Forms of Business Ownership Business 40 Week 4 Carole K. Meagher 9 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 youll borrow? Lessons learned youll 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 Advantages Limited Liability Tax Choice Flexible Ownership Rules Flexible Profit & Loss Distribution Operating Flexibility Disadvantages No Stock Limited Life Span Fewer Incentives Taxes Paperwork

Why Mergers Dont 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

GMs Ownership In: Source: USA TODAY

Types of Mergers Horizontal Vertical Conglomerate

Leveraged Buyout Individual + Loan= Purchase of Company Purchase Loan Company = Collateral

Franchise System Franchise Agreement Franchisor Franchisee

Franchise Contract Franchisor, Inc. Franchisee Branded Product/Service PerformanceMonitoring $$$$$

Franchisor Assigns Territory Assigns Territory May Provide Financial Aid/Advice May Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price Offers Merchandise/ Supplies at Competitive Price Provides Training/Support Provides Training/Support Business Expansion Using O.P.M. Business Expansion Using O.P.M.

Franchisee Pays Up-Front Costs Makes Monthly Payment to Franchisor Runs Business by Franchisors Rules/Procedures Buys Materials from Franchisor/ Approved Supplier

CompanySinceType# Stores Curves1995 Womens Only Fitness 3,778 Subway1974 Submarine Sandwich 14,800 7-Eleven Hr. Convenience 3,761 Taco Bell1964 Mexican Fast Food 5,417 Jani-King1974 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 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 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? Couldnt 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

Entrepreneurship Definition Characteristics of Successful Entrepreneurs Intrapreneur Micropreneur vs. Home-Based Corporation Entrepreneur

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 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? % % % % 55+ 2% AGE AT START-UP

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 hours 8% hours15% hours23% hours28% hours13% 80 + hours12%

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 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 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 = 1 st 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 Dont Get Stung By Killer Bankruptcy

Capital Sources of Successful Entrepreneurs SOURCE: FSB, March 2001

Reasons for a Banker To Say No $I dont know enough about you or your business. $You havent clearly stated why you need the money. $Your numbers dont 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 Bankers Background- Family, Hobbies, etc. 5)Follow Up With Phone Calls, Visits 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 Deal With Individuals Faster Shipping Variety of Suppliers Professional Service Information Dept. of Commerce- SBA- International- ernat.html ernat.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!