BUS10: Ch. 5: Small Business and the Entrepreneur

What makes entrepreneurs motivated to succeed? (p. 138)

(1) want to provide for themselves or family, (2) personal fulfillment upon succeeding

franchisee

an individual who is allowed to establish and operate a franchised location

venture capital

an investment in the form of money that includes a substantial amount of risk for investors

What are the advantages of franchising? (p. 144)

(1) proven system of operation, (2) strength in numbers (economies of scale, easy loan approval), (3) initial + on-going training, (4) corporate marketing materials and benefit from national marketing campaigns, (5) market research (local demand and competitors)

How important is planning to a business's success or failure? (p. 149)

"Failing to plan is planning to fail." Neglecting to build an effective business plan is one of the biggest reasons businesses fail. Conversely, a well-thought-out business plan can lead to greater financing options as lenders are more likely to invest. (note: costs of government-mandated healthcare in companies with more than 50 employees is also sometimes overlooked)

What are the advantages of buying an existing business? (p. 146)

(1) Ease of startup; existing suppliers, staff & management, equipment & inventory. (2) Existing customer base; immediate cash flow if no negative changes are made. (3) Financing opportunities: if the business has a positive track record, it might be easier to obtain financing to purchase it.

What are the disadvantages of buying an existing business? (p. 147)

(1) High initial purchase price if buying out and previous owner's goodwill is overvalued. (2) Inheriting previous owner's mistakes (bad debt, unhappy customers, distributors, or purchasing agents). (3) Unknowns in transition; no guarantee that employees, managers, customers, suppliers, or distributors will stay (even if they do, you may inherit unanticipated problems).

How do entrepreneurs take risks? (p. 138)

(1) Innovative but untried products or processes = risk of financial, career, & reputation loss. (2) Successful entrepreneurs consider the likelihood of success before taking risks (calculated risk).

What if I need more money than what I can provide for myself? (pg. 154)

(1) It is RISKY to borrow against personal assets such as the equity in their homes or retirement accounts. (2) Loans are easier to obtain if purchasing an existing business or franchise.

What are the 8 different types of entrepreneurs? (p. 139)

(1) Lifestyle entrepreneurs, (2) Micropreneurs, (3) Home-based entrepreneurs, (4) Internet entrepreneurs, (5) Growth entrepreneurs, (6) Intrapreneurs, (7) Social entrepreneurs and social intrapraneurs, (8) Serial intrapreneurs.

5 reasons for starting a small business? (p. 134)

(1) Opportunity: new needs & ideas; solve a problem, improve an existing idea, or help overcome a personal obstacle. (2) Financial Independence: owners feel they can make more money (danger: usually 3-5 yrs before profitable), (3) Control: more control of business decisions; self-employed. (4) Flexibility: better work/life balance. (5) Unemployment: seeking income due to job loss.

Why do so many small businesses fail? (p. 148)

(1) Too much accumulation of debt. (2) Inadequate management. (3) Poor planning. (4) Unanticipated personal sacrifices.

Why are small businesses important to the economy? (p. 132)

(1) account for more than ~50% of US GDP, (2) employ ~50% of private workforce, (3) export 33% of total US goods, (4) help foster innovation, (5) supply products and services to larger companies and consumers that larger companies do not or cannot supply.

gazelles (p. 141)

(1) base revenue of at least $100,000, (2) experience 20% sales growth every year for 5 years; 100% increase in revenue in 5 years, (3) represent 15% of all businesses, (4) generate 50% of all new jobs

Where do small business owners go for advice? (p. 150)

(1) industry-related conferences, seminars, or workshops, (2) SBA, (3) SCORE, (4) Entrepreneurs Organization

What are the 6 traits of successful entrepreneurs? (p. 137)

(1) innovative & have a vision, (2) take risks, (3) motivated to succeed, (4) flexible & self-directed, (5) work well with others & possess good leadership skills, (6) "system thinkers" - view the whole process rather than just pieces

How do small businesses foster innovation? (p. 132)

(1) introduce new products and procedures, (2) flexibility allows them to react more quickly than larger companies to changing market trends and needs, (3) create more patents per employee than large firms (greatly impacts technology field)

What are the disadvantages of franchising? (p. 145)

(1) lack of control over the product/service or the store appearance, (2) start-up costs and on-going fees paid to franchisor (initial fee + royalty fee of 6-10% gross revenue), (3) share common problems, (4) affected by negative news involving franchisor, (5) heavy workload?

Why do successful entrepreneurs need to be flexible and self-directed? (p. 138)

(1) need to be able to react quickly to unexpected situations and downturns, (2) must be able to play many roles, (3) need to know when to sell or exit a business

What other types of improper management lead to failure? (p. 149)

(1) overwhelming surge in sales insufficient inventory, (e.g. dot-com bust in late 1990s), (2) expanding the business too soon, (3) moving into areas of business that are less profitable

EO (p. 151)

Entrepreneurs Organization. (1) Connects business owners with industry experts. (2) Requires members to be a founder, co-founder, or controlling shareholder of a business with at least $1 million in annual gross sales and younger than 50 years old.

SCORE (p. 151)

Service Corps of Retired Executives. (1) A non-profit organization and a partner of the SBA. (2) A network of nearly 11,000 volunteers who are either working or retired business experts. (3) Review business plans, help with tax planning, and offer new ideas and fresh insights to small business owners.

SBA (p. 131, 151)

Small Business Administration: Provides small businesses with (1) counseling, (2) workshops/events, (3) small loans. (note: SBA also works to maximize benefits that small businesses receive from the government)

franchisor

a company that allows an individual to run a franchised location of their business

business plan (p. 149)

a formal document that states the goals of the business as well as the plan for reaching those goals (see figure 5.8 on p. 150)

advisory board (p. 152)

a group of individuals who offer guidance to a new business owner but do not have the authority to make decisions

entrepreneurial team (p. 142)

a group of qualified entrepreneurs with varied experiences and skills who come together to form a new venture

franchise (p. 143)

a method of doing business whereby the business (the franchisor) sells its products or services under the company's name to an independent third party operator (the franchisee)

crowdfunding (p. 153)

a way to generate funds via donations or, more recently, investments from individuals via social networking (e.g. Kickstarter, Indiegogo)

social intrapreneurs (p. 141)

build and develop ventures within a company that are designed to indentify and solve large-scale social problems (e.g. solar-power at eBay)

due diligence (p. 147)

conducting a resonable investigation into the business's history, operating and financial records, contracts, and the valuation of the business

How do small businesses help bigger companies? (p. 133)

cooperative relationships: (1) make or supply parts for manufacturing (e.g. car seats), (2) provide new and better product design (e.g. heated car seats)

venture capitalists (p. 154)

corporate entities that use funds from other investors and manage that money by investing LARGE amounts in businesses with prospects for high growth in exchange for some form of equity or ownership in the businesses (note: VCs usually want to play an active role in management) (e.g. Shark Tank)

serial entrepreneurs (p. 141)

create and grow many different businesses over their business career (e.g. Richard Branson - Virgin Records, Virgin Airways, Virgin Mobile)

small business (p. 131)

defined by SBA as a business that (1) is independently owned and operated, (2) is not dominant in its field, (3) has fewer than 500 employees (nearly 90% have 20 or fewer employees), and (4) limited to annual revenue between $7.5 and $38.5 million depending on industry

grants (p. 154)

financial awards offered by federal and state governments and some private organizations; (1) do not need to be repaid, (2) long application process, (3) difficult to write the proposal, (4) often only available to small businesses in industries that the government is trying to nurture, (5) failure to comply with grant requirements will generally result in funding being converted to a loan with interest

How does poor fiscal management lead to failure? (p. 149)

financial statements and budgets need to be created honestly and adhered to each month, accounts receivable religiously collected, and accounts payable aggressively managed

enterprise zones (p. 152)

geographic areas targeted by federal and state governments for economic revitalizing based on various criteria such as: (1) population, (2) poverty rates, (3) amount of economic stress the area is experiencing. (note: the generous tax benefits of locating in these areas often outweigh the risk)

What causes excessive debt accumulation? (p. 149)

if the new business does not generate revenue quickly enough to begin to pay back loans, then the burden of paying the debt balance plus additional interest as well as normal operating expenses can cause an owner to become further entrenched in a potentially unrecoverable situation

bootstrap financing (p. 153)

is when entrepreneurs start a business with little capital and by: (1) using your own money, (2) borrowing from family and friends, (3) bartering with vendors or clients, (4) former employers?, (5) crowdfunding, (6) credit cards

lifestyle entrepreneurs (p. 139)

look for a business that matches their desired lifestyle (e.g. RV Water Filter Store)

accounts payable (p. 149)

money owed by a company to its creditors (a person or institution who has lent money or extended credit to the company)

accounts receivable (p. 149)

money owed to a company by its debtors (a person or institution who owes money to the company because it has delivered a product or service)

small business failure statistics (p. 148)

nearly 25% of all start-ups fail in the first year, and 66% survive only two years

Should I use credit cards to finance my business? (p. 153)

only if used wisely (interest rates are extremely high compared to other types of financing); a convenient way to finance a business's short-term needs but only if the balance is paid off completely every month.

business incubators (p. 151)

organizations that support a group of start-up businesses and increase success rates by offering administrative services, technical support, business networking, sources of financing, and more (note: [1] can be either private or public, [2] lend legitimacy to a new company)

equity

ownership interest in a company in the form of stocks

opportunity niche (p. 137)

problems to solved or opportunities that aren't being addressed in the marketplace

How do small businesses help consumers? (p. 133)

provide specialized goods and services larger businesses do not or cannot supply (e.g. mom & pop stores, environmentally friendly, etc.)

How are entrepreneurs innovative? (p. 137)

recognize opportunity niches; make improvements to existing products or systems, or introduce profitable solutions to problems that aren't being addressed in the marketplace; "exploit change as an opportunity for a different business or service"

economies of scale (p. 144)

reduced costs per unit that arise from increased total output of a product (e.g. discounted bulk orders of materials, supplies, and services)

home-based entrepreneurs (p. 140)

run their business from the comfort of their home (e.g. house-practice vet) (note: tax deductions from rent/mortgage + other home expenses, but also the downside of zoning restrictions)

internet entrepreneurs (p. 140)

run their business only online (e.g. blogging?) (note: increase since the advent of Web 2.0 tech)

micropreneurs (p. 139)

satisfied with keeping the business small to achieve a balanced lifestyle (e.g. dog walking services)

entrepreneur (p. 137)

someone who assumes the risk of creating, organizing, and operating a business

lines of credit (p. 154)

sources of credit that can be drawn on at the borrower's discretion

social entrepeneurs (p. 141)

start businesses with a social mission in mind (e.g. Delancey Street Foundation - teaches addicts, felons, and homeless necessary skills for life)

growth entrepreneurs (p. 140)

strive to create fast-growing businesses (gazelles) and look forward to expansion (e.g. Tesla)

goodwill (p. 147)

the intangible assets represented by a business's name, customer service, employee morale, and other factors (note: might be lost upon change in ownership)

Why are people skills and leadership skills important to entrepreneurs? (p. 138)

they must recruit and motivate other people with complementary skills in order to expand business

What does it mean for entrepreneurs to be "system thinkers"? (p. 139)

turning an idea into a successful business by being able to see the whole picture (developing a plan for production, financing, marketing, distributing)

angel investors (p. 154)

wealthy individuals who provide capital ($25,000 - $1 million) for business start-ups in hopes of a profit later on and DO NOT seek to control the business (note: typically have industry experience and can provide guidance/advice)

intrapreneurs (p. 141)

work in an entrepreneurial way within organizations owned by other people (e.g. employee "pet projects" at Google) (note: replaces traditional research-and-development, not compensated for ideas?)