Entreprenuership

1. Chapter 6
Forms of Business Ownership
and
Buying an Existing Business

2. Choosing a Form of Ownership
• There is no one “best” form of ownership.
• The best form of ownership depends on an
entrepreneur’s particular situation.
• Key: Understanding the characteristics of each
form of ownership and how well they match an
entrepreneur’s business and personal
circumstances.

3. Factors Affecting the Choice
• Tax considerations
• Liability exposure
• Start-up and future capital requirements
• Control
• Managerial ability
• Business goals
• Management succession plans
• Cost of formation

4. Major Forms of
Ownership
• Sole Proprietorship ( Limited liability Sole
Company)
• General Partnership
• Limited Partnership
• Corporation
• S Corporation
• Limited Liability Company

5. 5 - 5

6. 5 - 6

7. Advantages of the Sole Proprietorship
• Simple to create
• Least costly form to begin
• Profit incentive
• Total decision making authority
• No special legal restrictions
• Easy to discontinue

8. Disadvantages of the Sole Proprietorship
• Unlimited personal liability
• Limited skills and capabilities
• Feelings of isolation
• Limited access to capital
• High percentage of Lack of continuity of the
business

9. Limited Liability Sole Proprietorship
Advantages
• limited personal liability
Disadvantages :
• Limited access to scaling up and expansion
• Limited access to capital

11. Partnership
• An association of two or more people who co-own
a business for the purpose of making a profit.
• Always wise to create a partnership agreement
states in writing the terms under which the
partners agree to operate the partnership and that
protects each partner’s interests in the business.
• .The best partnerships are built on trust and
respect.

12. Types of
Partners
• General partners
• Take an active role in managing a business.
• Have unlimited liability for the partnership’s
debts.
• Every partnership must have at least one
general partner.
• Limited partners
• Cannot participate in the day-to-day
management of a company.
• Have limited liability for the partnership’s
debts.

13. Types of
Limited
Partners
• Two types of limited partners:
1. Silent partners:
• Not active in a business but are generally
known to be members of the
partnership
2. Dormant partners:
• Neither active nor generally known to be
associated with the business

14. Limited Partnership
• A partnership composed of at least one general
partner and one or more limited partners.
• A general partner in this partnership is treated
exactly as in a general partnership.
• A limited partner has limited liability and is treated
as an investor in the business.

15. Advantages of
the Partnership
• Easy to establish
• Complementary skills of partners
• Division of profits
• Larger pool of capital
• Ability to attract limited partners
• Minimal government regulation
• Flexibility

16. Disadvantages
of the
Partnership
• Unlimited liability of at least one partner
• Capital accumulation
• Difficulty in disposing of partnership interest
without dissolving the partnership
• Lack of continuity in case of argument
• Potential for personality and authority conflicts
• Double taxation

17. Liability Features of the Basic Forms of Ownership
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17
Partnership
Claims of Partnership’s Creditors
Partnership’s
Assets
General
Partner’s
Personal
Assets

18. Types of
Corporation
Types of corporations:
• Publicly held – a corporation that has a
large number of shareholders and
whose stock usually is traded on one of
the large stock exchanges.
• Closely held – a corporation in which
shares are controlled by a relatively
small number of people, often family
members, relatives, or friends.

19. Pros and Cons of the Corporation

20. Avoiding Legal
Tangles
• File all reports and pay all necessary fees required by the
state in a timely manner.
• Hold annual meetings to elect officers and directors.
• Keep minutes of every meeting (formal and informal) of
the officers and directors.
• Be sure that the corporation’s board makes all major
decisions.
• Make it clear that the business is a corporation – officers
should sign all documents in the corporation’s name.

21. Limited Liability Company
(LLC)
• Resembles an S Corporation but is
not subject to the same restrictions.
• Two documents required:
• Articles of organization
• Operating agreement

22. Limited Liability Company (LLC)

23. Liability Features
Limited Liability Company - LLC
Claims of LLC’s Creditors
LLC’s Assets
Member’s
Personal Assets
Member’s
Personal Assets

24. The Professional Corporation
• Designed for professions – lawyers,
doctors, dentists, accountants and other
professionals
• Created in the same manner as a
corporation
• Identified by the abbreviations:
• P.C. – Professional Corporation
• P.A. – Professional Association
• S.C. – Service Corporation
5 - 24

25. Corporation
• A separate legal entity from its owners.
• Types of corporations:
• Domestic – a corporation doing business in the state
in which it is incorporated.
• Foreign – a corporation doing business in a state
other than the state in which it is incorporated.
• Alien – a corporation formed in another country but
doing business in another country.
• Off shore - An Offshore Company refers a
corporation, LLC or similar class of entity formed in a
foreign country to that of the principals of the
organization or one that can only operate outside of
its country of formation. This article provides
information to help one understand the definition of
the term “Offshore Company” and to describe how
they differ from domestic companies

26. The Joint Venture
• Much like a partnership, but it:
• Is formed for a specific purpose
• Has a beginning and an end

28. Buying a
Business

29. Key Questions
to Consider
Before Buying
a Business
• Is the right type of business for sale in the
market in which you want to operate?
• What experience do you have in this particular
business and the industry in which it operates?
How critical is experience in the business to
your ultimate success?
• What is the company’s potential for success?
• What changes will you have to make – and how
extensive will they have to be – to realize the
business’s full potential?

30. Key Questions
to Consider Before Buying a
Business
• What price and payment method are
reasonable for you and acceptable to the
seller?
• Will the company generate sufficient cash
to pay for itself and leave you with a
suitable rate of return on your investment?
• Should you be starting a business and
building it from the ground up rather than
buying an existing one?

31. Types of
Business
Buyers
7 - 31

32. Advantages of Buying a Business
• It may continue to be successful
• It may already have the best location
• Employees and suppliers are established
• Equipment is already installed
• Inventory is in place and trade credit is
established
• New owners can “hit the ground running”
• New owners can use the previous owner’s
experience
• Financing is easier to obtain
• It’s a bargain!

33. Disadvantages of Buying a Business
• It’s a “loser”
• Previous owner may have created ill will
• “Inherited” employees may be unsuitable
• The location may have become unsatisfactory
• Equipment and facilities may be obsolete or
inefficient
• Change and innovation can be difficult to
implement
• Inventory may be outdated or obsolete
• Accounts receivable may be worth less than face
value

34. Critical Areas for Analyzing an Existing
Business
1. Why does the owner want to sell ... what is the real
reason?
2. What is the physical condition of the business?
 Accounts receivable
 Lease arrangements/ loans / On credit
purchase agreements
 Business and Financial records
 Intangible assets / Reputation
 Location and appearance
3. What is the potential for the company's products
or services?
 Product line status / equipment's
 Potential for company’s products or services
 Customer characteristics and composition /
Segmentation
 Competitor characteristics and composition
 Market Shares
4. What legal aspects must I consider?

35. The Legal Aspects of Buying a Business
• Lien - creditors’ claims against an asset.
• Bulk transfer - protects business buyer from the
claims unpaid creditors might have against a
company’s assets.
• Contract Assignment - buyer’s ability to assume
rights under seller’s existing contracts.
• Covenant not to compete (restrictive covenant or
non compete agreement) contract in which a
business seller agrees not to compete with the
buyer within a specific time and geographic area.
• Ongoing legal liabilities - physical premises,
product liability lawsuits, and labor relations
issues.

36. Bulk Transfer
• Seller must give the buyer a sworn list of
creditors.
• Buyer and seller must prepare a list of the
property included in the sale.
• Buyer must keep the list of creditors and property
for six months.
• Buyer must give written notice of the sale to each
creditor at least ten days before he takes
possession of the goods or pays for them
(whichever is first).

37. The Acquisition Process
Ch. 7: Buying an Existing Business
7
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37
FIGURE 7.2
Sources: Adapted from Buying and Selling: A Company Handbook, Price Waterhouse,( New York: 1993) pp.38-42;Charles F. Claeys, “The Intent to Buy,” Small Business Reports, May 1994, pp.44-47.

38. Negotiating the Deal
7 - 38
Buyers seek to:
• Get the business at the lowest cost.
• Negotiate favorable payment terms.
• Get assurances that they are buying the business they are
getting.
• Avoid putting the seller in a position to open a competing
business.
• Minimize the amount of cash paid up front.

39. Negotiating the Deal
7 - 39
Sellers seek to:
• Get the highest price possible
• Sever all responsibility for company liabilities
• Maximize the cash they receive
• Minimize the tax burden from the sale
• Make sure the buyer will be able to make all
future payments

40. The Five Ps of Negotiating
Ch. 7: Buying an Existing Business
7
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40
Preparation - Examine the needs
of both parties and all of the
relevant external factors affecting
the negotiation before you sit
down to talk.
Poise - Remain calm during the
negotiation. Never raise your voice
or lose your temper, even if the
situation gets difficult or
emotional. It’s better to
walk away and calm
down than to blow
up and blow
the deal.
Persuasiveness - Know what
your most important positions
are, articulate them, and offer
support for your position.
Persistence - Don’t give in
at the first sign of resistance to your
position, especially if it is an issue
that ranks high in
your list of priorities.
Patience –
Don’t be in such
a hurry to close the deal that
you end up giving up much of what
you hoped to get. Impatience is
a major weakness in
a negotiation.
In addition to the text

41. Conclusion
• When buying an existing business:
• Assess the advantages and disadvantages
• Follow the steps to improve your chances of
success
• Determine the value of the business
• Appreciate the seller’s side
• Negotiate wisely

42. Copyright © 2011 Pearson Education
Chapter 7
Franchising and the
Entrepreneur

43. The Franchising Boom
• About 3,000 franchisors operate more than
770,000 outlets in the United States.
• Franchises generate more than $800 billion
in annual sales and account for 4.1% of the
U.S. GDP.
• Franchises employ 8.1 million workers in the
United States in more than 300 major
industries.

44. US leading the Franchise Industry

45. The Franchising Boom
• Franchise businesses contributed indirectly to
the U.S. economy in other ways, too. According
to the report, franchises were the cause of more
than 16 million jobs, $723.2 billion of annual
payroll and $2.1 trillion of annual output, which
ultimately accounted for 7.4 percent of the GDP
• A new franchise opens somewhere in the world
every 8 minutes.

47. Franchised Outlets by Industry

48. Franchising
A system in which semi-independent business
owners (franchisees) pay fees and royalties to a
parent company (franchiser) in return for the
right to become identified with its trademark, to
sell its products or services, and often to use its
business format and system.
6 - 48

49. The Franchising Relationship

50. Types of Franchising
• Trade-name:
• A franchisee purchases the right to use the
franchisor’s trade name without distributing
particular products exclusively under the
franchisor’s name.
• Product distribution:
• A franchisor licenses a franchisee to sell its
products under the franchisor’s brand name and
trademark through a selective, limited distribution
network.
• Pure:
• A franchisor sells a franchisee a complete business
format and system.

51. Franchising Basics
• Franchisee gets the right to use all of the elements of
a fully integrated business operation.
• Essence of what franchisees purchase from the
franchisors: Experience.
• Key Question: “What can a franchise do for me that I
cannot do for myself?”

52. Benefits of
Franchising
• A Successful established business system
• Management training and during Start-up and ongoing
• Brand name appeal - “Cloning” Effect
• Standardized quality of goods and services
• Less likely to fail
• Business support
• Brand protection
• National advertising program
• Financial support if Valid
• Centralized buying power
• Site selection and territorial protection / encroachment
• Greater chance for success

53. Drawbacks of
Franchising
• Franchise fees and ongoing royalties
• Average upfront franchise fee = $25,147
• Royalties range from 1% to 11% of franchisees’
sales
• Average royalty = 6.7% of sales
• Strict adherence to standardized operations
• Restrictions on purchasing
• Approved suppliers only
• Limited product line
• Contract terms and renewal
• Unsatisfactory training programs
• Market saturation
• Less freedom –
• “No independence”
• “Happy prisoners”

54. Ten Myths of
Franchising
1. Franchising is the safest way to go into business because
franchises never fail.
2. I’ll be able to open my franchise for less money than the
franchiser estimates.
3. The bigger the franchise organization, the more successful I’ll
be.
4. I’ll use 80 percent of the franchiser’s business system, but I’ll
improve upon by substituting my experience and know-how.
5. All franchises are the same.
6. I don’t have to be a hands-on manager, I can be an absentee
owner and still be very successful.
7. Anyone can be a satisfied, successful franchise owner.
8. Franchising is the cheapest way to get into business for
yourself.
9. The franchiser will solve my business problems for me; after all,
that’s why I pay an ongoing royalty fee.
10. Once I open my franchise, I’ll be able to run things the way I
want to

55. Franchising and the Law
Franchise Disclosure Document (FDD)
• Established in 2008 to replace the Uniform
Franchise Offering Circular (UFOC)
• Requires franchisors to disclose to potential
franchisees information on 23 important topics
• Objective: To give franchisees the information
they need to protect themselves from dishonest
franchisers and to make good investment
decisions

56. Detecting
Dishonest
Franchisers
• Claims that the contract is “standard; no need
to read it.”
• Failure to provide a copy of the required
disclosure documents.
• Marginally successful prototype or no
prototype.
• Poorly prepared operations manual.
• Promises of future earnings with no
documentation.
• High franchisee turnover or termination rate.
• Unusual amount of litigation by franchisees.

57. Detecting
Dishonest
Franchisers
• Attempts to discourage your attorney from
evaluating the contract before signing it.
• No written documentation.
• A high pressure sale.
• Claims to be exempt from federal disclosure
laws.
• “Get rich quick” schemes, promising huge
profits with minimal effort.
• Reluctance to provide a list of existing
franchisees.
• Evasive, vague answers to your questions.

58. The Right Way
to Buy a
Franchise
• Evaluate yourself - What do you like and dislike?
• Research your market.
• Consider your franchise options.
• Get a copy of the Franchisor’s FDD – and read it!
• Talk to existing franchisees.
• Ask the franchiser some tough questions.
• Make your choice.

59. Factors That
Make a
Franchise
Appealing
• Unique concept or marketing approach
• Profitability
• Registered trademark
• Business system that works
• Solid training program
• Affordability
• Positive relationship with franchisees

60. Trends Shaping
Franchising
• Smaller, nontraditional locations
• Intercept Franchise : putting a franchise’s products
or services directly in the paths of potential
consumers, wherever they may be.
• Conversion franchising
• Owners of independent businesses become
franchisees to gain the advantage of name
recognition.
• 72% of North American franchisors use it as a
growth strategy.

61. Trends Shaping
Franchising
• Co-branding
• Aka piggyback or combination franchising:
• Two or more franchises team up to sell
complementary products or services under one
roof.

62. Trends Shaping
Franchising
• Refranchising
• Franchisors sell their company-owned outlets to
franchisees.
• Multi-unit franchising
• IFA: 20% of franchise owners are multiple-unit
owners.
• Typical multiple-unit franchises own five outlets.

63. Trends Shaping
Franchising
• Area development and master franchising
• Area development: the franchisee earns the
exclusive right to open multiple units in a specific
territory in a specific time.
• Master franchise: franchisee has the right to create
a semi-independent organization in a particular
territory to recruit, sell, and support other
franchisees.

66. Conclusion
• Franchising:
• Is a key part of the small business
sector
• Increases the chance of business
success for the entrepreneur
• Growth continues