Chapter 3: Entrepreneurship, New Ventures, and Business Ownership

Three options for starting a small business

1. Buying an existing business Already proven ability to attract customers and generate profit Established relationships with lenders, suppliers, stakeholders Existing track record so easier to give potential buyers an idea of what to expect Easier in many cases to do this (if you have the funds) 2. Franchising 3. Starting from scratch (Don't suffer from previous errors Free to choose lenders, equipment, inventories, locations, suppliers, and workers Of all new businesses started in the past decade, about 62% were from scratch)

5 trends in new ventures

1. Emergence of e-commerce 2. Crossovers from big business More people starting businesses who left big corps Lost jobs, hated culture, saw opportunity, wanted to be own boss 3. Opportunities for POC and women Number of businesses owned by Black Americans has increased by 60% during the most recent 5-year period, now about 2 million Hispanic owned: grown 44%, now about 2.25 million Asians: 41% growth, Pacific Islanders 35% growth Almost 11.6 million businesses owned by women, employ 9 million workers, combined $1.7 trillion in revenue a year Reasons for women: 46% gain control over schedule 7% other reasons 23% frustrated with glass ceiling at big companies 24% saw a market opportunity and decided to pursue it 4. Global opportunities New opportunities in international markets 5. Better survival rates Small business failure rate has declined 1960s and 70s, fewer than half of new start-ups survived more than 18 months, and only 1 in 5 lasted 10 years Now, over half can expect to survive for at least 4 years and a third survive for 10 years or longer

Reasons for success in business (4 basic factors)

1. Hard work, drive, dedication 2. Market demand for the products or services being provided Careful analysis of market conditions 3. Managerial competence Few succeed alone or straight out of college; need to get training or draw on experience by others 4. Luck

Entrepreneurship Goals (3)

1. Independence From working for someone else 2. Financial security Often just want to achieve a safe and secure financial future for themselves but not grow business beyond their own capacity to run it What we think of as small business 3. Some launch with the goal of growth and expansion To transform their venture into a large business Dell's vision was this Often referred to as venture or startup 4. Some don't have clear goals but blow up anyway Facebook

Sole proprietorship

Business owned and usually operated by one person who is responsible for all of its debts 74% of all US businesses are this, but only account for about 4% of business revenue Advantages: Freedom Easy to form (not as much paperwork and doesn't involve others as much) Low startup costs Tax benefits extended to businesses for suffering losses in early stages Disadvantages: Unlimited liability for all debts Ends with death or decision of owner Legally dissolves with death of owner Can be reorganized by successor otherwise executors or heirs must sell assets Investment: personal Bankers don't lend as much

Types of corporations (6)

Closely held (or private) Publicly held (or public) Subchapter S Limited liability (LLC) Professional Multinational

Business plan

Describes a business strategy for the new venture and demonstrates how it will be implemented In the act of preparing it, forced to firm up your thinking and add more specifics before investing more time or money

Gig economy

Freelancers and contractors who work on a temporary basis, often outside set hours Relies heavily on technology (laptops and mobile devices, online tools to provide services)

Small Business Administration (SBA)

Gov agency charged with assisting small businesses, consulting, small business loans, business advice, etc.; helps them get in touch with retired executives Has different standards based on industry Manufacturer: 1000 or fewer employees Wholesaling firm: 100 to 500 employees Services, retailing, construction, and other industries all tend to be classified as small based on revenue rather than number of employees

Small business investment companies (SBICs)

Government regulated investment company that borrows money from the SBA to invest in or lend to a small business Federally licensed Apple, Intel, FedEx received these Also sponsors minority enterprise small business investment companies (MESBICs)

Venture capital companies

Group of small investors who invest money in companies with rapid growth potential Most don't lend money and instead invest it, supplying capital in return for partial ownership (like stocks) Might demand representation on board of directors from venture capital company Some cases, managers need approval from the venture capital company before making major decisions

Publicly held (or public) Corporation

Stock is widely held among many investors, available for the public Large businesses typically Subject to corporate taxation Apple, starbucks

Employee stock ownership plan (ESOP)

allows employees to own a significant share of corporation Not like getting stock from a company that employers offer, it's its own thing

Board of directors

group elected by stockholders to oversee corporate management If CEO is doing stuff that the shareholders won't like, then the board of directors all get a vote from shareholders about what's going on

Acquisition

purchase of one company by the other If company name changes to acquired company, headquarters changed, culture changed, then it's an acquisition

Corporate governance

roles of shareholders, directors, and other managers in corporate decision making and accountability

Corporate officers

run the corp on a day-to-day basis, hired by the board

Spin-off

strategy of setting up one or more corporate units as new, independent corporations Sells part of themselves TO RAISE CAPITAL Could also mean that a business unit is more valuable as a separate company

Divestitures

strategy whereby a firm sells one or more of its business units Like if they want to focus on core business and sell off other useless business operations (could be underperforming)

Stockholders (or shareholders)

the owners of a corporation, investors who buy ownership shares in the form of stock Usually headed by CEO, who is responsible for overall performance President, VPs Functional areas like marketing and operations

Strategic alliance

two or more organizations collaborate on a project for mutual gain Ntech and Pfizer did this during the pandemic to get vaccines out faster General Motors and Ford have a strategic alliance

Merger

union of two corps to form a new one Like delta and northwest airlines If the firms are about the same size, it's a merger; if one is bigger, it's typically an acquisition Often one company culture will become dominant over time

Niche

A segment of a market that is not currently being exploited Small entrepreneurial businesses better at discovering these niches than larger organizations as many resources committed to older, established business practices

Three ways small business impacts the US economy

1. Job creation Important source of new (and often well-paid) jobs Recently, small businesses have accounted for around 35-45% of all new jobs in high-tech sectors Small firms hire faster 2. Inovation Major innovations are as likely to come from small businesses as from big ones 3. Contributions to big business Most of the products made by big businesses are sold to consumers by small ones Many are suppliers for big business Most dealerships are independently operated Most are franchises Many larger traditional retailers with an online store will outsource the management and distribution to other firms, many small or regional companies Provide data storage Raw materials and services

Reasons for Business Failure (4 general factors)

1. Managerial incompetence or inexperience Put too much faith in common sense, overestimate own managerial skills, believe hard work alone is enough Not a sound business plan Don't know how to make basic business decisions Don't understand basic management principles 2. Neglect Don't put in enough time or effort 3. Weak control systems Control systems need to signal impending problems, keep business on track, alert managers to potential trouble Some businesses fail, for example, because they do a poor job of managing their credit collection policies - so too liberal in extending credit to customers and not being able to collect all money that is owed 4. Insufficient capital Poor Overly optimistic about how long until profit (Amazon took 10 years) Need enough capital to operate at least 6 months without earning a profit (some recommend at least a year)

Business plans should have (3)

1. Setting goals and objectives (What strategies will be used to obtain them? How will these strategies be implemented? Strategies for production, marketing, legal elements, organization, accounting and financing) 2. Sales forecasting (research markets, plan carefully, how many employees you'll need and what equipment/locations) 3. Financial planning (plan for turning all other activities into dollars; Cash budget, income statement, balance sheets, breakeven chart)

Cooperatives (co-ops)

A group of sole proprietorships or partnerships agree to work together for common benefits Limited to serving the specific needs of their members Important in agriculture

Which resource is the most important for financing the small business?

According to the National Federation of Independent Business, personal resources and not loans are the most important sources of money Personal resources (including from friends and relatives) account for more than 2/3rds of money invested in new small business ½ of that is used to purchase existing businesses Gov't programs have strict eligibility requirements Banks and investors will want to review business plans

What percentage of all US businesses have no more than 20 employees? How many work for companies with fewer than 100 employees? How many for companies with 1,000+ employees?

Almost 90%, about 1/5 of the workforce; 17%; only about .1 of % employ 1,000 or more people

First mover advantage

Any advantage that comes to a firm because it exploits an opportunity before any other firm does Large firms often can't move as quickly as a small firm Layers of hierarchy mean decisions get made slowly Many assets can be at risk when they take advantage of new opportunities

Franchise

Arrangement in which a buyer (franchisee) purchases the right to sell the good or service of the seller (franchiser) Most McDonald's, Subway, 7-Eleven, RE/MAX, Holiday Inn, Dunkin Donuts, many professional sports teams Benefit from parent corporation's experience and expertise Franchiser might even supply financing May pick store location, negotiate the lease, design the store, purchase equipment May train the first set of employees and managers and issue standard policies and procedures Has set suppliers so can be cheaper Marketing and advertising may be handled by the franchiser Can grow rapidly by using the investment money provided by franchisees Don't have to build business step-by-step Biggest disadvantage: Start up cost Disadvantages: Ongoing payments and management rules and restrictions

Understanding Distinctive Competencies (usually falls into 3 areas)

Aspects of a business that the firm performs better than its competitors 1. Identifying Niches in Established Markets 2. Identifying New Markets (two ways: entrepreneur can transfer a product or service from one well-established geographic market to a second market; can create entire industries) 3. First-Mover Advantages

Professional

B & H Engineering Doctors, lawyers, accountants, or other professionals typically compose these Protection from unlimited financial liability, members are not immune from unlimited liability Taxed like a partnership, legally like a corporation Helps them with lawsuits too like medical malpractice lawsuits Gain access to the industry as well

Limited liability (LLC)

Hybrid Owners are taxed like partners Hold benefits of limited liability accorded to publicly held corporations Become more popular recently Ritz-Carlton Protected in lawsuits

Subchapter S

Hybrid of a closely held corporation and a partnership Organized and operates like a corp, treated like a partnership for tax purposes To qualify, must meet stringent legal conditions, like stockholders must be individual US citizens Frontier Bank

Small business

Independent and has relatively little influence on the market

Stock Ownership and stockholders' rights

Investors become stockholders or shareholders when they buy stock Profits are distributed among stockholders in the form of dividends

Institutional ownership

Large investor, such as a mutual fund or a pension fund, that purchases large blocks of corporate stock A lot of insurance companies own a lot of stocks Purchasing or selling large shares of stock tends to have a disproportionately large impact Institutions can also own stock and they tend to have a lot of active stock traders and institutional equipment Some shares of stock are restricted to institutions Because an institution will have more advanced notice potentially to buy the stock

What are the popular areas for small business?

Services About 56.2% of businesses with fewer than 20 employees are involved in the service industry Sell products made by other firms directly to consumers Low startup cost and low overhead Retail 13.69% of small business Usually, if starting a small retail business, it's a speciality shop, like big men's clothing or gourmet coffee Construction Just under 10% Small local project, so local contractors are often best suited Manufacturing and transportation are the least (more regulations, more equipment needed)

Two alternatives to general partnerships: Limited partnership and master limited partnership

Limited partnership Allows for limited partners who invest money but are liable for debts only to the extent of their investments Can't take active roles in business operations Must also have at least one general (or active) partner for liability purposes Can't take active roles in business operations Must also have at least one general (or active) partner for liability purposes Master limited partnership Form of ownership that sells shares to investors who receive profits that pay taxes on income from profits Investors are paid back from profits Master partner has at least 50% ownership and runs the business Minority partners no management voice

Closely held (or private) Corporation

Most common form Stock held by only a few people Could be family, a management group, or even employees Subject to corporate taxation Smaller corporations Blue Cross/Blue Shield

Partnership

Not a legal entity No laws require partners to file agreements with any gov agency IRS taxes partners as individuals Business with two or more owners who share in both the operation of the firm and the financial responsibility for its debts Partners share profits equally or in proportion to their investment Could also be based on other things (like one person invests, the other manages - silent partner) Sweat equity: person who labors and not invests paid not as much until they gradually gain a growing ownership stake of the business Advantages: Ability to grow by adding new talent and money Banks prefer to make loans to enterprises not dependent on single individual Partnership can be organized by only a few legal requirements Disadvantages: Each partner may be liable for all debts incurred by partnership All partners may be liable even if another partner got the debt Difficult to transfer ownership No partner may sell out without the consent of the others - including retiring, selling to a son or daughter, etc.

Established Market

One in which many firms compete according to relatively well-defined criteria Like Blockbuster and movie market

Entrepreneurs

People who assume the risk of business ownership, and also the opportunities

Entrepreneurial Characteristics

Resourcefulness Concern for good, personal customer relations Strong desire to be their own boss "Gain control over my life" "build for the family" Can deal with uncertainty and risk Today's entrepreneur, instead of like the past (male, self-reliant, quick and firm decisions) looks more like: Open-minded leader and relies on networks, business plans, consensus

Corporation

The corporate entity: Business that is legally considered an entity separate from its owners and is liable for its own debts; owner's liability extends to the limits of their investments Indefinite life spans legally Corporations can sue and be sued, buy hold and sell property, make and sell products, and commit crimes and be tried and punished for them 6 million corporations, 17% of all US businesses, generate 81% of sales revenue Almost all large businesses use this Corpos dominate global business Capital invested is the liability Continuity is perpetual or for specified period of years, as stated in charter Management is under control of board of directors, which is selected by stockholders Investment comes from purchase of stock Biggest advantage: Limited liability: investor liability limited to personal investment (stock ownership) Invest $1k, biggest risk is losing that $1kContinuity Selling stock - expand the number of investors and the amount of available funds Disadvantage: Tender offer: offer to buy shares made by a prospective buyer directly to a target corporation's shareholders, who then make individual decisions about whether to sell So a corp can be taken over against the will of its managers Start-up cost is higher Heavily regulated, complex legal requirements of the state Double taxation: taxes may be payable both by a corporation on its profits and by shareholders on dividend incomes

Entrepreneurship

The process of seeking business opportunities under conditions of risk

Multinational

Toyota, Nestle, General Electric Each region is pretty autonomous, runs like its own corporation Amazon and walmart are NOT multinational because they have a headquarter that controls everything Spans national boundaries Stock may be traded in several countries Managers likely to be of different nationalities

joint venture

When partners share ownership of a new enterprise More 50/50 and sets up a new entity/corporation with a new name often