Chapter 3

 Do a Google search of “Google”  How many results are found?  Who are Google’s users?  How does Google make money?

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

3.1 – Run an Existing Business 3.2 – Own a Franchise or Start a Business 3.3 – Choose the Legal Form of Your Business

Lesson 3.1

 You will be able to:  List the reasons for wanting or not wanting to purchase an existing business in our community.

 Why is the business for sale?  Insufficient sales or profits  New competition  New economic conditions  Retirement  Partner challenges  Owner’s interests changed

 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

 Look through the classified ads online to find local businesses for sale in Connecticut.  Jobs & Employment – Business Opportunities  What kinds of businesses did you find?  What are the prices of the businesses?

 Existing customer base, suppliers, procedures  Training from seller  Prior financial records  Financial arrangements can be easier

 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?

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

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

 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.

Lesson 3.1 continued

 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

 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

 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

 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

 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

What are some franchises you would consider purchasing?

 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 – 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

 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

 What are some advantages of each?  Do an internet search for franchise opportunities in your business field.  What is the cost of purchasing the franchise?  Is there financing available through the franchise?

 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

 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

 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

 Uniform Franchise Offering Circular  A.K.A. – Franchise Disclosure Document (FDD)  Document provided from franchisor before the purchase of the franchise 1. Items describing various aspects of franchise 2. Financial Statements 3. Franchise Agreements

 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.

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.

3. Equipment & Supplies Savings  Buying in bulk is less expensive 4. Consistency Attracts Customers  Mandated quality no matter the location

 Why are international franchises becoming a popular way of doing business?  What should an entrepreneur consider before expanding abroad?

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

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

How can franchises be affected by other franchises in the chain?

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 startup costs -> little investment in equipment and building sites  High startup costs -> brand-name recognition, specialized equipment and processes, and storefront locations

 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

Go to andwww.kidscloset.biz 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?

Lesson 3.2 continued

ADVANTAGESDISADVANTAGES  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

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)

 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 Arby's for Sale

Lesson 3.3

 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

 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?

ADVANTAGESDISADVANTAGES  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.

ADVANTAGESDISADVANTAGES  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

 States, in writing, the rights and responsibilities of each owner: 1. Name of business 2. Type and value of investment 3. Managerial and rights 4. Accounting method 5. Division of profits and losses 6. Salaries 7. Duration of partnership 8. Dissolution 9. Distribution of assets upon dissolution 10. Procedures dealing with death of a partner

GENERALLIMITED (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?

 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

ADVANTAGESDISADVANTAGES  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)

 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

 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

 You have a friend who is interested in being your business partner. Write the partnership agreement for the two of you.