1. Forms of Business Ownership and Buying an Existing Business
Chapter 6

2. Issues entrepreneurs should consider when evaluating forms of business ownership
Tax Considerations
Liability Exposure
Start-up and future capital requirements
Control
Managerial ability
Business goals
Management succession plans
Cost of formation

3. Sole Proprietorship
a business owned and managed by one individual; the business and the owner are one and the same in the law

4. Advantages of a Sole Proprietorship
Simple to create
Least costly form of ownership to begin
Profit incentive
Total decision making authority
No special legal restrictions
Easy to discontinue

5. Disadvantages of a Proprietorship
Unlimited personal liability
Limited skills and capabilities
Feelings of isolation
Limited access to capital
Lack of continuity of the business

6. The Partnership
A partnership is an association of two or more people who co-own a business for the purpose of making a profit.
A Partnership Agreement is a document that states in writing the terms under which the partners agree to operate the partnership and that protects each partner’s interest in the business.

7. Advantages of the Partnership
Easy to establish
Complementary skills
Division of profits
Larger pool of capital
Ability to attract limited partners
General Partners share owning/operating/managing a business and have unlimited liability, while Limited Partners make financial investments, don’t take an active role in management, and their liability is limited to the amount they have invested.

8. Disadvantages of the Partnership
Unlimited liability of at least one partner
Capital accumulation
Difficulty in disposing of partnership interest
Potential for personality and authority conflicts
Partners are bound by the law of agency

9. Limited Partnerships
A Limited Partnership is a partnership composed of at least one general partner and at least one limited partner.
A Limited Liability Partnership (LLP) is a special type of Limited Partnership in which all partners are limited partners. In many states they must be professionals.

10. Corporations
A corporation is a legal entity apart from its owners that receives the right to exist from the state in which it is incorporated.
A corporation may be Closely Held (shares held by just a few people - often family, employees, etc.) or Publicly Held (large number of shareholders)

11. Advantages of Corporations
Limited liability of stockholders
Ability to attract capital
Ability to continue indefinitely
Transferable ownership

12. Disadvantages of the Corporation
Cost and time involved in the incorporation process
Double taxation
Potential for diminished managerial incentives
Legal requirements and regulatory red tape
Potential loss of control by the founder

13. Other Forms of Ownership
The S-Corporation is a corporation that retains the legal characteristics of a regular C corporation but has the advantage of being taxed as a partnership if it meets certain criteria.
The Limited Liability Company (LLC) is like a S-Corporation (a cross between a corporation and a partnership), but it is not subject to many of the restrictions imposed on S-Corporations.
The Professional Corporation is designed to offer professionals the advantages of corporate ownership
The Joint Venture is much like a partnership, but formed for a specific purpose.

14. The Advantages of Buying an Existing Business
Success existing businesses often continue to be successful.
Superior location
Employees and suppliers are in place.
Installed equipment with known production capacity
Inventory in place

15. The Advantages of Buying an Existing Business (p.2)
Trade credit is established
The turnkey business
The new owner can use the experience of the previous owner
Easier access to financing
High value

16. Disadvantages of Buying an Existing Business
Cash requirements
The business is losing money.
Paying for ill will
Employees inherited with the business may not be suitable.
Unsatisfactory location

17. Disadvantages of Buying an Existing Business (p.2)
Obsolete or inefficient equipment and facilities
The challenge of implementing change
Obsolete inventory
Worthless accounts receivable may be worth less than face value.
The business may be overpriced.

18. The Steps in Acquiring a Business (7 steps)
Conduct a self-inventory, objectively analyzing skills, abilities, and personal interests to determine the type(s) of business that offer the best fit.
Develop a list of the criteria that define the “ideal business” for you.
Prepare a list of potential candidates that meet your criteria.

19. The Steps in Acquiring a Business (7 steps)
Thoroughly investigate the potential acquisition targets that meet your criteria. This due diligence process involves practical steps, such as analyzing financial statements and making certain that the facilities are structurally sound. The goal is to minimize the pitfalls and problems that arise when buying any business.

20. The Steps in Acquiring a Business (7 steps)
Explore various financing options for buying the business.
Negotiate a reasonable deal with the existing owner.
Ensure a smooth transition of ownership.

21. Evaluating an Existing Business: The Due Diligence Process
The process of reviewing, investigating, and analyzing the relevant details about the top acquisition candidates to determine which one best meets a buyer’s purchase criteria.

22. Evaluating an Existing Business: The Due Diligence Process
Motivation. Why does the owner want to sell?
Asset valuation. What is the physical condition of the business?
Market potential. What is the potential for the company’s products or services?
Legal issues. What legal aspects of the business represent known or hidden risks?

23. Asset Valuation Accounts receivable Lease arrangements
Business records
Intangible assets
Location and appearance

24. Market Potential Customer characteristics and composition
Competitor analysis

25. Lien: a creditor’s claim against an asset
Liens
Lien: a creditor’s claim against an asset
Legal Issues (p.1)

26. Legal Issues (p.2)
Contract assignments
Due-on-sale clause: a local contract provision that prohibits a seller from assigning a loan arrangement to the buyer. Instead, the buyer is required to finance the remaining loan balance at prevailing interest rates.

27. Covenants not to compete
Legal Issues (p.3)
Covenants not to compete
Covenant not to compete (restrictive covenant or non- compete agreement): an agreement between a buyer and seller in which the seller agrees not to compete with the buyer within a specific time and geographic area.

28. Ongoing Legal Liabilities, such as: Physical premises
Legal Issues (p.4)
Ongoing Legal Liabilities, such as:
Physical premises
Product liability claims
Labor relations

29. Financial Condition
Income statements and balance sheets for the past three to five years
Income tax returns for the past three to five years
Owner’s compensation (and that of relatives)
Cash flow

30. Valuing a Business - 3 methods
Adjusted Balance Sheet Technique
A method of valuing a business on the basis of the market value of the company’s net worth (net worth = total assets – total liabilities)

31. Valuing a Business - 3 methods
Balance Sheet Technique
A method of valuing a business on the basis of the value of the company’s net worth (net worth = total assets – total liabilities)

32. Valuing a Business - 3 methods
Earnings Approach
A method of valuing a business that recognizes that a buyer is purchasing the future income (earnings) potential of a business.