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3-1
Copyright © 2006 Pearson Education Canada Inc.
Chapter 3Chapter 3
Understanding Entrepreneurship, Small Business, and BusinessOwnership
3-2 Copyright © 2006 Pearson Education Canada Inc.
Learning Objectives
Define small business and explain its importance to the Canadian economyExplain entrepreneurship and describe some key characteristics of entrepreneurial personalities and activitiesDescribe the business plan and the start-up decisions made by small businesses
3-3 Copyright © 2006 Pearson Education Canada Inc.
Learning Objectives
Identify the main reasons for success and failure in small businessesExplain sole proprietorships and partnerships and discuss the advantages and disadvantages of eachDescribe corporations, and discuss their advantages and disadvantagesIdentify recent trends in business ownership
3-4 Copyright © 2006 Pearson Education Canada Inc.
What Is a “Small” Business
Management of the firm is independentAn individual or a small group supplies the capital and holds the ownershipThe area of operations is usually local
3-5 Copyright © 2006 Pearson Education Canada Inc.
What Is a “Small” Business
Markets are usually local, but may be regional, national, or international The enterprise is smaller than others in the industry The enterprise qualifies for the small business income tax rate Characterize every industry, particularly the retail trade
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What Is a “Small” Business
Small business is the dominant type of business in Canada
Over half (58%) provide self-employment, while the remainder employ under 50 persons
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The Importance of Small Business
Job creation InnovationImportance to big businessDominant in the construction and retailing industries
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Job Creation
Small business is creating jobsImportant source of new (and often well-paid) jobsSmall firms often hire at a faster rate but are likely to cut jobs at a far higher rate when they encounter difficultiesFirst to hire in times of economic recovery
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Innovation
Small businesses create many innovations Characterized by autonomy and freedom Move rapidly
Small business are responsible for the following innovations: Personal computer Jet engine Helicopter Automatic transmission
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Importance to Big Business
Most of the products made by big business are sold to consumers by small business Automobiles (dealers are small
businesses) Software
Most big businesses outsource business services to small firms
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Popular Areas of Small-Business Enterprise
Retailing
Construction
Manufacturing
Service
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Entrepreneurship
Entrepreneur A business person who accepts both the
risks and the opportunities involved in creating and operating a new business venture
Embraces the challenge of business ownershipAccepts risks to pursue opportunitiesThose who are not truly entrepreneurial are content to stay small and manage their existing business
3-13 Copyright © 2006 Pearson Education Canada Inc.
Entrepreneurial Characteristics
Drive to achieve business success and be their own bossNeed to control their own timePerceived market opportunity
Freedom to work in their own wayAdventure, independence, & challengeProfit opportunityNeed to make a living
3-14 Copyright © 2006 Pearson Education Canada Inc.
Starting and Operating a Small Business
Crafting a business plan Setting goals and objectives
Sales forecasting
Financial planning
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Elements of the Business PlanCover PageTable of ContentsExecutive SummaryBackground/History of the EnterpriseManagementMarketing AssessmentProduction AssessmentFinancial AssessmentResearch and DevelopmentBasic DataAppendices
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Starting and Operating a Small Business
Buying an existing business Take over a family business
Start a business from scratch
Buy a franchise
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Buying an Existing Enterprise
Pros Established clientele Ease of financing Experienced
employees Established lines of
credit and supply Less risky than
starting from scratch
Cons uncertainty about
actual financial health of the firm
location, reputation may be poor
pricing strategy may need revisiting
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Family-owned Business Challenges
Ongoing Management:
Succession:
•Managing spouse’s contribution
•Recognizing spouse’s contribution
•Managing the “in-laws”
•Managing non-family managers
•Managing the Board of Directors
•Managing outside advisers
•Selecting a successor
•Timing succession
•Training the successor
•Assuring economic security for retiring leader and spouse
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The Downside of Starting from Scratch
All variables are unknown no existing operation or demand no track record to evaluate no financial or supplier relationships
Start-up costsNo profits until firm becomes established
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Microenterprise
Owner is self-employed on a part-time basis still holding onto the “day job”
Provides the entrepreneur time to build the business and test the idea before committing to it full time
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Buying a Franchise
An agreement that gives franchisees (buyers) the right to sell the product of the franchiser (seller)Stipulates how the product or service will be sold, and the amount and type of paymentA quick way to establish a business
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Benefits of Franchising for the Franchiser
Attain rapid growthShare advertising costIncreased investment moneyTeam approach creates more efficient advertising deliveryIncreased sales revenues
Development of a motivated sales teamNo need to deal with local business issues (managed by franchise owners)
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Benefits of Franchising for the Franchisee
Access to management expertise
Do not need to build a business from scratch
Lower failure rates
Well-developed brand
Training provided
Expert advice Economies of scale in buying suppliesFinancial assistanceHelp with getting external financingBe your own bossKeep most of the profits
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Franchise Problems
Franchisers may impose policy changes without consulting franchiseesLocal market may be saturatedPayments to franchiser are required even if profits are lowFranchiser controls how business is run and how product is madeFranchiser could be financially strapped and unable to help individual franchisee
3-25 Copyright © 2006 Pearson Education Canada Inc.
Financing the Small Enterprise
Debt Money borrowed from others
Equity Money raised by selling ownership in
the business
Retained earnings Profits earned by the firm
3-26 Copyright © 2006 Pearson Education Canada Inc.
Financing the Small Enterprise
Debt sources Entrepreneur, who may lend money
to enterprise Private lenders Financial institutions Trade credit Government agencies
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Financing the Small Enterprise
Equity sources The entrepreneur’s personal funds Partners Family and friends Venture capitalists Governments Selling shares to the public
3-28 Copyright © 2006 Pearson Education Canada Inc.
Survival of Small Business
13% to 15% of small businesses disappear each year50% of small businesses don’t make it through the first 3 years25% of small businesses are still in existence after 10 yearsAverage life span of small enterprises is 7.25 yearsFemale-owned businesses have a survival rate twice as high as male-owned businesses
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Causes of Small Business Failure
Poor management skills
Inadequate marketing capabilities
Inadequate financial capabilities
Inadequate production capabilities
Personal reasons
Disasters
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Forms of Business Organizations
Sole proprietorship
Partnership
Corporation
Cooperatives
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Sole Proprietorships
Advantages
Freedom
Simplicity
Low start-up costs
Tax benefits
Disadvantages
Unlimited liability
Lack of continuity
Difficult to raise
money
Reliance on one
individual
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Partnerships
Advantages
Larger talent pool
Larger money pool
Ease of formation
Tax benefits
Disadvantages
Unlimited liability
Lack of continuity
Ownership
transfer difficult
Potential conflict
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Corporations
Regardless of the size or industry corporations have the following rights and characteristics
Legal status as a separate entity
Property rights and obligations
Indefinite lifespan
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Corporations
Advantages
Limited liability
Continuity
Professional
management
Easier to raise money
Disadvantages
Start-up costs
Double taxation
Regulations
Stockholder
revolts
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Cooperatives
Types of cooperatives Consumer goods Financial services Insurance Marketing Service Housing
An organization formed to benefit its owners in the form of reduced prices and the distribution of surplusesEach member has one vote