Select a Type of Ownership

SELECT A TYPE OF OWNERSHIPChapter 3

GOOGLE Do a Google search of “google”

How many results are found? Who are Google’s users? How does Google make money?

CHAPTER 3: TYPE OF OWNERSHIP3.1 – Run an Existing Business3.2 – Own a Franchise or Start a Business3.3 – Choose the Legal Form of Your

Business

Lesson 3.1

RUN AN EXISTING BUSINESS

3.1 ASSIGNMENT You will be able to:

List the reasons for wanting or not wanting to purchase an existing business in our community.

CHOOSING AN EXISTING BUSINESS Why is the business for sale?

Insufficient sales or profits New competition New economic conditions Retirement Partner challenges Owner’s interests changed

FINDING BUSINESSES FOR SALE Local newspaper advertisements Business Broker

Person who sells businesses for a living People in the industry Others

Landlords, leasing agents, lawyers and bankers, management consultant, SBA, Chamber of Commerce, bankruptcy announcement

CLASSIFIED ADVERTISEMENTS Look through the classified ads online

to find local businesses for sale in Connecticut.

www.classifiedads.com Jobs & Employment – Business

Opportunities What kinds of businesses did you find? What are the prices of the businesses?

ADVANTAGES TO EXISTING BUSINESS

Existing customer base, suppliers, procedures

Training from seller Prior financial records Financial arrangements can be easier

DISADVANTAGES TO EXISTING BUSINESS Not making profit

Not financially viable Serious problems may be inherited

Poor reputation, trouble with suppliers, poor location

Capital is required Name a local business that closed

recently. Why did it close?

STEPS TO BUYING A BUSINESS1. Write your business objective and

identify businesses for sale in the industry

Writing it down will help you find the right business for you

2. Meet with sellers or brokers to investigate opportunities

3. Observe the company in action

During regular business hours

STEPS TO BUYING A BUSINESS CON’T

4. Retain financial records of past three years

5. Get important information in writing

6. Determine how you would finance the business (“how to” startup guides)

7. Get expert help to determine a price to offer Valuator (expert on determining the value of a

business) Bank loan vs. financing through owner

RESEARCH Using the business you found in the

previous activity: Come up with five to seven questions to

the owner about the sale of the business.

ENTER A FAMILY BUSINESSLesson 3.1 continued

ADVANTAGES OF A FAMILY BUSINESS Family business owners enjoy the

pride and sense of mission that comes with being part of a family enterprise.

Remain in the family for at least 1 generation

Enjoy working with relatives

Benefits people they care about

DISADVANTAGES OF A FAMILY BUSINESS Family members hold high

management positions regardless of their ability. Poor business decisions can

be made Difficult to retain good employees who are

not family Family politics interfere with decision

making Business life affecting private life

LOCAL FAMILY OWNED BUSINESSES What family owned businesses are

located here in West Hartford? Elmwood Pastry Shop Jac’s Cleaning Service S.K. Lavery Appliance Company South Street Automotive

REVIEW 3.1 What should you consider before

purchasing an existing business? Why the business is for sale, general

operations, problems with customers, suppliers, location.

What are some of the advantages and disadvantages of entering a family business? Advantages: sense of family pride Disadvantages: blurring of family/business life,

not being able to make all decisions

3.1 ASSIGNMENT Choose 2 or 3 local competitors

(Chamber of Commerce website). Write down at least 3 reasons why you

would or would not consider buying each of these companies if they were for sale

Lesson 3.2

OWN A FRANCHISE OR START A BUSINESS

START YOUR OWN VS. BUY A FRANCHISE

What are some franchises you would consider purchasing?

3.2 ASSIGNMENT You will be able to:

Gather information about purchasing a franchise.

Create an advertisement offering to sell franchises of your business to prospective owners.

FRANCHISE OWNERSHIP Franchise – legal agreement that

gives an individual the right to market a company’s products or services in a particular area. Franchisee – person purchasing franchise Franchisor – person or company offing the

franchise purchase

RESOURCES Buying a Franchise: A Consumer Guide

Federal Trade Commission Books The Wall Street Journal Magazines: Forbes, Barron’s,

Entrepreneur, and Inc. The Franchise Opportunities Handbook

U.S. Dept. of Commerce 1,400 + franchise opportunities by

category

FRANCHISE VS. YOUR OWN BUSINESS What are some advantages of each? Do an internet search for franchise

opportunities in your business field.http://www.franchisehandbook.com/

What is the cost of purchasing the franchise?

Is there financing available through the franchise?

OPERATING COSTS Initial franchise fee

Fee paid by franchisee in return for the right to run the franchise

Range: few thousand dollars to few hundred thousand dollars

Startup costs Costs associated with beginning a business

OPERATING COSTS CON’T Royalty fees

Weekly or monthly payment made by the franchisee to the franchisor

Percent of franchise income Advertising fees

Local and nationwide Supports TV, magazine, and other ads

THINGS TO CONSIDER Direct Measurables

Fees, royalty rates, and total investment Market Impact

Recognition of trademark, maturity of the franchisor, thoroughness of training programs

Intangibles Culture of network, leadership style, mood

of franchisees, “success quotient” of franchisors

UFOC Uniform Franchise Offering Circular

A.K.A. – Franchise Disclosure Document (FDD)

Document provided from franchisor before the purchase of the franchise

1. Items describing various aspects of franchise2. Financial Statements3. Franchise Agreements

ADVANTAGES OF OWNING A FRANCHISE1. Established product/service

Competition with giant companies2. Franchisor assistance

Management, technical, other Onsite training or classes

Starting the business, daily operations, crisis management, location, building design, equipment purchases.

ADVANTAGES CON’T3. Equipment & Supplies Savings

Buying in bulk is less expensive4. Consistency Attracts Customers

Mandated quality no matter the location

INTERNATIONAL FRANCHISE, PG. 69 Why are international franchises

becoming a popular way of doing business?

What should an entrepreneur consider before expanding abroad?

DISADVANTAGES OF OWNING A FRANCHISE

1. Costly and reduce profits High initial capital and portion of the

profits are returned to the franchisor2. Less freedom

Initial decisions already made Sale of certain products/services and prices

already set Contradicts some reasons for becoming an

entrepreneur in the first place

DISADVANTAGES CON’T3. Dependent on performance of other

franchises Sloppy operations will impact customer

opinions across the board4. Termination of franchise agreement

Failure to pay or meet other conditions can result in termination

Upon expiration the franchisor can decide not to renew the agreement

ADVANTAGES VS. DISADVANTAGES

How can franchises be affected by other franchises in the chain?

EVALUATE A FRANCHISE1. Location demands and exclusive territory in

my area?2. Costs & royalty fees?3. Current profitable franchises and

reputation?4. Length of time as a franchise? Profit for

franchisor?5. Services provided by franchisor?6. Benefits provided worth the loss of

independence and cost of purchase?7. Cancelation of franchise agreement?

LOW-COST FRANCHISES

Low startup costs -> little investment in equipment and building sites

High startup costs -> brand-name recognition, specialized equipment and processes, and storefront locations

CAUTION! False/misleading claims Written financial statements High-pressure sales tactics Signing the agreement right away

Allow time to read and understand the UFOC

Lawsuits filed against company? Consult your attorney before hand

Oral promises included in the contract

KID’S CLOSET CONNECTIONGo to www.kidscloset.biz and research the following information: Startup Cost & Royalty Fees Territories available Financing through Kid’s Closet Services available

Would you consider purchasing a Kid’s Closet Franchise? Why or why not?

START YOUR OWN BUSINESSLesson 3.2 continued

ADVANTAGES VS. DISADVANTAGES

ADVANTAGES DISADVANTAGES Decisions are yours

Location Employees Prices to charge Products to sell

Independent Satisfaction of doing it

on your own

Risky Estimate demand for

your product/service No certainty Decisions are yours

alone Location Employees Prices to charge Products to sell

GROUP WORKDebate the pros and cons of starting a

business from scratch for each of the following areas: restaurant, retail gift shop, and home improvement.

Failure leads to success (as long as the entrepreneur learns from their

mistakes)

FAILURE LEADS TO SUCCESS (as long as the entrepreneur learns from their mistakes)

3.2 ASSIGNMENT Find franchise opportunities available in

your business field. Gather information such as franchise fees, royalties, projected earnings, and operating costs.

If you start your own business, assume you will decide to franchise it. Write an advertisement offering to sell franchises of your business to prospective owners.

Lesson 3.3

CHOOSE THE LEGAL FORM OF YOUR BUSINESS

3.3 ASSIGNMENT

You will be able to: Write the partnership agreement

between you and your business partner.

List the advantages and disadvantages of becoming an S corporation

FORMS OF BUSINESS OWNERSHIP Name some local businesses, how are

they owned? Sole Proprietorship

Owned by one person Partnership

Owned by two or more people Corporation

Legal rights lie with a person independent of the owners

Businesses ending with Inc., Corp., and LTD What happens to the debt of a failed

business?

SOLE PROPRIETORSHIP

ADVANTAGES DISADVANTAGES Little gov’t control

Tax records Employee laws

Run simply and smoothly

Raising money to start Only person

contributing financially Debt directly connected

with owner

One person in control of all business aspects, can range in size from very small with just a few employees or large with 100 employees.

PARTNERSHIP

ADVANTAGES DISADVANTAGES Initial capital

investment shared between partners

Losses shared between partners

Multiple areas of expertise

Little gov’t control

Sharing responsibilities and profits

Legally liable for errors made by partner

Two or more owners

PARTNERSHIP AGREEMENTS States, in writing, the rights and

responsibilities of each owner: Name of business Type and value of investment Managerial and rights Accounting method Division of profits and losses Salaries Duration of partnership Dissolution Distribution of assets upon dissolution Procedures dealing with death of a partner

TYPES OF PARTNERSHIPSGENERAL LIMITED LIMITED

LIABILITY(LLP)

•mgmt decisions shared equally•financial liabilities shared equally

•Con: personally liable for debt•Pro: income passed through to personal return (taxed at lower rate)

• no mgmt decisions•financial liability restricted to personal investment

at least 1 general partner (exposed to personal liability)

• tax advantage of gen. partnership + some personal liability protection• personally protected from errors made by partners

Is a sole proprietorship or partnership more advantageous for you? Why?

CORPORATIONS Same legal rights as a person

Pays taxes, enters contracts, held liable for negligence

Ownership = stock holders A share of stock is a unit of ownership

Board of Directors makes important decisions Meets several times per year

Dividends – distribution of profits to shareholders

CORPORATIONS

ADVANTAGES DISADVANTAGES Liability (owed to

others) Limited to amount

invested with purchase of stock

Raise $ by selling more stock

Lenders more likely to lend

Management of corp does not change with buying and selling of stock

Incorporation setup Lawyers to file articles of inc.

with state to register the corp.

Costly Very detailed articles of inc.

Limited activities if not Gov’t regulations Income taxed twice

Corp. pays income tax Shareholders pay tax on

dividends (double taxation)

IN YOUR OPINION, WHAT IS THE BIGGEST ADVANTAGE AND DISADVANTAGE OF BEING A CORPORATION?

S CORPORATION Small corporation Income taxed as partnership (avoiding

double taxation) Shareholders pay taxes on dividends

received Same formalities and record-keeping as

a regular corporation Managed by board of directors and

officers

LIMITED LIABILITY COMPANY (LLC) Partnership taxation Limited liability for owners Simpler to operate than S corp Owners are members (not

shareholders) Do participate in management of business

Can be limited by state law

3.3 ASSIGNMENT

You have a friend who is interested in being your business partner. Write the partnership agreement for the two of you.

List the advantages and disadvantages of becoming an S corporation.