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Chapter Five – Forms of Ownership

PART TWO: STARTING & GROWING A SUCCESSFUL BUSINESS. Chapter Five – Forms of Ownership. Basic Forms of Ownership. Basic Forms of Ownership. Sole Proprietorships. Benefits You can start up the business with ease You can make all your own decisions You get to keep all the profits

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Chapter Five – Forms of Ownership

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  1. PART TWO:STARTING & GROWING A SUCCESSFUL BUSINESS Chapter Five – Forms of Ownership

  2. Basic Forms of Ownership

  3. Basic Forms of Ownership

  4. Sole Proprietorships • Benefits • You can start up the business with ease • You can make all your own decisions • You get to keep all the profits • Your taxes are relatively simple • You can close the business with ease • Drawbacks • You have unlimited financial liability • You have limited financial resources & few fringe benefits • You have limited management resources • You will be investing a lot of time in the company • Many businesses end when the owner dies or retires

  5. Partnerships • Four Types • General • Limited • Master Limited • Limited Liability • Advantages • Ease of start up • Increased financial resources • Increased management resources • Taxes are simple • Drawbacks • Personality or partnership conflicts • Unlimited liability • Hard to end or pass along partnerships

  6. Corporations

  7. Corporations • Advantages • Little or no liability • Possible tax breaks • Increased financial resources • More managerial expertise • Ease of selling • Drawbacks • Lots of start-up paperwork and costs, some on-going • Can be taxed twice • Need to publicly disclose financial information • Tough to end the corporation

  8. Corporations • “C” Corp: Unlimited # of owners, corporation pays corporate income tax • “S” Corp: Up to 100 owners, pays no corporate tax • “LLC”: Limited liability COMPANY. No corporate tax, BUT: no personal liability to the owner.

  9. Cooperatives • Limits the power of each shareholder • Less about profit, more about providing a service • Over 460,000 in the U.S. today • Includes some Fortune 500 companies, like Ace Hardware and Sunkist • Shareholders elect their own board of directors

  10. Franchises • A franchise is an arrangement in which a business owner allows others the right to use its name and sell its goods or services within a specific geographical area.

  11. Franchises • A franchise is an arrangement in which a business owner allows others the right to use its name and sell its goods or services within a specific geographical area.

  12. Franchises – Benefits & Drawbacks • Benefits of Franchising • Own your own business • Start your new enterprise with some name recognition • Follow someone else’s proven formula for doing business • Receive marketing support • Receive management and financial support • Drawbacks • Large initial investment • Need to share sales with franchisor • Close management of franchisor • Potential conflicts with franchisor • Inflated expectations of return on investment

  13. Franchising

  14. Franchise—a business that markets a product/service developed by a franchisor Franchising—the system of operating a franchise governed by a legal agreement Franchisor—person or company who develops/sells a franchise and specifies the terms and methods of the agreement Franchisee—owner of a franchise unit or territory rights What Is Franchising?

  15. Product and trade-name franchising—licensing or production of the product, and use of the franchise trade mark, logo, or identity Cutter Ford Windward Nissan H&R Block Molly Maids Main Types of Franchises

  16. Business-format franchising—purchase of an entire business model and system, including access to management expertise McDonald’s Krispy Kreme Circle K Jani-King Main Types of Franchises

  17. Master franchise—allows individuals and organizations to buy the right to sub-franchise within a defined geographic territory Area franchise or multiple-unit franchise—gives exclusive rights to open franchisee-operated units within specific areas Other Franchise Variations

  18. Negative and Positive Aspects of Franchising Advantages Start-up assistance Instant recognition Purchasing power Advertising and promotional support Operating guidelines Record of success Drawbacks Constraints on creativity and freedom Costs Standards and obligations

  19. A few large franchisors, with worldwide franchisees, control most of the industry. Many smaller franchisors have local and regional franchisees. 900,000 U.S. franchisees! U.S. franchises provide over 9.5 million jobs. Franchise Industry Structure

  20. Additional Types of Franchises Conversion franchising—an existing stand-alone business or local chain becomes part of a franchise operation Piggybacking or co-branding—two franchises share locations and resources

  21. Legal Aspects of Franchising State and federal regulations govern franchises. Federal Trade Commission (FTC)—primary agency involved in oversight Franchise Disclosure Document (FDD)—primary source of data for prospective franchisees regarding franchisors Franchise agreement—legal contract between the parties in a franchise

  22. Overview and background Fees and costs Contractual obligations Territory Financial performance Data on existing units Financial statements and contracts Termination, renewal, and other policies Information Included in a FDD

  23. Term of agreement (length of time) Standards of quality and performance Royalties Non-compete, “hold harmless,” and integration clauses; choice of venue Clauses regarding termination, renewal, and transfer of the franchise Territories Information Included in a Franchise Agreement

  24. Steps for Franchise Selection Take time to reflect and engage core supporters. Identify potential franchises. Do research to narrow the list of options. Decide if to use a franchise broker. Visit and observe franchise operator(s).

  25. Steps for Franchise Selection (continued) Request preliminary information from franchise companies. Perform due diligence on a specific franchise. Explore financing options. Make a decision, engage professional counsel, and negotiate an agreement. Make it work!

  26. Opportunities exist worldwide. The decision to go global is more complex than domestic franchising. Ethnic, cultural, and religious diversity impact business format and operations. Policies must be altered for differences in governing law and custom. International Franchising

  27. Mergers and Acquisitions • How to Grow • Internal expansion • External expansion • Merger • Acquisition • Why Mergers & Acquisitions Occur • Shortcut to growth • Management talent • Saving money • Tax benefits

  28. Mergers and Acquisitions • Types of strategic mergers • Horizontal: same industry, same activity • Vertical: same industry, different activities • Conglomerate: different industries, different activities • Unfriendly mergers • Hostile takeovers • Tender offer & Proxy fight • “White Knights” & “Poison pills” • Borrow & Buy Strategies • Leveraged buyout • Employee buyout

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