Chapter 1:

Module Objectives:

1. Distinguish between the term small business

and entrepreneurial opportunity
2. Explain basic characteristics of entrepreneurs
and describe different kinds of
entrepreneurship
3. Discuss motivations related to owning a small
business
4. Describe five potential competitive advantages
of small companies over large companies

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1-2 What is a small business?

"I know what a small business is, I just can't explain it."
Over 12 million people are involved in some form of an entrepreneurial venture and it is
anticipated that HALF of all adults will engage in self-employment at some point in their careers
(Reynolds and Curtain, 2008).
According to the Small Business Administration, Six million businesses in the U.S. have
employees. 90% of these have fewer than 20 employees. 99.7% of them have fewer than 500
employees.
In the past 10 years, there has been a 86% growth in minority business owners. U.S. Government
data's "Business Dynamics Statistics" validates that U.S. Startups (less than a year old) create an
average of three million new jobs annually.
Are you ready to be one of them?
Remember that you can be a small business manager and not be the owner/entrepreneur. In
reality, most people are both.

1-3 Small Business vs. Entrepreneurial

Opportunity
"How about a bit more clarity?"
There are a number of different types of small businesses. They are:

 High-Potential ventures - these are phenomenal prospects for growth (tech startups)
 Attractive small firms - these offer substantial rewards for owners
 Micro-businesses - these are the least profitable but provide a modest return to their
owners (landscapers, beauty shops, service companies).
 Lifestyle businesses - these provide a modest return but permits the owner to follow a
particular lifestyle.

Micro-businesses and Lifestyle businesses make up the largest sector of the U.S. Economy.
They don't attract investors and are financed by owners savings, family, and friends.
For this class, we will define a small business as:

1. less than 100 employees

2. geographically localized
3. financed by only a few individuals
4. may start with one person but has potential to grow
5. must have growth potential (even if the owner doesn't capture the growth).

Now that we have given some clarity around small business let's look at how it differs from an
entrepreneurial opportunity. Here are some definitions:
Entrepreneurial Opportunity: An economically attractive and timely opportunity that creates
value both for customers and firm's owners.
Entrepreneur: A person who relentlessly pursues an opportunity in either a new or an existing
business to create value while assuming both the risk and reward for their efforts.
Bootstrapping: Using other people's resources to help create your venture.
Founder: An entrepreneur who brings a new firm into existence.

1-4 Entrepreneurial Qualities

Stephen Spinelli and Robert Adams identified six descriptors of an entrepreneur:

1. commitment and determination

2. leadership
3. opportunity obsession
4. tolerance of risk, ambiguity and uncertainty
5. creativity, self-reliance, and adaptability
6. motivation to excel - self awareness

They also gave us six characteristics to avoid:

1. overestimate what you do

2. lack of understanding of the market
3. hire mediocre people
4. fail to be a team player
5. be a domineering manager
6. fail to share ownership in the business in an equitable way

I hope at this point you are starting to assess yourself and your likelihood of success. Here are
just a few more points to keep in your mind as we use certain terminology in class.
"Are all entrepreneurs also called founders of a company?"
I am glad you asked. The short answer is, no. The more complicated answer is that yes, all
founders are entrepreneurs but not all entrepreneurs are founders. Entrepreneurs can take over
other businesses or can start a franchise, etc. Founders, however were the very first. As an
example, Dave Thomas is the founder of Wendy's but I can take advantage of the opportunity to
open my own franchise. I an entrepreneur but not the founder. Davey T. is both.
For purposes of this class, we will use the terms small business owner and entrepreneur
interchangeably. We are going to assume that you, as a hypothetical business owner, are willing
to assume the risk of your business venture. You will be rewarded and punished financially
based on your own results.

1-5 Motivations
"I am so motivated. Can I start now?"
Before you choose to enter the small business game, you need to think carefully about the person
you want to be and how owing a business will help make you that person.
I can't emphasize this enough. You won't cut it as a reluctant entrepreneur or a corporate
refugee. If you are driven by friends, family, or a bad job situation, you set your self up for
failure. The days will be TOO HARD. It is vitally important that you know what motivates
you.

Motivations for founding a company

 1. Personal fulfillment
1. Making a difference
2. sense of belonging and working together
2. Personal satisfaction
1. intellectually challenging
2. passion for firms product/service
3. recognition and respect
3. Independence
1. being own boss
2. controlling my own future
3. discretionary time and flexibility
4. Financial Reward - building personal financial wealth.

1-6 Competitive Advantage

"Does, uh, size matter? Asking for a friend."
Large businesses sometimes have an advantage over smaller ones. This is often referred to as
economies of scale. If large firms can make the product or service cheaper and faster, how can
you compete? Don't fret. There are times, that small businesses have the advantage over larger
ones. Here are some advantages of small business over larger ones.

1. Customer focus - they are often faster, more direct and effective. There is less red
tape and they can offer the personal touch.
2. quality performance - they can provide individualized service to maintain quality.
3. integrity and responsibility - owners actions determine the culture
4. innovation - the internet has flattened the world. small firms outperform larger firms
in producing patents per employee. You don't have to be high tech to be innovative.
5. niche markets - narrow range of product or service interests

1-7 Your Paradigm

"I think I can. I know I can. I think I can."
The E-Myth Revisited: Why Most Businesses Don't Work and What To Do About It by Michael
Gerber describes three personalities of entrepreneurs. They are the technician, the manager, and
the entrepreneur. The book tells the story of a lady who loved to make pies. She was so good at
it that she decided to start a pie making business. The problem is that the company becomes
dependent upon the pie maker. The E-Myth suggests that just because one has the technical
skill, doesn't automatically translate to understanding what is needed to run a business.
Review the following
 Technician Manager Entrepreneur
 Asks how
 avoids business must
 short-term
paternalism work
oriented
 delegates  sees the
 Paternalistic
authority company as a
 uses traditional
 varies marketing system
marketing
strategies  visualizes the
strategies
 uses different future
 reluctant to
sales approaches  develops
delegate
 seeks multiple strategies for
 relies on personal
financing the business by
selling
sources first seeing the
whole picture.

BALANCE DETERMINES THE LEVEL OF YOUR EFFECTIVENESS!

The manager tends to like order while the entrepreneur takes ideas and turns them into
opportunities. They survey the work to find an opportunity and then finds a solution to the
problem. We have ALL THREE traits, but one is dominant in each of us. Understanding their
purpose can make it a considerable strength.

Chapter 2:

CH 2 Integrity and Ethics for Business

Success
C.S. Lewis once said that integrity is doing the right thing when no one is watching. This week's
module is about understanding the importance of integrity and ethics in the workplace. Our
news stations are full of details about unethical businesses, but in reality, most businesses
function with a high level of integrity. If you are going to join the ranks of the small business
owner, be prepared for your peers to expect this from you.
Module Objectives:

1. Define integrity, and it's relationship to small business management

2. Explain stakeholder groups and their expectations for integrity
3. Explain the challenges and benefits of maintaining integrity
4. Define sustainability

2-1 Integrity
C.S. Lewis once said that integrity is doing the right thing when no one is watching. This week's
module is about understanding the importance of integrity and ethics in the workplace. Our
news stations are full of details about unethical businesses, but in reality, most businesses
function with a high level of integrity. If you are going to join the ranks of the small business
owner, be prepared for your peers to expect this from you.
Integrity: A general sense of honesty and reliability that is expressed in a strong commitment to
doing the right thing, regardless of the circumstances
According to Karl Eller--the highly successful entrepreneur who turned the business of outdoor
advertising into a revenue powerhouse once said,
[A person fo integrity] doesn't fold in a crunch; doesn't lie, cheat, flatter; doesn't fake
credentials or keep two sets of books. He doesn't blame others for his mistakes or steal credit
for their work. She never goes back on a deal: her handshake matches the tightest contract
drawn up by the fanciest law firm in town."
Acting with integrity requires that an individual first considers the welfare of others.

2-2 Stakeholders
Stakeholders are individuals or groups who either can affect or are affected by the performance
of the company. There are three big stakeholders in every business: the owners, the customers,
and the employees. In a perfect world, all three of these big stakeholders would share the same
interests. In reality, they rarely do. Managing competing interests can be tricky. The concerns
of important stakeholders are fundamental to the management of the business. If neglected, any
one group can use its influence to affect the performance of the company negatively. Therefore,
stakeholder interests should be carefully considered and wisely balanced.
Think about your own business, how many stakeholders can you identify?

2-3 Ethical Culture

Business theorist, Peter Drucker once said, "Culture eats strategy for breakfast." As a manager,
you have a lot of power to control the ethical culture of your organization. Just look at this flyer.
June_EthicsStat.pdfDownload June_EthicsStat.pdf
The personal integrity of the founder and manager is the key to the firm's ethical performance.
They provide a powerful voice in shaping the ethical performance of the small company for good
or for ill. Entrepreneurs further reinforce an ethical culture in the business when they hire and
promote ethical people, recognize and correct behavior that is unethical, and lead by example in
business dealings, while encouraging all employees to do the same.
The book The Power of Ethical Management by Kenneth Blanchard and Norman Vincent Peal
suggest five fundamental principles to creating an ethical culture.

1. Purpose
2. Pride
3. Patience
4. Persistence
5. Perspective

We should expect that every business have a Code of Ethics that will

1. define behavioral expectations

2. communicate that expectations apply to
employees at all levels in the business
3. help employees convey the company's
standards of conduct to suppliers and
customers
4. serve as a tool for handling peer pressure
5. provide a formal channel for communicating
with superiors without fear of reprisal.

Let me share with you a personal story from my office. I hired an employee from a competitor.
She was an excellent employee, but when she came to me, she tried very hard to impress me with
her sales numbers. Please understand that sales are significant to my operation. They keep the
lights on and pay everyone's salary, so it is vital that we meet our goals and quotas.
I received a complaint call from a colleague that this particular employee had "stolen" a
customer. She had pretended to be from another office to close the sale. After the deal was
complete, she notified the customer of where she was located.
She was shocked when I called her into my office to discuss what she had done. This was a
prevalent practice in her previous office and under threat of dismissal, they were forced to meet
numbers or be fired. As her boss and because integrity and ethics should never be a question in
my office, I assured her that my employees do not lose their jobs because of lack of sales. But I
will fire someone in a heartbeat if their heart isn't in the right place.
I realize it is my job to encourage honesty and I believe this has a lot to do with why I have a
waiting list of people who want to work with my team.

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2-4 Responsibility
Every business has four areas of responsibility. They are:

 Economic
 Legal
 Ethical
 Discretionary

The economic responsibility of the business is to make a profit. Legal responsibilities require
that a business adhere to regulations and obey the law. Both economic and legal responsibilities
are required.
Ethical responsibilities are expected behaviors that are above reproach. This is different from
discretionary responsibilities that are desired but not required. Discretionary responsibilities
focus on the company as good corporate citizenship and giving back to the community.

Conflict of Interest
How about this legal definition? "A state of affairs is said to constitute a conflict of interests - or
potential thereof - in a set of circumstances where the individual has the capacity to influence
decisions that promote his/her self-interest but may have a detrimental impact upon the
organization he/he belongs to, or the well-being of some other group. Crucial to a charge of a
conflict of interest is the reasonable expectation that some individuals in similar circumstances
may unfairly favor their own self-interest at the expense of others (e.g., the group, organization,
or agency).
International Business Concerns
With the advent of the internet and ever more integrated international business, it is foreseeable
that a global business ethic will eventually develop. Cultural differences redefine standards of
appropriate behavior in matters of ethics, etiquette, and civility. This topic is beyond the scope
of this class, but it is worth noting a few things.

1. Cultural Factors and self-reference criterion

1. language
2. body language
3. punctuality
4. conversational etiquette
5. ethnocentrism
2. Cultural relativism and ethical conflict
3. multinational conflicts
1. transfer of jobs
2. resource exploitation
4. Areas of ethical conflict
1. discrimination
2. price discrimination
3. bribery
4. dumping hazardous products
5. compromised worker safety

2-5 Social Responsibility

Social responsibility is a company's ethical obligations to the community. A business starts by
creating jobs and adding to the local tax revenues, but many entrepreneurs feel a duty to give
back even more to the community in return for the local support they enjoy--and they usually
benefit from increased goodwill as a result. It is important to recognize that opinions differ as to
the extent to which businesses are obligated to engage in socially desirable activities, and the
response of small business to those obligations also varies.
Entrepreneurs should think carefully about their community commitments, because building a b
business on a foundation of "doing good" may add to a small company's financial burden. A
National Federation of Independent Business (NFIB) study found that 91% of small businesses
made contributions to their communities.
The Value of Giving BackLinks to an external site.

Taxes Taxes Taxes

The greatest gift to a small business owner is the tax write-off! Sadly, people take advantage of
this gift by skimming (concealing income and inflating expenses). Tax evasion can be flagrant
and very intentional, but entrepreneurs often come up short on their tax commitments because of
casual accounting systems, single-minded focus on their product or service, or both.
One student entrepreneur confessed that he had a close brush with the law because he and his
friends were creating clothing in his dorm room and selling it on his campus, but the company
did not legally exist, and he was not keeping track of sales and expenses because he didn't' take
seriously the obligations and advantages of maintaining good records. But after a close
encounter with the IRS agents, this young entrepreneur learned that accurate recordkeeping and
legal formalities are necessary to ethical practice and, just as important, to peace of mind.

2-6 The Integrity Edge

Integrity is good for business. There are many long-term benefits of adopting ethical business
practices. Some of these include:

 Improved financial performance

 enhanced brand image and reputation
 increased sales and customer loyalty
 improved productivity and quality
 better recruitment and reduced employee turnover
 fewer regulatory inspections and less paperwork
 improved access to capital

The Institute of Business Ethics found that firms operating with a "clear commitment to ethical
conduct" consistently outperform companies that do not.

2-7 Sustainability
Sustainability refers to both the ability to maintain a profitable business as well as a company's
response to environmentalism. At one time there was very little concern with how businesses
impacted the environment. Industrial waste released into streams, contaminants into the air, and
noise into neighborhoods are no longer acceptable. It is essential that we recognize eco-friendly
practices while responding to customer's needs and remaining profitable.
Some firms have suffered because of laws passed to protect the environment. Businesses such as
fast lube and oil change centers, medical waste disposal operations, self-service car washes, and
asbestos removal services have been especially hard hit by expanding environmental
regulations. While companies might be able to pass the added financial on to their customers,
not all small businesses can remain in operation.
Regardless of the impact on the company, it is critical to follow the environmental regulations
that apply to your business. A few great resources to help you with this are the Small Business
Administration and the U.S. Environmental Protection Agency (EPA) which offers technical
assistance and solutions to manage compliance.

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Chapter 3:

CH 3 Starting a Small Business

Learning Objectives:

 Identify innovative things to generate ideas for startups

 describe the external and internal analysis that might shape the selection of venture
opportunities
 Assess the feasibility of a startup idea

3-1 Opportunities are Everywhere!

Links to an external site.

I
should emphasize that identifying imaginative new products or services that may lead to
promising business ventures is so central to the entrepreneurial process that it has its own name
-- opportunity recognition.
What sets entrepreneurs apart from everyone else is their ability to see the potential that others
overlook and then take the bold steps necessary to get businesses up and running. Economist
Israel Kirzner proposed that entrepreneurs have a unique capability, which he
called entrepreneurial alertness.
For this week we will focus on startups--that is businesses that are created from scratch.
There are three types of startups:

 New market ideas - provide customers existing products or services not available in
their market.
 New technology ideas - new or relatively new technology centered around a new
product
 New benefit ideas - provide customers with new or improved products or services

3-2 Ideas
From where do ideas come? You might be interested to know that research by the National
Federation of Independent Business (NFIB) note these common sources of startup ideas.

 45% - prior work experience

 16% - Personal interest/hobby
 11% - chance happening (serendipity
 7% - suggestion
 6% - education/courses/family business
 5% - family/relatives
 4% - other

If the sources of startup ideas do not reveal the opportunity that is right for you, you may find
these useful:

 Tap personal contacts with potential customers and suppliers, professors, patent
attorneys, former or current employees or co-workers, venture capitalists, and
chambers of commerce.
 visit trade shows, production facilities, universities and other successful entrepreneurs
who are doing what you want to do
 observe trends, such as those related to material limitations and energy shortages,
emerging tech, recreational practices, fads, pollution problems, security needs, and
social movements
 pay close attention to all forms of change, including shifts in specific industries and
markets, demographic swings, and emerging discoveries or scientific breakthroughs
 read trade publications, bankruptcy announcements, and profiles on entrepreneurs
and various business opportunities
 search the internet, where you can find an unlimited supply of information on the
startup process.

Innovative thinking
Xerox developed amazing new technology but was not using it. Steve Jobs realized this and put
their ideas into practice and launched Apple Computer. When it comes to ideas, borrow heavily
from existing products, services, and other industries. Entrepreneurs think deeply about how
they might put ideas to work in launching and accelerating the growth of an existing idea. The
following suggesters are designed to help guide your search for a great idea.
 1. Borrow from existing products, services or industries
2. combine two businesses to create an opening (i.e., bookstore and coffee shop in one
business)
3. begin with a problem in mind
4. recognize a trend
5. improve the function of an existing product or service
6. possibilities to streamline activities
7. adapt an existing product to meet customer needs in a different way
8. expand an existing product
9. see if you can make an existing product into a "green" one
10. keep an eye on new technologies

3-3 Analysis
It is important to understand the environment of the general industry of your business. For
example, yourmechanics.comLinks to an external site. made a significant dent in the world of
small car repair shops in California. If you haven't given much though to your industry, now is
the time to do so. Here are some key points to note.

1. new competitors (How easy is it for new competitors to enter the industry?)
2. substitute products or services (Are there other products to replace those that the
industry offers?)
3. rivalry (Is it intense?)
4. suppliers (Are suppliers so powerful that they can demand high prices for inputs?)
5. buyers (Are industry customers so powerful that they can demand low prices?)

Internal Analysis
1. Resources - cash, knowledge, access, business partners
1. tangible - building, equipment, cash
2. intangible - reputation, intellect, brand recognition
2. Capabilities - routines and processes that coordinate the combined use of these
productive assets to achieve desired outcomes
3. Core competencies - those capabilities that provide a firm with a competitive edge
and reelect its personality
4. Competitive advantage - a benefit that exists when a firm has a product or service that
is seen by its target market as better than those of competitors

Merits of ideas
1. the strength of the business idea
2. targeted markets and customers
 3. industry and competitive advantages
4. founders capability

3-4 Analysis Continued

The general environment contains some important trends. They are

1. economic trends - inflation rate and interest

rates, currency exchange rates can promote or
discourage business growth
2. sociocultural trends - societal currents affect
consumer demand
3. political/legal trends - changes in tax law and
government regs can pose a threat to a business
concept
4. global trends - reflect international
developments, expand markets, outsource,
invest abroad, etc.
5. technological trends - i.e., web-based or cloud
computing, Quick Response (QR) codes,
crowdsourcing, GPS and geo-targeting, and
other creative applications
6. demographic trends - population size, age
structure, ethnic mix, and wage distribution

Feasibility analysis is an essential part of the preliminary work on an entrepreneur. It is the

initial assessment of a business idea that gages, whether the venture envisioned, is likely to
succeed. The most common assessment is the SWOT analysis. SWOT stands for Strengths,
Weaknesses, Opportunities, and Threats. Strengths and weaknesses look inside the company.
Opportunities and Threats look outside the company.
Here is an example of a simple SWOT analysis.

Strengths Weaknesses

 strategy  money and resources

 skills  distribution problems
 network  inefficiencies
 money and resources  lack of skills or experience

Opportunities Threats
  competition
 market potential
 suppliers
 government regulations
 government regs
 technology
 GDP growth or slowdown

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3-5 What could possibly go wrong?

As you conduct your feasibility analysis, you need to think about what might doom your
business. John Osher estimates that nine out of ten entrepreneurs fail because their business
concepts are deficient. It is important to look deeply and honestly for potential weaknesses in
your ideas. You need to look for fatal flaws. Fatal flaws are circumstances and developments
that and could render a new business unsuccessful.
You should question the market potential of your venture as well as your industry attractiveness.
Ultimately, you want to make money and if signs point to an inability to create a profit, you will
want to reevaluate your idea.
As a final analysis you need to think of yourself as a leader. You need to ensure that your
venture fits with your mission, aspirations, and level of comfort with the risk involved. You
need to grasp critical factors for success and your ability to execute your venture. Lastly, you
need to have a connection to suppliers, customers and investors and other essential partners that
are essential to making the venture work.

Chapter 4:

CH 4 Franchises and Buyouts

Learning Outcomes:

 Define franchise and franchise terminology

 Understand the pros and cons of franchising
 Describe the process for evaluating a franchise
opportunity
 List reasons for buying a franchise
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4-1 Franchise Terminology

From food to fitness centers, hardware stores to swim lessons, pet sitters to barber shops, there
are franchises in every shape and size. Most people think of franchises as fast food restaurants,
but many entrepreneurs have chosen the franchise platform as the business purchase of choice.
Interestingly, the first franchise in the U.S. was the Singer Sewing Machine Company--not a fast
food restaurant.
As much of franchising requires an understanding of contract law, it is important that you
understand the terminology associated with it.

Terminology
Franchise - a business model that involves one owner licensing trademarks and methods to an
independent entrepreneur
Franchisor - owner of the trademark, service, name, advertising symbol. The franchisor has the
expertise, marketing plans, management guidance, financing assistance, site location, training,
etc.
Franchisee - an individual or group whose power is limited by a contractual relationship with a
franchising organization. A franchisee sells goods or services supplied by the franchisor. The
franchisee brings an entrepreneurial spirit and drives to make it a success.
Franchise contract - the legal agreement between franchisor and franchisee
Master license - an independent firm or individual acting as a middleman or sales agent with the
responsibility of finding new franchisees within a specified territory
Multiple-unit ownership - ownership by a single franchisee of more than one franchise from the
same company
Area Developers - individuals or firms that obtain the legal right to open several outlets in a
given area
Piggyback franchising - the operation of a retail franchise within the physical facilities of a host
store (i.e., subway in a truck stop)
Multi-brand franchising - The operation of several franchise organizations within a single
corporate structure
Co-branding - Bringing two or more franchise brands together under one roof
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4-2 Franchising
There are two kinds of franchising

1. Product and trade name franchising -

franchisor owns rights to a name or trademark
and sells that right to a franchisee. e.g., Ford
automobile dealers, Pepsi bottlers, chevron
convenience stores
2. Business format franchising - full range of
services including site selection, training,
product marketing plans, financing assistance,
e.g., Carl's Junior, Hotels, motels, and business
services (i.e., Jani-King)

The franchisee contract is the legal contract spelling out your relationship and obligations.
BEFORE YOU SIGN the franchisor MUST provide you a Franchise Disclosure Document
(FDD). The FDD is required by the Federal Trade Commission (FTC) must include information
on (1) Investment requirements and (2) conditions that affect the renewal, termination, and sale
of a franchise.
A helpful resource for both franchisees and franchisors is the International Franchise
Association(IFA). Its mission is to protect, enhance, and promote franchising. Franchise
businesses provide 750,000 establishments and over 8 million jobs. They create over $782
Billion in revenue which is approximately 3% of our Gross Domestic Product (GDP).

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4-3 The Pros of Franchising

Buying a franchise can be attractive for a variety of reasons. The greatest advantage is the
probability of success. Franchisors offer a business model with a proven track record. They
provide you with the business system and operating plan. Their names are normally well-known
(e.g., Cinnabon, Curves) and they support the franchisee by providing training, reducing
purchasing costs, designing promotional campaigns, and assisting in obtaining capital.
Success for many businesses results from their intellectual property. Patents usually protect
intellectual property, but a trademarked name can be just as valuable if it has become part of
common public use. A trademark protects "words, names, symbols, sounds, or colors that
distinguish goods and services from those manufactured or sold by others and it indicates the
source of the goods. Trademarks, unlike patents, can be renewed forever as long as they are
being used in commerce" (uspto.gov). Think, for example, of McDonald's Golden Arches.
The single most valuable tool provided to a franchisee, however, is the operations manual. The
manuals and procedures supplied to the franchisees enable them to function more efficiently
from the start. Following the path laid out in the manual helps the owner avoid mistakes that
often occur with a startup business.
The training support is another valuable aspect of the franchise relationship. McDonald's has
Hamburger University and Painting with a Twist has a 3-day training which includes how to use
social media to build their business.
Another pro of a franchise is the supply and purchasing power that occurs when you purchase
larger quantities. Buying larger quantities lowers the per-unit costs which lowers the operating
expenses.
The final pro for the purchasing of a franchise is the financial support offered by the franchisor.
GNC and Wingstop have formed alliances with banks to create preferred lending programs. Mac
Tools provides $10,000 of free tool inventory. U.S. Small Business Administration (SBA)
maintains a franchise registry which speeds up loan processing.

4-4 The Cons of Franchising

The founders of the International Franchise Association were disturbed by the dishonest and
unethical acts of some companies that were growing through franchising and damaging the
reputation of the entire industry. These concerns led to regulations by the Federal Trade
Commission and the passage of laws in a few states, and include financial issues, franchisor
competition, and management issues.
Concerns have arisen regarding the true costs of becoming and remaining a franchisee. Some
franchisees have felt misled about their earnings opportunities. Quiznos 2010 lawsuitLinks to an
external site. is a glaring example of this issue. Other criticisms of franchisors include refusing
to permit franchisees to sell the business, forcing franchisees to purchase products and services
from business associates resulting in higher than market costs, and churning. Churning refers to
the practice of a franchisor voiding contracts to sell again and collect additional fees.
Another concern of franchisees is about competition. They have had to compete against their
corporate owns store or via internet. A variation of this complaint is encroachment. A
franchisor is said to encroach on a franchisee's territory when the frianchisor sells another
franchise location within the market area.

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4 Costs of Being a Franchisee
If you chose to be a franchisee, you pay for the privilege. You are busying a proven model and
the franchisor will charge you for the benefits being offered. The Franchisee should recognize
and consider the following:

1. Initial Franchise Fee - this will be hundreds to

thousands of dollars
2. Investment Costs - this is inventory, start-up
expenses, legal fees, rent, insurance, and funds
to cover expenses and emergencies for at least
six months
3. Royalty payments - this is a percentage of
gross income that the franchisee pays to the
franchisor. It is usually between 4%-6%
4. Advertising costs - this is generally 1%-2% of
sales and is paid to the franchisor to promote
the business

Please note that these are not the only expenses of a business owner! These costs are in addition
to all of the "normal" business expense (payroll, rent, utilities, etc.).

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4 Evaluating Franchise Opportunites

LinkLinks to an external site.

There are a number of great resources for helping you to evaluate franchises. Every year
Entrepreneur magazine ranks the top-10 franchises. There is also a comprehensive list
on www.franchise.orgLinks to an external site.. I would start with an assessment of your
interests. If you dislike children, you may not want to enter into a childcare franchise contract.
It is important that you investigate the potential. You need to be very skeptical of pressure to
sign a contact without proper investigation. Always beware if the only information you using to
develop your opinion comes from one source. Look at the franchisors reputation and
dedication. Look at the quality of the goods and services. Understand consumer demand and
market potential. Understand what training will be provided. Investigate the current
relationships between existing franchisees and the franchisor. Analyze the history of the
organizational earnings.
It is always a good idea to look online to discover the top franchises this year. While you are
hunting around the internet, look at the franchisor's website. Review the Franchise Disclosure
Document and call current franchisees!

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4 Become a Franchisor
Soooo, let's say you have a successful business and someone approaches you to francise your
business. Before you head down that path, ask yourself these questions:

1. Is your business reproducible and replicable? Will it work in another location? Is

your system efficient?
2. How will your finance the growth of the company? You don't just sell your idea, you
need a legal team ($$). You need to write an operation manual. You need a
recruitment and selection of franchisees team. You will need trainers and other
personnel. Are you ready?
3. Does your legal team specialize in trademark law, contract law, and franchises? Are
you a member of the International Franchise Association?
4. Does your operations manual spell out EVERY daily activity? You will want to hire
specialists to help you write this because it is what the franchisee is buying.
5. Are you aware of all government regulations? Have you complied with the Federal
Trade Commission's Franchise Rule of 2008? Are you aware of your disclosure
requirements?
6. Can you create long-term valued for your franchisees? Will you bring value year
after year? A franchise agreement is typically 10-15 years. If you are expecting
someone to pay you royalties that entire time, how will you add value to justify this
franchisee expense?

4 Non-compete clauses and other

issues
Some Franchisors require a non-compete clause in their contracts. From the Franchisor
perspective this makes sense. After providing training and sharing their secrets and strategies,
they don't want you to become a competitor.
As a Franchisee, you might consider this to be a restraint of trade--especially if the franchisor is
nonresponsive to your needs or if you project that you could make more money on your own.
Both points of view are valid. So whether you are the franchisor or franchisee, you have an
interest in what your commitment are today and what they will be in the future. Always have an
attorney review the contract before you sign it!
As a franchisee, you are not a truly independent business owner. You have contractual
arrangement and the franchisor stipulates various conditions to your relationship. The contract
was drafted by, and most likely favors, the franchisor. Some common restrictions are:

1. limiting sales territories

2. requiring site approval for the retail outlet
3. imposing requirements regarding outlet
appearance
4. limiting goods and services offered for sale
5. limiting advertising and hours of operation.

A frequent complain from franchisees is that when their contract expires they are required to
accept new and often costly provisions. From a franchisors point of view want to see their
franchises maintained and improved so they will not harm the entire network.

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4 Buyouts
Sometimes being tied to another organization isn't your thing. You might prefer to buy an
existing business. The most common reasons for buying an existing business are

1. Reduce uncertainty and unknowns faced by

startups
2. Take advantage of established relationships
with customers and suppliers
3. Obtain a business at a price below what it
would cost to star a new business or franchise
4. To get into the business more quickly.

Where should you look?

 Contact realtors who specialize in the sales of

business firms and properties
 Meet with a business brokers - but beware of
the potential conflict of interest!

Ask yourself
  Do I like this business?
 Do I have the talents, skills and experience to
make this type of business thrive?
 Does location matter? How do I envision this
business?
 How much can you afford?

Do your Due Diligence! Carefully evaluate the business you want to buy. Small Business
Administration says you must evaluate all of the following:

 contracts
 financials
 tax returns (last 5 years!)
 employee roster
 property docs
 bank accounts
 customer lists
 payroll, benefits and pensions
 sales records
 lease agreements
 list of owners
 certification
 etc.
 etc.
 etc.

Ask WHY is this business for sale? The "real" reason may not be the "stated" reason. Here is a
list of the most common reasons for a business sale:

1. Retirement
2. Illness
3. Partner or family disputes
4. Unprofitability or failure of business
5. Burnout
6. Lack of capital for growth potential

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4 Fair Market Value of a Buyout

I love watching NBC's television show Shark Tank. Every week venture capitalists (VC)
negotiate the market value of a number of startup ventures. In class this week we will learn the
valuation process that is used by most VCs. There are a number of ways to valuate a business,
but the most common are:

1. Asset-based valuation
2. Market comparable valuation
3. Cash flow based valuation

Non-Quantitative Factors
1. Can the market support the business?
2. What is the competition?
3. What is the future of community development
4. What are the current legal commitments? (ie
unsettled lawsuits, liens)
5. Are union contracts required?
6. Are there access restrictions on the buildings?
7. What are the product prices?

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Introduction to a Business Plan

Please review the following information regarding a business plan.

Chapter 6: Business Plan Powerpoint

Why Do You Need a Business Plan

Read the following article about "Why do You Need a Business Plan By Sunday March 11, 2018
By 11:00pm
What is the Importance and Purpose of a Business PlanLinks to an external site.
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How to Write a Business Plan

Review the following videos about "How to write a business plan" For Closed Captioning (CC)
press the CC button at the bottom of the video.

Chapter 7:

CH 7 Marketing
Market analysis is the process of locating and describing potential customers. A marketing
mix is the combination of product, service, pricing, promotion and distribution activities.
A customer profile is the key demographic and psychological characteristics of the customers
you consider most likely to be qualified purchasers of your products and services.
A formal marketing plan has

1. Market analysis
2. Competitive analysis (SWOT)
3. Marketing strategy

It is one thing to know that a large target market exists--another to explain why they would buy it
from YOU.

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7-1 Marketing Strategy

Four P's of a Marketing Strategy
1. Product - Will this satisfy the consumer?
2. Place - How does the consumer access the product?
3. Pricing - What will the consumer be willing to pay?
4. Promotion - How will you communicate the necessary info to the target market?

Product: What's in a name?

A good name is simply memorable and descriptive and REGISTERED so they can be
protected.
Apple Computer could not trademark the IPAD in Europe because it was already owned by
STMicroelectronics, a Swiss semiconductor corporation had already trademarked "Integrated
Passive and Active Devices (IPAD).
KFC's eleven herbs and spices are trade secrets and fall under the definition of Intellectual
Property. They built their marketing strategy around promotion the idea that only they can
provide.

Place: Is it all about location?

Some retail ventures use intermediaries to handle distribution (e.g., Amazon, Wal-mart,
HamCo). Other retail ventures require a fixed location. Even other retail ventures can only sell
via the internet but use the distribution chain.
Questions that business owners might need to address:

 How will the product be delivered?

 How are orders taken?
 Is the service provided from an office or home, or the neighborhood coffee shop?
 What is the lag time between order placement and actual delivery?
 Will you be exporting? How will you address exchange rates if exporting?
 How will you address cross-state sales tax?

Price: Show me the money!

Pricing is important because you can price yourself out of the business if you are not careful.
You need to understand break-even computations.
You should know your competitor's prices. Many business owners think the best strategy is to
underprice their competition, but this could be a problem for two reasons:

1. Competitors probably have more resources than you.

2. Do you want customers to come to you only because you are cheaper?

If a person only comes to you because of price, they will leave you as soon as something cheaper
comes along. You are in the business of building brand loyalty!

Promotion: Hey! I am over here!

How do you plan to create awareness? What media are you employing and how do you know it
will appeal to your target market? For example, if you are in the business of geriatric home
health services, would you use Instagram to advertise? If you employ an ad agency, look at what
other things they have done that has made other businesses successful.

7-2 Marketing Research

Steps in the Marketing Research Process
1. Identifying the informational need
2. Searching secondary data (already compiled data). A good place to start
is www.sba.govLinks to an external site.
3. Collect primary data which can be observational or questioning data.
1. An example of observational data might be a mystery shopper
2. Examples of questioning data might be a focus group or surveys.
4. Interpret the data

From this information, you might create a prediction for the potential of your offering. A direct
forecast may come from looking at your recent sales trends (I sold 10 in January, 25 in February,
50 in March. Therefore, I predict to sell 75 in April). You can also have indirect forecasting. If
the data of births in the U.S. has a direct correlation to the sales of baby bibs, we can predict that
as birthrates fall annually, so might the sale of bibs.
A market is a group of customers (or potential customers) who have purchasing power and a
need. Market segmentation refers to dividing a market into smaller groups like age, gender,
marital status, shopping behavior, or location.
Your marketing strategy could be unsegmented, multi-segmented or single-segmented.
Unsegmented marketing is mass marketing to everyone. Multi-segmented recognizes individual
segment preferences. Single-segmented focuses only on one segment (for example new mothers
or cyclists).

7-3 Marketing
This video is a little difficult to hear, so the subtitles are helpful. It is an important piece of
Apple history that helps us understand how Marketing decisions are decided within
organizations.

If you want to see some of the best ads of 2017:

Click here for the Best Ads of 2017Links to an external site.

7 - Mid-Term Exam Study Guide

Here is the list of topics you will need to know for the Mid-Term Exam. The exam is open
note.
Market strategy/ the Four P’s
Primary Data versus Secondary Data
Franchisor
Franchisee
Three dimensions of leadership and small business
Types of franchises
Pro’s and con’s of Franchising
The E-Myth’s three personalities
Piggy back franchising
Churning
Encroachment
Common motivations for starting a small business
Bootstrapping
Foundational traits of an entrepreneur
Trend Analysis done by entrepreneurs
SWOT
Competitive advantages of a small business
Fatal Flaw
Lifestyle business vs. Microbusiness vs. Attractive Small firms vs. High-potential ventures
Opportunity Recognition
Small Business Manager Resources
Stakeholders
Intellectual property