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?

ACTIVITY

Discuss with your group members the advantages and disadvantages of 1) purchasing an existing business and taking over a 2) family business.

CHAPTER 3: TYPE OF OWNERSHIP

3.1 – 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 BUSINESS

1. 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 3 local businesses (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

USEFUL 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 over a

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 franchise1. Items describing various aspects of franchise2. Financial Statements3. Franchise Agreements

REVIEW What is a franchise? Franchisee vs.

Franchisor? Legal agreement that gives an individual the right to market a

company’s products or services in a particular area

What are the costs involved in purchasing a franchise?

Franchise fee, Royalty fees, startup costs, advertising fees

What should you consider before purchasing a franchise?

Direct Measureables, Market Impact, Intangibles

What does UFOC stand for and what is it? Uniform Franchise Offering Circular – provides necessary

information about a franchise from the franchisor to prospective franchisee.

ADVANTAGES OF OWNING A FRANCHISE

1. Established product/service Competition with giant companies

2. Franchisor assistance Management, technical, other Onsite training or classes

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

ADVANTAGES CON’T

3. Equipment & Supplies Savings Buying in bulk is less expensive

4. 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 franchisor

2. 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’T

3. Dependent on performance of other franchises Sloppy operations will impact customer

opinions across the board

4. 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 FRANCHISE

1. 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 CONNECTION

Go 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 WORK

Debate 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 2 franchise opportunities available in

your business field. Gather information such as franchise fees, royalties, projected earnings, operating costs, services provided by franchisor (trainings), etc.

When 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. Arby's for Sale

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

Income taxed once

Raising money to start Only person

contributing financially Debt directly connected

with owner Work a LOT

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:1. Name of business2. Type and value of investment3. Managerial and rights4. Accounting method5. Division of profits and losses6. Salaries7. Duration of partnership8. Dissolution9. Distribution of assets upon dissolution10. Procedures dealing with death of a partner

TYPES OF PARTNERSHIPS

GENERAL LIMITED(LP)

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?

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.