Chapter 05 – Becoming the Owner of a Small Business
5-1
CHAPTER
Create, Buy or Franchise
a Small Business
CHAPTER CONTENTS
Learning Objectives 5.2
Chapter Overview 5.2
Brief Chapter Outline 5.2
5
Chapter 05 – Becoming the Owner of a Small Business
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LEARNING OBJECTIVES
After studying the material in this chapter, the student will be able to:
1. Explain how to go into business for yourself.
2. Describe the steps involved in the procedure recommended for going into business.
3. Describe how to search for and identify a product needed by the public—that is, how to
CHAPTER OVERVIEW
Chapter 5 provides information for prospective small business owners, as to the interests and abil-
ities of the prospective business owner, good marketing potential, where to find information on the mar-
ket for a given business and how to analyze the market. It also discusses reasons for and against buying an
existing business, for and against starting a new business, and reasons for and against buying a franchise.
BRIEF CHAPTER OUTLINE
I. HOW TO GO INTO BUSINESS FOR YOURSELF
II. FINDING YOUR NICHE BY IDENTIFYING A NEEDED PRODUCT
A. How to Decide on a Product
III. STUDYING THE MARKET FOR THE PRODUCT
A. Methods of Obtaining Information about the Market
B. Methods Used to Study the Market
IV. DECIDING WHETHER TO START A NEW BUSINESS, BUY AN EXISTING ONE, OR
BUY A FRANCHISE
A. To Start a New Business?
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V. GROWING OPPORTUNITIES IN FRANCHISING
A. What Is Franchising?
VI. WHY FRANCHISING IS GROWING IN IMPORTANCE
A. Recent Rapid Growth
VII. HOW TO TELL WHETHER A FRANCHISE IS RIGHT FOR YOU
A. See What the Franchise Can Do for You
VIII. THE FUTURE OF FRANCHISING
A. Expected Areas of Growth
B. Other Areas of Expected Development
C. Global Franchising
IX. TURNING YOUR DREAM INTO A REALITY
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CHAPTER OUTLINE AND TEACHING NOTES
CHAPTER OPENING PROFILE:
Brynn Albretsen, Chick-Fil-A Franchise Owner
The opening profile for this chapter follows Brynn Albretsen and her drive to become a
Chick-Fil-A franchise owner. Brynn started at age 15 working at a Chick–Fil-A outlet, learning the
I. HOW TO GO INTO BUSINESS FOR YOUR-
SELF
Learning Objective 1.
Explain how to go into business for yourself.
A. Steps in Starting a Business
Learning Objective 2.
Describe the steps involved in the procedure recom-
mended for going into business.
1. Search for and identify a needed
product.
2. Study the market for the product, us-
ing as many sources as available.
5. Make operational plans, including
setting policies, budgets, standards,
procedures, and methods, and plan-
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CHAPTER OUTLINE AND TEACHING NOTES
7. Develop these plans into a detailed
8. Implement the plan.
II. FINDING YOUR NICHE BY IDENTIFYING A
NEEDED PRODUCT
Learning Objective 3.
Describe how to search for and identify a product needed
by the public—that is, how to find your niche.
A. NICHE MARKETING is the process of
finding a small—but profitable—demand
REAL WORLD EXAMPLE 5.1
Brad Oberwager found a unique market niche—providing
brand stickers for watermelon growers.
REAL WORLD EXAMPLE 5.2
Poor service from trash pickup companies was the spark
that led Pam Altman and Cheryl Alley to form their own trash
pickup company, She Can.
1. Proper planning improves the chance
of success, but does not ensure it.
2. The work is yours to do, find some
B. How to Decide on a Product
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CHAPTER OUTLINE AND TEACHING NOTES
1. Sit down with paper and pencil and
“Brainstorm”. Write down anything
and everything as to product or ser-
2. Beware of advertised “business op-
portunity.” Many times these are
sales traps.
3. Think about past big hits that you
4. What do you like to do? What are
your hobbies? Is there something
5. It takes observation, study, vision,
and luck to recognize the right prod-
uct. Look around you. Do you see a
need, a service to help the children or
seniors? Can you find a way to house
the homeless? Educate the poor?
Fight abuse? Improve race relations?
Remove pollution from the ocean?
Design a car?
6. Extensive research and constant
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CHAPTER OUTLINE AND TEACHING NOTES
7. Maybe you have always had a burn-
way. YOU CAN DO IT!
C. Choosing the Business to Enter
1. Eliminate the ideas that will not pro-
vide the challenges, or rewards that
you are seeking.
2. Concentrate on the things you would
4. SCORE (SERVICE CORPS OF RE-
TIRED EXECUTIVES), a group of re-
tired—but active—managers from all
walks of life, help people develop
business ideas.
a. SCORE has about 13,000 volun-
6. Sources for information:
a. Small Business Administration
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CHAPTER OUTLINE AND TEACHING NOTES
d. U.S. Department of Commerce
(Office of International Trade)
7. Chambers of Commerce are familiar
with the area’s needs and have a
vested interest in expanding business
opportunities.
8. Obtain advice from outsiders, but
don’t let someone talk you into some-
thing you are uncomfortable with.
9. A checklist such as the one pre-
III. STUDYING THE MARKET FOR THE
PRODUCT
Real World Example 5.5
Entrepreneurs often discover a market that has not been
adequately served. Jan Herrick began publishing Royal Re-
sources to cater to plus-sized individuals.
A. Methods of Obtaining Information
about the Market
1. MARKET RESEARCH, WHICH IN-
CLUDES TEXT MARKETING is the
systematic gathering, recording, clas-
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CHAPTER OUTLINE AND TEACHING NOTES
2. Formal research programs are valua-
ble in giving direction, but they can
be very expensive.
3. Libraries, either public or online pro-
4. The Census Bureau website
5. The U.S. Department of Commerce
publishes many useful books on
planning and organizing small busi-
nesses, usually available at district
offices.
C. Methods Used to Study the Market
1. Estimate the size of the market to de-
termine whether it is large enough to
accommodate a newcomer.
a. How large is the industry?
b. Where is the market for the
company?
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CHAPTER OUTLINE AND TEACHING NOTES
g. What is the success rate for
competing businesses?
2. Estimate your share of the market.
a. Determine the geographic
boundaries of the market area.
IV. DECIDING WHETHER TO START A NEW
BUSINESS, BUY AN EXISTING ONE, OR
BUY A FRANCHISE
Learning Objective 4.
Decide whether to start a new business, buy an existing
one, or buy a franchise.
A. To Start a New Business?
1. Many entrepreneurs start their own
2. Reasons FOR starting a new bus-
iness—owners are free to:
a. Define the nature of the busi-
ness.
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CHAPTER OUTLINE AND TEACHING NOTES
e. Take advantage of the latest
REAL WORLD EXAMPLE 5.6
Cindy and Bob Maynard realized that the market for bike
trips was peaking in Vermont and refocused the business on
walking tours and a store with related, clothing accessories.
3. Reasons for NOT starting a new
business:
a. Problems in finding the right
business.
d. Production problems associated
with starting a new business.
e. Lack of an established market
and channels of distribution.
B. To Buy an Existing Business?
1. Reasons FOR buying an existing
business:
a. Personnel are already working.
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CHAPTER OUTLINE AND TEACHING NOTES
c. A product is already being pro-
duced for an existing market.
generated, and goodwill exists.
2. Reasons for NOT buying an existing
business:
a. The physical facilities may be old
or obsolete.
b. The employees may have a poor
production record or attitude.
3. Some questions to ask before buying
a. The evaluation finally narrows
the search down to one business
that must be thoroughly evalu-
ated.
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CHAPTER OUTLINE AND TEACHING NOTES
e. Table 5.1 suggests some im-
portant questions to be asked
before making a decision.
D. To Buy a Franchise?
1. Reasons FOR buying a franchise:
a. Franchiser agreements spell out
responsibility of franchiser and
franchisee.
of franchisee.
d. Franchises are available in a
wide range of endeavors,
so you may be able to find one
combines your talents and de–
sires.
REAL WORLD EXAMPLE 5.7
After being involved in two corporate downsizings, Tom
Scherwitz sought help from his father-in-law Hap Appleman,
a SCORE volunteer. This led Tom to obtain to a franchise for
a UPS Store.
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CHAPTER OUTLINE AND TEACHING NOTES
2. Reasons for NOT buying a franchise:
a. Not having enough money to
cover all needs (including per-
sonal funds), such as initial in-
vestments, fees and royalty pay-
ments.
REAL WORLD EXAMPLE 5.8
John and Katherine Tait experienced three major prob-
lems with their franchise business, which forced them to leave
because of low profit margins: the economic downturn, in-
crease in cost-of-good sold, and high overhead costs.
d. Franchisers hold the advantage
as relates to operating stand-
Real World Example 5.9
Not all franchise opportunities are successful. Two young
people lost their investment in candy machines, when the fran-
chiser disappeared.
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CHAPTER OUTLINE AND TEACHING NOTES
V. GROWING OPPORTUNITIES IN FRANCHIS-
ING
Learning Objective 5.
Describe the growing opportunities in franchising.
A. Many franchising opportunities exist, but
they do not automatically spell success.
1. Be careful when dealing with fran-
chisers who promise a guaranteed
return on your investment.
2. There are about 828,000 franchise
B. What Is Franchising?
1. FRANCHISING is a marketing sys-
tem whereby an individual owner
2. A FRANCHISE is an agreement
3. A FRANCHISER owns the fran–
4. The FRANCHISEE is an independent
businessperson who agrees to sell
the product according to the fran-
chiser’s requirements.
5. a. The contract spells out what the
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CHAPTER OUTLINE AND TEACHING NOTES
Franchisee can and cannot do.
C. Extent of Franchising
1. U.S. franchises create around
300,000 new jobs each year and em-
ploy more than 8 million people.
D. Types of Franchising Systems
1. PRODUCT AND TRADEMARK
FRANCHISING grants the franchisee
the right to sell a widely recognized
product or brand.
a. Examples include automobile
and truck dealerships, gasoline
2. BUSINESS FORMAT FRANCHIS-
ING grants the franchisee the right to
market the product and trademark
and use a complete operating sys-
tem.
a. Examples include restaurants,