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www.downloadslide.com www.downloadslide.com This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. www.downloadslide.com Small Business Management Entrepreneurship and Beyond FIFTH EDITION TIMOTHY S. HATTEN Mesa State College Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States www.downloadslide.com Small Business Management: Entrepreneurship and Beyond, Fifth Edition Timothy S. 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For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.CengageBrain.com www.downloadslide.com To: Jill, Paige, Brittany, and Taylor www.downloadslide.com Brief Contents Preface xvii P A R T 1: The Challenge 1 Chapter 1: Small Business: An Overview 2 Chapter 2: Small Business Management, Entrepreneurship, and Ownership 23 P A R T 2: Planning in Small Business 51 Chapter 3: Social Responsibility, Ethics, and Strategic Planning 52 Chapter 4: The Business Plan 80 P A R T 3: Early Decisions 107 Chapter 5: Franchising 108 Chapter 6: Taking Over an Existing Business 131 Chapter 7: Starting a New Business 156 P A R T 4: Financial and Legal Management 179 Chapter 8: Accounting Records and Financial Statements 180 Chapter 9: Small Business Finance 213 Chapter 10: The Legal Environment 239 P A R T 5: Marketing the Product or Service 263 11: 12: 13: 14: Small Small Small Small Business Business Business Business Marketing: Marketing: Marketing: Marketing: P A R T 6: Managing Small Business Chapter Chapter Chapter Chapter 15: 16: 17: 18: Notes 480 Index 491 iv Strategy and Research 264 Product 284 Place 308 Price and Promotion 337 369 International Small Business 370 Professional Small Business Management 399 Human Resource Management 426 Operations Management 459 © Carlos Hernandez/STOCK4B, Getty Images Chapter Chapter Chapter Chapter www.downloadslide.com Contents Preface xvii PA RT 1 The Challenge 1 CHAPTER 1 Small Business: An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 What Is Small Business? 3 Size Definitions 4 Types of Industries 6 Small Businesses in the U.S. Economy 7 Workforce Diversity and Small Business Ownership 9 The Value of Diversity to Business 11 Secrets of Small Business Success 11 Competitive Advantage 11 Getting Started on the Right Foot 13 Understanding the Risks of Small Business Ownership 14 What Is Business Failure? 14 Causes of Business Failure 16 Business Termination versus Failure 17 Mistakes Leading to Business Failure 17 Failure Rate Controversy 18 Is Government Intervention the Answer? 19 E NTREPRENEURIAL S NAPSHOT : Beer Entrepreneur 15 MANAGER ’S NOTES : Straight from the Source 12 Summary 20 Questions for Review and Discussion 20 Questions for Critical Thinking 21 What Would You Do? 21 Chapter Closing Case 21 CHAPTER 2 © Carlos Hernandez/STOCK4B, Getty Images Small Business Management, Entrepreneurship, and Ownership . . . . . . . . . . . . . . . . 23 The Entrepreneur-Manager Relationship 24 What Is an Entrepreneur? 24 Entrepreneurship and the Small Business Manager 25 A Model of the Start-Up Process 26 Your Decision for Self-Employment 30 Pros and Cons of Self-Employment 30 Traits of Successful Entrepreneurs 32 Preparing Yourself for Business Ownership 34 Forms of Business Organization 35 Sole Proprietorship 37 Partnership 38 v www.downloadslide.com vi Contents Corporation 42 Specialized Forms of Corporations 45 MANAGER ’ S NOTES: Are You Ready? 25 REALITY C HECK : Small Biz on Campus 32 Summary 46 Questions for Review and Discussion 47 Questions for Critical Thinking 47 What Would You Do? 47 Chapter Closing Case 48 PA RT 2 Planning in Small Business 51 CHAPTER 3 Social Responsibility, Ethics, and Strategic Planning . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Relationship between Social Responsibility, Ethics, and Strategic Planning 53 Social Responsibilities of Small Business 53 Economic Responsibility 54 Legal Obligations 55 Ethical Responsibility 56 Philanthropic Goodwill 57 Ethics and Business Strategy 58 Codes of Ethics 58 Ethics under Pressure 60 Strategic Planning 62 Mission Statement 63 Environmental Analysis 64 Competitive Analysis 66 Strategic Alternatives 73 Goal Setting and Strategies 73 Control Systems 75 Strategic Planning in Action 76 MANAGER ’ S NOTES: Playing Hardball 73 C OMPETITIVE A DVANTAGE: Competitive Intelligence 60 REALITY C HECK : Green Can Be Gold 62 Summary 77 Questions for Review and Discussion 77 Questions for Critical Thinking 78 What Would You Do? 78 Chapter Closing Case 78 CHAPTER 4 The Business Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Every Business Needs a Plan 81 The Purpose 81 The Practice: Guidelines for Writing a Business Plan 82 Business Plan Contents 86 Cover Page 86 Table of Contents 86 Executive Summary 86 Company Information 87 Environmental and Industry Analysis 87 www.downloadslide.com Contents vii Products or Services 89 Marketing Research and Evaluation 89 Manufacturing and Operations Plan 91 Management Team 92 Timeline 93 Critical Risks and Assumptions 93 Benefits to the Community 93 Exit Strategy 94 Financial Plan 94 Appendix 99 Review Process 99 Business Plan Mistakes 99 MANAGER ’S NOTES : Good, Bad, and Ugly Business Plans 83 MANAGER ’S NOTES : How Does Your Plan Rate? 101 C OMPETITIVE A DVANTAGE: Bring It On 94 REALITY C HECK : Feasible, Viable, Good Idea? 98 Summary 103 Questions for Review and Discussion 103 Questions for Critical Thinking 103 What Would You Do? 103 Chapter Closing Case 104 PA RT 3 Early Decisions 107 CHAPTER 5 Franchising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 About Franchising 109 Background 109 Franchising Today 110 Franchising Systems 110 Product-Distribution Franchising 111 Business-Format Franchising 111 Why Open a Franchise? 111 Advantages to Franchisee 112 Disadvantages to Franchisee 113 Advantages to Franchisor 115 Disadvantages to Franchisor 116 Selecting a Franchise 117 Evaluate Your Needs 117 Do Your Research 117 Analyze the Market 121 Disclosure Statements 121 The Franchise Agreement 124 Get Professional Advice 126 International Franchising 126 MANAGER ’S NOTES : Just the Facts … 110 C OMPETITIVE A DVANTAGE: Franchise—Failed! 125 REALITY C HECK : Go to the Source 120 Summary 127 Questions for Review and Discussion 128 Questions for Critical Thinking 128 www.downloadslide.com viii Contents What Would You Do? 128 Chapter Closing Case 129 CHAPTER 6 Taking Over an Existing Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Business-Buyout Alternative 132 Advantages of Buying a Business 133 Disadvantages of Buying a Business 134 How Do You Find a Business for Sale? 135 What Do You Look for in a Business? 136 Due Diligence 137 General Considerations 138 Why Is the Business Being Sold? 138 Financial Condition 139 What Are You Buying? 141 Tangible Assets 141 Intangible Assets 143 Personnel 144 The Seller’s Personal Plans 144 How Much Should You Pay? 145 What Are the Tangible Assets Worth? 146 What Are the Intangible Assets Worth? 146 Buying the Business 148 Terms of Sale 148 Closing the Deal 148 Taking Over a Family Business 149 What Is Different about Family Businesses? 150 Complex Interrelationships 150 Planning Succession 150 General Family Business Policies 151 E NTREPRENEURIAL SNAPSHOT : Their Family Business Tree Is a Sequoia 149 MANAGER ’ S NOTES: Show and Don’t Tell 140 MANAGER ’ S NOTES: What’s It Really Worth? 143 C OMPETITIVE A DVANTAGE: In the Box—Negotiating Strategies 133 Summary 152 Questions for Review and Discussion 153 Questions for Critical Thinking 153 What Would You Do? 153 Chapter Closing Case 154 CHAPTER 7 Starting a New Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 About Start-ups 157 Advantages of Starting from Scratch 158 Disadvantages of Starting from Scratch 158 Types of New Businesses 158 E-Businesses 159 Home-Based Businesses 160 Starting a Business on the Side 161 Fast-Growth Start-ups 162