Foundations of business 4th edition pride solutions manual 1

Foundations of Business 4th Edition Pride

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CHAPTER 5

Small Business, Entrepreneurship, and Franchises

5.1 A WORD FROM THE AUTHORS

Our study of small business the final chapter in Part 2, “Business Ownership and Entrepreneurship” is a logical sequel to Chapter 4, “Choosing a Form of Business Ownership.” Nine out of ten business firms in the United States are classified as “small,” and many business students will be employed in small companies or will become entrepreneurs themselves one day. Accordingly, we begin Chapter 5 with a profile of the small business. We define small business, list the industries that are widely represented in small firms, analyze some of the characteristics of the entrepreneurs who start small businesses, and explain why small businesses fail. The importance of small business in our economy is acknowledged with respect to four main areas: small businesses are sources of technical innovation, employers, spurs to competition, and specialized marketers. Following a discussion of the advantages and disadvantages of smallness, we emphasize the importance of a business plan and then turn our attention to the Small Business Administration, noting the various forms of assistance it offers to small firms.

Finally, we examine franchising, an increasingly popular form of small-business ownership. We use an extended illustration to explain how a franchise originates, and we discuss the advantages and disadvantages to both franchisor and franchisee. We conclude the chapter with global perspectives in small businesses.

5.2 TRANSITION GUIDE

New in Chapter 5: Small Business, Entrepreneurship, and Franchises

 A new Inside Business feature describes how Dunkin’ Donuts, as a franchisor, works with entrepreneurs who want to own their own business.

 The introductory paragraphs have been revised and updated with current data from the Small Business Administration.

 The “Women as Small-Business Owners” section includes new data.

 A new Career Success feature, “Is Entrepreneurship in Your Future?,” describes how some entrepreneurs realize at an early age that they want to start a business.

 Table 5-2, “U.S. Business Start-ups, Closures, and Bankruptcies,” has been updated.

 The “Providing Employment” section has been revised using the latest data.

 A new Entrepreneurial Success feature, “Students by Day, Entrepreneurs by Night,” describes how a growing number of students are becoming entrepreneurs even before they graduate.

 A new Personal Apps feature cautions students that writing a business plan won’t guarantee their success, but it will help them think through many of the issues that can trip up entrepreneurs.

 The “SCORE” section has been revised and includes new data.

 The “SBA Financial Assistance” section has been revised with a new example of the agency helping 16,800 businesses after Hurricane Sandy hit the Northeast.

 The section “Small-Business Investment Companies” includes the most recent available data.

 “The Growth of Franchising” section has been revised with new information about the National Black McDonald’s Operators Association.

 In the section “Global Perspectives in Small Business,” a new example explains that more than 70 percent of the world’s purchasing power is outside of the United States and 85 percent of the world’s economic growth will be overseas over the next five years.

 The Murray’s Cheese video case has been replaced with a new video case entitled “From Two Men and a Truck to 220 Franchises and 1,400 Trucks.” This company’s annual revenue is $275 million, and it handles more than 400,000 moves every year.

 The Building Skills for Career Success section contains a new Social Media Exercise that describes how businesses are using social networks.

5.3 QUICK REFERENCE GUIDE

Instructor Resource Location

Transition Guide

Learning Objectives

Brief Chapter Outline

Comprehensive Lecture Outline

At Issue: Should fast-food restaurants be curtailed from national franchising?

Career Success Is Entrepreneurship in Your Future?

Entrepreneurial Success Students by Day, Entrepreneurs by Night

Inside Business Dunkin’ Brands Helps Franchisees Brew up Sales

Marginal Key Terms List

Concept Checks

Discussion Questions

Video Case (From Two Men and a Truck to 220 Franchises and 1,400 Trucks) and Questions

Building Skills for Career Success

IM Quiz I & Quiz II

Classroom Exercises

Running a Business—Part 2

Building a Business Plan—Part 2

IM, pp 155–156

Textbook, p. 127; IM, p. 158

IM, pp 158–159

IM, pp. 159–166

IM, p. 166

Textbook, p. 133

Textbook, p. 138

Textbook, p. 128

Textbook, p. 151

Textbook, pp 130, 134, 136, 140, 144, 145, and 149

Questions and Suggested Answers, IM, pp 167–170

Textbook, p. 151

Questions and Suggested Answers, IM, pp 170–171

Textbook, p. 153

Questions and Suggested Answers, IM, pp. 171–172

Textbook, p. 154

Suggested Answers, IM, pp 172–173

IM, pp. 174–176

Answers, IM, p. 176

IM, pp 177–178

Textbook, pp. 155–156; IM, p 187

Textbook, p 157; IM, p 188

5.4 LEARNING OBJECTIVES

After studying this chapter, students should be able to:

1. Define what a small business is and recognize the fields in which small businesses are concentrated.

2. Identify the people who start small businesses and the reasons why some succeed and many fail.

3. Assess the contributions of small businesses to our economy.

4 Describe the advantages and disadvantages of operating a small business.

5. Explain how the Small Business Administration helps small businesses.

6. Explain the concept and types of franchising.

7 Analyze the growth of franchising and its advantages and disadvantages.

5.5 BRIEF CHAPTER OUTLINE

I. Small Business: A Profile

A. The Small-Business Sector

B Industries That Attract Small Businesses

1. Distribution Industries

2. Service Industries

3 Production Industries

II. The People in Small Businesses: The Entrepreneurs

A. Characteristics of Entrepreneurs

B. Other Personal Factors

C. Motivation

D. Women as Small-Business Owners

E. Teenagers as Small-Business Owners

F. Why Some Entrepreneurs and Small Businesses Fail

III. The Importance of Small Businesses in Our Economy

A. Providing Technical Innovation

B Providing Employment

C Providing Competition

D. Filling Needs of Society and Other Businesses

IV. The Pros and Cons of Smallness

A. Advantages of Small Business

1. Personal Relationships with Customers and Employees

2 Ability to Adapt to Change

3. Simplified Record Keeping

4. Independence

5 Other Advantages

B. Disadvantages of Small Business

1 Risk of Failure

2. Limited Potential

3. Limited Ability to Raise Capital

C The Importance of a Business Plan

D. Components of a Business Plan

V. The Small Business Administration

A. SBA Management Assistance

1. Management Courses and Workshops

2. SCORE

B. Help for Minority-Owned Small Businesses

1. Small-Business Institutes

2. Small-Business Development Centers

3 SBA Publications

C. SBA Financial Assistance

1. Regular Business Loans

2 Small-Business Investment Companies

VI. Franchising

A What Is Franchising?

B. Types of Franchising

VII. The Growth of Franchising

A. Are Franchises Successful?

B. Advantages of Franchising

1 To the Franchisor

2. To the Franchisee

C. Disadvantages of Franchising

VIII. Global Perspectives in Small Business

5.6 COMPREHENSIVE LECTURE OUTLINE

I. SMALL BUSINESS: A PROFILE. According to the Small Business Administration (SBA), a small business is “one which is independently owned and operated for profit and is not dominant in its field.” Table 5-1 provides the SBA small-business size standards for various industries. The SBA periodically revises and simplifies its small-business size regulations. Most small firms have annual sales well below the maximum limits in the SBA guidelines.

Teaching Tip: The “So You Think You Know Entrepreneurs?” fun quiz can be used here.

A. The Small-Business Sector. In the United States, it typically takes less than a week and $600 to establish a business as a legal entity. There are about 27.9 million businesses in this country. Approximately 18,500 of these employ more than 500 workers. According to a recent study, 69 percent of new businesses survive at least two years, about 50 percent survive at least five years, and 31 percent survive at least 10 years. The primary reason for these failures is mismanagement resulting from a lack of business know-how.

B. Industries That Attract Small Businesses. Small enterprise ranges from corner newspaper vending to the development of optical fibers. The following industries are dominated by small businesses:

 Real estate, rental, and leasing: 74 percent

 Leisure and hospitality services: 61 percent

 Construction: 86 percent

The various kinds of businesses are generally grouped into three broad categories:

1. Distribution Industries. This category includes retailing, wholesaling, transportation, and communications industries that are concerned with the movement of goods from producers to consumers and it accounts for about 33 percent of all small businesses.

2. Service Industries. This category accounts for about 48 percent of all small businesses. Of these, about 75 percent provide nonfinancial services, and about 8 percent offer financial services. An increasing number of self-employed Americans are running service businesses from home.

3 Production Industries. This category includes the construction, mining, and manufacturing industries. It accounts for about 19 percent of all small businesses.

II. The People in Small Businesses: The Entrepreneurs. The United States is quite entrepreneurial when compared with other countries. Small businesses are typically managed by the people who started and own them. More than 70 percent of Americans would prefer being an entrepreneur to working for someone else. This compares with 46 percent of adults in Western Europe and 58 percent of adults in Canada.

A. Characteristics of Entrepreneurs. Entrepreneurial spirit is the desire to create a new business

B. Other Personal Factors. The following personal factors contribute to small-business success:

1. Independence

2. A desire to determine one’s own destiny

3. A willingness to find and accept a challenge

4. Family background.

Teaching Tip: Ask students how many of them have parents who run their own small business and if they are interested in small business themselves.

5. Age. More than 70 percent of people who start their own businesses are between 24 and 44 years old. (See Figure 5-1.)

C. Motivation. The motivation to start a business may come from losing a job, having an idea for a new product, or as a result of commercializing a hobby.

D. Women as Small-Business Owners

1. Women make up 51 percent of the U.S. population. According to the SBA, women owned at least 30 percent of all small businesses in 2012.

2. Women own 66 percent of the home-based businesses in the United States, and the number of men in home-based businesses is growing rapidly.

3. About 7.8 million women-owned businesses in the United States provide almost 7.6 million jobs and generate $1.2 trillion in sales

4. Women-owned businesses have proven that they are more successful. They are financially sound, and their risk of failure is lower than average.

5. Just over half of small businesses are home based, and 91 percent have no employees.

E Teenagers as Small-Business Owners. High-tech teen entrepreneurship is definitely exploding.

1. Young entrepreneurs must juggle school, their social life, and a high-tech workload.

2. Knowledge and ability especially management ability are probably the most important factors involved.

F Why Some Entrepreneurs and Small Businesses Fail. Small businesses are prone to failure. Capital, management, and planning are the key ingredients in the survival of a small business.

1. Small businesses can experience a number of money-related problems, such as insufficient capital for start-up and continuous cash flow obstacles.

2. Money, time, personnel, and inventory need to be effectively managed if a small business is to succeed.

3. Success and expansion sometimes lead to problems. The entrepreneur must plan carefully and adjust to potentially new and disruptive situations.

III. THE IMPORTANCE OF SMALL BUSINESSES IN OUR ECONOMY

A. Providing Technical Innovation. Studies show that the incidence of innovation among small-business workers is significantly higher than among workers in large businesses. Small firms produce two and a half times as many innovations as large firms relative to the number of persons employed. Small firms employ 43 percent of all high-tech workers and produce 16 to 17 more patents per employee than large patenting firms.

B Providing Employment. Small businesses represent 99.7 percent of all employers, employ over one-half of the private workforce, and provide about two-thirds of the net new jobs added to our economy.

C. Providing Competition. Small businesses challenge larger, established firms in many ways, prompting them to become more efficient and more responsive to consumer needs.

D. Filling Needs of Society and Other Businesses. Many large firms may be unwilling or unable to meet the special needs of smaller groups of consumers. Such groups create almost perfect markets for small companies. Small firms also provide a variety of goods and services to one another and to much larger firms.

Teaching Tip: Ask your students what unfulfilled needs might exist in their communities or consider using the “Most Creative Business/Product Combination Contest” here.

IV. THE PROS AND CONS OF SMALLNESS. For many small-business owners, the advantages of remaining small far outweigh the disadvantages.

A Advantages of Small Business

1 Personal Relationships with Customers and Employees. The owners of retail shops get to know many of their customers by name and deal with them on a personal basis. Through such relationships, small-business owners often become involved in social, cultural, and political affairs within the community. The personal service offered to customers is a major competitive weapon of small businesses.

2. Ability to Adapt to Change. As his or her own boss, the owner-manager of a small business does not need anyone’s permission to adapt to change. Through customer relationships, owners are made aware of changes in people’s needs as well as the activities of competitors.

3. Simplified Record Keeping. Many small firms need to keep only a simple set of records.

4. Independence. Small-business owners don’t have to punch in and out, bid for vacation times, take orders from superiors, or worry about being fired or laid off.

5. Other Advantages. Small-business owners also enjoy a number of the advantages of sole proprietorship, which were discussed in Chapter 4.

B. Disadvantages of Small Business

1. Risk of Failure. About 50 percent of small firms close their doors within the first five years.

2. Limited Potential. Many small firms are simply the means of making a living for the owner and his or her family. Such businesses are unlikely to grow much. Also, employees have limited opportunity for advancement.

3 Limited Ability to Raise Capital. Small businesses typically have a limited ability to obtain capital. As shown in Figure 5-2, most small-business financing comes out of the owner’s pocket.

C. The Importance of a Business Plan. A business plan is a carefully constructed guide for the person starting a business. Potential investors examine the business plan to determine if they would like to invest in or help finance a new venture.

D. Components of a Business Plan

1. The business plan should be easy to read, uncluttered, and complete. (See Table 53 for the components of a business plan.)

2. Table 5-4 provides a business plan checklist. The plan should answer the following four questions:

a) What exactly are the nature and mission of the new venture?

b) Why is this new enterprise a good idea?

c) What are the businessperson’s goals?

d) How much will the new venture cost?

V. THE SMALL BUSINESS ADMINISTRATION. The Small Business Administration (SBA), created by Congress in 1953, is a governmental agency that assists, counsels, and protects the interests of small businesses in the United States. It helps people get into business and stay in business. The agency provides assistance to owners and managers of prospective, new, and established small businesses.

A. SBA Management Assistance. The SBA places special emphasis on improving the management ability of the owners and managers of small businesses. Recently, the SBA indicated that it provided management and technical assistance to nearly 1 million small businesses.

1. Management Courses and Workshops. The management courses offered by the SBA cover all the functions, duties, and roles of managers. The Small Business Training Network is an online training network consisting of 23 courses, workshops, and resources.

2 SCORE. The Service Corps of Retired Executives (SCORE) is a group of more than 13,000 retired businesspeople who volunteer their services to small businesses through the SBA. A small-business owner can request free counseling from SCORE. Recently, SCORE volunteers served over 523,800 small-business people

B Help for Minority-Owned Small Businesses. The SBA makes a special effort to assist those minorities who want to start small businesses or expand existing ones. The Minority Business Development Agency awards grants to develop and increase business opportunities for members of racial and ethnic minorities. Helping women become entrepreneurs is also a special goal of the SBA.

1 Small-Business Institutes. A small-business institute (SBI) is a group of senior and graduate students in business administration who provide management counseling to small businesses.

2. Small-Business Development Centers. A small-business development center (SBDC) is a university-based group that provides individual counseling and practical training to owners of small businesses. In 2012, there were over 900 SBDC locations, primarily at colleges and universities, assisting small businesses.

3. SBA Publications. The SBA issues management, marketing, and technical publications dealing with hundreds of topics of interest to present to prospective managers of small firms.

C. SBA Financial Assistance. The SBA offers special financial assistance programs that cover a variety of situations. For example, the Supplemental Terrorist Activity Relief (STAR) program has made $3.7 billion in loans to 8,202 small businesses harmed or disrupted by the September 11 terrorist attacks. In early 2013, the SBA guaranteed over $1 billion in loans to businesses, homeowners, and renters impacted by Hurricane Sandy. However, its primary function is to guarantee loans to eligible businesses.

1. Regular Business Loans. Most of the SBA’s business loans are actually made by private lenders such as banks, but repayment is partially guaranteed by the agency. The average size of an SBA-guaranteed business loan is about $300,000 for an average duration of about eight years.

2 Small-Business Investment Companies. Venture capital is money invested in small and sometimes struggling firms that have the potential to become very successful. To help such companies, the SBA licenses, regulates, and provides financial assistance to small-business investment companies (SBICs), which are privately owned firms that provide venture capital to small enterprises that meet their investment standards. SBICs are intended to be profit-making organizations. However, SBA aid allows them to invest in small businesses that would not otherwise attract venture capital.

VI. FRANCHISING. A franchise is a license to operate an individually owned business as though it were part of a chain of outlets or stores. Often, the business itself is also called a franchise.

A What Is Franchising?

1 Franchising is the actual granting of a franchise.

2 The franchisor is an individual or organization granting a franchise

3 The franchisee is a person or organization purchasing a franchise. Table 5-5 lists some items that would be covered in a typical franchise agreement.

B Types of Franchising. Franchising arrangements fall into three categories.

1. A manufacturer authorizes a number of retail stores to sell a certain brand-name item.

2. A producer licenses distributors to sell a given product to retailers.

3 The franchisor supplies brand names, techniques, or other services, instead of a complete product. The franchisor’s primary responsibility is the careful development and control of marketing strategies.

VII. The Growth of Franchising. Franchising has experienced enormous growth since the mid1970s. This growth has generally paralleled the expansion of the fast-food industry.

A Are Franchises Successful?

1 The success rate for businesses owned and operated by franchisees is significantly higher than the success rate for other independently owned small businesses.

2 Franchising, however, is not a guarantee of success for either franchisees or franchisors.

Teaching Tip: Display a list of the top 10 franchises Ask your students which of these franchises they would invest in and why. This could also be a short group or partner activity.

B Advantages of Franchising

1 To the Franchisor

a) The franchisor gains fast and well-controlled distribution of its products without incurring the high cost of constructing and operating its own outlets.

b) The franchisor benefits from the fact that the franchisee, usually a sole proprietor, is highly motivated to succeed. The success of the franchise means more sales, which translate into higher royalties for the franchisor.

2. To the Franchisee

a) The franchisee gets the opportunity to start a business with limited capital and to make use of the business experience of others. If business problems arise, the franchisor gives the franchisee guidance and advice.

b) The franchisee receives materials to use in local advertising and can take part in national promotional campaigns sponsored by the franchisor.

C. Disadvantages of Franchising. The disadvantages of franchising mainly affect the franchisee, because the franchisor retains a great deal of control. The franchisor’s contract can dictate every aspect of the business.

1. Franchise holders typically pay a one-time franchise fee plus continuing royalty and advertising fees collected as a percentage of sales.

2. Franchise operators must work hard, often putting in 10- and 12-hour days, six days a week.

3 Sometimes a franchise is so successful that the franchisor opens its own outlet nearby, in direct competition.

4 The International Franchise Association advises prospective franchise purchasers to investigate before investing and to exercise caution before buying.

VIII. Global Perspectives in Small Business

A For American small businesses, the world is becoming smaller.

B The SBA offers help to the nation’s small-business owners who want to enter the world markets.

C. International trade will become more important to small-business owners as they face unique challenges in the new century.

Teaching Tip: The “Ok I Have an Idea Now What?” group activity could be used here. It takes approximately 20 minutes.

At Issue

Franchising has been both heralded and condemned in this country. There are many advantages and disadvantages to franchise ownership for both the franchisee and the franchisor, as well as for the general public. Some critics claim that fast-food franchises have all but eliminated the culinary arts from this country. Should fast-food restaurants be curtailed from national franchising?

For Franchising Against Franchising

1. Franchising provides national and sometimes international consistency of products and services for people who must travel and may be uncertain about local businesses.

2. Franchises bring jobs and incomes to local communities that smaller, local businesses cannot create.

1. Franchising destroys the local entrepreneur’s incentive inasmuch as infant businesses cannot compete initially with large corporate franchises.

2. When a franchise is sold, many of the franchise dollars and subsequent installment percentages are returned to the corporate office for use in other communities. As a result, money is actually removed from local communities.

3. Franchising allows people of moderate and wealthy means a meaningful and convenient way to invest in worthwhile businesses that directly serve the public. It also enables those with less business experience to own their own business with less risk.

3. Franchising rarely allows an ownermanager enough flexibility to creatively manage, develop new ideas and ways of doing things, or “finetune” the business to local needs.

5.7 TEXTBOOK ANSWER KEYS

5.7a Concept Checks

Concept Check (p. 130)

1. What information would you need to determine whether a particular business is small according to SBA guidelines?

The SBA’s guidelines for smallness are as follows:

a. Manufacturing, mining industries: maximum number of employees: 500

b. Wholesale trade: maximum number of employees: 100

c Agriculture: maximum annual receipts of up to $750,000

d. Retail trade: maximum annual sales or receipts of $7 million

e. General and heavy construction: maximum average annual receipts of $33.5 million

f. Dredging: maximum average annual receipts of $20 million

g. Special trade contractors: maximum average annual sales of up to $14 million

h. Travel agencies: maximum average annual receipts of $3.5 million

i. Business and personal services: maximum annual receipts of up to $7 million, except for architectural, engineering, surveying, mapping, dry cleaning, and carpet cleaning: up to $4.5 million

2. Which two areas of business generally attract the most small business? Why are these areas attractive to small business?

Real estate, hospitality, and construction industries attract many small businesses. These industries are attractive because entrepreneurs are generally more familiar with them. They may also require a lower initial investment than other industries.

3. Distinguish among service industries, distribution industries, and production industries. Service industries provide nonfinancial and financial services to the public. Distribution industries include retailing, wholesaling, transportation, and communications. Production industries include construction, mining, and manufacturing.

Concept Check (p. 134)

1. What kinds of factors encourage certain people to start new businesses?

The factors that prompt certain people to start new businesses are the desire to create a new business, independence, the desire to determine one’s own destiny, and the willingness to find and accept a challenge.

2. What are the major causes of small-business failure? Do these causes also apply to larger businesses?

The major causes of small-business failure are (1) lack of experience, (2) lack of money, (3) the wrong location, (4) mismanagement of inventory, (5) poor credit-granting practices, and (6) poorly planned expansion. The last three causes also apply to larger businesses.

Concept Check (p. 136)

1. Briefly describe four contributions of small business to the American economy. Small businesses contribute to the American economy in that they (1) provide technical innovation, (2) employ approximately one-half of all nongovernment workers, (3) provide competition, and (4) fill the needs of society and other businesses.

2. Give examples of how small businesses fill needs of society and other businesses. Small firms provide a variety of goods and services to each other and to much larger firms. Sears, Roebuck & Co. purchases merchandise from approximately 12,000 suppliers and most of them are small businesses. General Motors relies on more than 32,000 companies for parts and supplies and depends on more than 11,000 independent dealers to sell its automobiles and trucks. Large firms generally buy parts and assemblies from smaller firms; it is less expensive than manufacturing the parts in their own factories. This lower cost eventually is reflected in the price that consumers pay for their products. It is clear that small businesses are a vital part of our economy and that, as consumers and as members of the labor force, we all benefit enormously from their existence.

Concept Check (p. 140)

1. What are the major advantages and disadvantages of smallness in business?

The advantages of smallness in business are (1) personal relationships with customers and employees, (2) the ability to adapt to change, (3) simplified record keeping, (4) independence, (5) the opportunity to keep all profits, and (6) the low cost of going into business. The disadvantages of smallness are (1) risk of failure, (2) limited potential, (3) limited ability to obtain capital, (4) limited management skills of owners, and (5) lack of opportunity.

2. What are the major components of a business plan? Why should an individual develop a business plan?

As illustrated in Table 5-3, the components of a business plan are the introduction, executive summary, benefits to the community, company and industry, management team, manufacturing and operations plan, labor force, marketing plan, financial plan, exit strategy, critical risks and assumptions, and appendix. The business plan should help the entrepreneur answer the following questions:

a. What exactly is the nature and mission of the new venture?

b. Why is this new enterprise a good idea?

c What are the businessperson’s goals?

d. How much will the new venture cost?

Concept Check (p. 144)

1. Identify six ways in which the SBA provides management assistance to small businesses. The SBA provides the following assistance:

a Management courses and workshops

b. Service Corps of Retired Executives: a group of retired business executives who volunteer their services to small-business owners

c. Help for minority-owned small businesses

d. Small-business institutes: groups of senior and graduate students in business administration who provide management counseling

e. Small-business development centers: university-based groups that provide individual counseling and practical training to small-business owners

f. SBA publications

2. Identify two ways in which the SBA provides financial assistance to small businesses.

a The SBA grants regular business loans.

b. Small-business investment companies (SBICs) provide venture capital to small firms that have the potential to become very successful.

3. Why does the SBA concentrate on providing management and financial assistance to small business?

The SBA was created to provide assistance to prospective new and established small businesses so that they could compete with larger, more established firms.

4. What is venture capital? How does the SBA help small businesses to obtain it?

Venture capital is money that is invested in small and sometimes struggling firms that have the potential to become very successful. The SBA licenses, regulates, and provides financial assistance to small-business investment companies (SBICs). SBICs provide financial assistance (venture capital) to small enterprises. The SBA aid allows SBICs to invest in small businesses that would not otherwise attract venture capital.

Concept Check (p. 145)

1. Explain the relationships among a franchise, the franchisor, and the franchisee. The franchise is an individually owned business operated as though it were part of a chain. The franchisor is the individual or firm granting the franchise. The franchisee is the person or firm purchasing the franchise.

2. Describe the three general categories of franchising arrangements.

Franchising arrangements fall into three general categories. In the first approach, a manufacturer authorizes a number of retail stores to sell a certain brand-name item. In the second type of franchising arrangement, a producer licenses distributors to sell a given product to retailers. In a third form of franchising, a franchisor supplies brand names, techniques, or other services instead of a complete product.

Concept Check (p. 149)

1. What does the franchisor receive in a franchising agreement? What does the franchisee receive? What does each provide?

The franchisor receives fast and selective distribution of its products without incurring high costs. The franchisor provides a known and advertised business name, management skills, a method of doing business, and the required training and materials. The franchisee gets the opportunity to start a business with limited capital and to make use of the business experience of others. If problems arise, the franchisor gives the franchisee guidance and advice. The franchisee provides labor and capital.

2. Cite one major benefit of franchising for the franchisor. Cite one major benefit of franchising for the franchisee.

The major advantage for the franchisor is fast and selective distribution of its products without incurring the high cost of constructing and operating its own outlets. The major advantage for the franchisee is the opportunity to start a business with limited capital.

3. How does the SBA help small-business owners who want to enter the world markets?

The SBA’s efforts include counseling small firms on how and where to market overseas, matching U.S. small-business executives with potential overseas customers, and helping exporters to secure financing. The agency brings small U.S. firms into direct contact with potential overseas buyers and partners. The SBA International Trade Loan program provides guarantees of up to $5 million in loans to small-business owners. These loans help small firms in expanding or developing new export markets.

5.7b Discussion Questions

1. Most people who start small businesses are aware of the high failure rate and the reasons for it. Why, then, do some take no steps to protect their firms from failure? What steps should they take?

Entrepreneurs are often too impulsive and eager to get started. They go ahead without paying much attention to planning. They should take the following steps before going into business:

a. Get advice on management skills from experienced people in business.

b Have enough capital not just to start the business but to keep it going during the building-up period.

c Investigate the right location for the business.

d Get advice on inventory control and credit-granting practices.

e. Wait to expand until they have sufficient capital and experience to do so.

2. Are the so-called advantages of small business really advantages? Wouldn’t every smallbusiness owner like his or her business to grow into a large firm?

Yes, the benefits inherent in small business often are lost as a business expands. Some smallbusiness owners are content to stay as a small business. But for most owners, the benefits of business growth far outweigh the additional burdens.

3. Do average citizens benefit from the activities of the SBA, or is the SBA just another way to spend our tax money?

The average citizen benefits greatly by having tens of thousands of more competitive businesses from which to select goods and services. These businesses might not have started or perhaps could not have continued without the assistance of the SBA.

4. Would you rather own your own business independently or become a franchisee? Why?

Students’ answers will vary but will, no doubt, be based on the advantages and disadvantages of business ownership. The advantages of business ownership are (1) pride in ownership, (2) management flexibility, (3) retention of all profits, and (4) ease of transfer. The advantages of a franchise are (1) ease of start-up, (2) benefits of an established name, (3) professional/expert assistance, and (4) managerial guidance.

5.7c Comments on Video Case

From Two Men and a Truck to 220 Franchises and 1,400 Trucks

Suggestions for using this video case are provided in the Pride/Hughes/Kapoor Video Guide.

1. Which advantages of small business helped Mary Ellen Sheets establish and grow Two Men and a Truck?

One advantage that helped Two Men and a Truck grow was the ability to form personal relationships by having employees follow the “Grandma Rule” of showing respect and caring for customers. This personal touch attracted new customers, kept existing customers loyal, and created a unique image for the company. Another advantage that helped Two Men and a Truck was its independence. Mary Ellen Sheets could schedule moves when her two sons were home from college, for example. She also made her own decisions about buying a larger truck and hiring additional employees when demand was growing. And she decided to donate the first profits to charity, another aspect of independence. Becoming known for community involvement helped Two Men and a Truck establish itself in the early years.

2. Which disadvantages of small business did Two Men and a Truck have to overcome? If you had been part of the business at the start, what suggestions would you have offered for overcoming these issues?

One disadvantage the company had to overcome was the risk of failure. When Mary Ellen Sheets bought the larger truck and hired new employees, she had no way of knowing how quickly this financial outlay would lead to higher revenue and profitability if at all. Demand for moving services could have evaporated so suddenly that Two Men and a Truck would be stuck with a large truck and have to lay off workers. A second disadvantage was limited potential. At first, the business consisted of two high school guys doing moving jobs in an old pickup truck. Once they graduated and entered college, their mother had to replace them if she was to keep the business going. Students may offer a variety of suggestions for overcoming these issues (such as recruiting neighbors and classmates to handle moving jobs when the original “two guys” were unavailable).

3. Do you think it’s a good idea for Two Men and a Truck to offer franchises outside of North America? Why or why not? What kinds of questions would international franchisees be likely to ask the company?

Students who believe Two Men and a Truck should expand outside North America may note that this will enable the company to take advantage of economic expansion and market opportunities far from its headquarters, instead of relying solely on North American markets for growth. Students who take the opposite view may say that it will be difficult for Two Men and a Truck to enforce its customer service standards if franchisees are located at a great distance from headquarters which could hurt the firm’s reputation. International franchisees are likely to ask questions such as: How much will it cost to get started in this franchise business, and what do I get for my money? What qualifications make for a successful franchisee in the moving business? What kind of service and support will Two Men and a Truck provide to franchisees outside the home country?

5.7d Building Skills for Career Success

1. Social Media Exercise

American Express’s “Open Forum” is a website that is designed for small-business owners (www.openforum.com). Do a search using a search engine like Google or Bing and you will also find its presence on Tumblr and Pinterest. Take a look at the Open Forum website and answer the following questions.

1. What questions can Open Forum answer for business owners?

Open Forum connects business owners and helps them manage and grow their companies. The site include articles to assist business owners with information on decision making and provides them with current information on many topics. The “Highlight” section contains topic areas with current information that will help business owners answer many questions. Categories include Sales, Money, Productivity, Managing, Marketing, Technology, and Innovation among others.

2. Develop a list of five issues or topics that you feel illustrates how American Express does an effective job of presenting information on this website. Students might include some of the following topics:

 American Express has divided the “Business” section into sub-categories. The OPEN Small Business, Corporations, and Merchants categories each contain information relating specifically to those target groups.

 There are videos, articles, podcasts, and blogs that provide multiple avenues of information.

 Online communities such as Twitter, Facebook, LinkedIn, and Tumblr connect business owners.

 AmEx is able to market to business owners some of its product line such as travel services, travel insurance, and credit cards.

 Business owners can manage their AmEx accounts online through this site.

 Apps allow users to link to other sites such as Yola, which enables business owners to create a professional website, or pagemodo, which enables creation of a custom business Facebook page

 Businesses are organized by industry: Manufacturing; Entertainment & Recreation; Marketing, Advertising & Creative Services; Health Care; and Educational Services among others.

 There are many resources available, but the site offers “Most Popular,” “Top Story,” and “What’s New” categories to pare down the available articles and videos.

2. Building Team Skills

A business plan is a carefully constructed guide for starting a business. Students should follow the outline in Table 5-4 in preparing their business plan.

3. Researching Different Careers

Successful entrepreneurs are unique people. They are highly motivated, self-directed, actionoriented, highly energetic, willing to take risks, and willing to work long hours. Today, entrepreneurs are older with more education, more experience, and more managerial skills than their predecessors. People with many years of experience are opening their own businesses after losing their jobs of many years and not being able to find employment that meets their needs.

5.8 QUIZZES I AND II

True-False Questions

Select the correct answer.

Quiz I

1. T F A small business is one that is dependent, is operated as a not-for-profit organization, and is not dominant in its field.

2. T F The primary reason for small-business failure is mismanagement resulting from lack of business know-how.

3 T F The type of person likely to start a small business is independent, has a desire to determine his or her own destiny, and is willing to find and accept a challenge.

4. T F The SBA is more likely to help nonminority small businesses.

5. T F Franchising is the actual granting of a franchise.

Multiple-Choice Questions

Circle the letter before the most accurate answer.

6. A government agency that was created to assist, counsel, and protect the interests of small businesses in the United States is called

a. Small Business Institutes.

b. Small Business Investment Companies.

c the Small Business Administration.

d. Small Business Development Centers.

e Small Business Guidance Centers.

7. Businesses seem to cluster in which of the following industries?

a. Service industries

b Distribution industries

c. Production industries

d. Financial industries

e All of the above

8. A group of retired businesspeople who volunteer their time to help small-business owners is known as

a. SCORE.

b. ACE.

c SBDC.

d. SBI.

e SBIC.

9. A privately owned company that provides venture capital to small firms is a(n)

a. small-business association.

b small-business investment company.

c. small-business institute.

d. active corps of executives.

e small-business development center.

10. The person or firm that purchases a franchise is called a(n)

a. entrepreneur.

b franchisor.

c. franchisee.

d. enterpriser.

e. capitalist.

Quiz II

True-False Questions

Select the correct answer.

1 T F An advantage to the franchisor is that he or she gains fast and selective distribution of the product.

2 T F An advantage for the franchisee is the opportunity to start a business with limited capital.

3. T F The majority of small businesses are found in the production industry.

4. T F Because of their small size, small businesses affect the U.S. economy very little.

5. T F Planning is one vital element in the success of a small business.

Multiple-Choice Questions

Circle the letter before the most accurate answer.

6 The individual or firm that grants a franchise is known as the

a SBA.

b. franchisor.

c. franchisee.

d. entrepreneur.

e. grantor.

7 Small businesses provide

a technical innovation.

b. employment.

c competition.

d. for the needs of society.

e all of the above.

8. One advantage a small business has is

a. no risk of failure.

b limited management skills of owners

c. developing personal relationships with customers and employees.

d. sharing profits with employees.

e limited ability of raising capital.

9. Groups of senior and graduate students in business administration who provide management counseling are called

a. small-business institutes.

b. small-business development centers.

c active corps of business students.

d. small-business investment centers.

e small-business senior centers.

10. The main disadvantage of franchising affects

a. the consumer.

b the franchisor.

c. the franchisee.

d. both b and c.

e. the grantor.

5.9 ANSWER KEY FOR QUIZZES I AND II

5.10 CLASSROOM EXERCISES

5.10a Homework Activities

 Article Report. Have students bring in an article that shows an example of an entrepreneur.

 Researching and Following a Company Throughout the Course (continuing assignment). Have students research the history of their company and describe how it started. With each continuing assignment, students should document their sources of information, as they would with any research project.

 Characteristics of Entrepreneurs. To gain a better understanding of the personality of the entrepreneur, have each student research and report on a well-known entrepreneur (these can be found in the Inc. magazine profiles or in Fast Company magazine). After the reports, students can compare notes on the characteristics the entrepreneurs share. A fun way to do this is to hand out five post-its to each student and have them write down up to five different characteristics of that entrepreneur. Have the students arrange their post-its in groups on the wall. See how many end up in groups such as “persevered in the face of failure,” or “good in high tech,” etc.

 Interviewing a Small-Business Owner. To help students understand the different challenges facing small-business owners, you may have them interview various small-business owners and report their findings to the class. Some questions could include the nature of their daily activities, dealing with constant change, surviving in tough times, and the differences they perceive between what they do and what employees in larger organizations do.

5.10b Classroom Activities

 Fun Quiz.

Using the “So You Think You Know Entrepreneurs?” questions as a handout or PowerPoint, have students take this quick (five minutes or less) individual quiz that can be used as a discussion starter. Answers are provided.

 Let’s Brainstorm! Group Activity.

Arrange students into groups of five or six. Ask one student to be a note taker. Use the handout provided. The students will have 10 minutes to brainstorm possible service business ideas for aging baby-boomers. The purpose of the exercise is to encourage them to think of unfulfilled needs for an important and moneyed target group. Encourage them to be creative and not to be concerned with feasibility at this stage. See instructor notes for some suggestions to use in your debriefing or to get the students started.

 Ok I Have an Idea Now What? Group Exercise.

Arrange students into groups of four or five. In this exercise, students are asked to provide advice to a relative with a potentially attractive new product idea. The purpose of the exercise is to help students actively consider the factors involved in making a start-up business a success. They should have approximately 15 minutes to develop a plan. Upon completion, each group should share their recommendation with the class. Instructor notes are provided with some suggestions.

 Most Creative Business/Product Combination Contest Group Exercise.

This exercise gives students the opportunity to both be creative and compete in a fun atmosphere. It is a short exercise (10–15 minutes) that asks students to consider business synergy and cost reduction. The exercise can also be expanded to a longer homework assignment or presentation.

5.10c Exercise Handouts Follow on Next Pages

So You Think You Know Entrepreneurs?

There are many myths about entrepreneurs take the true-false quiz below and see how well you see past the stereotypes!

1. Most people start their own business to make lots of money.

2. You don’t need a lot of money to start a business.

3. It is important to have a great idea.

4. The bigger the risk, the bigger the reward!

5. Successful entrepreneurs are born to have their own business.

or F

6. If you haven’t started a business by the time you are 30, you are too old. T or F

7. You don’t need a business plan for success.

8. It is better to be creative than self-disciplined.

9. It is smarter to focus on the big picture instead of business details.

10. Most entrepreneurs are ethical people.

or F

or F

So You Think You Know Entrepreneurs?

1. Most people start their own business to make lots of money. False The number one reason is a desire for independence.

2. You don’t need a lot of money to start a business. True Most entrepreneurs start with $10,000 or less.

3. It is important to have a great idea. False A great idea helps, but companies like Sony and Walt Disney started without a great idea.

4. The bigger the risk, the bigger the reward! False Risk, while always present, must be managed. Successful entrepreneurs do it well.

5. Successful entrepreneurs are born to have their own business. False Sometimes inspiration doesn’t strike until you have worked for someone else for a while.

6. If you haven’t started a business by the time you are 30, you are too old. False You are never too old to start a business. Colonel Harland Sanders, born September 9, 1890, actively began franchising his chicken business at the age of 65.

7. You don’t need a business plan for success. False It is better to have one, but companies like Pizza Hut and Crate and Barrel started without one.

8. It is better to be creative than self-disciplined. False Hard work and discipline wins over creativity!

9. It is smarter to focus on the big picture instead of business details. False Details matter! The successful entrepreneur has a good grasp of all areas of the business.

10. Most entrepreneurs are ethical people. True Dishonesty is a recipe for failure. People will not trust or help someone without a reputation for integrity.

Let’s Brainstorm!

You and your team have been given the task of developing a new service business idea for a potential client. In the next five minutes, please brainstorm and list as many new service business ideas as you can. There are only a few rules. First, all ideas are acceptable at this stage. Nothing should be ruled out as silly, impractical, or even antisocial. Improvements on existing services should also be listed. Do not consider cost or practicality.

This service must appeal to aging baby-boomers 50 years old or older, who work in professional or high-level corporate careers. They work an average 60- to 80-hour week and make a minimum $100,000 per year. They like to look good, be social, and stay healthy. Time is a big issue for them.

HINT: Think of problems these folks may have that could be solved by a service. You have 10 minutes.

Let’s Brainstorm! Instructor Notes

One group of services might relate to health issues. For example:

 At-home teeth cleaning and whitening

 A service that fills out insurance forms and handles claims

 A message service that calls when any medical provider is running late

Another group might be related to domestic errands. For example:

 A service where someone comes in once a week to water plants, replace light bulbs, check for adjustments to be made to appliances or any other fixes

 At-home oil change for the car

A third group might be purchasing. Perhaps the following:

 Menu planner and grocery shopper

 Automatic replacement/delivery of items such as printer cartridges, paper, and other home office items

 Gift shopper, wrapper, and shipper

Other groupings could be social events, laundry, organization, travel, computer technology, etc.

OK—I Have an Idea—Now What?

Your Aunt Carole has come to you and your classmates for help with her new product. After years of frustration, aggravation, bites, and scratches from her beloved but bad-tempered long-haired cats when attempting to groom them, Aunt Carole has developed a new product the “Happy Pet” mat remover. The “Happy Pet” electronically stimulates individual hairs to separate with no pulling or tugging on sensitive skin. Even the worst mat comes out easily. It is no more than two ounces, small enough to fit the owner’s palm, and made of soft rubber. It would come with an automatic recharger similar to that of a cell phone.

You have done some research and found that according to the U.S. Pet Ownership & Demographics Sourcebook (2012), Americans own approximately 75 million cats. Even if only 20 percent of them have long hair, that is a substantial market for a small business.

In your groups, decide what advice you would give Aunt Carole to help her succeed. You might start by considering the market viability of the idea. How do you find out if people will actually pay for something like this? Who is most likely to buy it? You have 15 minutes.

OK I Have an Idea Now What? Instructor Notes

Some of the suggestions students will come up with might include:

 Seek help and guidance from the SBA, SCORE volunteers, Small Business Institutes and Development Centers, as well as SBA publications.

 Investigate grooming products available in pet stores, catalogs, and online. If similar products exist, how are they advertised and priced?

 Talk to friends and acquaintances who own cats and have similar problems. Find out how they feel about “Happy Pet.”

 Talk to several veterinarians and get their point of view.

 Find out if Aunt Carole actually wants to have a small business and is willing to put out the effort to get it started.

 Does Aunt Carole have enough money for the initial investment?

 Who will help Aunt Carole write the business plan so that she can get loans if she needs them?

 Determine what skills Aunt Carole has and what skills she will need to start and run a business.

Most Creative Business/Product Combination Contest

In a weak economy, people are generally interested in ways to save both time and money. Creative combinations of services and products can be very popular in such times. The bank that has a coffee shop on its premises, the laundromat and pub combination, or the drug store with a resident nurse practitioner all of these offer synergy and potential cost savings to both the business and the customer.

Your instructor has assigned you to a team. Your task in the next 10 to 15 minutes is to discuss possible combinations of products or businesses that might be attractive to hard-working people who are watching their budgets. Choose the most attractive alternative to present to your classmates. You will then be asked to vote for the best new business idea. You will have a limited time to present so be sure to indicate who the most likely customers for your new business will be and how they will benefit from the business. Also, be prepared to explain why these combinations work and if you see potential cost savings for either the business or the customer.

Most Creative Business/Product Combination Contest Instructor Notes

This is a short, fun exercise that encourages creativity. Small groups of three would be ideal for this project. You may choose to expand this exercise to request more detail from the students. You could direct students to the Kaboodle shopping website (http://www.kaboodle.com/gadgets/omg) and show them some of the very creative product ideas shown there.

This exercise could also be adapted for a presentation or homework, depending on time and the size of the class.

RUNNING A BUSINESS—PART 2

Suggestions for using this video case are provided in the Pride/Hughes/Kapoor Video Guide

Graeter’s: A Fourth-Generation Family Business

1. Graeter’s current management team bought the business from their parents, who did not have a formal succession plan in place to indicate who would do what. Do you think the current team should have such a plan specifying who is to step into the business, when, and with what responsibilities? Why or why not?

The current owners should definitely prepare a succession plan, not only to ensure the company continues to operate smoothly should one or more of them choose to retire, but also to prevent destructive conflicts and disagreements among family members about how the company should continue to be run at that time. While the three appear to have stepped smoothly and willingly into roles for which they have been trained since childhood, there is no guarantee that any of their own children will be ready or willing to assume the reins, or when. Preparing a succession plan provides the opportunity for all members of the family to discuss what they see as the company’s future and what role they hope to play in it, as well as what skills and education they might bring to that role, how they will share decision making, and so on. It will be particularly helpful if the company’s future management team is cross-generational.

2. Graeter’s hired management consultants to help improve its training procedures and expand distribution. “I think my cousins and I all have come to realize we can’t do it alone,” says the CEO. Why do you think the management team made this decision? Does the involvement of outside consultants move Graeter’s further from its roots as a family business?

Simply hiring consultants does not reduce the Graeter family’s control over or ownership of the firm. Franchising did more to reduce the family’s control than bringing consultants in. Management’s decision does suggest that the current owners recognize the opportunities they need to take advantage of in order for the business to remain competitive and grow. They also correctly assessed the challenges they would face in expanding and the specific training and skills they needed to add to their management team to make it happen.

3. Do you agree with Graeter’s decision to stop franchising? Explain your answer. Given the owners’ focus on maintaining the traditional, almost artisanal, quality of all Graeter’s products, it was probably a wise step to close the franchise operations, even though they had operated successfully. The company now owns not only all of its retail outlets but all of its manufacturing operations as well, substantially lowering the risk that quality might not remain high and uniform. This protects the brand’s reputation and also ensures that Graeter’s can expand without regard to potentially competing with any franchisees.

BUILDING A BUSINESS PLAN—PART 2

Before students start the company and industry component of the business plan, remind them to correct any weaknesses or problem areas in Part 1.

The Company and Industry Component

In this section, students should provide information about the background of the company; choice of legal business form; information on the products or services to be offered; and a description of potential customers, current competitors, and the business’s future.

Refer students to Chapter 4, “Choosing a Form of Business Ownership,” and Chapter 5, “Small Business, Entrepreneurship, and Franchises ” Both chapters should help students answer many questions in this section of the business plan. Specifically, refer students to content regarding:

 Partnerships, types of partners, the partnership agreement, and advantages and disadvantages of partnerships

 The corporate form of ownership and its advantages and disadvantages.

 Other types of business ownership.

 A profile of the small-business sector, industries that attract small businesses, the people in small business, and why small businesses fail.

 The importance of small businesses in our economy.

 Advantages and disadvantages of small business

Once again, refer students to the text to review the guidelines for developing a business plan. If students’ new business venture is a franchise, refer them to Chapter 5 for information about franchising and its advantages and disadvantages.

Review of Business Plan Activities

Make sure that students resolve any issues in this component of their business plan before beginning Part 3. Again, make sure that their answers in each part are consistent with the entire business plan. They should also write a brief statement that summarizes all the information for this part of the business plan.