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  1. Chapter Six Small Business, Entrepreneurship, and Franchises

  2. Small Business: Defined • A business that is independently owned and operated for profit & not dominant in its field • Accounts for 99.7% of all U.S. businesses • SBA “smallness” guidelines • Manufacturing—a maximum of 500 employees • Wholesaling—a maximum of 100 employees • Retailing—maximum annual sales of $6.5 million • Agriculture—maximum annual sales of $.75 million

  3. The Small-Business Sector • There are 23 million businesses in the U.S. • Only 17,000 employ over 500 workers • In the last decade, # of small businesses increased by 49% • Part-time entrepreneurs have increase fivefold and account for one-third of all small businesses • Small businesses provide over 50% of the jobs in the U.S. • Over 70% of new business fail within their first 5 years WHY???

  4. Why Small Businesses Fail • Lack of capital • Cash-flow problems • Lack of management skills • Overexpansion

  5. Developing a Business Plan • A carefully constructed guide for the person starting a business -Accuracy and realistic expectations are crucial Need to include: Description of the goods or services to be offered Detailed estimate of potential customers Current competitors Facilities and labor force needed Financing and cash flow required Marketing strategy Exit Strategy-go public, sell out, dissolve

  6. The Small Business Administration A governmental agency that assists, counsels, and protects the interests of small business in the U.S • Types of SBA management assistance • Management courses and workshops • Service Core of Retired Executives (SCORE) • SBA publications

  7. Importance of Small Business to Economy 1) Providing employment • hire a larger proportion of younger workers, older workers, women, and part-time workers • provide 67% of workers with their first job and initial job skills • provide 2/3 of the new jobs added to the economy

  8. Importance of Small Business 2) Providing technological innovation • Innovation among small-business workers is higher than among workers in big business • More than half of the major technological advances of the 20th century originated with individual inventors and small businesses

  9. Importance of Small Business to Economy 3) Providing competition • Satisfy niche markets, forcing larger firms to become more responsive to customer needs 4) Filling needs of society & other businesses • meet the special needs of smaller customers • act as specialized suppliers of goods and services to larger businesses

  10. ADVANTAGES Personal relationships with customers and employees Ability to adapt to change Independence Keeping all profits Ease and low cost of going into business Keeping business information secret DISADVANTAGES Risk of failure Limited potential Limited ability to raise capital The Pro and Cons of Smallness

  11. Franchising • Franchise • A license to operate an individually owned business as though it were part of a chain of outlets or stores • Franchisor • An individual or organization granting the franchise (Avon Corp) • Franchisee • A person or organization purchasing a franchise (Avon lady in your neighborhood)

  12. Types of Franchises • Product and trade name- • Dealer sells product provided by the franchisor, but can use any sales tactics he chooses ex-Michelin Tires • Business Format- • Dealer must sell the product in the exact way the franchisor prescribes ex-Mc Donalds

  13. Entrepreneur’s Top Ten Franchises in 2006 • Subway • Quiznos Sub • Curves • UPS Store, The • Jackson Hewitt Tax Service • Dunkin' Donuts • Jani-King • RE/MAX Int'l. Inc. • 7-Eleven Inc. • Liberty Tax Service For updates: www.franchise500.com

  14. TO THE FRANCHISOR Fast and well controlled distribution of its products No need to construct and operate its own outlets More working capital available for expanded production and advertising Franchising agreements maintain product and quality standards Motivated work force of franchisees because they see themselves as owners Advantages of Franchising

  15. Advantages of Franchising TO THE FRANCHISEE • Opportunity to start a proven business with limited capital • Guaranteed customers • Franchisor available for advice and guidance • Materials for local promotional campaigns and participation in national campaigns • Cost savings when purchasing supplies in cooperation with other franchisees

  16. TO THE FRANCHISOR Failure of the franchisee to operate franchise as agreed Disputes with franchisees over the terms of the franchise (flat or % royalty, sphere of influence) Disadvantages of Franchising

  17. Disadvantages of Franchising TO THE FRANCHISEE • Franchisor retains a large amount of control over the franchisee’s activities • Franchisor or other franchisees opening competing outlets within the franchisee’s market