CHAPTER 5 How to Form a Business McGraw-Hill/Irwin Copyright © 2015 by the McGraw-Hill Companies, Inc All rights reserved LEARNING OBJECTIVES Compare the advantages and disadvantages of sole proprietorships Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships Compare the advantages and disadvantages of corporations and summarize the differences between C corporations, S corporations and limited liability companies 5-2 LEARNING OBJECTIVES Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising Explain the role of cooperatives 5-3 ANNE BEILER Auntie Anne’s • Started selling pretzels when her family was living paycheck to paycheck • Now Auntie Anne’s has over 1,200 locations and brings in over $410 million! • Beiler sold the company in 2005 to start focusing on charity work 5-4 NAME that COMPANY In 2013, this company became the largest firm in terms of revenue to be taken private through a leveraged buyout. After closing the $25 million deal, the founder now controls a 75% stake of the company he started in his dorm room Name that company! 5-5 MAJOR FORMS of OWNERSHIP • Sole Proprietorship A business owned, and usually managed, by one person • Partnership Two or more people legally agree to become coowners of a business • Corporation A legal entity with authority to act and have liability apart from its owners. 5-6 FORMS of BUSINESS OWNERSHIP 5-7 ETHNIC BUSINESS CENTERS Cities with the Most MinorityRun Firms Atlanta, GA Baltimore, MD Nashville, TN Houston, TX Miami Ft. Lauderdale, FL Source: Forbes, www.forbes.com, accessed November 2014 Photo Credit: James Rintamaki 5-8 MAJOR BENEFITS of SOLE PROPRIETORSHIP LO 41 1) Ease of starting and ending the business 2) Being your own boss 3) Pride of ownership 4) Leaving a legacy 5) Retention of company profit 6) No special taxes 5-9 DISADVANTAGES of SOLE PROPRIETORSHIPS LO 41 1) Unlimited Liability Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else 2) Limited financial resources 3) Management difficulties 4) Overwhelming time commitment 5) Few fringe benefits 6) Limited growth 7) Limited life span 5-10 MAKE WAY for the NEWBIES LO 45 Top New Franchises Source: Entrepreneur, www.entrepreneur.com, accessed November 2014 5-40 ADVANTAGES of FRANCHISING LO 45 Management and marketing assistance Personal ownership Nationally recognized name Financial advice and assistance Lower failure rate 5-41 DISADVANTAGES of FRANCHISING LO 45 Large startup costs Shared profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors 5-42 THE BUILDING BLOCKS of FRANCHISING • Bricks 4 Kidz was created as a way to help kids understand engineering and construction • Since the business was low cost and easily reproduced, this led to over 200 franchises in the U.S. and 11 other countries 5-43 WOMEN in FRANCHISING LO 45 • Women own about half of U.S. companies, yet ownership of franchises is about 21% • More women are becoming franchisors. Auntie Anne’s and Jazzercise and are owned by women 5-44 MINORITYOWNED FRANCHISES LO 45 • DiversityFran is an initiative to build awareness of franchising opportunities within minority communities • Domino’s Pizza launched a minority franchise recruitment program called Delivering the Dream Photo Credit: Tom Magliery • Over 20% of franchises are minorityowned 5-45 HOMEBASED FRANCHISES LO 45 Advantages: • Relief from commuting stress • Extra family time • Low overhead expenses Main Disadvantages: • Isolation • Long hours 5-46 HOME SWEET HOME LO 45 Top HomeBased Franchises Source: Entrepreneur, www.entrepreneur.com, accessed November 2014 5-47 ECOMMERCE in FRANCHISHING LO 45 • Most brickandmortar franchises have expanded online • Many franchisors prohibit franchiseesponsored sites because conflicts can erupt • Sometimes “reverse royalties” are sent to franchisees who believe their sales were hurt by the franchisor’s site • Other franchises are solely based online 5-48 GIVING ENTREPRENEURS OPTIONS with DIGITAL FRANCHISING • Chris Jeffrey created OrderUp shortly after graduating college • OrderUp links up restaurants with hungry patrons and allows people to order online while OrderUp takes a small commission • For a startup fee of $42,000 franchisees receive software and training to launch OrderUp in their area 5-49 GLOBAL FRANCHISING LO 45 • Canada is the most popular target for U.S.based franchises. • China, South Africa, the Philippines and the Middle East are becoming popular despite high cost • International franchising goes both ways – some foreign franchises have come to the U.S. 5-50 WHAT to CHOOSE? LO 45 Picking Franchises that May Survive a Recession • Focus on triedandtrue name brands • Stick to core goods and services • Be choosy about the site • Don’t pinch pennies • Have a fallback choice • Don’t assume the franchise will pay off Source: Richard Gibson, Wall Street Journal, www.wsj.com, accessed November 2014 5-51 HIGH FLYERS LO 45 Ten HighPerforming Franchises Anytime Fitness Hampton Hotels Subway Supercuts Jimmy John’s 7Eleven Servpro Denny’s Photo Credit: Innisfree Hotels Pizza Hut 10 Dunkin Donuts Source: Entrepreneur, www.entrepreneur,com, accessed November 2014 5-52 COOPERATIVES LO 46 • Cooperatives Businesses owned and controlled by the people who use them– producers, consumers, or workers with similar needs who pool their resources for mutual gain. • Worldwide, coops serve one billion members! • Members democratically control the business by electing a board of directors that hires professional management 5-53 TEST PREP • What are some of the factors to consider before buying a franchise? • What opportunities are available for starting a global franchise? • What is a cooperative? 5-54 ... MAJOR FORMS of OWNERSHIP • Sole Proprietorship A business owned, and usually managed, by one person • Partnership Two or more people legally agree to become coowners of a business • Corporation A legal entity with authority to act ... Corporation A legal entity with authority to act and have liability apart from its owners. 5-6 FORMS of BUSINESS OWNERSHIP 5-7 ETHNIC BUSINESS CENTERS Cities with the Most MinorityRun Firms Atlanta, GA Baltimore, MD... DISADVANTAGES of SOLE PROPRIETORSHIPS LO 41 1) Unlimited Liability Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else 2) Limited financial resources