Forms of Business Ownership

Business 40Week 4Carole K. Meagher9 February, 2005

Agenda

Roll call, introductions, project ideas DVD Article analysis Before you leave tonight…

I need a roster with your group and project idea

Week 4 Lead-in

“Joe to Go”

Cluster into your groups Think about your own project while

watching this DVD Best practices/Good ideas you’ll borrow? Lessons learned you’ll watch out for?

Starting your own business

Yes, decide what type you want to be and why… Sole proprietorship – just get started! Partnership – pair up with a friend Corporation - function separate from owners

Sole Proprietorship

Advantages

Ease of start/end

Be your own boss

Pride of ownership

Leave legacy

Retain profit

No special taxes

Disadvantages Unlimited liability Limited financial

resources Difficulty in managment Time commitment Few fringe benefits Limited growth Limited life span

Types of Partnerships General Limited Master Limited Limited Liability

Partnership

Advantages More financial

resources Shared mgmt. Longer survival No Special Taxes

Disadvantages Unlimited liability Division of profits Disagreements

among partners Difficult to

terminate

Types of Corporations Regular ‘C’ S Corporation Limited Liability Companies

Corporations

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

Advantages More money for

investment Limited liability Separation of

ownership/mgmt. Ease of ownership

change Perpetual life Size

Disadvantages Initial cost Paperwork Two tax returns Termination difficult Stockholder & Board

Conflict Double taxation

How Owners Affect Management

S Corporations

No more than 75 shareholders

Individual or Estates

U.S. citizens or residents

1 class of stock

<25% of income can be passive

Slower-growing companies

Benefits change with new tax rules

Limited Liability Companies

AdvantagesLimited Liability

Tax Choice

Flexible Ownership Rules

Flexible Profit & Loss Distribution

Operating Flexibility

Disadvantages

No Stock

Limited Life Span

Fewer Incentives

Taxes

Paperwork

Why Mergers Don’t Work

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

Horizontal Vertical Conglomerate

Leveraged Buyout

Individual + LoanIndividual + Loan = Purchase of = Purchase of CompanyCompany

Purchase LoanPurchase Loan

Company = Company = CollateralCollateral

Franchise System

Franchise Agreement

Franchisor Franchisee

Franchise ContractFranchisor, Inc.

FranchiseeFranchisee

Branded Branded Product/ServicProduct/Servic

eePerformancPerformanc

ee

MonitoringMonitoring$$$$$$$$$$

Franchisor

Assigns TerritoryAssigns Territory

May Provide Financial May Provide Financial Aid/AdviceAid/Advice

Offers Merchandise/ Offers Merchandise/ Supplies at Supplies at Competitive PriceCompetitive Price

Provides Provides

Training/SupportTraining/Support

Business Expansion Business Expansion

Using O.P.M.Using O.P.M.

Franchisee Pays Up-Front Costs Makes Monthly Payment to

Franchisor Runs Business by Franchisor’s

Rules/Procedures Buys Materials from Franchisor/

Approved Supplier

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

Fastest Growing Franchises (2002)

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 aFranchise 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 aHome-Based Franchise

Flexible work hours Quality lifestyle Doing the work of your

choice Opportunity to expand

using technology Self-motivation

.

Franchising & E-Commerce

Technology- Faster Customer Service

Access to International Markets

Cooperatives Farm Cooperative

Owned &

Controlled by

People Who Use It

Pool of Resources

Economic Power

Count off by 3s…

1. Why did Demos decide to start White Wave? What did he think he could do differently/better?

2. Why did Engles want to acquire White Wave? In other words, why was WW growing and Dean foods not growing?

3. Why did Engles keep Demos and his team around? Couldn’t he just run the operation with his own people?

Break…

Small Business Revival

Shift to Services CAD/CAM Lessening

Advantages of Big Manufacturing

Maturation of Baby Boomers

More Women in Workforce

19719700

19819800

19901990 20002000

EntrepreneurshipDefinitionCharacteristics of

Successful Entrepreneurs

IntrapreneurMicropreneur vs.

Home-Based

CorporatioCorporationn

EntrepreneuEntrepreneurr

Small Business- Advantages

Personalized Service/ Personal Contact

Flexibility Lower Costs Innovation Opportunities

Small Business-Disadvantages

- Limited Experience

- Long Hours

- Insufficient Capital

- High Failure Rate

Why People Start Their Own Businesses

0 10 20 30 40 50 60

Use My Abilities

Control My Life

Build For Family

Like The Challenge

Live Where/How I Like

Source: BFIB/VISA Card Primer

Reasons Women Leave Jobs in Big Companies to Start Business

0%10%20%30%40%50%60%70%80%90%

Bette

r Ben

efits

More

Fam

ily T

ime

Recogniti

on

Less P

olitic

s

Partn

ers/C

olleagues

Influ

ence S

trate

gy

More

Money

Risk-T

aking

Source: FSB, March 2001

Self- Perception of Small Business Owners

0% 5% 10% 15% 20% 25% 30% 35%

Managers

Heroes

Rainmakers

Artists

Mavericks

Source: USA Today, 5/20/03

Who Starts New Businesses?

18 - 24 8%25 - 34 71%35 - 44 13%45 - 54 6%55+ 2%

AGE AT START-AGE AT START-UPUP

Entrepreneurial Attributes

A. Self-Directed & Self-Disciplined

B. Self-Nurturing

C. Action-Oriented

D. Highly Energetic

E. Tolerant of Uncertainty

Hours per Week Entrepreneurs Worked 1st 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 ofHome-Based Businesses

Personal Svcs.14%

Bus. Services

27%

Bldg. Trades31%

Financial & Real Estate

5%Sales &

Distribution10%

Arts/ Design Creative

13%

Source: Independent Insurance Agents of America

Home Office Owners

Challenges

New Customers

Time Management

Work vs. Family

City Ordinances

Risk

Focus

Find Opportunity Results vs. Routine Profit vs. Paycheck New Ideas Long Term vs. Short

Term

Government Efforts

Immigration Act of 1990- Investor Visa

Enterprise Zones

Incubators

What is Small Business?

Independent

Not Dominant

< 500 Employees

U.S. Small Businesses

20 Million Full/Part-Time Businesses 75% of New Jobs 45% of Gross Domestic Product Jobs

80% of Americans = 1st Job in Small Business 75% of New Jobs = Small Business

Women-Owned Growing Rapidly

Small Business Success

Learn from Others

Get Experience

Take Over Successful Firm

Successful Business Management Requirements

Business Plan Adequate Funding

Lenders/Investors “Angels” Venture Capitalists

Professional Advice/Help Know Your Customer Manage Human Resources Keep Good Records

Small Business Strategies

Examine Marketing & ID Areas for Growth Profile Best Customers & Market to Similar

Prospects Invest in Sales Training & Technology Refresh Business Perspective With Outside

Views Streamline Business & Eliminate Waste

Saving A Business In Trouble

React/Not Overreact

Understand Financial Situation

Find Professional Help

Develop “Recovery Plan”

Be Visible Confident Leader

Remind Employees of Stake in Business

Don’t Get Stung By Killer “Bankruptcy”

Capital Sources of Successful Entrepreneurs

0%

20%

40%

60%

80%

100%

VentureCapital

Family BankLoan

CreditCards

PersonalFunds

By Company Age

< 3 Years6+ YearsSOURCE: FSB, March 2001

Reasons for aBanker 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

4) Express Interest In Banker’s Background- Family, Hobbies, etc.

5) Follow Up With Phone Calls, Visits

Source: St. Louis Business Monthly, August 2002

Small Business & International Prospects

Positives1. World Market

2. Absorb Excess Inventory

3. Soften U.S. Downturns

4. Extend Product Life

Negatives1. Financing Difficult

2. How to Get Started?

3. Lack of Cultural Understanding

4. Paperwork

International Small Business

Advantages Deal With Individuals Faster Shipping Variety of Suppliers Professional Service

Information

Dept. of Commerce- www.bxa.doc.gov

SBA- International- www.sba.gov/hotlist/internat.html

Week 5 Lead-in

Production and Distribution Chapters 9, 15

Weekly assignment… the usual If you are not yet on a group, get into one!