Download Entrepreneurship and Small Business

Fourth Edition
PART 1 . . . . . . . . . . . . . . . . . . . . . . . .
Understanding the Contemporary
Business Environment
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Chapter 4
Entrepreneurship and
Small Business
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4-2
“Entrepreneurs are simply those
who understand that there is little
difference between obstacle and
opportunity and are able to turn
both to their advantage.”
~ Victor Kiam
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4-3
Key Topics
Small business and its importance in the economy
Sole proprietorships, partnerships, and corporations
Creating and managing corporations
Corporate trends and issues
Starting and funding a small business
Pros and cons of franchising
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4-4
Discussion
What does the concept mean? Who are
some successful entrepreneurs in Gaza?
(Probe for local examples as well as betterknown individuals.) Why have these people
been successful?
Point out that regardless of product or
market, many experts agree that personal
characteristics are key to successful
entrepreneurship.
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4-5
What Is “Small Business”?
Independently owned and
managed business that does
not dominate its market
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What Is “Small Business”?
Developing a definition of “small business” is
challenging. The U.S. Department of Commerce considers
a business small if it has fewer than 500 employees, while
the Small Business Administration defines small business
according to both the total number of employees AND total
annual sales relative to other players in the industry.
For the purpose of this course, we have opted to define
small businesses as those that are independently owned and
managed, and do not dominate their markets.
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Small business plays a critical role
in the U.S. economy.
Job Creation
Innovation
Importance to
Big Businesses
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4-8
How about in Palestine?
95% percent of all businesses are small, they employ 10
persons or less.
Why the businesses in Palestine are dominated by small
ones?
1.
Individualism trend.
2.
Family oriented.
3.
Lack of availability of fund.
4.
Lack of awareness of the process of establishing corporations.
5.
The skills needed to set and manage large companies are not
there.
6.
The Israeli occupation’s policies.
7.
Lack of government support.
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Small Bus. Role in the economy
Small businesses play a critical role in the health of the U.S. economy.
Job Creation: According to the SBA, seven of the ten industries that
added the most new jobs in 1998 were in sectors dominated by small
businesses. Furthermore, small businesses currently account for 38% of
all jobs in the high-technology sectors of the economy.
Innovation: According to the SBA, small businesses supply 55% of all
“innovations” introduced into the American marketplace. Examples:
personal computers, photocopying machines, jet engines.
Discussion: Why are small businesses such prolific innovators?
Wouldn’t you expect the opposite, given that most small businesses have
limited resources?
Importance to big business: Small businesses play a crucial role in the
success of large businesses in terms of supply, distribution, and
services.
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The Labor Force Reflects the
Importance of Small Business
11.00
Percentage of All U.S. Workers
Percentage of All U.S. Businesses
86.09
2.00
0.20
Under
20
2099
100499
Total Employees
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25.60 29.10
25.50
12.70
7.10
0.10
500- 1000 or
1000 more
Under
20
2099
100499
500- 1000 or
1000 more
Total Employees
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The Labor Force Reflects the
Importance of Small Business
Over 86% of U.S. businesses have no more than 20
employees. The total number of people employed
by these small businesses is about one quarter of
the entire U.S. workforce. Another 29% of the
workforce is employed by businesses with fewer
than 100 employees.
Discussion: Many students probably either work in
small businesses, or come from families who run small
businesses. Ask for a show of hands regarding how
many students fit this description. What types of
businesses have they worked for? What are the pros
and cons of working in a small business? Of owning a
small business?
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Popular Areas of Small Business Enterprise
in US
Services
Retailing
Construction
Financial
Manufacturing
5%
Finance &
Insurance
Other
10%
1.7%
Wholesale
8%
Insurance
Wholesaling
Transportation
Manufacturing
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Construction
10%
Transportation
5%
Retailing
22.7%
Services
37.6%
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Types of Business Organizations
Type of Business
73%
7%
20%
Sales Revenue
89%
5%
6%
Sole Proprietorship
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Partnership
Corporations
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Types of Business Organizations
Regardless of business type, all business owners
must decide which form of legal organization best
suits their goals: sole proprietorship, partnership, or
corporation.
The previous slide shows that while the vast
majority of businesses are organized as sole
proprietorships, corporations account for the
overwhelming majority of aggregate sales revenue.
Discussion: Why do corporations account for such a
disproportionately large chunk of sales revenue? What
are the implications for smaller businesses? For our
economy as a whole?
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Comparative Summary: Three Forms of Business
Business
Form
Proprietorship
Liability
Continuity
Management
Investment
Sources
Personal,
unlimited
Ends with death
or decision of
owner
Personal,
unrestricted
Personal
General
Partnership
Personal,
unlimited
Ends with death
or decision of
any partner
Unrestricted or
depends on
partnership
agreement
Personal by
partner(s)
Corporation
Capital
invested
As stated in
charter,
perpetual or for
specified period
of years
Under control of Purchase of
board of
stock
directors, which
is selected by
stockholders
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Sole Proprietorships
Advantages:
Freedom
Disadvantages:
Unlimited Liability
Simple to form
Limited resources
Low start up costs
Limited fundraising
capability
Tax benefits
Lack of continuity
Unlimited Liability
Legal principle holding owners responsible
for paying off all debts of a business
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Sole proprietorships\ traders
Sole proprietorships are the most basic legal form of
business organization.
Advantages:
Freedom: Sole proprietors answer to no one but themselves—this
is a terrific fit for certain personalities (and we can probably all
think of someone who fits the profile!).
Simple to form: In some states, forming a business is as simple as
hanging a sign on the door.
Low start-up costs: Low costs go hand-in-hand with minimal
legal requirements
Tax benefits: Sole proprietors are taxed only on personal income,
and can take advantage of certain tax deductions.
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Sole proprietorships\ traders
Sole proprietorships are the most basic legal form of
business organization.
Disadvantages:
Unlimited liability: Sole proprietors are personally liable for all
debts incurred by the company (including damages in lawsuits).
This is the most significant drawback to this form of business.
Limited resources: This can ultimately limit the size of the
business.
Limited fundraising capability: Sole proprietors often find it
difficult to borrow money. Difficult to provide loan security.
Lack of continuity: A sole proprietorship legally dissolves when
the owner dies.
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Partnerships
Advantages:
Disadvantages:
More talent and money
Unlimited Liability
More fundraising
capability
Disagreements among
partners
Relatively easy to
form
Lack of continuity
Tax benefits
Unlimited Liability
Legal principle holding owners responsible
for paying off all debts of a business
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Partnerships
The most common type of partnership, a general partnership, is simply
a sole proprietorship multiplied by the number of partner-owners.
Advantages:
More talent and money: A partnership draws on the talent and money
of more than one person.
More fundraising capability: Partnerships are able to borrow money
more easily from lending institutions, and also have the option of
inviting more partners to invest.
Relatively easy to form: Legal requirements are limited, but must
include a partnership agreement of some kind.
Tax benefits: Partners are taxed only on personal income.
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Partnerships
Disadvantages:
Unlimited liability: Each partner is liable for all debts
incurred in the name of the partnership, even if one partner
incurs a debt without the knowledge of the other partners.
Disagreements among partners: Partnerships have been
known to ruin relationships between close friends and
family members.
Discussion: What are some possible safeguards against this
happening?
(Possibilities: Creating a fair, complete partnership,
planning up front for all the contingencies you can think of,
developing a fair exit agreement at the outset of the
partnership.)
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Partnerships
Lack of continuity: When one partner leaves or dies, the
original partnership dissolves, and must be reorganized if
other partners want to continue.
Within a partnership, a significant level of conflict can be
healthy and creative, generating more effective solutions to
a range of different obstacles. However, an exit plan is still
crucial in case disagreements become unmanageable.
Discussion: What should be included in the exit plan for a
partnership?
(Possibilities: How to dispose of and distribute assets, how to
reorganize should one or more partners exit.)
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Remember…
“When two men in business always
agree, one of them is unnecessary.”
William Wrigley Jr.
But…
An exit plan is still crucial!
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What is a Corporation?
“An artificial being, invisible, intangible, and existing
only in contemplation\ reflection of the law.”
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Corporation
Almost all large businesses use the corporate form of
ownership, which has enormous influence on the U.S.
economy, accounting for 89% of all sales revenue.
Corporations may perform the following activities:
1.
Sue and be sued
2.
Buy, hold, and sell property
3.
Make and sell goods and services to consumers
4.
Commit crimes and be tried and punished for them
Discussion: guess the largest Palestinian companies.
Examples: PALTEL, PADECO, Bank of Palestine, Mortaja.
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Corporations
Advantages:
Disadvantages:
Limited Liability
Double Taxation
Continuity
Fluid\difficult control
Stronger fundraising
capability
Complicated and
expensive to form
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Corporation
While many corporations are enormous, most are small and
medium-sized. All share significant advantages and
drawbacks.
Advantages:
Limited liability: The liability of investors (owners) for the debts
of a corporation is limited to the size of their investments—a huge
benefit!
Continuity: Theoretically, a corporation may continue to exist
forever, with ownership transferred via sale of stock.
Stronger fund-raising capability: Lenders are more willing to
grant loans. Larger corporations also have the option of selling
stock to raise capital.
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Corporation
Disadvantages
Double taxation: Profits earned by corporations are taxed at
the corporate level, and then taxed again at the ownership
level.
Is it fair? Who benefits?
Fluid \difficult control: Given the easy transfer of ownership,
corporations are subject to hostile takeovers, which (at the
very least) distract management from achieving the
corporation’s goals. El-Fayed took over Harrots.
Complicated and expensive to form: Costs include filing fees
to meet government incorporation requirements, and usually
legal fees as well.
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Types of Corporations
Closely Held (Private) Corporation (Ltd)
Publicly Held (Public) Corporation (PLC)
S Corporation
Limited Liability Corporation (LLC)
Professional Corporation
Multinational or Transnational Corporation
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Types of Corporations
Specific types of corporations are widely varied:
Private or closely held corporations: All stock is held by only a
few people.
Publicly held corporations: Stock is available for sale to the
general public.
S corporations: A hybrid\mixture of a closely held corporation
and a partnership. Firms must meet strict legal requirements to
qualify.
Limited liability corporations (LLCs): A hybrid of a publicly held
corporation and a partnership.
Professional corporations: Typically groups of doctors, lawyers,
accountants, etc. These groups do not have unlimited professional
liability: individuals are still liable for professional negligence.
Multinational \transnational corporations: Span national
boundaries. Subject to regulation in multiple countries.
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Stockholders
Owners of Corporations
Stock: Share of ownership in a corporation
Common Stock
Preferred Stock
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Stocks
Stockholders: The real owners of corporations. Profits are
distributed to stockholders in the form of dividends, and
managers of corporations serve at the discretion\interest of
the stockholders.
Types of Stocks:
1.
Common Stock: The most basic form of ownership.
Common stockholders always have voting rights.
2.
Preferred Stock: Offers fixed dividends but no corporate
voting rights.
Discussion: How many of you own stock? Which companies?
Why?
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Corporate Governance Hierarchy
Stockholders
Board of Directors
Officers
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Corporate Governance Hierarchy
Stockholders: Use their voting power to elect the board of directors.
Board of directors: Elected members who are legally responsible for
corporate actions and for hiring and overseeing corporate officers. They
report to stockholders on performance.
Discussion: What kind of people should serve on the board of directors
of a corporation? Why?
(Possibilities include major shareholders, attorneys, academics, officers
of other companies, and former government personnel.)
Discussion: What factors contribute to an effective board of directors?
1) accountability to shareholders, 2) quality of directors, 3) independence,
and 4) corporate performance. GE was at the top of the list (board
members each own an average of $6.6 million GE stock), along with
Johnson & Johnson, and Campbell
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Corporate Governance Hierarchy
Corporate officers: Senior managers of corporations who
are responsible for overall performance. They report to the
board of directors.
Discussion: The Chief Executive Officer (CEO) is typically
the highest ranked corporate manager. Which CEOs
received the highest pay in the last seven years. The
answers:
2000: Steven Jobs, Apple Computer, $381MM
1999: Charles Wang, Computer Associates, $507MM
1998: Michael Dell, Dell Computer, $94MM
1997: Henry Silverman, Cendant, $194MM
1996: Michael Eisner, Walt Disney, $194MM
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Special Issues in Corporate Ownership
Joint Ventures &
Strategic Alliances
Employee Stock
Ownership Programs
(ESOPS)
Institutional
Ownership
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Special Issues in Corporate Ownership
Joint ventures and strategic alliances: Strategic alliances
are when two companies collaborate on a project for mutual
gain, and a joint venture is when the partners share
ownership stakes in the joint project.
Employee stock ownership programs (ESOPs): Allows
employees to own a significant share of the corporation.
Discussion: Why would a corporation choose to go this direction?
What are the potential benefits and drawbacks?
Institutional ownership: Large investors (e.g. pension funds,
banks) who purchase large blocks of stock. Institutional investors
now own almost 40% of all stock in the U.S.
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Special Issues in Corporate Ownership
Mergers &
Acquisitions
(M&As)
Divestitures
& Spin-offs
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Special Issues in Corporate Ownership
Mergers and acquisitions (M&As): A merger is the union
of two corporations to form a new corporation, and an
acquisition is the purchase of one company by another.
Discussion: What are some of the reasons why companies engage
in M&A activity?
(The concepts of horizontal and vertical mergers usually arise through
the discussion, but if not, you may want to introduce them.)
Divestitures and Spin-offs: A divestiture is when a corporation sells
one or more of its business units. When the company sell unrelated
and underperforming business.
Spin-off is when a firm decide to sell part of itself to raise capital.
Or establish one or more corporate units as new, independent
corporations.
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Strategies in Action
Vertical Integration Strategies
•
•
•
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Forward integration
Backward integration
Horizontal integration
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Strategies in Action
Forward
Integration
Defined
•
Gaining
ownership or
increased control
over distributors
or retailers
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Example
•
General Motors is
acquiring 10% of its
dealers.
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Strategies in Action
Backward
Integration
Defined
•
Seeking
ownership or
increased control
of a firm’s
suppliers
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Example
•
Motel 8 acquired a
furniture
manufacturer.
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Strategies in Action
Horizontal
Integration
Example
Defined
•
•
Hilton recently
acquired Promus.
Seeking
ownership or
increased control
over competitors
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Entrepreneurship vs. Small Business
Entrepreneur: Accepts the
risks and opportunities of
creating, operating and
growing a new business
Small Business Owner:
Does not have plans for growth
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Trends in Small Business Start-ups
Emergence of
E-commerce
Crossovers From
Big Business
Opportunities for
Minorities & Women
Global
Opportunities
Increased
Survival Rates
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Trends in Small Business Start-ups
Emergence of e-commerce: E-commerce plays a small role in the overall economy, but it
continues to grow rapidly, despite the current recession.
Crossovers from big business: More and more people are leaving big corporations, and
launching their own businesses.
Opportunities for minorities and women: Over the past five years business ownership by
minorities has increased significantly:
African Americans:
+46%
Hispanics:
+76%
Asians:
+56%
Native Americans:
+93%
In addition, women own 38% of ALL businesses in the U.S. (!!!)
Global opportunities: With the emergence of the Internet, foreign markets have become
much more accessible to small businesses, both as a source of suppliers and as a source of
customers.
Increased survival rates: Today, the SBA estimates that at least 40% of all new
businesses will survive for six years. This represents dramatically increased odds\chances
vs. previous decades.
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Percentage
E-commerce Continues to Grow Rapidly
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
$17,387
$12,090
$7,924
$4,828
$2,444
1997
1998
1999
2000
2001
Year
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Reasons for Success and Failure
Reasons for Failure
Poor management
Neglect
Weak control systems
Insufficient capital
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Reasons for Success
Hard work, drive,
dedication
Market demand
Strong management
Luck!!!
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Reasons for success and Failure
Ultimately, 63% of all new businesses fail, due in large part to the following
factors:
1.
Poor management: While common sense is important, not knowing basic
business principles can hinder long-term success.
2.
Neglect: Starting a new business requires an overwhelming time commitment.
Doing it “on the side” usually isn’t enough.
3.
Weak control systems: Without control systems, small business owners don’t
know about problems until it’s too late.
4.
Insufficient capital: Many experts recommend that a new business should
have enough capital to last six months to one year without earning a profit.
Small businesses that succeed typically credit the following factors:
Hard work, drive, and dedication: Commitment is essential. Nearly 44% of
successful entrepreneurs interviewed by the Ontario Department of Industry
and Commerce cited determination as the personal quality that contributed to
success.
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Reasons for Success and Failure
» Market demand: Clearly, if there is demand for a product,
success will be easier. Careful up-front market analysis is
crucial.
» Managerial competence: Training and experience make a
real difference. Most successful entrepreneurs spend time
working in successful companies or they partner with others
who bring more expertise.
» Luck: Never underestimate the importance of luck, but keep
in mind Thomas Jefferson’s adage: “The harder I work, the
luckier I become”!
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Getting Started
Buying an
Existing
Business
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Starting
From
Scratch
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Sources: Finding the money
Finding the money to finance a new business is clearly critical.
Personal resources: Money from personal savings, friends, and relatives
accounts for over two-thirds of all money invested in new small businesses, and
one half of all money invested in the purchase of existing small businesses.
Loans: Potential sources include banks and other lending institutions,
independent investors, and the government. All of these sources require formal
business plans.
Venture capital companies: These firms invest in businesses with rapid growth
potential, supplying capital in return for stock.
Small business investment companies: These are government-regulated
companies that borrow money from the SBA to invest in or lend to a small
business. Past recipients include Apple, Intel, and Fed Ex.
Small business association (SBA): The SBA offers a wide range of financing
programs. In addition, the SBA has a number of virtually free management
counseling and small business information services…great resources for
entrepreneurs!
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Financing the Small Business
Personal resources
Loans
Venture capital companies
Small-business investment companies
Small Business Association (SBA)

Financial aid and management advice
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FRANCHISING
Franchising is a very accessible path to entrepreneurship. A
franchise is an arrangement that permits the franchisee
(buyer) to sell the product of the franchiser (seller).
Advantages:
Proven business opportunity: There is much less risk in
buying a business with brand recognition and a successful
track record across a range of venues.
Access to management expertise: Big business
management skills and guidance further reduce the risk of
failure.
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FRANCHISING
Disadvantages:
Start-up costs: Franchise fees range widely, from
$30,000 for a Fantastic Sam’s hair salon, to more than
$650,000 for a McDonald’s, to several hundred million
dollars for a professional sports team.
On-going payments: Many franchisees are required to
pay a percentage of sales to their franchisers.
Management roles and restrictions: Owners have
much less flexibility in operating a franchise business.
Discussion: How many would like to own a franchise. What
kind of franchise? Why?
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FRANCHISING
An Ownership Opportunity
Advantages
Proven business
opportunity
Access to
management
expertise
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Disadvantages
Start-up costs
On-going
payments
Management rules
and restrictions
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Chapter Review
Why did the founders initially choose a partnership form
of legal organization? Were there any risks in choosing
this form?
Answer: The founders chose a partnership because it was easy
to set up, and they knew it would only be temporary. The
biggest risk was unlimited liability.
What advantages were gained from switching from a
partnership to a corporation?
Answer: The key advantages were limited
liability and greater fundraising capability.
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Chapter Review
Why are small businesses important to the U.S.\Palestinian economy?
They create new jobs, foster entrepreneurship and innovation, and supply goods and services
needed by larger businesses.
Why might a closely held corporation choose to remain private? Why might a closely
held corporation choose to become a publicly traded corporation?
Remain private: to retain control
Become public: to generate additional funding
What key factors typically contribute to the success and failure of small businesses?
Contributing to success: hard work and dedication, market demand, managerial competence,
and luck.
Contributing to failure: inexperience, neglect, weak control systems, and insufficient capital.
From the standpoint of the franchisee, what are the primary advantages and
disadvantages of most franchise arrangements?
Advantages: proven business opportunity, access to management expertise
Disadvantages: high start-up costs, possible on-going fees, management rules and restrictions
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Assignment
Choose a private limited corporation operates in the Gaza Strip and
conduct empirical study on it.
Consider the following elements:
1.
Identify the company name and the type of business it belongs to (e.g.,
food industry, beverages..)
2.
How many partners it has.
3.
Why the choose such type of legal form. Why not PLC?
4.
What challenges (management, finance, political..) they face?
5.
What future strategies they plan to take (expansion, divesture, close-down,
..)?
Be practical you need to visit the company in the field.
Two can join efforts in one assignment. But it can be individual
assignment.
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