Small Business and Business Ownership Chapter 2. Small business and the US Economy Independently...
-
Upload
amanda-little -
Category
Documents
-
view
225 -
download
2
Transcript of Small Business and Business Ownership Chapter 2. Small business and the US Economy Independently...
Small business and the US Economy
Independently owned and operated w/fewer that 500 employees.Non-employer are self-employed
Less than 4% of all income received from business transactionsEmployer businesses
Account for 99% of all businesses40% of all business income
Starting a small business
Three approachesStarting from “scratch”
Risk of failure is highMust understand market: location, product/service offered, how much will be soldMust understand competitors’ market
Buying an existing businessLess riskyHave current data on which to make decisions
FranchiseThe buyer (franchisee) purchases the right to sell the good or service of the seller
(franchisor).90% success rate.
Franchisor/Franchisee Relationship
Franchisor:Known and advertised brand nameManagement skillsTraining and materialsMethod of doing business
Franchisee:InvestmentLabor and capitalOperationsAgrees to follow the franchise contract.
Advantages of Franchising
The Explosive Growth of Franchising Worldwide (pg 13)Franchisee:
Start a new business while buying an existing businessSuccessful business model already developedControl of risks in External and Internal Business EnvironmentAlready have brand recognition and a fully developed product/serviceAccess to business experts and management trainingCan purchase advertising and supplies through co-op with other franchisees
FranchisorAbility to expand business without trouble of opening a new location.Able to delegate managerial and operational responsibility to franchisee
Disadvantages of Franchising
Operational control:Franchisor
preserve brand recognition and unique characteristicsProtect product qualityTendency to “micromanage” franchisee.
Franchisee:Start up costs are highMust pay a percentage of sales (royalty) back to FranchisorDependent upon other Franchisees upholding reputationFranchisor may compete with franchisee
Evaluating Franchise Opportunities
Name recognition and reputationQuality products?
Franchisor’s experienceHow long has the company been franchising?
GrowthSteady growth or growth too fast?How many franchisees, especially in location
Your investmentAffordability? Can you afford to lose the start up cash?Do you need to borrow?Annual expected (realistically) income
Your Knowledge, Skills, and ExperienceTraining?Do you have previous experience in this area?
Be wary of franchise brokersBroker represents franchisors, who are paying a commissionWritten documentation of expected earnings.Hire an accountant and/or lawyer to review documents
Study the disclosure documentAfter filing application for franchise, request and receive the franchisor’s disclosure
document at least 14 days before any contract is signed.Document will include key sections pertaining to financial and legal history of
franchise.
Seek input from current and previous franchiseesMost reliable way to verify franchisor’s claims
Seek professional helpContact franchise associations
The importance of a Business Plan
Business Plan: formal written plan that clearly explains every aspect of your business.
Missions/GoalsStrengths/WeaknessesMarket AnalysisBreak Even Analysis
Components of a Business Plan
Executive SummaryConcise overview of the nature and organization of the business, the rationale for
opening it, and why the business will be a success.Business Description
Business Purpose, goals, and how these will be achieved.Name of businessContact informationAnalysis of industryForm of business ownershipWho are your “ideal” customers?What is your competitive advantage?Ethical issues and social responsibility
Management and Operation PlanSWOT analysis
Strengths Weaknesses Opportunities Threats
Mission StatementBusiness goalsManagement teamOrganization structurePhysical layoutOperational scenariosEtc.
Human Resource PlanPersonnelJob descriptions and specificationsCompensation and incentivesCorporate cultureLeadershipTraining and prof. dev.
Marketing planWho is your ideal customer?Analysis of competition
• Financial Plan• Revenue• Expenses• Financing the business• Balance Sheet/Income Statement• Break Even Analysis
• Appendix
Key to Success?
Market DemandBusiness failure is often due to a lack of understanding of the marketplace.
LocationNeed to know the characteristics of customer and locate where they are!Zoning laws are crucial.
Lack of managerial experience Incompetence and managerial mistakes are often listed at top of lists of reasons why a
business fails.Insufficient capital to grow the business
Including poor control over cash flow and expenses. Cash flow: the net amount of cash and cash-equivalents moving into and out of a business.
Financing the Small Business
Venture Capital Company: group of investors that pool their capital to invest in companies with rapid growth potential in return for owning part of the company (equity position).
must have high profit potentialAngel Investor: Wealthy individual who will provide a business with
capital in exchange for equity in the company. “Shark Tank”.
Governmental Sources
Small Business Investment Company (SBIC): investment company that borrows money from the Small Business Administration solely for the purpose of investing or lending to small businesses.
Minority Enterprise Small Business Investment Company (MESBIC): finances business owned by minorities.
Microloans: makes small loans (under $35,000) to people such as single mother and public housing tenants
CDC/504 Loans: long-term, fixed rate financing for expansion or modernization. Private, non-profit that works through the SBA.
Assistance for Small Businesses
SCORE: Service Corps of Retired Executives: retired executives that work with small businesses. Website with wealth of info for small businesses.
ACE: Active Corps of Executives: ran by executives who are still working.
SBI: Small Business Institute: college and university students and instructors work with small businesses on specific problems.
SBDC: Small Business Development Center: consolidates information from various disciplines for small businesses.
Why start your own Business?
Want to be small and stay smallMore satisfying relationships with employees, clients, vendors, etc.Becomes an integral part of the community where it residesAbility to adapt quickly to changing business environmentDisadvantage: risk of failure due to lack of capital.
Small size usually equals limited financial resources and lack of access to capital market
By deciding to stay small, the owner limits the potential of the business.
The Role of the Entrepreneur
More of a mindset:Love innovationHave a wide vision of where they want to goA strong desire to be successful and make moneyLove to idea of creating employment opportunitiesWilling to accept a higher level of risk.
Skills Entrepreneurs need:
Need to be alert to changes in their everyday environmentHave a wild enough imagination to see how the changes can alert
them to other possibilitiesDeep belief in their ideas and believe in the importance of their ideasResearch everything they need to know about fulfilling their ideas,
their dreams. Self disciplined; task oriented; hard workers. Very demanding out of
themselves and others. Not for wimps!Women-owned business—pg 20
Internet Based Small Business
Appealing because it’s easy and has a low costHowever:
Must follow federal privacy laws enacted by the Federal Trade CommissionMust know how to properly collect and pay any applicable state sales and use tax
which are applicable in the state where the customer resides.Must understand rules and regulations that apply for exporting to foreign
countries.Become familiar with the federal laws regulating advertisement and marketing
online.Must follow Digital Millennium Copyright Act that protects the copyright of
intellectual property owners whose work is transmitted or used over the internet.May need to hire a consultant who specializes in online retailing.
Using Social Media
Affiliate Marketing: A common marketing strategy for increasing sales and customer loyalty is to reward customers for referrals.
Widget: a small piece of software from the retailer’s web page that is placed on the customer’s social media page. When a friend clicks on the widget and buys, the customer is rewarded.
Research: engage current and potential customers in a conversation about a product or service. Provides relevant information that assists a cutomer in making a purchase.
Types of Business Ownership
Sole Proprietorship:One person owns and operatesEasy to establishSimple structureOwner maintains a high degree of control
Tax implicationsIncome from business goes on owner’s personal tax return. Taxed only once
Disadvantage:Lack of access to capitalOwner is exposed to risk
Personal assets may be seized to pay business debt. May cause personal bankruptcyBusiness succession if owner dies.
General and Limited Partnerships
General partnershipsEach partner contributes financially, increasing the amount of capital
available.Financial losses are shared in proportion to the investmentShare in work and managerial duties
Tax implicationsIncome is included on personal tax returns of partners. Taxed only once.
Liability—unlimitedPersonal assets can be seized to cover business losses. May cause personal
bankruptchy
Limited PartnershipPartners have some limited liability in case of business failure.Are not allowed to manage the business.“General Partner” manages the business for all other partners.
Has unlimited liability—may be personally liable for debtsPaid a salaryParticipates in the profits and losses of the partnership
Page 23: Why General Partnerships are a Liability Nightmare
Corporation
Legal entity that can act and have liability separate from the individuals who set up the corporation.
Owners are “stockholders”. Only liable up to the amount of their personal investment.
Chartered by the state government. In Indiana—through the Secretary of State’s Office
Profit/Non-ProfitPublic/Private Ownership
AdvantagesLimited liabilityEase of raising capital through the sale of stockContinuity of the business. Lives beyond the lifetimes of the owners
DisadvantagesLegal: Charter, filing fees, additional expensesTax implications: Taxed twice—first as a corporation and then on each
individual stockholder’s income tax for the dividends received.May become inflexible; non-responsive to stockholders.Public corporations must publicly disclose financial information
The “S” Corp
Provides the protection of a corporation but taxed like a partnership.Under Subchapter S of Chapter 1 of the US Internal Revenue CodeConditions to meet:
Have no more than 100 stockholdersShareholders must be individuals (not companies) who are citizens or permanent
residents of the United StatesOffer only one class of stock (either common or preferred stock)Receive no more than 25% of corporate income from passive sources such as rent,
royalties, or interestDisadvantages:
Subject to IRS Code, which changes frequentlyMay have a state corporation tax to pay
Limited Liability Corporation
Liability of each owner is limited to the amount that each investsOption of being taxed like a partnership or corporationNot limited on membershipMust have an operating agreementDisadvantages
LLC must be dissolved after 30 years (some states)Death of a member dissolves the LLC
Flexible
Cooperatives
Same people who buy and use the products and services of the cooperative are the people who own and run it.
Combine resources for mutual benefits in order to provide servicesElect Board of DirectorsSurplus revenue is returned to the members in proportion to the
member’s use of it, not in proportion to investment.Farmers use them a lot.
Non-Profit Organizations
Exist to provide services to the public, not to make a profitAny capital left after operating expenses are paid is funneled back
into the non-profit.Exempted from income taxesMust apply to state for incorporation; must file with IRS to become a
501( c )3.Must be charitable, educational, scientific, religious, or literaryMust meet other criteria as established by the IRS code.
Merger/Acquisitions
Merger: two or more companies become a single companyVertical: companies at different phases of the production process become one. Ex: Steel
Dynamics buying scrap metal recyclerHorizontal: companies in the same industry or companies involved in the same phase of
a production process. Reduces competition and can reduce production costs by eliminating duplicate facilities and realizing economies of scale. Ex: Comcast and Frontier
Conglomerate: highly diversified company made up of two or more corporations in different industries. Ex: Berkshire Hathaway owns MedPro, Dairy Queen and Geico
Acquisitions: One company purchases the property and assumes the liabilities of another. The acquired company may keep its own identity.
Leveraged Buyout: Merger or acquisition is accomplished by using borrowed money