Entrepreneurship, Small Business, and New Venture Creation: Learning Objectives

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4 Entrepreneurship, Small
Business, and New
Venture Creation
CBC TV
Learning Objectives
After studying this chapter, you should be able to:
LO1 List the traits of an effective entrepreneur, and describe how LO6 Explain the advantages and disadvantages of sole
these characteristics often lead to business success. proprietorship. (pp. 80–82)
(pp. 66–70) LO7 Explain the advantages and disadvantages of partnership
LO2 Describe the factors that lead to small business failure, and and describe the importance of partnership
explain why a business plan is crucial to small business agreements. (pp. 82–84)
success. (pp. 70–73) LO8 Explain how a corporation is formed and how it compares
LO3 Compare the advantages and disadvantages of starting a with sole proprietorships and partnerships. (pp. 84–85)
business from scratch to buying an existing business. LO9 Describe the characteristics of nonprofit corporations and
(pp. 73–75) cooperatives. (pp. 86–87)
LO4 Outline the advantages and disadvantages of LO10 Summarize the different types of mergers and acquisitions
franchising. (pp. 75–79) and explain why they occur. (pp. 87–88)
LO5 Summarize the potential benefits and drawbacks of each
major source of small business financing. (pp. 79–80)
Chapter 4 Entrepreneurship, Small Business, and New Venture Creation 65
Opening Discussion: Starting

a New Business
It’s often said that necessity is the mother of all invention, and Lee Renshaw brings this
sentiment to life. While he was studying industrial design at Humber College, Renshaw
lived an hour away in Kitchener, Ontario. As a result, he spent the majority of his school
nights couch-surfing with friends and living out of a duffel bag: “It was a nightmare—my
clothes were literally in a huge ball all the time. I wanted some way not to look like I was
living out of a laundry basket,” he says. From this aversion to wrinkled trousers arose
Rise and Hang Travel Gear, his organizational travel gear line. In other words, a better
kind of luggage.
Rise and Hang Travel Gear rose to fame on a 2013 episode of CBC’s Dragons’ Den.
Clad in nothing but their fluorescent underwear, Lee and brother/co-owner Sean demon-
strated their product’s ability to keep clothing clean and neat by taking clothes out of the
Rise and Hang and dressing neatly in front of the panel. After catching the Dragons’
attention, it was up to Lee’s presentation skills to seal the deal. The brothers ended up
securing $100 000 for a 50 percent stake in their company with Arlene Dickinson and
David Chilton.
Before starting Rise and Hang Travel Gear, Lee developed many skills and abilities
both through part-time jobs and as a college student that he says helped him to refine
Rise and Hang both as a company and a product. “I got a tonne of experience communi-
cating my ideas and receiving positive and negative feedback . . . and then being able to
use it constructively. Everyone has an opinion, but the trick is to be able to sort out what
is useful and what is not. I like getting negative feedback because it means that I . . .
might gain an insight that my competitors don’t know about. [Using this skill, I] did a lot
of market research to determine what our customers liked and didn’t like and used that
knowledge to develop our product line.”
To begin, he and Sean wrote a business plan, but he stresses the importance of its
adaptability. “A business plan is good to figure out that the basics are in check when
starting. After that, all you really have is assumptions until you get real data.” Initially,
they had intended to market Rise and Hang to the retail mass market on their own, but
realizing the need for publicity they changed their plan quickly. Part of his grander plan
was choosing a perfectly matched partner in brother Sean. Optimistic Lee had the
design and sales skills, while his more realistic brother was a pro at project management.
“While we have different strengths and weaknesses, at the core we share the same
vision for our brand and keep each other accountable.” They complement one another,
as all great partners do.
His top advice for budding entrepreneurs? Start young. You need lots of time to
build a business. He also explains that even if, like him, your product may be more inno-
vative than the standard Adidas hold-all, this alone won’t make it more popular. “With-
out sales, you have no business, no matter how good your ‘mousetrap’ is. Anything you
do in life comes down to being able to sell.” If you can’t sell, hire somebody who can.
Luckily, the Renshaw brothers hit the mark dead on: not only a good mousetrap, but
“Don Drapers” in the Dragons’ Den, too.1
Discussion Questions
1. Lee mentioned that the experience he gained from past jobs and what he learned at
college helps him in his business. What experiences do you have or what are you
learning in school that you think could help you be successful in business?
2. What do you think are some of the biggest advantages and disadvantages of working
with a partner?
3. What types of issues do you think Lee and Sean have had to deal with to start and
grow their business?
66 Chapter 4 Entrepreneurship, Small Business, and New Venture Creation
Entrepreneurship: What’s In It for Me?

LO1 List the traits of an effective entrepreneur, and describe how these characteristics often lead
to business success.
The Traits of Successful Entrepreneurs

What is an entrepreneur? We’ve all heard of Starbucks, Nike, and Microsoft, but
you probably don’t associate these big-name companies with small business. But at one
entrepreneur Someone who point, each of these companies was a small business started by entrepreneurs—people
assumes the risk of creating, who assume the risk of creating, organizing, and operating a business. Not all small busi-
organizing, and operating a nesses are entrepreneurial. What makes a new venture entrepreneurial is that the idea
business and who directs all
the business resources.
behind the business is innovative or change oriented. Entrepreneurs most often start a
business to satisfy an opportunity niche—a need in the marketplace that is not being
opportunity niche A need in adequately fulfilled.
the marketplace that is not
The brothers who started McDonald’s spotted an opportunity niche. Realizing that
being adequately fulfilled.
the hamburger was the bestseller in their California restaurant, they created an assembly
line that allowed them to produce burgers quickly and inexpensively, and business
boomed. It expanded even more when Ray Kroc, who was selling milkshake machines in
California, convinced the brothers not only to use his milkshake machines but also to let
him open another McDonald’s restaurant in Chicago. Seeing the opportunity niche in fast
Video: New Toy Company food, Kroc later bought the McDonald’s restaurants from the McDonald brothers. The
Inspires Little Girls to company now operates more than 32 000 restaurants in 117 countries, generating more
Build Houses than US$20 billion in revenue annually.2
What are the traits of successful entrepreneurs? Wayne Huizenga started Waste
Management Inc., now a leader in the waste and environmental services industry, by
buying a single garbage truck in 1968. He expanded the company by buying other trash
collection services, and by 1983 the company had grown into the largest of its kind in the
United States. But Huizenga didn’t stop there. He also started Blockbuster Video, as well
as AutoNation, the behemoth automotive dealer.3 How can some entrepreneurs like Hui-
Video: Fruit Breeder
zenga begin many successful businesses while others have a difficult time getting their
Invents Cotton Candy
ideas off the ground? How do successful entrepreneurs see an opportunity niche and
Flavoured Grapes
know exactly what they need to do to seize the opportunity and succeed?
Although luck and timing play a large role in entrepreneurial success, research has
Video: Convertible Heels: also shown that successful entrepreneurs
Shoe Transforms for Day, ■ are innovative
Night take risks
■
are motivated to succeed
■
are flexible and self-directed
■
work well with others and possess good leadership skills
■
■ a re “system thinkers,” seeing the whole process rather than just individual pieces of it
Whitebox media/Mediablitzimages/Alamy
How are entrepreneurs innovative? Successful entrepreneurs

see problems to be solved or opportunities that aren’t being
addressed in the marketplace—they recognize opportunity niches.
They also make improvements to existing products or systems, or
they introduce something new and make profitable solutions out of
problems. Renowned management and business thinker Peter
Drucker noted that successful entrepreneurs “exploit change as an
opportunity for a different business or a different service.”4 For
example, Henry Ford did not invent the automobile—he just found
a better way to build them. His improvement was not only in creat-
ing a new machine (the Model T), but also in developing an assem-
All businesses have to start somewhere. Even McDonald’s,
which is one of the biggest businesses in the world today, bly line process by which his company could make multiple
started out as just a single restaurant in California. automobiles more efficiently, allowing Ford to dramatically lower
Polaroid Portable Portable

FM radio camera Supercomputer computer Digital X-ray MP3 player
1933 1947 1958 1981 1983 1998
Figure 4.1 Twentieth-Century Entrepreneurial Innovations
the price and thus make automobile ownership affordable to the average worker. Ford’s
innovative assembly process became the standard for efficient manufacturing. Think
about other entrepreneurs and the innovation behind their success. Ben Cohen and Jerry
Greenfield of Ben & Jerry’s Ice Cream didn’t invent ice cream; rather, they capitalized on
people’s growing desire for high-quality food products and used the best and biggest
chunks of nuts, fruits, candy, and cookies in their ice cream.5 Figure 4.1 lists some other
important innovations by entrepreneurs in the twentieth century.6
How do entrepreneurs take risks? Being an entrepreneur involves risk—the risk of

failure, the risk of losing one’s career, and of course financial risks. Because entrepreneurs
are often creating new and innovative products, the processes they
develop are often untried and therefore involve risk. Successful entre- Becoming a successful entrepreneur
Self check
preneurs are aware of these risks, recognize that they can influence involves a complex blend of skill,
events but do not have complete control over them, and are willing to savvy, and luck. Before embarking on such an
accept the knowledge that they may fail. Successful entrepreneurs endeavour, however, you’ll need to familiarize your-
therefore take calculated risks—that is, they consider the likelihood self with a few concepts. Test your entrepreneurial
vocabulary with the following quiz.
of success before deciding whether to take a particular risk.
1. “It’s all about fulfilling an opportunity niche!”
Liza, a budding entrepreneur, exclaims. Liza is
What makes entrepreneurs motivated to succeed? Entrepre- likely referring to
neurs are motivated by many different factors. Some entrepreneurs a. a need in the market.
are motivated to provide for themselves or their families. These b. a storage nook.
individuals may be driven to pursue multiple ventures before c. a sense of belonging.
uncovering a successful idea. Other entrepreneurs are motivated to 2. A system thinker is someone who
succeed by the personal fulfillment they feel upon successfully a. contemplates the technological side of a
launching a business. business.
Entrepreneurs’ keen desire to succeed has led one entrepreneur, b. focuses on the entire process of turning an
Ted Kennedy, to start a company rooted in this notion. Kennedy idea into a reality.
c. designs methods of doing things.
noticed that many participants in the Ironman triathlon were corpo-
rate executives. He also noticed that these executive triathletes 3. Micropreneurs are likely to
a. be petite.
sought above-average accommodations prior to and during their
b. hire thousands of employees.
competition. So he formed CEO Challenges, a company that orga- c. enjoy running a small business.
nizes luxury sports experiences for corporate executives. CEO Chal-
4. When you hear the word gazelle, you think
lenges provides luxury accommodations the night before a race, a. antelope.
ensures family members and friends are positioned alongside the b. fast-growing business.
race to have the perfect view of their racer, and offers other amenities c. graceful.
an executive might want when competing in physical challenges.7 Are you confident in your understanding of entre-
preneurial lingo? Or do you need a primer in the
Why do successful entrepreneurs need to be flexible and use of these terms? Whatever the case, read on
self-directed? Because entrepreneurial ventures are subject to for in-depth information on entrepreneur basics,
types of entrepreneurs, and what it takes to be an
uncertainty and risk, entrepreneurs need to be able to react quickly
entrepreneur.
to new and unexpected situations. And because entrepreneurs are
their own bosses, they need to be able to make their own decisions. An
entrepreneur must be able to wear many hats, acting not only as the execu-
tive but also as the sales manager, financial director, administrative assistant,
and mailroom clerk.
Why are people skills and leadership skills important to entrepre-

neurs? They may come up with the initial idea behind their business, but
entrepreneurs rarely work by themselves. At some point most entrepreneurs
need other people with complementary skills to join them in their venture. If
their business expands, they must hire employees and other managers to
help them run it. Leadership and communication skills are therefore impor-
tant traits of successful entrepreneurs who must motivate others to feel as
passionately about the entrepreneurial enterprise as they do.
What does it mean for entrepreneurs to be “system” thinkers?

Although entrepreneurs develop companies from an idea, they must focus
Maridav/Shutterstock
on the entire process of turning their idea into a business to succeed. Suc-
cessful entrepreneurs are able to see the whole picture when they set up
their businesses. They determine how to resolve a problem or capitalize on
an opportunity by developing a solid plan, including the production, financ-
ing, marketing, and distribution of the service or product. For example,
Entrepreneurs are self-directed and innovative, while on a canoe trip in northern Ontario, Greg Taylor, Cam Heaps, and
but they rarely work alone. At some point Greg Cromwell sat around a campfire dreaming of running their own brew-
everyone needs someone else with
ery one day. This dream became a reality when they wrote a business plan
complementary skills to help in the venture.
and attracted investors with their vision and passion. In 2000 they opened
Steam Whistle Brewing in Toronto, brewing a premium pilsner that com-
petes with the best in the world. The three friends saw the opportunity and began the
process of creating their company not with just an idea but with a system: Use quality
natural ingredients, employ “good beer folks,” and “do one thing really really, really
well.” In 2013 Steam Whistle won a number of awards including the Ontario Craft Brew-
ers Centre of Excellence awards in Product Quality and Process Innovation, and Sustain-
ability Accomplishments.8
Types of Entrepreneurs
Are there different types of entrepreneurs? Beyond the traditional entrepreneurs
described in the previous sections, other entrepreneurial categories have begun to crop up:
■ lifestyle entrepreneurs

■ micropreneurs

■ home-based entrepreneurs

■ Internet entrepreneurs

■ growth entrepreneurs

■ intrapreneurs
lifestyle entrepreneurs What are lifestyle entrepreneurs? Lifestyle entrepreneurs look for more than
Entrepreneurs who look for profit potential when they begin a business. Some lifestyle entrepreneurs are looking
more than profit potential
for freedom from corporate bureaucracy or the opportunity to work at home or in a
when they begin a business.
location other than an office. Others are looking for more flexibility in work hours or
travel schedules.
micropreneurs What are micropreneurs? Micropreneurs start their own business but are satisfied
Entrepreneurs who start their with keeping the business small in an effort to achieve a balanced lifestyle. For example, a
own business but are satisfied micropreneur might open a single restaurant and be satisfied with running only that one
with keeping the business
small in an effort to achieve a
restaurant, instead of expanding as Ray Kroc did with the McDonald brothers’ restaurant.
balanced lifestyle. Micropreneurs, or small business people, have no aspirations of growing large or hiring
hundreds or thousands of employees. Businesses such as dog-walking services, painters,
and special-occasion cake bakers would all be considered micropreneurial opportunities.
What are home-based entrepreneurs? As the name suggests, home-based entre- home-based entrepreneurs
Entrepreneurs who run their
preneurs are entrepreneurs who run their businesses out of their homes. Sheena
businesses out of their homes.
Edwards was a stay-at-home mom who was looking for a creative outlet. She decided to
start making crystal-embellished women’s flip-flops and now runs Lizzie Lou Shoes from
her home. Production of the shoes is managed by Edwards’s cousin in New Delhi, India.
“I love owning my own business, as it gives me the creative outlet I crave while still
allowing me to be home with my kids and not miss a thing (with the exception of
sleep!),” says Edwards.9
In addition to offering lifestyle advantages, such as being able to stay at home with
children, home-based businesses offer several financial advantages. Staying at home
eliminates commuting time and costs, as well as office rent and other overhead expenses.
Also, home-based entrepreneurs can take advantage of tax deductions for part of their
rent or mortgage payment, property taxes, insurance, utilities, and home repairs and
improvements.
What are Internet entrepreneurs? Advances in technology have spawned another

type of entrepreneur, the Internet entrepreneur, who creates businesses that operate Internet entrepreneurs
solely online. The advent of Web 2.0 technologies (e.g., blogging and social networking), Entrepreneurs who create
businesses that operate solely
smartphone apps, contextual web-based advertising (e.g., Google Ads) that helps to pro-
online.
vide revenue, along with faster broadband connections has meant that a greater number
of successful online businesses are being established. Some of the most famous Internet
entrepreneurs include Mark Zuckerberg (Facebook), Jeff Bezos (Amazon), Pierre
Omidyar and John Donahoe (eBay), Sergey Brin and Larry Page (Google), and Jimmy
Wales (Wikipedia).
Youth may have an advantage in this entrepreneurial genre because success requires
little investment, some spare time, and a good understanding of what their peers are
looking for. For example, David and Catherine Cook and their older brother Geoff started
MeetMe (formerly MyYearbook.com) over spring break in 2005. The social networking
site invites members to meet new people through playing games, chatting, and sending
growth entrepreneurs
virtual gifts purchased with Lunch Money, the site’s virtual currency. Members are also
Entrepreneurs who strive to
given the opportunity to donate Lunch Money to their favourite charity through their create fast-growing businesses
charity application. MeetMe has over 1 billion page views on mobile devices and 1.2 bil- and look forward to
lion page views on the web each month. In 2013, the social networking company had rev- expansion.
enue of approximately $39 million.10
intrapreneurs Employees
who work in an
What are growth entrepreneurs? Growth entrepreneurs strive to create fast- entrepreneurial way within
growing businesses and look forward to expansion. The companies that these types of the organizational
entrepreneurs create are known as gazelles. Typically, a gazelle business has at least 20 environment.
percent sales growth every year for five years,
starting with a base of at least $100 000.11 It is
hard to recognize a gazelle business during its
rapidly growing period, though companies
such as eBay and Google can clearly be identi-
fied in retrospect as having been gazelles in
their early years.
What are intrapreneurs? You don’t neces-

sarily have to leave your company to have an
entrepreneurial experience. Some companies
Andrew Miller/Newscom
are fostering intrapreneurs—employees who

work in an entrepreneurial way within the
organizational environment. At the home appli-
ance company Whirlpool, for example, devel-
oping intrapreneurs is an important part of
corporate success. The company’s success
depends on producing creative solutions to Catherine Cook, at the age of 17, co-created the wildly successful website
household problems. Instead of relying solely MeetMe with her older brothers Dave and Geoff during spring break.
On Target
Facebook’s Mark Zuckerberg and Chris Hughes joined Zuckerberg to help promote the
site. Within two months, the entire Ivy League was included
When Mark Zuckerberg, a Harvard student, came up with in the Facebook network. In September 2005, these entre-
the idea for Facebook, he didn’t realize that he was spear- preneurs decided to allow high schools to join the network.
heading a billion-dollar organization. The idea behind “The Finally, on September 11, 2006, the public was allowed to
Facebook,” as it was originally called, was to provide a join Facebook, so long as all potential members had a valid
forum for students on the Harvard campus to network and email address and were at least 13 years old.
display pictures of themselves and their friends. The site On May 18, 2012, Facebook sold shares to the public
was launched on February 4, 2004, and within a month half for the first time, which proved to be highly controver-
of the undergraduates on the Harvard campus were users sial.14 The IPO (initial public offering) was one of the big-
of the site. Expansion came quickly, as Dustin Moskovitz gest in technology history, and certainly the biggest in
Internet history, with a peak market capitalization of over
$100 billion.15 A lot of “hype” in the media likely contrib-
uted to inflating share prices. Shortly after the stock
peaked its value began to drop quickly, and within three
months the company’s stock had fallen by 50 percent,
wiping out $50 billion in shareholder value.16 Despite the
controversy, the site has more than 1.6 billion monthly
users worldwide and is constantly expanding, so many
analysts still see Facebook as a good investment.17
Discussion Questions
1. Why do you think Facebook is so popular? Is it
without problems?
2. How was Facebook able to grow so quickly? What
Yaacov Dagan/Alamy
marketing strategy was used?

3. Research Mark Zuckerberg on the Internet and read
about the history of Facebook. What characteristics
does Zuckerberg have that relate to those of entre-
preneurs?
on the traditional research and development (R&D) process, Whirlpool management is

tapping the creative juices of their employees by encouraging them to generate ideas that
will enhance the company’s existing products. Although employees are not separately
compensated for their ideas, they are pleased that the company asks for their ideas and
have responded enthusiastically. By the end of the first year of the program, 60 ideas were
in the prototype stage and 190 were close to entering the marketplace.12,13
Starting Your Own Business

LO2 Describe the factors that lead to small business failure, and explain why a business plan is
crucial to small business success.
Why would I want to start my own business? People start small businesses for
many different reasons (see Figure 4.2):
Opportunity knocks. An idea for a new company often starts when someone envisions
1.
a product or a service that isn’t being offered yet. Other people create opportunities
from their own obstacles. For example, a father frustrated at watching his autistic
Opportunity & Innovation Control

New ideas and needs bring More control of business decisions;
new businesses. do not want to work for someone else.
Financial Independence Schedule Flexibility

Owners feel they can make more Looking for a better
money operating their own business. work–life balance.
Unemployment
Seeking income due to job loss.
Figure 4.2 Reasons to Start a Small Business

Image Sources: top to bottom, left to right: Carsten Reisinger/Fotolia; alphaspirit/Fotolia; tiero/Fotolia; almagami/Fotolia; alphaspirit/Fotolia
child try to communicate with others founded the Animated Speech Corporation, a
company that develops software-based conversational language learning systems to
help autistic children communicate.18
Financial independence. Many people begin a small business because they want finan-
2.
cial independence, though this should not be the sole reason. Most small businesses
don’t start out as profitable ventures. Traditionally, it takes three to five years for new
businesses to become profitable.
Control. Many people starting their own business state that they want more control
3.
over business decisions than their current position allows. Others know that they
aren’t satisfied working for someone else.
Flexibility. Many small business owners appreciate the work–life balance that owning
4.
their own business affords. Many also feel working in a small business is more
rewarding than working for a larger company. Small business owners believe their
companies offer less bureaucracy and more flexibility than larger firms. With fewer
channels to go through when decisions need to be made, small business owners can
react more quickly to take advantage of immediate opportunities. In addition, small
business owners say running their own business gives them the flexibility to adjust
their work to their particular situations.
Unemployment. Whereas most individuals start their own businesses for the reasons
5.
mentioned previously, some are pushed into starting their own business because
they have no other employment opportunities. “Life begins when you get fired,”
was exactly the case for Bruce Freeman, owner of ProLine Communications, Inc.
Three months after being fired, he couldn’t think of
what to do next. Then, encouraged by a friend,
Bruce started his own business. His first client was a
company he worked with in his previous job. Now,
over 10 years later, he’s making more money than
he ever could have in his old job.19
What are the advantages and disadvantages of

owning a business? Operating a business is a lot of
hard work and comes with no guarantee for success.
Svanblar/Shutterstock
Small business survival rates in Canada decline over

time. About 96 percent of small businesses that enter the
marketplace survive for one full year, 85 percent survive
for three years, and 70 percent survive for five years.20
Substantial benefits await the successful entrepre-
neur, including financial rewards (profit), social rewards Sometimes being fired is the best thing that could happen to you!
(pride, making a difference, worthwhile cause), and Some entrepreneurs get started when they have no other employment
independence (work for yourself, at your own pace). opportunities.
However, with these rewards come

potential risks:21
■ Financial risk. Substantial finan-
cial loss and even bankruptcy are
possible results of business fail-
ure. Business owners also have to
take taxes and insurance costs
into consideration, such as a
health insurance plan to cover
employees. They also need liabil-
ity insurance, which will protect
Amy Walters/Shutterstock
the company in the event of sto-

len or damaged property or if an
employee is injured on the job.
For example, if a local jewellery
store is broken into and inven-
tory is stolen, liability insurance
Staring your own business is not without risk. Unfortunately, many small businesses fail, will cover the cost of the broken
and failure can mean substantial financial loss for the owner. window and the stolen property.
If the jewellery store is not
insured, the business could go bankrupt if the owner can’t afford to cover the
loss and damages.
■ Social risk. Due to the excessive amount of time an entrepreneur has to devote to a
new business venture, he or she has less time for family, friends, and social events, so
the potential for losing a friend or even a marriage is very real.
■ Career risk. Entrepreneurs usually quit their jobs to pursue their own startup, but if
things go wrong in the new business venture it may be difficult to resume a career.
■ Psychological risk. Owning your own business can be rather stressful. There is a differ-
ence between good stress (eustress), which gives a person enough adrenalin to han-
dle difficult situations in a positive way, and bad stress (distress), which can hurt the
entrepreneur and the business. Some factors that may cause distress are having too
much worry, working too hard for long periods, and having no one to turn to for
help when feeling overstressed.
While many entrepreneurs feel that the rewards of owning their own business are
worth the risks, it’s important to be aware of why businesses fail. These reasons include
■ accumulating too much debt
inexperienced management
■
poor planning
■
Let’s look at each of these reasons for failure in more detail.
What causes excessive debt accumulation? One reason many new businesses fail
is that they accumulate too much debt. Most begin a new business by borrowing funds.
Regardless of whether the loan comes from a bank, an outside investor, or a credit card
company, if the new business does not generate returns quickly enough to begin to pay
back the initial loan, there is temptation to take on more debt to keep the business run-
ning. Interest on loans can accumulate quickly, causing an owner to become further
entrenched in a potentially unrecoverable situation. What’s worse is that some business
owners borrow against their personal assets, putting them at risk of personal bankruptcy.
How does inexperienced management lead to failure? Although entrepreneurs

and small business owners are good at coming up with ideas, they may not be great at
managing the books and their employees. Many inexperienced business owners ignore
the signs of a business beginning to fail or attribute the failure to the wrong reasons. In
addition, although owners need to build a team they can’t hand over all control. Good
management stays on top of all aspects of the business and makes the tough decisions
when necessary. As Nina Riley, CEO and founder of Water Sensations, a company that
Figure 4.3 A Business

Company Information
Plan Outlines a Company’s
• Mission Statement
• Current Status
Goals and Strategies
• History
• Management Team
Risk Analysis Marketing Plan

• Risk Evaluation • Competitive Analysis
• Risk Management Plan • Pricing
• Distribution
• Promotion and Brand Development
Financial Plan Operational Plan

• Current Financing • Staffing
• Funding Needs and Plan • R&D
• Financial History • Manufacturing Plan
• Financial Forecasts • IT Plan
• Valuation
makes clear-liquid flavour enhancers for water, says, “When things go bad—at the first
indication—you gotta nip it in the bud, wrestle it to the ground to fix it. You just can’t let
it go. If this is your own company, you have to strive to be perfect.”22
How important is planning to business success? Accumulating debt and poor

business management happen after the business has developed. One of the biggest rea-
sons businesses fail is that there was no formal plan in place to begin with. Planning is
sometimes harder than doing because it takes time, brainwork, and requires delaying
your personal gratification, but the old adage is true: “Businesses that fail to plan, plan to
fail.” The good news is that poor planning is completely avoidable once you know what
kinds of planning you should do before you start your small business.
A business plan is a formal document that states the goals of the business as well as business plan A formal
the plan for reaching those goals. A business plan should tell the story of your business con- document that states the goals
cept—it is a blueprint for the company, and it is an indispensable tool in attracting investors of the business as well as the
plan for reaching those goals.
or obtaining loans. Preparing a business plan takes a lot of time, but it is time well spent
because your business plan is an ongoing guide. You use it to acquire startup capital as well
as to assess your company’s progress, as long as you remember to update it periodically.
A realistic business plan forces you to think critically about your proposed business
and reduces your risk of failure. Business plan templates are available online, and the
Royal Bank of Canada (RBC) has a very useful site (www.rbcroyalbank.com/sme/) for
entrepreneurs starting a business, which includes sample business plans and templates.
Business plans vary in format and number of sections. The main components in most
business plans are shown in Figure 4.3 and include the company’s mission statement, his-
tory, and the qualifications of the owners and management team and any resources they
might have to contribute to the business. It also includes a marketing plan, an operational
plan, a financial plan, a risk analysis, and identifies the competition and highlights oppor- Video: Wild Planet: The
tunities for success. Entrepreneurial Spirit
Starting a Small Business

LO3 Compare the advantages and disadvantages of starting a business from scratch to buying an
existing business.
Entrepreneurs usually start a small business by starting from scratch (building a new
business), buying an existing business, or buying a franchise.
Starting a Business from Scratch

What are the advantages of starting a business from scratch? Although start-
ing from scratch is the riskiest way to take ownership of a business, most entrepreneurs
choose this option because there are a number of attractive benefits:
■ Freedom to do what you want. When building something new there is opportunity to
make all the important decisions such as location, equipment, staff selection, and
supplier relationships.
■ You can start small and grow the business over time. Buying an existing business can be
costly, but starting from scratch, particularly if it’s a home-based business, may be
possible with a modest investment.
The satisfaction of building something from nothing. Many entrepreneurs are inspired by
■
the challenge of creating something new and are passionate about bringing their
ideas to life.
You can create the image and reputation you want. There is no negative impact of a previ-
■
ous owner’s bad decisions when you start a business from scratch, so you have a
Video: Toms blank slate and can build your own reputation.
What are the disadvantages of starting a business from scratch? Starting a

business from scratch is not an easy proposition. There is a lot of hard work involved, and
it is very risky. Some of the disadvantages of starting a business from scratch include the
following:
■ The business has no proven track record. A new business has not produced any results,
so it is uncertain if the business plan will lead to actual profits. Although the plan
should be based on significant market research, the success of the business is always
a gamble until proven by real results.
■ It takes time to build a good reputation. A new business is unknown to customers, so a great
deal of effort is needed to develop relationships and build a strong brand. This takes years.
■ Nothing is established—you need to do everything. Equipment must be purchased, loca-
tions determined, facilities set up, staff hired, procedures developed, and supplier rela-
tionships established. Although these decisions are critical, they consume many weeks.
■ There is no existing cash flow, and it can take a long time before the business begins to earn a
profit. A new business starts with no customer base and zero sales. It usually takes
several years before the business begins to earn a profit, so during this time owners
need to have access to large amounts of cash to keep the business operating until it
can support itself.
■ It can be difficult to obtain financing. For all the reasons stated above, starting a busi-
ness from scratch is extremely risky. Since financial institutions are highly risk
averse, it can be difficult to secure loans or even credit from suppliers until the busi-
ness has proven to be viable.
Buying an Existing Business

What are the advantages of buying an existing business? While starting from
scratch is a popular way to begin a business, another way is to buy a pre-existing busi-
ness. Many experts recommend buying an existing business because this option has cer-
tain important advantages:
■ Ease of startup. It’s often simpler to buy an existing business than to start one from
scratch. For example, there is a reduction in startup time and energy when you pur-
chase an operational business that has no serious problems. This means that suppli-
ers, existing staff and management, and equipment and inventory are all in place to
help facilitate the transition.
■ Existing customer base. An existing business may have a satisfied customer base
already in place. If no significant changes are made to drive away current customers,
the business can continue to run and provide immediate cash flow.
Video: Domino’s Pizza: Financing opportunities. If the business has had a positive track record, it might be eas-
■
Franchising ier to obtain financing to purchase the existing business.
Table 4.1 Things to Consider before Buying a Business

Initial Questions to Ask
Why is the business for sale?
What do current customers say?
How much time does the current owner put into the business?
Are there opportunities for growth?
Who is the competition?
Due Diligence Checklist
Get an independent valuation of inventory and equipment.
Have an accountant go over financial statements for the past three years.
Have a lawyer analyze pertinent business documents (property leases, employment contracts, etc.).
Talk to suppliers to see if they will continue to supply the business when ownership changes hands.
Check for lingering or festering hazardous waste problems—they’ll become your responsibility as
the new owner.
What are the disadvantages of buying an existing business? There are also dis-
advantages to buying an existing business:
■ High purchase price. Because you may need to buy the owner out of the business, the
initial purchase price may be high. This can be more than the immediate upfront
costs associated with a startup, but not necessarily any different from a franchise.
Although you can easily determine the value of the physical business and its assets,
it is more difficult to determine the true value of the previous owner’s goodwill—the
intangible assets represented by the business’s name, customer service, employee
morale, and other factors—that might be lost with a change in ownership. Often the
intangible assets are overvalued, making the business cost more than it is worth.
■ Inheriting the previous owner’s mistakes. If the previous owner made some poor
choices, you may have to deal with the ramifications. For instance, you might inherit
dissatisfied customers, bad debt, and unhappy distributors or purchasing agents.
You’ll need to work to change the minds of people who have had a bad experience
with the previous ownership.
The Unknowns. There is no guarantee that existing employees, management, custom-
■
ers, suppliers, or distributors will continue to work with the business once new own-
ership takes over. If staff does stay, you might be inheriting unanticipated problems.
What do you need to check before you buy a business? Existing businesses are
sold for many reasons. Before buying an existing business, make sure you perform due due diligence Researching
diligence—research and analyze the business to uncover any hidden problems associ- and analyzing the business to
uncover any hidden problems
ated with it. You want to avoid buying a company with a dissatisfied customer base or
associated with it.
with a large amount of unpaid bills. Table 4.1 provides a brief checklist of things you
should look into before buying a business. However, not all businesses for sale have
problems. For example, some family-run businesses run out of family members to pass
the business on to, so the owners might be left with no choice but to sell the business.
Whether you buy an existing business or franchise or begin a business of your own,
you’ll be joining a large group of small business owners who make a significant contribu-
tion to the Canadian economy.
franchise A method of doing
Buying a Franchise business whereby the
business (the franchisor)
LO4 Outline the advantages and disadvantages of franchising. grants the buyer (the
franchisee) the right to use its
What is a franchise? A franchise is a method of doing business whereby the busi- brand name and to sell its
ness (the franchisor) grants the purchaser (the franchisee) the right to use its brand name goods and services for a
and to sell its goods and services for a specified time. In return, the franchisee provides a specified time.
Table 4.2 Helpful Websites for Potential Franchisees

www.betheboss.ca BeTheBoss.ca is an information and resource directory for buying a
franchise in Canada.
www.cfa.ca The Canadian Franchise Association educates Canadians about
franchising, specific franchise opportunities, and proper due diligence.
www.canadabusiness. The Canada Business Network offers government services for
ca/eng entrepreneurs, information about grants and loans, and links to many
other resources.
www.entrepreneur.com/ Entrepreneur.com’s Franchise Zone allows users to search a directory of
franchises/index.html franchising opportunities and provides tips on buying a franchise. This
site also ranks the top franchises in terms of growth, cost, global
appeal, and other aspects.
www.franchise.org The International Franchise Association provides answers to frequently
asked questions about franchising and resources for potential and
current franchisees. This site also hosts a directory of franchising
opportunities in various industries.
www.franchiseinfo.ca Canadian Business Franchise Magazine offers a unique, behind-the-
scenes look at those entrepreneurs who have embraced the franchise
lifestyle.
share of the income back to the franchisor. Franchising is one of the more popular busi-
ness venture concepts in Canada. According to the Canadian Franchise Association
(CFA), the average term of a franchise agreement in Canada is five years, although fran-
chise agreements come in several fixed periods, including 10 and 20 years.23 Table 4.2
lists some helpful websites for potential franchisees.
What are the advantages of franchising? For many, franchising is an easier, less
risky means of starting a business. Since the franchisor provides much of the marketing
and financial tools needed to run the business, all the franchisee is expected to bring to
the table is management and marketing skills, time, and money. In addition to a recog-
nized brand name, there are many other advantages of owning a franchise:
■ It is a proven system of operation. Instead of wading through the muddy waters of new
business ownership by themselves, franchisees benefit from the collective experience
of the franchise company. The franchisor has determined, through trial and error, the
best system of daily operations for the established business. New franchisees can
therefore avoid many of the common startup mistakes made by new business own-
ers since they will be working with standardized products, systems, and financial
and accounting systems.
■ There is strength in numbers. You are not alone when you buy a franchise. Because as a
franchisee you belong to a group, you might benefit from economies of scale
achieved by purchasing materials, supplies, and services at discounted group rates.
In addition, it is often easier to get approval for business loans when running a fran-
chise, as the lending institution associates less risk with a franchise.
Initial training is part of the deal. The beauty of franchising is that you’re in business
■
for yourself but not by yourself. The franchisor offers initial training to ensure a suc-
cessful store opening and might offer ongoing training if new products or services
are being incorporated into the franchise line.
Marketing support is provided. As a franchisee, you are often given marketing materi-
■
als generated at the corporate level and have the benefit of any national advertising
programs that are created. Although you are expected to run your own local market-
ing efforts, you have the support of other franchisees in the area and the recognition
of an established brand to help you in your efforts.
■ Market research is often provided. Good franchisors do

considerable market research and can generally con-
clude whether there is demand for the product or ser-
vice in the area before selling the franchisee a franchise.
The franchisor should also help identify the competi-
tion and offer strategies to differentiate the franchise
from them.
ZUMA Press, Inc./Alamy

What are the disadvantages of franchising?
Although buying a franchise provides the franchisee with
many benefits, there are some disadvantages too:
■ Lack of control. There is not much opportunity to con-
tribute creatively to the franchise since the franchisor
often controls the look of the store and the product or
service. The franchisee, however, is expected to bring There are many benefits of owning a franchise. Tim Hortons is one
of the most recognizable brands in Canada, and some say that
the necessary drive and spirit to make the franchise a
owning a Tim Hortons franchise is like having a licence to print
success. money! However, this kind of brand awareness comes with
■ Startup costs. More than 70 percent of all franchises significant costs attached.
require more than $50 000 to start. In addition, franchi-
sees must pay a monthly royalty fee to the franchisor. The royalty fees are due
regardless of how the business is doing and can be a huge overhead expense. Other
costs the franchisee might incur include real estate purchase or rental, equipment
purchase or rental, extra signage, and opening inventory. For example, a Tim Hor-
tons franchise in Canada costs $480 000 to $510 000, with at least $153 000 of this
being liquid or cash assets. In addition, a franchisee must have at least $50 000 in
startup cash. Royalty fees of 4.5 percent on gross sales are paid each week, advertis-
ing fees of 4 percent on gross sales are paid each month, and rental fees of 8.5 percent
of gross sales are paid each month.24
Internal competition. Some franchises do not restrict the location or number of their
■
franchise locations. In those instances, franchisees could experience serious competi-
tion not only from another company but also from other franchisees in the same fran-
chise organization.
Share common problems. If the franchisor or another franchisee is having problems, all
■
franchisees will feel its pain. For example, when a Wendy’s restaurant was falsely
accused of serving chili with a human thumb mixed in, business in all Wendy’s res-
taurants plummeted.
What are things to watch out for when considering buying a franchise? The
most common piece of advice offered to anyone interested in buying a franchise is to do Video: My Gym:
your homework up front. Although a lot of the startup process is done for you, you are Organizing the Business
still buying a business that will require your time and money and is not guaranteed to
succeed. Table 4.3 shows suggested questions to ask the company that you are buying the
franchise from (franchisor) and other people who have bought franchises from the com- Video: Fun Facts about
pany (franchisees) before you take the plunge. Franchsisng
Small Business Support

Where can small business owners go for help? There are several sources of help
that a small business owner can turn to.
Government of Canada, Canada Business Network This government

resource (www.canadabusiness.ca/eng) offers startup services for entrepreneurs, includ-
ing developing a business plan, naming and registering a business, buying a business,
and financing a business.
Provincial Small Business Enterprise Centres The Small Business Enterprise

Centres (SBECs) across Canada provide entrepreneurs with all the necessary startup and
development tools. Each centre can help entrepreneurs determine what they need to do
Table 4.3 Questions to Ask before Buying a Franchise

Questions to Ask the Franchisor Questions to Ask Other Franchisees
Competition • What is the competitive advantage of the product/service? • How is your system better than competitors’?
• What makes the business more attractive to an owner and • How does your business match up?
more attractive to a customer? • Who are your competitors?
Franchise • How time tested and standardized is the franchise system? • How long have you been in business?
System • What franchise system is used and how does it work? • Does your location meet your customers’
• How long has the franchise been in business and what needs?
improvements has it made recently? • Who selected the site?
Support and • How much support does the franchisor give the franchisee? • How is your relationship with the franchisor?
Training • What is the initial and ongoing training? • How is the initial training, ongoing training,
• Are there toll-free help lines, field support, annual and ongoing support?
meetings, local meetings, purchasing programs, and • How are the marketing, advertising, and
marketing promotion? promotional programs handled?
Financial • What is the financial strength of the company and the • Are you pleased with earnings?
Strength experience of management? • Is volume growing?
• How much revenue comes from franchise fees and how
much revenue comes from royalties?
• How has the stock performed?
Franchise • How important is the franchisee to the franchise? • Do you have second thoughts (would you do
Relationships • How can they describe the relationship with the franchisor? this again)?
• Have there been any lawsuits/arbitration? • Would you own more units?
• If so, how have they been resolved?
Source: Based on “Checklist of Questions to Answer Before You Buy a Franchise,” PowerHomeBiz.com, http://www.powerhomebiz.com/vol2/franchise-
checklist.htm.
before, during, and after launching their business. Business support also exists for specific
groups, such as Aboriginal entrepreneurs, female entrepreneurs, and young entrepre-
neurs. (See www.ontario.ca/business-and-economy/small-business-advice-support-
services-regulations.)
Industry Canada The business section of Industry Canada’s website (www.ic.gc.ca/

eic/site/icgc.nsf/eng/h_07064.html) offers business owners many resources (e.g., financ-
ing program, internship program) and information on topics such as statistics, research,
and regulations.
Small Business Association of Canada (SBA Canada) A nonprofit organiza-

tion, SBA Canada (www.sba-canada.ca) provides growth and development opportunities
to small businesses through networking, mentorship, collaboration, self-development,
business incubators and education.
Organizations that support
Entrepreneurs’ Organization (EO) EO (www.eonetwork.org/) provides indi-
startup businesses by offering
resources such as vidual mentoring by connecting business owners with experts in their industry.
administrative services, Although EO is for those who are currently in a viable operation (its requirements
technical support, business are that you must be a founder, cofounder, owner, or controlling shareholder of a busi-
networking, and sources of ness with a minimum of $1 million in annual gross sales and you must be younger
financing that a group of
than 50 years old), such mentoring services can be helpful to second-stage small busi-
startup companies share.
ness owners.
Business Incubators Business incubators are organizations that support startup

Simulation: Getting Your businesses by offering resources such as administrative services, technical support, busi-
Business Off the Ground ness networking, and sources of financing that a group of startup companies share.
There are several benefits to incubation beyond sharing a receptionist and copy
machine. Business incubators are often run by colleges, universities, and techni-
cal schools, and many are sponsored by economic development organizations,
cities, or countries. The Canadian Association of Business Incubation (CABI) is a
vital national body of organizations dedicated to supporting the growth of new
and emerging businesses.
Financing Considerations
LO5 Summarize the potential benefits and drawbacks of each major source of small
business financing.
Mario beauregard/Fotolia
Personal Financing
Where can I get the money to start a business? Most new ventures need
some capital to purchase inventory, secure a physical location, and begin some
modest marketing efforts. Most business owners tap into their own personal sav-
ings when they initially invest in their business. Friends and family are generally
secondary sources of cash. Such contacts are often good sources for financing Finding the money required to finance
because, unlike banks or other lending institutions, they often do not require a your business venture can be challenging.
high rate of return or demand to see the business turn a quick profit. However, Many business owners use their own
personal savings.
it’s important when borrowing from friends and family that you treat them as
professionally as possible. Make sure you give them a document with an indica-
tion of how you intend to pay them back and some sort of a contingency plan if things go
wrong. In addition, they should be kept informed of any risks of the venture—both
upfront and ongoing.
Can I use credit cards to finance my business? Credit cards offer a convenient
way to obtain funds quickly, especially with some of the zero percent financing avail-
able. If used wisely, credit cards are a convenient means of acquiring short-term cash,
and nearly 50 percent of small business owners use personal credit cards as a source of
financing for their small business. However, credit cards should be used only if you
can pay the balance completely every month. The risk associated with using credit
cards for your initial business financing is the high rate of interest charged on unpaid
balances. According to the Financial Consumer Agency of Canada, if you had a $1000
balance on a credit card with an 18 percent interest rate and made the minimum
monthly payment, it would take you 10 years to pay off this debt and you would actu-
ally pay $1800 in total.25 The credit card option is expensive if
you cannot pay the balance every month.
Which of the following is a do and which
Self check
is a don’t?
Loans and Grants When financing a business . . .
1. Do or Don’t: Give friends and family who you borrow
What if I need more money than I can provide myself? from a document indicating how and when you
For larger amounts, new business owners sometimes obtain a intend to pay them back.
loan by borrowing against their own assets, such as the equity
2. Do or Don’t: Rely heavily on credit cards if you can’t
in their house or against their retirement account, but the conse- pay the balance completely every month.
quences of the business failing are very severe. If you’re pur-
3. Do or Don’t: Borrow against your own assets without
chasing an existing business or a franchise, banks and other fully understanding the potentially severe personal
financial institutions often provide funding. In fact, roughly half consequences of business failure.
of all small businesses use bank loans and lines of credit as part 4. Do or Don’t: Consider applying for a startup loan or
of their financing strategy. These institutions offer startup loans line of credit from your bank.
and lines of credit to help businesses make payroll during 5. Do or Don’t: Seek financing from a venture capitalist
slower periods as well as capital loans to buy equipment or if the idea of relinquishing any control over your busi-
machinery. The Business Development Bank of Canada (BDC) ness does not appeal to you.
promotes entrepreneurship by providing highly tailored financ- Answers: 1. Do; 2. Don’t; 3. Don’t; 4. Do; 5. Don’t
ing, venture capital, and consulting services to entrepreneurs.
grants Financial awards Can I apply for grants to help start a business? Grants are financial awards usu-
usually offered by federal and
ally offered by federal and provincial governments and some private organizations. The
provincial governments and
some private organizations. Canadian government realizes that small businesses are a significant part of our eco-
nomic growth; therefore, the government’s Centre for Small Business Financing (www.
grants-loans.org/small-business-grants.php) provides the necessary financial resources
to facilitate this. The government set aside more than $21 billion in 2011 for small busi-
nesses in grants (which are nonrepayable), low- or no-interest loans (repayable), tax
refunds or credits, guaranteed loans, financial insurance against business risks, and
repayable contributions.26
Venture Capital and Other Forms of Financing

What if I need additional sources of funds through investors? There are other
sources of funding for your business, such as venture capital, angel investors, or small
business investment companies (SBIC):
■ Venture capitalists. Unlike banks, where there is a contractual agreement to pay back
venture capitalists Investors the money, venture capitalists contribute money to your business in return for
who contribute money to some form of equity—a piece of ownership. Venture capitalists are very picky about
your business in return for
the projects in which they invest. They look for the potential of a public stock offer-
some form of equity—a piece
of ownership. ing; therefore, such financing is generally only available to those businesses that have
been operating for several years and that have the potential to become larger
regional or national companies. To protect their investment, venture capitalists some-
times require that they play an active role in the management of the company, so
business owners must be open to the idea of relinquishing some control when they
seek venture capital funding.
angel investors Wealthy ■ Angel investors. Angel investors are wealthy individuals who are willing to put up
individuals who are willing to their own money in hopes of a profit return later on. Angel capital fills the gap in
put their own money into
startup financing between “friends and family” who help provide you with startup
your business in hopes of a
profit return later on. money and venture capital. Angel investors are often retired entrepreneurs or execu-
tives who may be interested in angel investing for reasons that go beyond purely
monetary returns.
SBIC program. If venture capital is not available or suitable, an alternative is the
■
Small Business Investment Small Business Investment Company (SBIC) program. SBICs are private venture
Companies (SBIC) Private capital firms that make equity capital or long-term loans available to small compa-
venture capital firms that
nies. Canada’s Venture Capital and Private Equity Association (CVCA) represents
make equity capital or
long-term loans available to the majority of private equity companies in Canada, with more than 1800 members.
small companies. Keep in mind that, to protect their investments, outside investors are often looking
for some controlling or managerial role in the business. Funding a business is a task
fraught with challenges and difficult decisions. When a great deal of money is on the line,
the stakes—personal, professional, and financial—are quite high. Thorough research and
careful planning are essential to navigating these tricky issues. By understanding the
available options and being prepared to deal with financial predicaments, business own-
ers give themselves the best chance at success.
Forms of Business Ownership

LO6 Explain the advantages and disadvantages of sole proprietorship.
Sole Proprietorships
What is it called when one person owns a business? Whether they intend to run
large factories, small retail stores, or ebusinesses, entrepreneurs must decide which form
of legal ownership best suits their goals: sole proprietorship, partnership, corporation, or
sole proprietorship A
business owned by one
cooperative.
person and not protected by A sole proprietorship is a business that is owned by one person. A sole proprietor-
limited liability. ship does not need to register with the government and it is not legally separated from
Biz Chat
What’s in a Name? are obscure, hard to pronounce, or hard to spell unless
there is solid market research behind it.
Naming a business should be fun, but it can also be stress- Mistake 5 | Using geographic names. Unless you plan to
ful, especially if you make some of the more common mis- stay local, including a specific geographic name may imply
takes: that you won’t go beyond that regional territory.
Mistake 1 | Involving friends, family, employees, or cli-
ents in the naming decision. You want to make the name TIP: You might need to hire a company to create a name
communicate the key elements of your business, not the for you. Acura, Flixx, and Compac are all names that were
combined efforts of your friends and family. created by experts.
Mistake 2 | Description 1 Product 5 Name. Although it
seems catchy at the time, the result of company names
that try to marry description with product is forced and Discussion Questions
often trite. A service franchise named QualiServe or a day 1. Can you think of a company name that you are not
fond of? Do you shop there? Do you wonder why
spa named TranquiSpa ultimately aren’t the right choices. the owner gave it that name?
Mistake 3 | Using generic names. Gone are the days 2. Can you think of a company name that is difficult
when General Electric or ACME Foods work as corporate for you to pronounce? Do you think this causes a
loss of business for the company?
names. In such highly competitive times, when new prod-
3. Why do you think some business owners name
ucts or services are fighting for attention, it is best to their companies starting with an “A” or an “AA” or
choose a unique name. sometimes even an “AAA”? Does this make it easy
Mistake 4 | Making up a name. While using generic for customers to remember? Can it be confusing
for customers?
names may not be good, be careful to avoid names that
the owner. This means the company’s debts are the responsibility of the owner, and the
owner pays personal income tax on his or her profits rather than corporate taxes. A sole
proprietorship is simpler to operate and is under less government regulation than other
businesses, but there is also more risk involved. If the company is sued, the owner is lia-
ble. If the company owes a debt that the business can’t afford to pay, the creditors can
legally collect personal assets, such as funds from the owner’s retirement accounts, prop-
erty, or cars. A sole proprietorship is not protected by limited liability, which would
require owners to be responsible only for losses up to the amount they invested. Limited limited liability Safeguards
liability safeguards personal assets from being seized as payment for debts or claims. personal assets from being
seized as payment for debts or
claims.
How do I start a sole proprietorship? The minute you begin doing business by
yourself—that is, collecting income as a result of performing a service or creating a prod-
uct—you are operating as a sole proprietor. There are no special forms to fill out, nor any
special filing requirements with the federal or provincial government. At a minimum,
you might need to obtain local licences or permits, or you might have to ensure that
you’re operating in an area zoned for such business activity.
What are the advantages of being a sole proprietor? There are several advan-
tages to forming your business as a sole proprietorship, the first of which is ease of for-
mation. With only one person making all the decisions and no need to consult other
owners or interested parties, sole proprietors have greater control and more flexibility to
act quickly. Another advantage is that there are no specific corporate records to keep or
reports to file, including tax reporting. Since there is no legal distinction between the
owner and the business, no separate tax return is required. As a result, the income and
expenses of a sole proprietorship flow through the owner’s personal tax return. For
example, imagine you run a landscaping business during the summer in addition to your
regular job. If the lawn mower breaks down and needs to be replaced, that expense could
be more than all the earnings you collected, generating a loss for your lawn mowing busi-
ness. You can subtract that loss from the income earned from your regular job, reducing
your income tax obligation.
What are the disadvantages of being a sole proprietor? If the type of business
you’re running has the potential for someone to sue you because of errors on your part,
you may not want to operate as a sole proprietorship. A sole proprietor is personally
liability The obligation to pay responsible for all the debts and liabilities of the business. A liability is the obligation to
a debt such as an account pay a debt such as an account payable or a loan.
payable or a loan.
A sole proprietor may also incur a liability if he or she becomes responsible for pay-
ing for any damages or personal injuries the owner’s employees cause. While there may
be an unlimited number of employees in a sole proprietorship, there is also unlimited lia-
unlimited liability If bility for their actions. Unlimited liability means that if business assets aren’t enough to
business assets aren’t enough pay business debts, then personal assets, such as the sole proprietor’s house, personal
to pay business debts, then
investments, or retirement plans, can be used to pay the balance. In other words, the pro-
personal assets, such as the
sole proprietor’s house, prietor can lose an unlimited amount of money.
personal investments, or Imagine that you’re running a catering business, and while you’re preparing food in
retirement plans, can be used someone’s house, the oven catches fire because you forgot to take the egg rolls off the
to pay the balance. paper tray. You are personally responsible, or liable, for paying for any damages if your
business assets are not sufficient to cover the damages. If the damages are severe
enough—perhaps your client’s entire house burns down—you could lose all your assets,
including your own home and savings.
Another drawback of a sole proprietorship is the potential difficulty in borrowing
money to help your business grow. Banks will be lending to you personally, not to your
business, so they will be more reluctant to lend large amounts, and the loan will be lim-
ited to the amount of your personal assets.
Partnerships
LO7 Explain the advantages and disadvantages of partnership and describe the importance of
partnership agreements.
What are the advantages of bringing in a partner? Sometimes running a busi-
ness by yourself can be a daunting task, and adding one or more owners can help share
partnership A type of the responsibilities. A partnership is a type of business entity in which two or more
business entity in which two owners (or partners) share the ownership and the profits and losses of the business.
or more owners (or partners)
There are several reasons why joining with someone else in starting a business makes
share the ownership and the
profits and losses of the sense. More owners help contribute to both the starting and ongoing capital of the busi-
business. ness. Multiple people are involved in partnerships, so there is more time available to
increase sales, market the business, and generate income. Sharing the financial responsi-
bility brings on more people who are interested in the company’s overall profitability
general partnership A type and are as highly motivated as you are to make the business succeed. Therefore, addi-
of partnership that is similar
tional owners, unlike employees, are more likely to be willing to work long hours and go
to the sole proprietorship in
that all the (general) partners the extra mile.
are jointly liable for the Adding partners to help share the workload also allows for coverage for vacations,
obligations of the business. illness, or personal issues. Moreover, if partners have complementary skills, they create a
collaboration that can be quite advantageous. Partners can help discuss ideas and projects
general partners Partners
who are full owners of the as well as make the big decisions. For example, if you’re great at numbers but hate to
business and are responsible make sales calls, bringing in a partner who loves to knock on doors would be beneficial
for all the day-to-day business for your business.
decisions and remain liable The two most common partnership forms include general partnerships and limited
for all the debts and
partnerships. A general partnership is similar to the sole proprietorship in that all the
obligations of the business.
(general) partners are jointly liable for the obligations of the business. The general part-
limited partners Partners ners are full owners of the business, are responsible for all the day-to-day business deci-
who don’t participate actively sions, and remain liable for all the debts and obligations of the business. Sometimes a
in the business, and their
liability is limited to the
business can bring on additional “limited” partners, mostly to provide capital and earn a
amount they invested in the share in the profits, but not to operate the business. Limited partners don’t participate
partnership. actively in the business—they are simply investors and their liability is limited to the
amount they invested in the partnership. Limited part-

nerships consist of at least one general partner (who has
unlimited liability) and one or more limited partners who
cannot participate in the day-to-day activities of the busi-
ness or they will risk losing their limited liability status.
What are the disadvantages to adding partners?
Stephen Coburn/Shutterstock
For every advantage a partner can bring, adding the
wrong partner can be equally problematic. Obviously,
adding partners means sharing profits and control. A
potential partner may have different work habits and
styles from you, and if the partner’s style isn’t comple-
mentary the differences can prove challenging. In addi-
tion, as the business begins to grow and change, your
partner might want to take the business in a different Bringing in one or more partners to your business can be beneficial,
direction than you do. Like entering into a marriage, you especially if they have complementary skills to your own. However,
want to consider carefully the person(s) with whom you choosing a partner is a lot like choosing a spouse: The wrong decision
will be sharing your business. can bring you a lot of challenges and grief.
As a form of business ownership, how does a partnership compare to a sole limited partnerships A type
proprietorship? Partnerships and sole proprietorships are very similar; in fact, the of partnership that consists of
at least one general partner
biggest difference between the two is the number of people contributing resources and
(who has unlimited liability)
sharing the profits and the liabilities. It’s just as easy to form a partnership as a sole pro- and one or more limited
prietorship. The government does not require any special forms or reports—although partners who cannot
some local restrictions may apply for licences and permits. For example, if you and your participate in the day-to-day
brother-in-law form a small partnership called “All in the Family Electricians,” before activities of the business or
they will risk losing their
you are able to do business you might have to apply for a licence, but you do not need
limited liability status.
any special papers to create the partnership itself. Also, like a sole proprietorship, part-
nerships do not file a separate tax return. All profits and losses of the partnership flow
directly through each partner’s own tax return.
What goes into a partnership agreement? Although no formal documentation is

required to create a partnership, it’s a good idea to draw up an agreement. A partnership
can begin with a handshake, and many of them do, but it is best for all involved parties
that a written document, called a partnership agreement, formalizes the relationship between
business partners. Think of a partnership agreement as a business prenuptial agreement. It
helps to settle conflicts when they arise and may discourage small misunderstandings
from erupting into larger disagreements. Many points can be included in a partnership
agreement; however, the following items should always be included in the agreement:
Capital contributions. The amount of capital, or investments in the form of money,
1. capital Investments in the
equipment, supplies, computers, and any other tangible thing of value, that each form of money, equipment,
partner contributes to begin the business should be noted in the partnership agree- supplies, computers, and any
ment. In addition, the agreement should also address how additional capital can be other tangible thing of value.
added to the business—who will contribute it and whether there will be a limit to a
partner’s overall capital contribution.
Responsibilities of each partner. To avoid the possibility of one partner doing more or
2.
less work than others, or a conflict arising over one partner assuming a more control-
ling role than others, it’s best to outline the responsibilities of each partner from the
beginning. Unless otherwise specified, any partner can bind the partnership to any
debt or contract without the consent of the other partners. Therefore, it’s especially
important to spell out the policy regarding who assumes responsibility for entering
into key financial or contractual arrangements.
Decision-making process. It is important to consider how decisions will be made.
3.
Knowing whether decisions will be the result of mutual consent of all or several part-
ners, or whether just one or two partners will make the key decisions is essential to
help partners avoid disagreements. What constitutes a “key” decision should also be
defined in the agreement. In a partnership of two, where the possibility of a deadlock
is likely, some partnerships provide for a trusted associate to act as a third partner
whose sole responsibility is to act as the tiebreaker.
Shares of profits or losses. Not only should the agreement specify how to divide profits
4.
and losses between the partners, but it should also specify how frequently this will
be done. One partnership agreement might stipulate that the profits and losses will
be proportional to each partner’s initial contribution to the partnership, whereas
another partnership agreement might just split the profits evenly. It’s also important
to detail how adjustments to the distributions will be made—if any at all—as the
partnership matures and changes.
Departure of partners. Eventually, the composition of partners will change; original
5.
partners will leave and new partners will come aboard. The partnership agreement
should have rules for a partner’s exit, whether it’s voluntary, involuntary, or due to
death or divorce. Provisions to remove a partner’s ownership interest are necessary
so the business does not need to liquidate. The agreement should include how to
determine the amount of ownership interest and to whom the departing partner is
permitted to transfer his or her interest. It’s important to consider whether a partner
can transfer his or her ownership solely to the remaining partners or whether indi-
viduals outside the existing partnership can buy the departing partner’s share.
Addition of partners. The partnership agreement also helps spell out the requirements
6.
for new partners entering the partnership. How the profits will be allocated and
whether there will be a “junior partner” period during which the new partner can
prove him or herself before obtaining full partner status should also be included.
Corporations
LO8 Explain how a corporation is formed and how it compares with sole proprietorships and
partnerships.
What is a corporation? When you think of corporations, you might think of large
companies such as Canadian Tire, BlackBerry, or Air Canada, but any-sized company can
corporation A specific form incorporate. A corporation is a specific form of business organization that is a separate
of business organization that legal entity, that is liable for its own debts, and whose owners’ liability is limited to their
is a separate legal entity, that
investment in the company. Because a corporation is considered a separate entity apart
is liable for its own debts, and
whose owners’ liability is from its owners, it has legal rights like an individual, so a corporation can own property,
limited to their investment in assume liability, pay taxes, enter into contracts, and can sue and be sued—just like any
the company. other individual. Unlike partnerships and sole proprietorships, corporations provide
business owners with better protection of their personal assets.
How do corporations raise capital? Sole proprietorships and partnerships, by their

nature, are dependent on their founding owners. When an owner dies or otherwise
leaves, the partnership or sole proprietorship is usually terminated. On the other hand,
shareholders own a corporation, so its
existence doesn’t depend on its founding
members. Shares of ownership are easily
exchanged, so the corporation will con-
tinue to exist should the owner die or
wish to sell his or her interest in the busi-
ness. In theory, a corporation is capable of
continuing forever.
Incorporating offers a business
greater flexibility when raising money.
Banks and venture capitalists are more
Elena Elisseeva/Shutterstock
likely to lend money to a business that is

incorporated. In times when greater
sources of funds are needed than venture
capital or bank loans can raise, a corpora-
tion can extend its ownership by “going
public”—selling shares of ownership in
the corporation to the public on the stock
People usually think of big companies when they think of corporations, but any-sized exchange. A stock certificate is tangible
business can incorporate, including a one-person consulting firm. evidence of investment and for some
Hold a Obtain
Choose a Appoint File Articles of Draft
Meeting of Issue Stock Licences and
Name Directors Incorporation Bylaws
the Board Permits
Figure 4.4 Steps in Forming a Corporation
investors that is very important. Corporations are said to be public corporations when public corporations
shares of stock are widely held and available for sale to the public—such as Bombardier Companies whose shares of
stock are widely held and
and Petro-Canada. The stock of a private corporation is held by only a few people and
available for sale to the public.
is not generally available for sale—such as Cirque du Soleil and Pattison.
private corporations
Companies whose shares of
How is a corporation formed? If a company intends to do business in more than one
stock are held by only a few
province, it must incorporate under the federal Canada Business Corporations Act. If a people and are not generally
company intends to do business in only one province, it may incorporate under that available for sale.
province’s corporation act. Generally, a corporation files articles of incorporation with
articles of incorporation
the government, laying out the general nature of the corporation, the name of the corpo- Lay out the general nature of
ration and its directors, the type and number of shares to be issued, and the location of the corporation, the name of
the company’s operations. Once the articles are approved, the corporation’s directors the corporation and its
meet to create bylaws that govern the internal functions of the corporation (see Figure directors, the type and
4.4). Specific duties of the board of directors and individual board members, committees, number of shares to be issued,
and the location of the
and officers are set out in the corporate bylaws. The bylaws are the rules of a corporation, company’s operations.
established by the board of directors during the process of starting a corporation. All cor-
porations must attach the word “Incorporated” (Inc.), “Limited” (Ltd./Ltée), or “Corpo- bylaws The rules of a
corporation, established by
ration” (Corp.) to the company name. the board of directors during
the process of starting a
How is a corporation structured? Shareholders—investors who buy shares of corporation.
ownership in the form of stock—are the real owners of a corporation. Dividends are pay-
shareholders Investors in a
ments made by a corporation to its shareholders. When a corporation earns a profit, it can corporation who buy shares of
either reinvest that profit in the business (called retained earnings) or it can be paid to the ownership in the form of
shareholders as a dividend. Many corporations retain a portion of earnings and pay the stock.
remainder in dividends. A dividend is allocated as a fixed amount per share; therefore, a
shareholder receives dividends in proportion to their shareholdings (the more shares, the
more dividends). Shareholders can attend annual meetings, elect a board of directors, and
vote on matters that affect the corporation, in accordance with its charter and bylaws.
Each share or stock generally carries only one vote. The shareholders elect a board of board of directors A group
directors to govern and handle the overall management of the corporation. A corporate of people who are elected by
shareholders to govern and
board has great power and great responsibility: the board must act with the corporation’s
handle the overall
best interests in mind. The directors set corporate goals and policies, hire corporate offi- management of the
cers (e.g., president, vice-president, CEO, CFO, COO, CIO), and oversee the firm’s opera- corporation.
tions and finances.
What are the advantages of incorporation? Aside from the obvious, biggest
advantage of the corporate structure of limited liability, continuity is another advan-
tage. In theory, a corporation could continue forever because shares of stock may be
sold or passed on to heirs. As mentioned above, corporations also have an advantage
when raising money.
What are the disadvantages of incorporation? It is costly to incorporate and there

are many government regulations. Because a corporation is a separate legal entity, many
requirements must be fulfilled to maintain the corporate status. For example, all compa- double taxation Means that
nies must file an annual report and maintain written minutes of annual and other peri- the corporation must pay
odic board of director and shareholder meetings. Double taxation is also considered a income taxes on its profits,
and the shareholders must
disadvantage of incorporation. Double taxation means that the corporation must pay pay personal income taxes on
income taxes on its profits, and the shareholders must pay personal income taxes on the the dividends they receive
dividends they receive from the corporation. from the corporation.
Nonprofit Corporations
LO9 Describe the characteristics of nonprofit corporations and cooperatives.
Must a nonprofit corporation be legally incorporated? Some organizations don’t
fit the mould of sole proprietorship, partnership, or corporation. When this occurs, busi-
ness owners might form nonprofit organizations or cooperatives. Legally, a nonprofit cor-
poration is an incorporated business that does not seek a net profit and instead uses
revenue available after normal operating expenses for the corporation’s declared social or
educational goals. Incorporation is not necessary, but to receive limited liability protec-
tion a nonprofit organization must file incorporation papers and become established as a
separate legal entity.
Similar to a for-profit corporation, a nonprofit corporation is required to hold board
of director meetings and to keep complete books and records. The greatest difference
from a for-profit corporation is that a nonprofit organization cannot be organized for any
person’s private gain. Nonprofit organizations do not issue shares of stock, and their
members may not receive personal financial benefit from the organization’s profits (other
than salary as an employee). In addition, should the nonprofit dissolve, the organization’s
assets must go to a similar nonprofit group.
Do nonprofit corporations generate profits? Nonprofit corporations are not in

business to generate a profit. Nonprofit organizations generate their revenue primarily
through fundraising and donations. To maintain their tax-exempt status, nonprofit orga-
nizations must demonstrate that a substantial portion of their income or revenue is spent
on services to achieve their goals. Nonprofit corporations must apply for charitable status
to benefit from tax-exempt status and to issue tax-deductible receipts to donors. The Can-
ada Revenue Agency (CRA) is the government department responsible for granting orga-
nizations charitable tax status.
What are the benefits of being tax-exempt? As a corporation that has received
tax-exempt status, the donations that are the organization’s primary source of revenue are
tax deductible to the donor, which encourages funding. Other benefits of tax-exempt sta-
tus are that the nonprofit is exempt from paying most federal and provincial corporate
income taxes and may be exempt from provincial sales and property taxes. Such organi-
zations are able to apply for grants and other public or private distributions, as well as
discounts on postal rates and other services.
Cooperatives
How do cooperatives differ from the other forms of business ownership?
Cooperatives differ from other forms of business because they have a different purpose,
cooperative A business control structure, and allocation of profit. A cooperative is a business owned and gov-
owned and governed by erned by members who use its products or services, not by outside investors. The pri-
members who use its products
mary purpose of cooperatives is to meet the common needs of their members. For
or services, not by outside
investors. instance, Mountain Equipment Co-op is Canada’s largest retailer cooperative, which sells
outdoor gear, clothing, and offers services to its members. Cooperatives exist in virtually
every sector of the economy, from agriculture, retail, and financial services to housing,
Video: Elm City Market: childcare, funeral services, and renewable energy. See Table 4.4 for a comparison of the
Organizational Structure forms of business ownership.
How are cooperatives structured? Cooperatives depend on their members to vol-

unteer for projects supported by the co-op and serve on boards and committees. The con-
trol structure in a cooperative differs from that of a corporation in that each member
receives one vote, not one vote per share. This helps cooperatives serve the common need
rather than the individual need. Profits are shared among the members based on how
much they use the co-op, not on how many shares they hold. Some people may consider
the democratic voting arrangement and dividends based purely on patronage a disad-
vantage and may be discouraged from forming or joining a cooperative.
Table 4.4 Comparison of Forms of Business Ownership

Characteristic Sole Proprietorship Partnership Corporation Cooperative
Ease of formation High High Medium Medium
Continuity Low Low High High
Protection against liability Low Low High High
Tax advantages High High Low High
Ease of raising money Low Medium High High
Government regulation Low Low High Medium
Business Combinations: Mergers and Acquisitions

LO10 Summarize the different types of mergers and acquisitions and explain why they occur.
What are mergers and acquisitions? Sometimes, in the evolution of a business or
in response to market forces, companies seek opportunities to expand by adding new
product lines, spreading out into different geographic areas, or growing the company to
increase its competitive advantage. Often product or market expansion is done gradually
by slowly adding new product lines or penetrating new areas. However, it takes time and
investment to research and develop new products or to locate and build in new areas.
Often, especially to remain competitive, expansion needs to happen more quickly. In that
case, it’s easier to integrate another established business through the process of mergers
or acquisitions.
A merger occurs when two or more firms combine to form one new company, merger Occurs when two or
which often takes on a new corporate identity. Generally, a merger implies that the two more firms combine to form
one new company, which
companies involved are about the same size and have mutually agreed to form a new
often takes on a new
combined company. When a “merger of equals” happens, both merging companies corporate identity.
cease to exist and one new company takes over. For example, in 2009 Suncor Energy
merged with Petro-Canada, stating that by merging the two oil companies would create
Canada’s largest energy company, which would provide protection against potential for-
eign buyouts.27
Under the Competition Act, mergers of all sizes and in all sectors of Canada’s econ-
omy are subject to review by the Competition Bureau to determine whether they will
likely result in a substantial lessening or prevention of competition. For instance, when
TD Bank wanted to acquire Canada Trust in 2000, the Competition Bureau concluded that
the merger would likely lessen competition and affect consumers negatively. To remedy
the bureau’s concerns, TD Bank proposed to sell the branches in the identified problem-
atic markets and either convert its Visa credit card portfolio to MasterCard or sell the
Canada Trust MasterCard portfolio. The bureau announced that the government had
approved the Canada Trust acquisition contingent upon the proposed remedies being
fully implemented.28 acquisition Occurs when one
An acquisition, on the other hand, occurs when one company or investor group company or investor group
buys a corporation and the identity of the acquired company might be lost. Often the pur- buys a corporation and the
identity of the acquired
chased company ceases to exist, and it operates and trades under the buying company’s
company might be lost.
name. A company can also acquire divisions or subsidiaries of another firm.
When the acquisition is supported by the target company’s management and board friendly takeover Occurs
of directors, it is called a friendly takeover, but if the takeover goes against the wishes of when the target company’s
management and board of
the target company’s management and board of directors, it is called a hostile takeover.
directors support an
Hostile takeovers are usually accomplished through a proxy fight, whereby the acquiring acquisition.
company quietly purchases enough stock on the open market to gain a controlling inter-
est in the company and affect a change in management. Another method used in hostile hostile takeover Occurs
when a takeover goes against
acquisition occurs through a tender offer, where the acquiring firm offers to buy the target the wishes of the target
company’s stock at a price higher than its current value, which is meant to induce share- company’s management and
holders into selling. board of directors.
Horizontal Merger Why do mergers and acquisitions occur? Synergy is the

business buzzword often used to justify a merger or an acquisi-
merges with tion. Synergy is the achieved effect when two companies com-
bine and the result is better than each company could achieve
individually. Synergistic value is created when the new company
Vertical Merger can realize operating or financial economies of scale (the cost
advantage that a business obtains from expansion). Combined
firms often lower costs by trimming redundancies in staff, shar-
merges with
ing resources, and obtaining discounts accessible only to a larger
firm. Often, companies join together to gain a greater competitive
advantage or become the dominant force in their market.
Product Extension Merger
Are there different types of mergers? The rationale and
merges with strategy behind every merger is different but, as illustrated in
Figure 4.5, there are some consistencies that are distinguished by
the relationship between the two companies that are merging:
Market Extension ■ Horizontal merger. Two companies that share the same prod-
uct lines and markets and are in direct competition with
each other, such as a soft drink company and a mineral
merges with water company, are merging horizontally.
■ Vertical merger. Two companies that have a company/cus-
tomer relationship or a company/supplier relationship, such
as Walt Disney and Pixar or eBay and PayPal, are merging
Conglomeration vertically.
■ Product extension merger. Two companies selling different but
merges with
related products in the same market, such as the 2005
13 oz. (16
net wt.)
merger between Adobe and Macromedia, are forming a
product extension merger.
Figure 4.5 Different Types of Mergers ■ Market extension merger. Two companies that sell the same
products in different markets, such as Morrison and Safe-
Companies merge for different strategic reasons. Some- way supermarkets, are forming a market extension merger.
times companies merge to enter new markets, whereas Although both Morrison and Safeway are in the United
others want to expand into new fields and save costs. Kingdom, Morrison is mainly in Great Britain and Safeway
is mainly in Scotland.
synergy The achieved effect ■ Conglomeration. Two companies that have no common business areas merge to obtain
when two companies combine diversification, such as Citicorp, a banking services firm, and Travelers Group Inc.,
and the result is better than
an insurance underwriting company, which combined to form one of the world’s
each company could achieve
individually. largest financial services group, Citigroup Inc.
Are there disadvantages with mergers? Although cost cutting may be the initial
focus of some mergers, revenues and profits ultimately suffer because day-to-day activi-
ties are neglected. Additionally, corporate cultures may clash, and communications may
break down if the new division of responsibilities is vague. Conflicts may also arise from
divided loyalties, hidden agendas, or power struggles within the newly combined man-
agement team. Employees may be nervous because most mergers result in the elimina-
tion of jobs and some may actually leave the company, feeling their jobs are in jeopardy
and seeking a more stable environment.
Chapter Synopsis
LO1 List the traits of an effective entrepreneur, and describe ■ are motivated to succeed
how these characteristics often lead to business ■ are flexible and self-directed
success. (pp. 66–70) ■ work well with others and possess good leadership skills
■ are “system thinkers,” seeing the whole process rather than
Successful entrepreneurs
just individual pieces of it
■ are innovative
Successful entrepreneurs see problems to be solved or
■ take risks
opportunities that aren’t being addressed in the marketplace—
they recognize opportunity niches. They also make improve- LO5 Summarize the potential benefits and drawbacks of
ments to existing products or systems, or they introduce each major source of small business financing.
something new and make profitable solutions out of problems. (pp. 79–80)
For larger amounts, new business owners sometimes obtain a loan
LO2 Describe the factors that lead to small business failure, by borrowing against their own assets, such as the equity in their
and explain why a business plan is crucial to small house or against their retirement account, but the consequences of
business success. (pp. 70–73) the business failing are very severe. Grants are financial awards
that are usually offered by federal and provincial governments
A business plan is a formal document that states the goals of the
and some private organizations. Venture capitalists are another
business as well as the plan for reaching those goals. A business
source of funding. Unlike banks, where there is a contractual
plan should tell the story of your business concept—it is a blue-
agreement to pay back the money, venture capitalists contribute
print for the company, and it is an indispensable tool in attract-
money to your business in return for some form of equity—a piece
ing investors or obtaining loans. Preparing a business plan takes
of ownership. Angel investors are wealthy individuals willing to
a lot of time, but it is time well spent because your business plan
put up their own money in hopes of a profit return later on.
is an ongoing guide. You use it to acquire startup capital as well
Often, outside investors are looking for some controlling or
as to assess your company’s progress, as long as you remember
managerial role in the business. When a great deal of money is
to update it periodically. A realistic business plan forces you to
on the line, the stakes—personal, professional, and financial—are
think critically about your proposed business and reduces your
quite high. By understanding the available options and being
risk of failure.
prepared to deal with financial predicaments, business owners
Businesses fail because of the following reasons:
give themselves the best chance at success.
■ accumulating too much debt
■ inexperienced management LO6 Explain the advantages and disadvantages of sole
■ poor planning proprietorship. (pp. 80–82)
There are several advantages to forming your business as a sole
LO3 Compare the advantages and disadvantages of starting proprietorship, the first of which is ease of formation. With only
a business from scratch to buying an existing one person making all the decisions and no need to consult other
business. (pp. 73–75) owners or interested parties, sole proprietors have greater con-
trol and more flexibility to act quickly. Another advantage is that
there are no specific corporate records to keep or reports to file,
Purchasing an including tax reporting. Since there is no legal distinction
Starting from Scratch Existing Business between the owner and the business, no separate tax return is
required. As a result, the income and expenses of a sole propri-
• Freedom to do what you want • Ease of startup
etorship flow through the owner’s personal tax return.
• Can start small and grow • Existing customer base and
Advantages
A sole proprietor is personally responsible for all the debts

• Satisfaction of building revenue
and liabilities of the business. Unlimited liability means that if
something new • May be easier to secure loans
business assets aren’t enough to pay business debts, then per-
• Can create the kind of image and because the business has a
sonal assets, such as the sole proprietor’s house, personal invest-
reputation you want proven track record
ments, or retirement plans, can be used to pay the balance.
• It’s risky! • High purchase price Another drawback of a sole proprietorship is the potential diffi-
• The business has no proven track • May inherit previous owners culty in borrowing money to help your business grow.
record mistakes
Disadvantages
• It takes time to build a good • There are unknowns LO7 Explain the advantages and disadvantages of
reputation partnership and describe the importance of partnership
• Nothing is established; you need agreements. (pp. 82–84)
to do everything
• There is no existing cash flow Since a partnership has more owners, there are more available
• It can be difficult to obtain contributions to both the starting and ongoing capital of the busi-
financing ness. Sharing the financial responsibility means all the owners
are interested in the company’s overall profitability and are as
highly motivated as you are to make the business succeed.
Therefore, additional owners, unlike employees, are more likely
LO4 Outline the advantages and disadvantages of to be willing to work long hours and go the extra mile.
franchising. (pp. 75–79) Adding partners to help share the workload also allows for
For many, buying a franchise is an easier, less risky means of coverage for vacations, illness, or personal issues. Moreover, if
starting a business. Since the franchisor provides much of the partners have complementary skills, they create a collaboration
marketing and financial tools needed to run the business, all the that can be quite advantageous. Partners can help discuss ideas
franchisee is expected to bring to the table is management and and projects as well as make the big decisions. Partners can help
marketing skills, time, and money. In addition to a recognized in sales and marketing to generate income.
brand name, other advantages include a proven system of opera- For every advantage a partner can bring, adding the wrong
tion, strength in numbers, initial training, marketing support, partner can be equally problematic. Obviously, adding partners
and market research is often provided as well. means sharing profits and control. A potential partner may have
Although buying a franchise provides the franchisee with different work habits and styles from you, and if the partner’s
many benefits, other disadvantages include lack of control, style isn’t complementary, the differences can prove challenging.
heavy workload, competition, shared common problems, high In addition, as the business begins to grow and change, your
startup costs, and franchisees must pay a monthly royalty fee to partner might want to take the business in a different direction
the franchisor. Other costs the franchisee might incur include real than you do, so preparing a partnership agreement can help to
estate purchase or rental, equipment purchase or rental, extra clarify the partners’ expectations of how to run their business
signage, and opening inventory. and how they plan to resolve any possible disagreements.
LO8 Explain how a corporation is formed and how it LO10 Summarize the different types of mergers and
compares with sole proprietorships and acquisitions and explain why they occur. (pp. 87–88)
partnerships. (pp. 84–85) Sometimes, in the evolution of a business or in response to mar-
A corporation is a separate legal entity, liable for its own debts, ket forces, companies seek opportunities to expand by adding
and whose owners’ liability is limited to their investment in the new product lines, spreading out into different geographic areas,
company. Because a corporation is considered a separate entity or growing the company to increase their competitive advantage.
apart from its owners, it has legal rights like an individual, so a Often, especially to remain competitive, this expansion needs to
corporation can own property, assume liability, pay taxes, enter happen quickly. In that case, it’s easier to integrate another estab-
into contracts, and can sue and be sued—just like any other indi- lished business through the process of mergers or acquisitions
vidual. Unlike partnerships and sole proprietorships, corpora- than try to add new product lines or expand into new areas.
tions provide business owners with better protection of their ■ Horizontal merger: two companies that share the same product
personal assets. lines and markets and are in direct competition with each
If a company intends to do business in more than one other, such as a soft drink company and a mineral water com-
province, it must incorporate under the federal Canada Busi- pany.
ness Corporations Act. If a company intends to do business in ■ Vertical merger: two companies that have a company/cus-
only one province, it may incorporate under that province’s tomer relationship or a company/supplier relationship, such
corporation act. as Walt Disney and Pixar or eBay and PayPal.
■ Product extension merger: two companies selling different but
LO9 Describe the characteristics of nonprofit corporations related products in the same market, such as the 2005 merger
and cooperatives. (pp. 86–87) between Adobe and Macromedia.
■ Market extension merger: two companies that sell the same
Legally, a nonprofit corporation is an incorporated business that
products in different markets, for example, Morrison super-
does not seek a net profit and instead uses revenue available
market and Safeway. Although both are in the United King-
after normal operating expenses for the corporation’s declared
dom, Morrison is mainly in Great Britain and Safeway is
social or educational goals.
mainly in Scotland.
Cooperatives differ from other forms of business because
■ Conglomeration: two companies that have no common busi-
they have a different purpose, control structure, and allocation of
ness areas merge to obtain diversification, such as Citicorp, a
profit. A cooperative is a business owned and governed by mem-
banking services firm, and Travelers Group Inc., an insurance
bers who use its products or services, not by outside investors.
underwriting company, combining to form one of the world’s
The primary purpose of cooperatives is to meet the common
largest financial services group, Citigroup Inc.
needs of their members.
MyBizLab Study, practise, and explore real business situations with these helpful resources:
• Interactive Lesson Presentations: Work through interactive presentations and assessments to test
your knowledge of business concepts.
• Study Plan: Check your understanding of chapter concepts with self-study quizzes.
• Dynamic Study Modules: Work through adaptive study modules on your computer, tablet, or mobile device.
• Simulations: Practise decision-making in simulated business environments.
Key Terms
acquisition (p. 87) due diligence (p. 75) hostile takeover (p. 87) opportunity niche (p. 66)
angel investors (p. 80) entrepreneurial team (p. xx) Internet entrepreneurs partnership (p. 82)
articles of incorporation entrepreneur (p. 66) (p. 69) private corporations (p. 85)
(p. 85) franchise (p. 75) intrapreneurs (p. 69) public corporations (p. 85)
board of directors (p. 85) friendly takeover (p. 87) liability (p. 82) shareholders (p. 85)
business incubators (p. 78) general partners (p. 82) lifestyle entrepreneurs Small Business Investment
business plan (p. 73) general partnership (p. 82) (p. 68) Company (SBIC) (p. 80)
bylaws (p. 85) grants (p. 80) limited liability (p. 81) sole proprietorship (p. 80)
capital (p. 83) growth entrepreneurs limited partners (p. 82) synergy (p. 88)
cooperative (p. 86) (p. 69) limited partnerships (p. 83) unlimited liability (p. 82)
corporation (p. 84) home-based merger (p. 87) venture capitalists (p. 80)
double taxation (p. 85) entrepreneurs (p. 69) micropreneurs (p. 68)
Critical Thinking Questions

1. Bill Gates, Donald Trump, and Oprah Winfrey are some business is just starting? Which sources of funding seem best
well-known successful entrepreneurs. What common traits once the business is established and is looking to expand?
do these individuals possess that have led to their success? 3. Imagine that you are planning to open a new business in
2. Compare the different sources of funding available to small partnership with a close friend. Briefly describe the skills and
business owners. Which sources of funding seem best when a abilities that your new partner can offer that you lack. What
are the pros and cons of partnering with this person? What 5. Businesses, especially small businesses, often compete for
kinds of issues do you anticipate might potentially cause dis- customers through customer experience—customer service,
agreement with this person? Write examples of terms you quality of the experience, or exceeding the customer expecta-
could include in a partnership agreement that would help the tions. Imagine that you open your own business. Identify
business run more smoothly. how you could build a competitive advantage by offering a
4. Discuss the different risks facing someone creating a new better customer experience. Be specific. What would your
business from scratch and someone buying an existing small business offer customers that would entice them to buy from
business. What risks will both new business owners face? you instead of your competitors?
Compare the advantages and disadvantages of each option.
Which would you rather do and why?
Application Exercises
1. A closer look at franchising. Using the Internet, research a 4. Business combinations. Look on the Internet for a current
franchise that you think would be a viable investment oppor- example of a business merger, takeover, or acquisition.
tunity for you. Put together a brief report that outlines the Explain the circumstances of the event. What companies are
following information about your chosen franchise: fees (ini- involved? Was the event friendly or hostile? What are the rea-
tial and ongoing), location/site assistance, training and ongo- sons given for the combination? What is your opinion of this
ing support, marketing assistance, competition (both from business combination? Do you think it is a good business
other businesses and additional franchises within the organi- decision? Why or why not?
zation), and the pros and cons of starting a business with this 5. Small business owners. In the results of the 2011 Census,
franchise. Milton, Ontario, was named the fastest-growing community
2. Microfinancing: A little $ can go a long way. Visit www. in Canada. Imagine that you want to start a catering business
kiva.org and click on the “Lend” tab to view the list of entre- in Milton (or another fast-growing community). You see that
preneurs. Use the drop-down menus in the “Find Loans” a catering business is for sale in Milton for $150 000. The com-
search bar to locate an entrepreneur or entrepreneurial team pany specializes in catering business events. The owner, cur-
you would consider lending money to. In a brief report, dis- rently operating the business from home, is moving to
cuss the entrepreneur or group you chose, including informa- another country and wants to sell. You will need outside
tion on the loan amount requested, the percentage of funds investors to help you purchase the business. Develop ques-
raised, the entrepreneur’s country of origin, and a summary tions to ask the owner about the business. What other types of
of the entrepreneur’s business venture. In your report, information would you need before making a decision to buy
explain your reasons for choosing to loan to this particular this company? Either you will purchase this existing business
entrepreneur. or start a catering business of your own, therefore you should
3. Do you have what it takes to be an entrepreneur? Visit the investigate the feasibility of each option. Once you’ve gath-
Business Development Bank of Canada’s (BDC) website at ered the necessary information, visit Sample Business Plans
www.bdc.ca. Go to the Advice Centre, Tools, and complete (www.bplans.com) and search for a sample catering business
the Entrepreneurial self-assessment. What aspects of your plan and review it. Use the example you found as a starting
personality make you a good candidate to be an entrepre- point to draft an executive summary that will attract investors
neur? What is holding you back? for your business.
Ethics and Responsibility

Social Responsibility: Forming a Plan of Action Step 2. As a class or in smaller groups, discuss the ways in
Milton Hershey, founder of Hershey Chocolate Company, dedi- which your business can contribute to customers, employees,
cated himself to caring about his customers, his employees, and and the community in socially responsible ways. Write down a
his community at large. Hershey felt that giving back to the com- list of ideas that your group came up with.
munity was not only his moral obligation but also a crucial part Step 3. Create a social responsibility plan for your company. In
of his success. the document, describe your business and the ways in which your
Step 1. Imagine that you operate a business in your community business can contribute to specific organizations in your commu-
(choose from a restaurant, a landscaping service, or a beauty nity. Be as specific with your plan as possible. Your instructor may
salon). ask you to submit your work or discuss it with the class.
Closing Case
The Fish That Pulled Him Under sell them to fishing stores all over Ontario. There was a big
demand for this type of equipment, especially from Canadians of
Born in Europe, avid angler Kevin Hengeveld immigrated to European descent. He dealt with many fishing storeowners and
Canada in the early 1980s. In the 1990s, Hengeveld started an learned much about how the retail fishing industry worked.
import/export wholesale business in Ontario whereby he would Hengeveld created an online store called Fish in the Net
import products not currently sold in the Canadian market and where he could sell his imported goods directly to customers,
acquiring many loyal customers. He was very knowledgeable was only about half that of the second store so it was best to
about many types of fishing (i.e., float fishing, carp fishing, sport focus his efforts on the second store, even though the second
fishing, ice fishing) and published a fishing magazine in two store was not in as good a neighbourhood and the operating
languages. costs were somewhat higher. The property owner had Hen-
During the second year of business, Hengeveld noticed that geveld sign a lease that included a clause stating that the lessee
many stores were not paying on time, but the products were sell- was responsible for all repairs and for paying the hydro bills for
ing well. For many years, Hengeveld had thought about opening both the store space as well as the apartment upstairs. To Hen-
his own fishing equipment store. Recreational fishing/angling geveld’s dismay, the store space was dilapidated, and he found
was a passion of his since he was a small child, so when a retail out later that he was responsible for many more repairs than he
space became available in 2003 in a wealthy area of town, Hen- initially thought.
geveld decided to rent it and start his own brick-and-mortar Hengeveld hired a programmer to update the business
retail business. The store specialized in European-style fishing website since this was his primary marketing tool, and soon it
and float fishing and sold equipment and bait. Hengeveld con- became the first of its kind for sports anglers in Canada. Custom-
tinued his wholesale operations, but focused on his new venture. ers could order online, use message boards, chat with each other,
He held seminars at the store and provided information to cus- and arrange to meet at the store and go fishing together. The site
tomers regarding new and current fishing techniques. The busi- offered an interactive experience for customers and brought
ness was established as a sole proprietorship, and Hengeveld many new customers not only from Canada but also from the
initially financed the startup of the business through personal United States.
savings of $20 000 and a $25 000 line of credit. Later he obtained He installed a security system in his store, and had an alarm
another $75 000 line of credit. He never did have enough time to system in place because the store was open 24 hours on week-
write his business plan fully. ends. Hengeveld had a difficult time finding qualified staff that
The live bait the store sold generated a big percentage of the he could rely on to show up for work and not steal from the
income, but it also generated a big percentage of the expenses. store. He had a couple of employees who did not deal with cus-
Not only were storage tanks, refrigerated tanks, and fridges tomers well and customers had complained about them to Hen-
needed, but the government had many regulations pertaining to geveld. Part-time staff consisted of mostly college students
the type of bait a store could sell and the reporting that must be taking a break from their studies; while most had good customer
done. Due to the hours anglers would go fishing, the store had to service skills, they proved unreliable in other ways.
be open very early in the mornings and 24 hours on the week- In 2005, a major outdoors store, Bass Pro, opened within a
ends. Staff had to be trained on how to handle live bait. There 20-kilometre range, and Hengeveld estimated that he lost around
was a 40 percent loss in bait product, and suppliers insisted on 25 percent of his revenue after the mega store moved in. Business
cash payments on delivery with no returns. started to slow in 2007 just before the recession hit in 2008. In the
The store also sold fishing licences, which required monthly beginning, Hengeveld’s business was not making a profit, but he
reporting to the Ministry of Natural Resources (MNR) but also was able to cover expenses and repay creditors. During the last
attracted customers. A yearly live bait sales report was also few years, the store was losing money. In the end, Hengeveld
required by the MNR, which was very time consuming to create decided to close his brick-and-mortar store but continue to oper-
because it detailed the number of fish sold. The business was ate his online store as more of a part-time pursuit.
audited once by the Canada Revenue Agency and it went well
because Hengeveld had hired an accountant to be sure all payroll
deductions, special reporting, and income tax calculations were Discussion Questions
accurate and complete. 1. What entrepreneurial traits does Hengeveld have? What
There was not a lot of competition in the area, just a few made him want to start his own business?
small, family-operated stores. Hengeveld’s wife helped with the 2. Analyze the situation. What do you think went wrong? Did
bookkeeping and the purchases and reporting processes when Hengeveld make mistakes? If so, what were they?
she could, but she also had a full-time career. Hengeveld soon 3. What might Hengeveld had done differently to continue his
was doing enough business that he actually purchased a second business success? Search for one or more sample business
store, taking over his main competitor of the family-operated plans for a retail fishing store (you should find at least one at
stores. Hengeveld was doing so well in this second store location www.bplans.com). Review it. What stands out in your mind
that he decided to close the first store, as he was feeling a bit about the plan? Do you think Hengeveld could have done
stretched running between the two stores and trying to be a better with his business if he had a business plan to start
good husband and father. He felt the original store’s business with? Why or why not?

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M04_SOLO0974_02_SE_C04.indd Page 64 04/11/14 11:00 AM f-w-148 /201/PHC00156/9780133810974_SOLOMON/SOLOMON_BETTER_BUSINESS02_SE_9780133810974/SE ...

Chapter 4 Entrepreneurship, Small Business, and New Venture Creation 65

Opening Discussion: Starting

66 Chapter 4 Entrepreneurship, Small Business, and New Venture Creation

Entrepreneurship: What’s In It for Me?

The Traits of Successful Entrepreneurs

How are entrepreneurs innovative? Successful entrepreneurs

Chapter 4 Entrepreneurship, Small Business, and New Venture Creation 67

Polaroid Portable Portable

1933 1947 1958 1981 1983 1998

Figure 4.1 Twentieth-Century Entrepreneurial Innovations

How do entrepreneurs take risks? Being an entrepreneur involves risk—the risk of

68 Chapter 4 Entrepreneurship, Small Business, and New Venture Creation

Why are people skills and leadership skills important to entrepre-

What does it mean for entrepreneurs to be “system” thinkers?

Chapter 4 Entrepreneurship, Small Business, and New Venture Creation 69

What are Internet entrepreneurs? Advances in technology have spawned another

What are intrapreneurs? You don’t neces-

are fostering intrapreneurs—employees who

70 Chapter 4 Entrepreneurship, Small Business, and New Venture Creation

marketing strategy was used?

on the traditional research and development (R&D) process, Whirlpool management is

Starting Your Own Business

Chapter 4 Entrepreneurship, Small Business, and New Venture Creation 71

Opportunity & Innovation Control

Financial Independence Schedule Flexibility

Figure 4.2 Reasons to Start a Small Business

What are the advantages and disadvantages of

Small business survival rates in Canada decline over

72 Chapter 4 Entrepreneurship, Small Business, and New Venture Creation

However, with these rewards come

the company in the event of sto-

How does inexperienced management lead to failure? Although entrepreneurs

Chapter 4 Entrepreneurship, Small Business, and New Venture Creation 73

Figure 4.3 A Business

Risk Analysis Marketing Plan

Financial Plan Operational Plan

How important is planning to business success? Accumulating debt and poor

Starting a Small Business

74 Chapter 4 Entrepreneurship, Small Business, and New Venture Creation

Starting a Business from Scratch

What are the disadvantages of starting a business from scratch? Starting a

Buying an Existing Business

Chapter 4 Entrepreneurship, Small Business, and New Venture Creation 75

Table 4.1 Things to Consider before Buying a Business

76 Chapter 4 Entrepreneurship, Small Business, and New Venture Creation

Table 4.2 Helpful Websites for Potential Franchisees

Chapter 4 Entrepreneurship, Small Business, and New Venture Creation 77

■ Market research is often provided. Good franchisors do

ZUMA Press, Inc./Alamy

Small Business Support

Government of Canada, Canada Business Network This government

Provincial Small Business Enterprise Centres The Small Business Enterprise

78 Chapter 4 Entrepreneurship, Small Business, and New Venture Creation

Table 4.3 Questions to Ask before Buying a Franchise

Industry Canada The business section of Industry Canada’s website (www.ic.gc.ca/

Small Business Association of Canada (SBA Canada) A nonprofit organiza-

Business Incubators Business incubators are organizations that support startup

Chapter 4 Entrepreneurship, Small Business, and New Venture Creation 79