Options for Organizing Small and Large Businesses

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Chapter 5 Options for Organizing Small and Large
Businesses
Learning Goals
Explain franchisings benefits for francisors and
franchisees. Summarize the forms of business
ownership and the advantages and disadvantages of
each form. Identify the levels of corporate
management. Describe recent trends in mergers
and acquisitions. Differentiate among private,
public, and collective ownership.
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Distinguish between small and large businesses
and identify common industries for small
firms. Discuss the economic and social
contributions of small business. Explain why
small businesses fail. Describe how the Small
Business Administration assists small-business
owners.
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MOST BUSINESSES ARE SMALL BUSINESSES  Eighty-nine
percent of firms with employees have fewer than
20.  Ninety-eight percent have fewer than 100
employees.  Almost half of all sales in the U.S.
are made by small businesses.  Small business is
a launching pad for entrepreneurs.
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What Is a Small Business?  Small Business
Administrations definition An independently
owned and operated firm that is not dominant in
its field. Generally  Manufacturing businesses
that employ fewer than 500 workers.
Wholesalers that employ fewer than 100
workers.  Retailers and other service providers
with annual sales no more than 6
million.  Agricultural business with annual
sales no more than 750,000.  Small Business
Administration has established standards for a
variety of industries.
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Typical Small Business Ventures  Compete against
the worlds largest corporations.
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Typical Small Business Ventures  Compete against
the worlds largest corporations.
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 Just over half small businesses are
home-based.  Since 1980, number of people
working from home has doubled.  Rise of the
personal computer, Internet, and other
communication devices.  Benefits include lower
costs, greater flexibility, freedom from cost of
commuting.  Drawbacks include isolation and
less visibility.  Internet can increase
competitiveness of small businesses. Three in
five small businesses have an Internet presence.
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CONTRIBUTIONS OF SMALL BUSINESS TO THE
ECONOMY Creating New Jobs  Three of every four
new jobs are created by businesses with fewer
than 500 employees.  Small businesses dominate
fields with strongest employment growth.  More
likely to employ younger and older workers than
large firms. More likely to hire workers who
traditionally have difficulty finding a job.
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Creating New Industries  Many of todays
successful high tech firmsMicrosoft, Dell, Cisco
Systems, Yahoo!, and Googlebegan as small
businesses. Fuel local economies.  Adapt to
fill needs of larger corporate community by
acting as outsource firms. Adapt to shifts in
consumer interests and preferences. Innovation  B
etter than large firms at developing new and
improved goods and services. Example Netflix,
an alternative to Blockbuster which began as a
small business and now has annual revenue
approaching 1.2 billion.  Small firms develop
twice as many innovations per employee as large
firms.
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WHY SMALL BUSINESSES FAIL  One new business in
every three closes permanently within two
years. Half fail after four years. More than
60 percent are out of business within six
years.  By the 10-year mark, 82 percent of all
small businesses have closed permanently.
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Management Shortcomings Founders strengths in
areas such as marketing or interpersonal
relations are often offset by shortcomings in
areas such as finance or order fulfillment.
Words of warning for new small-business
owners Learn the basics of business.
Recognize your own limitations. Do market
research to determine product viability and
likely competitors.
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Management Shortcomings
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Inadequate Financing Start-up expenses can eat
resources before revenue begins coming in.
Uneven cash inflows and outflows can create
difficulties. Inadequate or high-interest
financing.
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Government Regulation  Paperwork consumes
billions of small-business dollars each
year.  Congress eases some burdens through
exemptions for small businesses. Small
businesses with fewer than 49 employees exempt
from Family and Medical Leave Act. U.S.
Department of Labor provides online forms and
guidelines for meeting many legal requirements.
Small firms have fewer resources to handle tax
burdens of paying employees workers
compensation insurance, Social Security payments,
and unemployment benefits.
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INCREASING THE LIKELIHOOD OF SMALL BUSINESS
SUCCESS Creating a Business Plan Business plan A
written document that Provides an orderly
statement of a companys goals. The methods
by which it intends to achieve these goals.
The standards by which it will measure
achievements.
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 Common format An executive summary that
briefly answers the who, what, why, when, where,
and how questions for the business An
introduction that includes a general statement of
the concept, purpose, and objectives of the
proposed business Separate financial and
marketing sections that describe the firms
target market and marketing plan as well as
detailed financial forecasts of the need for
funds and when the firm is expected to break
eventhe level of sales at which revenues equal
costs Résumés of principalsespecially in
plans written to obtain financing
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Small Business Administration Small Business
Administration (SBA) The principle government
agency concerned with helping small U.S. firms
and advocate for small businesses within the U.S.
government. Financial Assistance from the SBA
Provides guarantees for small-business loans by
private lenders. Provides some direct loans,
but infrequently. Guarantees microloans to
start-ups and very small firms. Licenses Small
Business Investment Companies, which are run by
experienced venture capitalists. Underwrites
Active Capital, which matches entrepreneurs
looking for funding with potential investors.
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Other Specialized Assistance  Manages set-aside
programs that reserve federal contracts for small
businesses.  Provides information and advice
about starting, financing, and managing a small
business.  Manages the Small Business Training
Network Free online courses Inexpensive
training courses on topics such as taxes,
networking, and start-ups in cities and small
towns throughout the country Free online
library of more than 200 SBA publications and
additional business resources Business
Incubators Business incubator Organization that
provides temporary low-cost, shared facilities
to small start-up ventures.
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SMALL BUSINESS OPPORTUNITIES FOR WOMEN AND
MINORITIES The numbers of women-owned and
minority-owned businesses are growing much faster
than the overall growth in U.S.
businesses. Women-Owned Businesses More than
10.6 million women-owned firms in the U.S. employ
almost 19.1 million people.  Forty-eight
percent of U.S. businesses owned by women one in
five of these is owned by minority women.
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Start companies for a variety of reasons.
Driven by an idea that they believe can help
others.  Have a unique idea they want to bring
to life.  Desire to strike out on their own
when they lose jobs or feel frustrated corporate
bureaucracy or hit the so-called glass
ceiling.  Seek means to achieve flexible
working hours to spend more time with their
families. Fastest growth occurring in
construction, transportation and communications,
and agricultural services.  Have rapidly
established support networks.  Small Business
Administration programs  Nonprofit support
organizations
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Minority-Owned Businesses Growth in number of
businesses owned by African Americans, Hispanics,
and Asian Americans has outpaced overall growth.
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Minority-Owned Businesses Growth in number of
businesses owned by African Americans, Hispanics,
and Asian Americans has outpaced overall
growth.  Immigrants own nearly 15 percent of all
small businesses and are more likely to own small
businesses than native-born citizens.  Minority
business owners face considerable
obstacles  Tend to start businesses on smaller
scale. Have more trouble attracting
investors.  Have harder time getting bank loans.
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THE FRANCHISING ALTERNATIVE Franchising
Contractual agreement that specifies the methods
by which a dealer can produce and market a
suppliers good or service. The Franchising
Sector  U.S. franchises generate 1.53 million
in sales and employ more than 18 million people.
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Franchising Agreements Franchisee Individual
or firm purchasing the franchise. Receives
materials, equipment, and training from the
franchisor.  Franchisor Small-business owner
who contracts to sell the good or service of the
supplier. Typically provides building plans,
site selection help, managerial and accounting
systems, and other services to assist the
franchisee.
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Benefits and Problems of Franchising
Benefits Prior performance record
Recognizable company name Proven business
model  Tested management program Business
training  Problems Expensive franchise fees
and future payments Linked to reputation and
management of the franchise
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INCREASING THE LIKELIHOOD OF SMALL BUSINESS
SUCCESS Creating a Business Plan Business plan A
written document that Provides an orderly
statement of a companys goals. The methods
by which it intends to achieve these goals.
The standards by which it will measure
achievements.
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ALTERNATIVES FOR ORGANIZING A SMALL BUSINESS
Every firm falls in one of three categories of
ownership.
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Changing Legal Structures to Meet Changing
Needs A person considering launching a new
business should consider these factors when
deciding on the proper form of ownership
Personal financial situations and the need for
additional funds for the businesss start-up and
continued operation. Management skills and
limitations. Management styles and
capabilities of working with partners and other
members of top management. Concerns about
exposure to personal liability. Form of
ownership can be changed.
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ORGANIZING AND OPERATING A CORPORATION Types of
Corporations Fall into three categories
Domestic corporation in the state in which it is
incorporated. Foreign corporation in states in
which it does business other than the one in
which it is incorporated. Alien corporation in
countries in which it does business other than
where it is incorporated A single company can
operate under all three of these designations.
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The Incorporation Process Where to Incorporate
Can incorporate in any state. More than half of
Forbes 500 companies are incorporated in
Delaware. The Corporate Charter Most states
requires three incorporators. Incorporators
file articles of incorporation. State grants a
corporate charter, a legal document that
formally establishes a corporation.
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Corporate Management Stockholder Person or
organization who owns shares of stock in a
corporation. Stock Ownership and Stockholder
Rights Annual meetings, elections of company
officers. Shares classified two ways Owners
of preferred stock have limited voting rights,
receive dividends before common-stock holders,
and have first claim on assets (after creditors)
if corporation is dissolved. Owners of common
stock have limited voting rights but are last to
receive income distribution.
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Board of Directors Board of Directors Governing
body of a corporation.  Hires chief executive
officer. Corporate Officers and Managers  CEO,
chief operating officer, and chief financial
officer make most major corporate decisions.
Managers handle ongoing functions of the
organization. 2002 Sarbanes-Oxley Act tightened
requirements of corporate boards and require CEOs
and CFOs to personally certify the accuracy of
their firms financial statements.
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Employee-Owned Corporations  Workers buy shares
of stock in the company that employs
them.  Growing popularity 11,400 firms
employing nearly 10 million people. Employees
share in wealth the company generates.
Managers want employees to care deeply about
companys success. Not-for-Profit
Corporations  Not-for-profit corporation Firm
pursuing objectives other than returning a
profit. 1.5 million in the U.S. Includes
charitable groups, social-welfare and educational
organizations, religious congregations, political
parties, and labor unions.  Exempt from paying
taxes.
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WHEN BUSINESSES JOIN FORCES Mergers and
Acquisitions (MA) Merger Combination of two or
more firms to form one company. Vertical
Combines firms at different levels in the
production and marketing process to ensure
adequate flow of raw materials and supplies or
increase distribution. Horizontal Joins firms
in the same industry that wish to diversify, cut
costs, or offer expanded product lines.
Conglomerate Combines unrelated firms to
diversify, spur sales growth, or spend a cash
surplus. Acquisition Procedure in which one firm
purchases the property andassumes the
obligations of another.
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Joint Ventures Specialized Partnerships Joint
venture Partnership formed between companies for
a specific undertaking. Example Transport4, a
joint venture among four U.S. pipeline companies
to better service oil refineries that use their
services.
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PUBLIC AND COLLECTIVE OWNERSHIP Public
Ownership A unit or agency of government owns
and operates an organization. Example
Pennsylvania Turnpike Authority. Government-Owned
Corporations Can result when private investors
are unwilling to invest in a high-risk but
socially important project. Example Rural
electrification program of the 1930s.
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Customer-Owned Businesses Cooperatives
Cooperative (co-op) Collective ownership of a
production, storage, transportation, or marketing
organization. Example Credit unions.