Forms of Business Ownership Business 40 Week 4
Forms of Business Ownership Business 40 Week 4 Carole K. Meagher 9 February, 2005
Agenda o o Roll call, introductions, project ideas DVD Article analysis Before you leave tonight… n o I need a roster with your group and project idea Week 4 Lead-in
“Joe to Go” o o Cluster into your groups Think about your own project while watching this DVD n n Best practices/Good ideas you’ll borrow? Lessons learned you’ll watch out for?
Starting your own business o Yes, decide what type you want to be and why… n n n Sole proprietorship – just get started! Partnership – pair up with a friend Corporation - function separate from owners
Sole Proprietorship Ø Advantages Ø Ease of start/end Ø Be your own boss Ø Pride of ownership Ø Disadvantages Ø Ø Ø Leave legacy Ø Retain profit Ø Ø No special taxes Ø Ø Unlimited liability Limited financial resources Difficulty in managment Time commitment Few fringe benefits Limited growth Limited life span
Types of Partnerships o o General Limited Master Limited Liability
Partnership o Advantages n n More financial resources Shared mgmt. Longer survival No Special Taxes o Disadvantages n n Unlimited liability Division of profits Disagreements among partners Difficult to terminate
Types of Corporations S Regular ‘C’ S S Corporation S Limited Liability Companies
Corporations Ø Ø Ø Private- Not Traded on Any Stock Exchange Public- Shares Are Traded on 1 or More Stock Exchanges Non-Profit- Performs Public Service, Has Special Tax Considerations To Encourage Formation
Corporation o Advantages n n n More money for investment Limited liability Separation of ownership/mgmt. Ease of ownership change Perpetual life Size o Disadvantages n n n Initial cost Paperwork Two tax returns Termination difficult Stockholder & Board Conflict Double taxation
How Owners Affect Management
S Corporations q. No more than 75 shareholders q<25% of income can be passive q. Individual or Estates q. Slower-growing q. U. S. citizens or residents q 1 class of stock companies q. Benefits change with new tax rules
Limited Liability Companies ü Advantages ü Limited Liability ü Tax Choice ü Flexible Ownership Rules ü Flexible Profit & Loss Distribution ü Operating Flexibility ü Disadvantages ü No Stock ü Limited Life Span ü Fewer Incentives ü Taxes ü Paperwork
Why Mergers Don’t Work ü ü Companies Overpay to Acquire Another Firm Acquiring Company Overestimates Cost Savings and Synergies After Merger, Managers Disagree About Integrating Operations After Merger, Cost Cutting Obsession Hurts Business Costing Top Employees & Customers
GM’s Ownership In: Source: USA TODAY
Types of Mergers o o o Horizontal Vertical Conglomerate
Leveraged Buyout Individual + Loan = Purchase of Company Purchase Loan Company = Collateral
Franchise System Franchise Agreement Ø Franchisor Ø Franchisee Ø
Franchise Contract Franchisor, Inc. Branded Product/Service Performance Monitoring $$$$$ Franchisee
Franchisor ü Assigns Territory ü May Provide Financial Aid/Advice ü Offers Merchandise/ Supplies at Competitive Price ü Provides Training/Support ü Business Expansion Using O. P. M.
Franchisee ü Pays Up-Front Costs ü Makes Monthly Payment to Franchisor Runs Business by Franchisor’s Rules/Procedures Buys Materials from Franchisor/ Approved Supplier ü ü
Fastest Growing Franchises (2002) Company Since Type # Stores Curves 1995 Women’s Only Fitness 3, 778 Subway 1974 Submarine Sandwich 14, 800 7 -Eleven 1964 24 -Hr. Convenience 3, 761 Taco Bell 1964 Mexican Fast Food 5, 417 Jani-King 1974 Commercial Cleaning 7, 843 Source: Entrepreneur, 2003
Franchises + Advantages + Management & marketing assistance + Personal ownership + Recognized name + Financial advice & assistance + Lower failure rate - Disadvantages - High start-up costs - Shared Profit - Management regulation - Coattail effects - Restrictions on selling - Fraudulent franchisors
Cost of Fast-Food Franchise
How to Avoid a Franchise Lemon 1) Research officers & their business experience 2) Get summary of any bankruptcy & litigation 3) Estimate all costs to set up franchise 4) Review franchise contract & three most recent financial statements
Benefits of a Home-Based Franchise. B B B Flexible work hours Quality lifestyle Doing the work of your choice Opportunity to expand using technology Self-motivation
Franchising & E-Commerce o Technology- Faster Customer Service o Access to International Markets
Cooperatives q Farm Cooperative q Owned & Controlled by People Who Use It q Pool of Resources q Economic Power
Count off by 3 s… 1. 2. 3. Why did Demos decide to start White Wave? What did he think he could do differently/better? Why did Engles want to acquire White Wave? In other words, why was WW growing and Dean foods not growing? Why did Engles keep Demos and his team around? Couldn’t he just run the operation with his own people?
Break…
Small Business Revival ü Shift to Services ü CAD/CAM Lessening Advantages of Big Manufacturing Maturation of Baby Boomers More Women in Workforce ü ü 1970 1980 1990 2000
Entrepreneurship o Definition o Characteristics Successful Entrepreneurs o Intrapreneur o Micropreneur Home-Based of vs. Corporation Entrepreneur
Small Business- Advantages Ì Personalized Service/ Personal Contact Ì Flexibility Ì Lower Costs Ì Innovation Opportunities
Small Business-Disadvantages - Limited Experience - Long Hours - Insufficient Capital - High Failure Rate
Why People Start Their Own Businesses Source: BFIB/VISA Card Primer
Reasons Women Leave Jobs in Big Companies to Start Business Source: FSB, March 2001
Self- Perception of Small Business Owners Source: USA Today, 5/20/03
Who Starts New Businesses? AGE AT START-UP 18 - 24 25 - 34 35 - 44 45 - 54 55+ 8% 71% 13% 6% 2%
Entrepreneurial Attributes A. B. C. D. E. Self-Directed & Self. Disciplined Self-Nurturing Action-Oriented Highly Energetic Tolerant of Uncertainty
Hours per Week Entrepreneurs Worked 1 st Year 1 - 39 hours 8% 40 - 49 hours 15% 50 - 59 hours 23% 60 - 69 hours 28% 70 - 79 hours 13% 80 + hours 12%
Reasons for Growth of Home-Based Businesses Technology Downsizing Attitudes Tax Advantages
Most Common Types of Home-Based Businesses Source: Independent Insurance Agents of America
Home Office Owners Focus Challenges o New Customers o o Time Management o o Work vs. Family o City Ordinances o Risk o o o Find Opportunity Results vs. Routine Profit vs. Paycheck New Ideas Long Term vs. Short Term
Government Efforts G Immigration Act of 1990 Investor Visa G Enterprise Zones G Incubators
What is Small Business? v Independent v Not Dominant v < 500 Employees
U. S. Small Businesses Ø 20 Million Full/Part-Time Businesses Ø 75% of New Jobs Ø 45% of Gross Domestic Product Ø Jobs Ø Ø 80% of Americans = 1 st Job in Small Business Ø 75% of New Jobs = Small Business Women-Owned Growing Rapidly
Small Business Success Ø Learn from Others Ø Get Experience Ø Take Over Successful Firm
Successful Business Management Requirements ü ü Business Plan Adequate Funding ü ü ü ü Lenders/Investors “Angels” Venture Capitalists Professional Advice/Help Know Your Customer Manage Human Resources Keep Good Records
Small Business Strategies o Examine Marketing & ID Areas for Growth o Profile Best Customers & Market to Similar Prospects o Invest in Sales Training & Technology Refresh Business Perspective With Outside Views Streamline Business & Eliminate Waste o o
Saving A Business In Trouble React/Not Overreact Be Visible Confident Leader Understand Financial Situation Find Professional Help Develop “Recovery Plan” Remind Employees of Stake in Business Don’t Get Stung By Killer “Bankruptcy”
Capital Sources of Successful Entrepreneurs SOURCE: FSB, March 2001
Reasons for a Banker To Say “No” $ $ I don’t know enough about you or your business. You haven’t clearly stated why you need the money. $ $ $ Your numbers don’t support the loan request. Your collateral is lacking. Your business does not support the loan on its own merits.
Small Business Collaborators § Small Business Administration (SBA) § § § Microloan program SBICs SBDCs Service Corps of Retired Executives (SCORE) Active Corps of Executives (ACE)
Ways to Improve Banking Relationships 1) Provide Bank With Business Plan, Brochures, Business Cards, etc. 2) Describe Business, Financial Situation, Plans 3) Ask About Scope of Bank Services Express Interest In Banker’s Background- Family, Hobbies, etc. Follow Up With Phone Calls, Visits 4) 5) Source: St. Louis Business Monthly, August 2002
Small Business & International Prospects Positives 1. World Market 2. Absorb Excess Inventory 3. Soften U. S. Downturns 4. Extend Product Life Negatives 1. Financing Difficult 2. How to Get Started? 3. Lack of Cultural Understanding 4. Paperwork
International Small Business Advantages o Deal With Individuals o Faster Shipping Variety of Suppliers Professional Service o o Information o o Dept. of Commercewww. bxa. doc. gov SBA- Internationalwww. sba. gov/hotlist/int ernat. html
Week 5 Lead-in o Production and Distribution n o o Chapters 9, 15 Weekly assignment… the usual If you are not yet on a group, get into one!
- Slides: 57