Page 30 - Business Principles and Management

Chapter 1 • Characteristics of Business

slowdown when many large firms were laying off thousands of workers, small
businesses were hiring in large numbers. Often the new entrepreneurs were facts
highly skilled managers who had been displaced by large firms that were down- &
sizing. During that time, the number of applicants hired by small firms exceeded
the number laid off by large firms. It is often believed that small businesses pay figures
lower wages than larger businesses. Contrary to that belief, many of these small
firms, especially those providing technical and professional services, were offer-
ing high-paying jobs. Over 25 million businesses cur-
Many small businesses are one-person or family operations with only a few rently exist in the United States.
employees. Examples include restaurants, gift shops, gas stations, and bakeries. They vary in size from one part-
Computers have made it possible for small businesses to operate from homes and time employee to over 1 million
on the Internet. For example, consultants working from their homes can do much employees worldwide and in
of their work by e-mail with clients, and craftspeople can offer their products for assets from a few dollars to bil-
sale on the Internet, without the expense of a storefront. lions of dollars. Some of these
Most large businesses today began as very small businesses. Because they businesses have only a few cus-
were well managed and supplied products and services consumers desired, they tomers, whereas others have
grew larger and larger. For example, Subway began as a small business and now millions of customers located
has over 25,000 restaurants in 83 countries. The first Kinko’s copy center was throughout the world.
opened by a new college graduate in 1970 to serve students and faculty at the
University of California at Santa Barbara. Due to its popularity and success,
it expanded into more than 1,200 locations with 20,000 employees. In 2003, it
was purchased by FedEx for over $2 billion.

GROWTH OF FRANCHISE BUSINESS
For the person with an entrepreneurial spirit, a popular way to launch a small
business is through a franchise. A franchise is a legal agreement in which an
individual or small group of investors purchases the right to sell a company’s
product or service under the company’s name and trademark. Wireless Zone,
Supercuts, and Bruegger’s Bagels are examples of franchises operated by small-
business owners under such agreements. The two parties to a franchise agree-
ment are the franchisor, the parent company of a franchise agreement that
provides the product or service, and the franchisee, the distributor of a fran-
chised product or service.
In a typical franchise agreement, the franchisee pays an initial fee—often
$100,000 or more—to the franchisor, and a percentage—usually 3 to 8 percent—
of sales. In return, the franchisee gets assistance in selecting a location for the
store or building and exclusive rights to sell the franchised product or service in
a specified geographic area. The franchisor also provides tested policies and pro-
cedures to follow as well as special training and advice in how to operate the
franchise efficiently. These services are particularly valuable to inexperienced
business owners. They give a franchise business a far greater chance of success
than a firm starting on its own has. Although 5 to 10 percent of franchised busi-
nesses fail, the failure rate is far lower than the failure rate of nonfranchised new
businesses.
Prospective franchisees should carefully check out the franchisor. Fraudulent
dealers have deceived many innocent people. Franchise agreements may require
franchisees to buy all items needed to operate the business from the franchisor,
often at a price substantially higher than available elsewhere. Some franchisors
have been charged with allowing other franchisees to open businesses too close
to each other, reducing the amount of possible revenues. To avoid these prob-
lems, some states have passed laws to protect franchisees. Potential franchisees
should seek the help of lawyers and accountants and even experienced business-
people before signing franchising agreements.

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