Entrepreneurship New Ventures and Business Ownership 2009

What Is a “Small” Business? • Small Business Defined – A business that is independent (not part of a larger business) and that has relatively little influence in its market. • The Importance of Small Business in the U. S. Economy – Job creation – Innovation – Contributions to big business • Suppliers of specialized services and raw materials • Sellers of larger firms’ products © 2009 Pearson Education, Inc.

FIGURE 3. 2: Small Business by Industry © 2009 Pearson Education, Inc.

Entrepreneurship • Entrepreneurship – The process of seeking business opportunities under conditions of risk • Entrepreneur – One who accepts the risks and opportunities of creating, operating and growing a new business • Small Business Owner – A person who independently owns a business that has relatively little impact in its market © 2009 Pearson Education, Inc.

Entrepreneurial Characteristics • Successful Entrepreneurs: – – – – Are resourceful. Are concerned about good customer relations. 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. © 2009 Pearson Education, Inc.

Starting and Operating a New Business • Crafting a Business Plan – Conveys a description of the business strategy for the new venture and how it will be implemented – A business plan should address: • The entrepreneur’s goals and objectives • The strategies that will be used to obtain them • The implementation of the chosen strategies • Preparing a Business Plan – Setting goals and objectives – Sales forecasting – Financial planning © 2009 Pearson Education, Inc.

Starting the Small Business • Buying an Existing Business – Less risk in purchasing ongoing, viable business • Franchising – Advantages • Proven business opportunity for franchisee • Access to management expertise of franchisor – Disadvantages • Start-up costs for franchise purchase • Ongoing payments to the franchisor • Management rules and restrictions on the franchisee © 2009 Pearson Education, Inc.

Starting the Small Business (cont’d) • Starting from Scratch – Disadvantage: Higher risk of business failure – Advantage: Avoids problems of an existing business • Questions to Be Answered: – – – Who and where are my customers? How much will those customers pay for my product? How much of my product can I expect to sell? Who are my competitors? Why will customers buy my product rather than the product of my competitors? © 2009 Pearson Education, Inc.

Financing the Small Business • Personal Resources • Loans from Family and Friends • Bank Loans • Venture Capital Companies • Small-Business Investment Companies (SBICs) • Minority Enterprise Small-Business Investment Companies (MESBICs) • SBA Financial Programs – Guaranteed loans and immediate loan programs – Management advice (SCORE and SBDCs) © 2009 Pearson Education, Inc.

Trends in Small-Business Startups Emergence of E-commerce Crossovers from Big Business Opportunities for Minorities

Reasons for Failure and Success • Failure – – Poor management Neglect Weak control systems Insufficient capital • Success – – Hard work, drive, and dedication Market demand Managerial competence Luck!!! © 2009 Pearson Education, Inc.

Business Ownership • Forms of Legal Ownership – Sole proprietorship: Owned and operated by one person – Partnership: Sole proprietorship multiplied by the number of partner-owners – Corporation • Choice of Ownership Form – 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 © 2009 Pearson Education, Inc.

Sole Proprietorships • Advantages: • Disadvantages: – Freedom – Simple to form – Low start-up costs – Tax benefits – Formation of cooperatives – Unlimited liability: Owners are responsible for all debts of a business – Limited resources – Limited fundraising capability – Lack of continuity © 2009 Pearson Education, Inc.

Partnerships • Advantages: • Disadvantages: – More talent and money – More fundraising capability – Relatively easy to form – Limited liability for limited partners – Tax benefits – Unlimited liability for general partner – Disagreements among partners – Lack of continuity © 2009 Pearson Education, Inc.

Alternatives to General Partnerships • Limited Partnership – Allows for limited partners who invest money but are liable for debts 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 • Master Limited Partnership – Organization sells shares (partnership interests) to investors on public exchange. Investors are paid back from profits – The master partner retains at least 50 percent ownership and runs the business, while minority partners have no management voice © 2009 Pearson Education, Inc.

Cooperatives • Combine the freedom of sole proprietorships with the financial power of corporations • Groups of sole proprietorships or partnerships agree to work together for their common benefit © 2009 Pearson Education, Inc.

Corporations • Corporation – Firms that have filed papers of incorporation • 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 © 2009 Pearson Education, Inc.

Corporations • Advantages: • Disadvantages: – Limited liability: The owners’ responsibility for the debts of a business is limited to their investment in a business – Double taxation of dividends – Fluid control – Complicated and expensive to form – Continuity – Stronger fundraising capability © 2009 Pearson Education, Inc.

Types of Corporations • Closely Held (Private) Corporation • Publicly Held (Public) Corporation • Subchapter S Corporation • Limited Liability Corporation (LLC) • Professional Corporation (PC) • Multinational (Transnational) Corporation © 2009 Pearson Education, Inc.

Managing a Corporation • Corporate Governance – 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 (shareholders): Investors who buy ownership shares in the form of stock • The board of directors: Group elected by stockholders to oversee corporate management • Corporate officers: Top managers hired by the board to run the corporation © 2009 Pearson Education, Inc.

Stockholders: Owners of Corporations • Stock: A share of ownership in a corporation •

Special Issues in Corporate Ownership • Joint Ventures and Strategic Alliances: – Strategic alliance: Two or more organizations collaborate on a project for mutual gain – Joint venture: Partners share ownership of a new enterprise • Employee Stock Ownership Plans – Allows employees to own a share of the corporation through trusts established on their behalf • Institutional Investors – Control enormous resources and can buy huge blocks of stock © 2009 Pearson Education, Inc.

Special Issues in Corporate Ownership (cont’d) • Mergers, Acquisitions, Divestitures, and Spin. Offs: – Merger: Two firms combine to create a new company – Acquisition: One firm buys another outright – Divestiture: Strategy whereby a firm sells one or more of its business units – Spin-off: A firm sells part of itself to raise capital © 2009 Pearson Education, Inc.