product at a lower cost than any current competitor.
Profit: The potential for financial gain serves as a primary motivator.
Challenge: Many individuals thrive on the psychological stimulation of overcoming significant professional obstacles.
Family Pattern: Growing up in an environment where family members have previously started their own businesses often influences individuals to follow suit.
Independence: A significant number of entrepreneurs prefer the autonomy of being their own boss over working for another employer.
Defining the Small Business in Canada
Legal and Regulatory Definition: A business establishment is classified as a small business if it meets the following criteria:
It maintains at least paid employee.
It generates annual sales revenue of at least or is legally incorporated.
It has filed a federal corporate income tax return at least once within the preceding .
Economic Independence: Most small businesses are Canadian-owned and managed, distinguishing them from large businesses which are frequently foreign-owned. This ownership structure helps maintain Canadian economic identity and independence.
Micropreneurs and Micro-enterprises: These represent the smallest category of small businesses, typically defined as having fewer than employees. This category includes online businesses and many home-based operations.
Home-Based Businesses: These are often attractive to individuals seeking to balance career goals with family responsibilities. Potential home-based business opportunities include:
Home Renovation Services
Pet Products and Services
Catering Services
Cleaning Services
Fall Prevention Products (Sales and Service)
Wedding Planner Services
Ecommerce
In-Home Beauty Services
Sewing and Alteration Services
Business or Life Coach Services
Entry Strategies for New Business Ventures
Methods of Entry: There are four primary ways to enter a first business venture:
Starting a new company from the ground up.
Purchasing an already existing business.
Buying a franchise unit.
Inheriting or taking over a family-owned business.
Buying an Existing Business (Pros):
Access to an established clientele.
Greater ease of securing financing.
Benefit of experienced employees already in place.
Established lines of credit and supply chains.
Reduced risk compared to starting from scratch.
Buying an Existing Business (Cons):
Uncertainty regarding the true financial health of the company.
Potential for a poor physical location.
Possible need to overhaul the pricing strategy.
Risk of inheriting a poor reputation.
Franchising Dynamics
Benefits for the Franchisor (The seller):
Enables rapid geographic and market growth.
Shared advertising costs across units.
Increased investment capital from franchisees.
Broad and efficient delivery of advertising.
Development of a highly motivated sales team.
Increased total revenue.
Avoidance of dealing directly with local day-to-day business issues.
Benefits for the Franchisee (The buyer):
Immediate access to management expertise and professional advice.
Removal of the need to build a brand from scratch.
Lower business failure rates compared to independent startups.
Association with a well-developed brand name.
Comprehensive training provided by the franchisor.
Economies of scale when purchasing supplies.
Assistance with external financing and internal financial help.
Opportunity to be their own boss while keeping most profits.
Challenges of Family-Owned Businesses
Management Conflicts: Difficulties often arise regarding which family members hold control and whether family members have an inherent right to a job.
Pricing: Determining the specific price to be paid for the business during a transfer.
Succession Planning: Challenges involve selecting the right successor, determining the timing of the transition, and ensuring the successor receives adequate training.
Forms of Business Ownership
Sole Proprietorship: This involves one person owning and operating the business without forming a corporation. The owner and the business are a single legal entity. Nearly of all registered Canadian businesses are sole proprietorships.
Advantages: Ease of starting and ending; being one's own boss; pride of ownership; retention of all profits; no special taxes; less government regulation.
Disadvantages: Unlimited liability (owner is personally responsible for all debts); limited financial resources; management difficulties; overwhelming time commitments; few fringe benefits; limited growth potential; limited lifespan; potential for higher personal tax rates.
Partnership: A business owned by two or more people. Types include General Partnerships (shared liability) and Limited Partnerships (which include at least one General Partner and one or more Limited Partners).
Advantages: More financial resources; shared management; pooled skills/knowledge; longer survival rates; shared risk; no special corporate taxes.
Disadvantages: Unlimited liability for general partners; division of profits; potential for partner disagreements; difficulty of termination; possible higher taxes.
Corporation: A legal entity separate from its owners. It does not need to be large to incorporate.
Advantages: Limited liability for stockholders; access to more investment money; larger size due to resources; perpetual life; ease of changing ownership through stock sales; attraction of talented employees; separation of ownership from management.
Disadvantages: High initial setup costs; extensive paperwork; double taxation (corporate income and personal dividends); requirement for two tax returns; potential for inflexibility due to size; difficult termination; conflicts between stockholders and the board of directors.
Specific Categories of Corporations:
Private Corporation: Not traded on stock exchanges; limited to or fewer stockholders (e.g., Chapman’s Ice Cream, started in by Penny and David Chapman).
Public Corporation: Shares are traded on one or more stock exchanges.
Non-Profit: Operates for public service rather than personal profit (e.g., universities, hospitals, charities); receives special tax considerations.
Professional Corporation: Owned by providers of professional services, such as accountants or architects.
Crown Corporation: Registered only by the provincial or federal government.
Business Planning and Financing
The Business Plan: A detailed written statement describing the nature of the business, target market, competitive advantages, and the qualifications of the owners. Essential components include:
Cover Letter
Executive Summary: A summary of goals and methods.
Company Background
Management Team
Financial Plan: Projections and current status.
Capital Required: Specific funding needs.
Marketing Plan: Strategy to reach customers.
Location Analysis
Manufacturing Plan
Appendix: Supporting documentation.
Example: Vancity's Business Plan: Focused on redefining wealth to include financial, social, and environmental well-being for members. Objectives included delivering advice-based service, understanding community values, and ensuring operational excellence.
Financing Sources: Small businesses can be funded through:
Supplier credit and personal savings.
Personal or business credit cards.
Retained earnings and leasing.
Personal lines of credit and personal loans.
Loans from friends and relatives.
Government lending agencies.
Angel Investors: Private individuals who invest personal funds into early-stage companies before they go public.
Crowdfunding: Raising small contributions from the general public using the Internet and social media (e.g., Kickstarter and Indiegogo).
Market Knowledge and Global Prospects
Understanding the Market: A market consists of people with unsatisfied wants and needs who possess both the resources and willingness to buy. Small businesses excel by knowing their customers better and adapting faster than large firms.
Global Expansion (Positives): Participation in the world market allows businesses to absorb excess inventory, soften the impact of domestic (U.S./Canadian) economic downturns, and extend the lifecycle of products.
Global Expansion (Negatives): Challenges include difficulty in securing financing, lack of knowledge on how to start, cultural misunderstandings, and excessive paperwork.
International Advantages for Small Business: Small firms can deal directly with individuals, utilize faster shipping, access a variety of suppliers, and provide professional service. The Canadian Trade Commissioner Service is a key resource for information.
Questions & Discussion
Scenario: Linda the Young Professional: Linda is an Accounting Assistant in Vancouver. She is considering pivoting from spending her salary on personal items (shoes/clothes) to investing in a new business venture. She is looking for assistance on how to apply her accounting background to entrepreneurship.
Exercise: Idea Generation: A potential business exercise involves using the framework of "reduce, reuse, recycle, upcycle." Participants must describe the product/service, identify the target customer base, and determine the sales location.