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CHAPTER 5

McGraw-Hill/Irwin

Copyright © 2015 by the McGraw-Hill Companies, Inc. All rights reserved.

How to Form a Business

LEARNING OBJECTIVES

5-*

  • 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.

*

LEARNING OBJECTIVES

5-*

  • 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.

*

ANNE BEILER
Auntie Anne’s

5-*

  • 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.

*

NAME that COMPANY

5-*

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!

Company: Dell

*

MAJOR FORMS of OWNERSHIP

5-*

  • Sole Proprietorship -- A business owned, and usually managed, by one person.
  • Partnership -- Two or more people legally agree to become co-owners of a business.
  • Corporation -- A legal entity with authority to act and have liability apart from its owners.

More than 600,000 businesses are started each year.

*

FORMS of
BUSINESS OWNERSHIP

5-*

Although corporations make up only 20 percent of the total number of businesses, they make 81 percent of the total receipts. Sole proprietorships are the most common form (72 percent), but they earn only 6 percent of the receipts.

*

Source: Forbes, www.forbes.com, accessed November 2014.

ETHNIC BUSINESS CENTERS
Cities with the Most Minority-Run Firms

5-*

Photo Credit: James Rintamaki

  • Atlanta, GA
  • Baltimore, MD
  • Nashville, TN
  • Houston, TX
  • Miami - Ft. Lauderdale, FL
  • This slide presents Forbes’ top 5 U.S. cities for minority-run businesses.
  • Most of these cities are situated in the South. However, we tend to hear a lot about the high population numbers of Asians in San Francisco or Hispanics in Los Angeles.
  • Milwaukee, WI was listed last at #40 in ethnic population growth.
  • To promote discussion, ask the students: Why do you think these cities attract minority-run companies? Don’t just focus on the businesses, also look at the total population and customer base.

*

MAJOR BENEFITS of SOLE PROPRIETORSHIP

5-*

LO 4-1

  • Ease of starting and ending the business
  • Being your own boss
  • Pride of ownership
  • Leaving a legacy
  • Retention of company profit
  • No special taxes

See Learning Objective 1: Compare the advantages and disadvantages of sole proprietorships.

This slide helps students understand why sole proprietorships account for the largest number of businesses in the United States.

*

DISADVANTAGES of SOLE PROPRIETORSHIPS

5-*

LO 4-1

  • Unlimited Liability -- Any debts or damages incurred by the business are your debts, even if it means selling your home, car or anything else.
  • Limited financial resources
  • Management difficulties
  • Overwhelming time commitment
  • Few fringe benefits
  • Limited growth
  • Limited life span

See Learning Objective 1: Compare the advantages and disadvantages of sole proprietorships.

Since the main advantage of sole proprietorships is the ease by which they can be started, this slide gives students the reason why this form of ownership only accounts for such a small percentage of overall total revenue. Special emphasis should be given to the disadvantage of unlimited liability (personal assets at risk), and to the time commitment (24 hours, 7 days per week, and 365 days per year).

*

Source: Inc., www.inc.com, accessed November 2014.

WORK-LIFE BALANCING ACT

5-*

% of small business owners

Work over 80 hours per week

Work over 40 hours per week

See Learning Objective 1: Compare the advantages and disadvantages of sole proprietorships.

  • Many students are not aware of the effort it takes to be a small business owner.
  • This slide shows us the amount of hours per week some owners spend in their businesses.
  • To promote discussion, ask the students: How many hours a week did you think owners spend at work? Do many take holidays off? How much time would you dedicate to your business?

*

Chart1

0.13
0.87
% of small business owners

Sheet1

% of small business owners
13%
87%
3rd Qtr 1.4
4th Qtr 1.2
To update the chart, enter data into this table. The data is automatically saved in the chart.

Chart1

0.43
0.57
% of small business owners

Sheet1

% of small business owners
43%
57%
3rd Qtr 1.4
4th Qtr 1.2
To update the chart, enter data into this table. The data is automatically saved in the chart.

TEST PREP

5-*

  • Most people who start businesses in the U.S. are sole proprietors. What are the advantages and disadvantages of sole proprietorships?
  • Why would unlimited liability be considered a major drawback to sole proprietorships?
  • The primary advantages of sole proprietors are: Ease of starting and ending the business, being your own boss, pride of ownership. leaving a legacy, retention of company profits, no special taxes. Disadvantages include: Unlimited liability, limited financial resources, management difficulties, overwhelming time commitment, few fringe benefits, limited growth, limited life span.

2) With unlimited liability, the sole proprietor is liable for all debts and obligations of the business and must pay them even if it means selling your home, car, or whatever else you own.

*

  • General Partnership -- All owners share in operating the business and in assuming liability for the business’s debts.

MAJOR TYPES of PARTNERSHIPS

5-*

LO 4-2

  • Limited Partnership -- A partnership with one or more general partners and one or more limited partners.

See Learning Objective 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

Each type of partnership has advantages and disadvantages. In a general partnership resources are pooled and liability is spread among all partners. However, in this type of partnership there is the possibility for disagreement and/or personality conflicts. A limited partnership is made up of a mixture of general partners and limited partners. Limited partners cannot actively take part in business dealings.

*

TYPES OF PARTNERS

5-*

LO 4-2

  • General Partner -- An owner (partner) who has unlimited liability and is active in managing the firm.
  • Limited Partner -- An owner who invests money in the business, but enjoys limited liability. Limited Liability means that liability for the debts of the business is limited to the amount the limited partner puts into the company; personal assets are not at risk.

See Learning Objective 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.


The limited partner is not able to exercise any management control over the partnership, but maintains limited liability. A limited partner’s liability is limited to the amount invested in the partnership.

*

OTHER FORMS of
PARTNERSHIPS

5-*

LO 4-2

  • Master Limited Partnership -- A partnership that looks much like a corporation, but is taxed like a partnership and thus avoids the corporate income tax.
  • Limited Liability Partnership -- Limits partners’ risk of losing their personal assets to the outcomes of only their own acts and omissions and those of people under their supervision.

See Learning Objective 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

There are two less common forms of partnerships outlined in this slide: master limited partnership and the limited liability partnership. The master limited partnership is unique because it combines the tax benefits of a more traditional partnership and the liquidity of a publicly traded security. One example of a master limited partnership is Kinder Morgan Energy Partners which is engaged in energy storage and operates 75,000 miles of pipelines.

*

ADVANTAGES of
PARTNERSHIPS

5-*

LO 4-2

  • More financial resources
  • Shared management and pooled/complementary skills and knowledge
  • Longer survival
  • No special taxes

See Learning Objective 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

Partnerships have some distinct advantages. The key advantage is that partnerships have access to more resources, such as financial resources, management skills and knowledge.

*

DISADVANTAGES of
PARTNERSHIPS

5-*

LO 4-2

  • Unlimited liability
  • Division of profits
  • Disagreements among partners
  • Difficult to terminate

See Learning Objective 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

Like the sole proprietorship, a partnership has some serious disadvantages such as unlimited liability and division of profits. One disadvantage that students might not consider is disagreement among partners.

*

There is no such thing as a perfect partner but ask these questions when you try to find your best match:

PICKING YOUR PARTNER

5-*

LO 4-2

  • Do you share the same goals?
  • Do you share the same vision for the company?
  • What skills does he/she have? Are yours the same?
  • What can he/she bring to the business?
  • What type of decision maker is he/she?
  • Do you trust each other?
  • How does he/she problem solve?

See Learning Objective 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

Successful partnerships start with a shared vision. In order to develop a successful partnership, all partners must be honest with each other and bring a variety of different skills to the partnership. Suggestions to discuss with students regarding partnerships:

  • Partnership agreements must be in writing!
  • Each individual’s responsibilities to the company must be in writing and included as part of the contract.
  • Make certain that provisions are in place if one or more partners want to terminate the agreement. Information outlining the terms and conditions of terminating any agreement, should be outlined in the original contract.

*

  • What do you think you should do?
  • What will be the consequences of your decision?

GOOD BUSINESS,
BAD KARMA?

5-*

Imagine you and your partner own a construction company. You receive a subcontractor’s bid you know is 20% too low. This could potentially put the subcontractor out of business. Accepting the bid will improve your chances of getting a big job. Your partner wants to take the bid:

See Learning Objective 2: Describe the differences between general and limited partners, and compare the advantages and disadvantages of partnerships.

*

TEST PREP

5-*

  • What’s the difference between a limited partner and a general partner?
  • What are some of the advantages and disadvantages of partnerships?

1) A general partner is an owner who has unlimited liability and can be active in managing the firm. A limited partner is an owner who invests money in the business, but does not have any management responsibility or liability for losses beyond his or her investment.

2) Some of the advantages of partnerships are: More financial resources, shared management and pooled/complementary skills and knowledge, longer survival, no special taxes. Disadvantages of partnerships include: Unlimited liability (for general partners), division of profits, disagreements among partners, difficulty of termination.

*

CONVENTIONAL
CORPORATIONS

5-*

LO 4-3

  • Conventional (C) Corporation -- A state-chartered legal entity with authority to act and have liability separate from its owners (its stockholders).

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

You don’t have to be big to incorporate. Incorporating may be beneficial for small businesses as well.

*

ADVANTAGES of
CORPORATIONS

5-*

LO 4-3

  • Limited liability
  • Ability to raise more money for investment
  • Size
  • Perpetual life
  • Ease of ownership change
  • Ease of attracting talented employees
  • Separation of ownership from management

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

The major advantage of corporate ownership is limited liability protection (personal assets are protected).

Interesting facts regarding incorporating a business: the cost for a business to incorporate ranges from about $50 to over $300, plus states’ fees. Over half of Fortune 500 companies choose to incorporate in Delaware because the state’s laws make the process easier than it is in other states.

*

HOW OWNERS AFFECT MANAGEMENT

5-*

LO 4-3

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

*

Source: Fortune, www.fortune.com, accessed November 2014.

The BIG BOYS of BUSINESS
America’s Largest Corporations

5-*

Photo Credit: Walmart Stores

LO 4-3

  • Walmart
  • Exxon Mobil
  • Chevron
  • Berkshire Hathaway
  • Apple

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

  • This slide presents Fortune’s 2014 top 5 U.S. corporations.
  • Ask the students: Several of the companies in the top five deal with similar products/services; how are the products/services these companies sell similar? (Exxon Mobil and Chevron are both oil companies.)

*

Source: Forbes, www.forbes.com, accessed November 2014.

PRIVACY PLEASE
The Ten Largest Private Corporations in the U.S.

5-*

LO 4-3

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

  • This slide presents America’s top 10 private companies in 2014.
  • Ask the students to debate why a company may want to remain private. (Some of the reasons may be control, privacy, no external pressure, and preference.)

*

DISADVANTAGES of
CORPORATIONS

5-*

LO 4-3

  • Initial cost
  • Extensive paperwork
  • Double taxation
  • Two tax returns
  • Size
  • Difficulty of termination
  • Possible conflict with stockholders and board of directors

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

Double taxation is a major disadvantage of corporations. A corporation is taxed on income earned, and then shareholders are taxed on any dividends the company may pay.

*

Source: Bloomberg Businessweek, www.businessweek.com, accessed November 2014.

EVEN the BIG GUYS
MAKE MISTAKES

5-*

LO 4-3

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

Even the Big Guys Make Mistakes

  • This slide presents examples of mistakes made by big corporations.
  • Sometimes mistakes can be rectified (as in the case of Coca-Cola withdrawing New Coke), but sometimes they contribute to the company going out of business.

*

B CORPORATIONS LET SUSTAINABILITY SET SAIL

5-*

  • Michael Dimin saw tons of fish were left to rot after fishermen caught too much.
  • Registered his company, Sea2Table as a benefit corporation.
  • B-corporations are judged on how they meet their own set of socially or environmentally beneficial goals.

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

*

WHO CAN INCORPORATE?

5-*

LO 4-3

  • Anyone - truckers, doctors, plumbers, athletes and small business owners can incorporate.
  • Normally stock is not issued to outsiders when individuals incorporate, so the advantages and disadvantages are not exactly the same as for large corporations.
  • Major advantages are limited liability and possible tax benefits.

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

*

OLDIES BUT GOODIES
America’s Oldest Corporations

5-*

LO 4-3

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

This is an interesting slide that identifies companies that have been in business for over 200 years.

  • A few facts you may wish to address with the students:
  • JE Rhoads & Sons is the oldest company in the U.S. and started off tanning leather for Buggy Whips.
  • Philadelphia Contributorship Insurance was formed based on a suggestion by Benjamin Franklin regarding the establishment of a volunteer fire brigade, which eventually developed into an insurance company.
  • The Bank of New York, New York’s first bank, was opened for business in Lower Manhattan on June 9th, 1784, only a few months after the departure of British Troops from American soil. (Bank of New York merged with Mellon Financial Corporation of Pittsburgh and was renamed Bank of New York Mellon in 2007.)
  • Environmental changes in the business world will always happen; those companies that embrace change and provide quality goods and services will continue to profit.
  • Discuss with the students the significant amount of commitment a company must have to stay in business. (Some areas that must continually be addressed are changes in societal culture, competition, economy, laws/politics, and technology changes.)

*

S CORPORATIONS

5-*

LO 4-3

  • S Corporation -- A unique government creation that looks like a corporation, but is taxed like sole proprietorships and partnerships.
  • S corporations have shareholders, directors and employees, plus the benefit of limited liability.
  • Profits are taxed only as the personal income of the shareholder.

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

An S corporation looks like a corporation, but is taxed like a sole proprietorship or partnership. The primary advantage of an S corporation is that it avoids the double taxation of a C corporation. Approximately 3 million U.S. companies operate as S corporations.

*

WHO CAN FORM
S CORPORATIONS?

5-*

LO 4-3

  • Qualifications for S Corporations:
  • Have no more than 100 shareholders.
  • Have shareholders that are individuals or estates and are citizens or permanent residents of the U.S.
  • Have only one class of stock.
  • Derive no more than 25% of income from passive sources.
  • If an S corporation loses its S status, it may not operate under it again for at least 5 years.

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

Originally to qualify as an S Corporation, the number of shareholders was limited to 75. This has now been amended to no more than 100.

*

LIMITED LIABILITY COMPANIES

5-*

LO 4-3

  • Limited Liability Company (LLC) -- Similar to an S corporation, but without the eligibility requirements.
  • Advantages of LLCs:
  • Limited liability
  • Choice of taxation
  • Flexible ownership rules
  • Flexible distribution of profits and losses
  • Operating flexibility

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

The biggest advantages of LLCs are limited liability and flexibility.

*

DISADVANTAGES of LLCs

5-*

LO 4-3

  • No stock, therefore ownership is nontransferable
  • Limited life span
  • Fewer incentives
  • Taxes
  • Paperwork

See Learning Objective 3: Compare the advantages and disadvantages of corporations, and summarize the differences between C corporations, S corporations, and limited liability companies.

Primary disadvantages from entrepreneurs’ perspectives would be limited life span and paperwork.

*

TEST PREP

5-*

  • What are the major advantages and disadvantages of incorporating a business?
  • What’s the role of owners (stockholders) in the corporate hierarchy?
  • If you buy stock in a corporation and someone gets injured by one of the corporation’s products, can you be sued? Why or why not?
  • Why are so many new businesses choosing a limited liability company (LLC) form of ownership?
  • Advantages of incorporating a business include: Limited liability, ability to raise more money for investment, size, perpetual life, ease of ownership change, ease of attracting talented employees, separation of ownership from management. Disadvantages of incorporating are: Initial cost, extensive paperwork, double taxation, two tax returns, size, difficulty to terminate, possible conflict with stockholders and board of directors.

2) Stockholders do not have to be employees of the corporation. They are investors who have limited liability. Stockholders elect the board of directors of a company who select the management to control the company.

3) Stockholders in a corporation have limited liability meaning as owners they are responsible for its losses only up to the amount they invested. The corporation could be sued and forced out-of-business but the stockholder would only lose what he/she invested.

4) Limited liability companies have become a popular way to form a business since all fifty states now recognize LLCs. Some of the advantages of LLCs are: Limited liability, choice of taxation (can be taxed as a partnership or corporation), flexible ownership rules, flexible distribution of profit and losses, operating flexibility.

*

  • Merger -- The result of two firms joining to form one company.

MERGERS and ACQUISITIONS

5-*

LO 4-4

  • Acquisition -- One company’s purchase of the property and obligations of another company.

See Learning Objective 4: Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.

*

TYPES of MERGERS

5-*

LO 4-4

  • Vertical Merger -- The joining of two firms in different stages of related businesses.
  • Horizontal Merger -- The joining of two firms in the same.
  • Conglomerate Merger -- The joining of firms in completely unrelated industries.

See Learning Objective 4: Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.

There are three types of mergers. Horizontal mergers take place in the same industry (i.e., one competitor merging with another). An example of this would be Daimler Mercedes Benz merging with Chrysler to create DaimlerChrysler in the 1990s. Vertical merger takes place between companies in a value chain, for example a supplier and a distributor merging. Conglomerate merger has no relationship between companies; both Tyco and General Electric operate as conglomerates.

*

LEVERAGED BUYOUTS

5-*

LO 4-4

  • Leveraged Buyout (LBO) -- An attempt by employees, management or a group of investors to buy out the stockholders in a company.
  • LBOs have ranged in size from $50 million to $34 billion and have involved everything from small businesses to giant corporations.
  • In 2012, foreign investors poured $166 billion into U.S. companies.

See Learning Objective 4: Define and give examples of three types of corporate mergers, and explain the role of leveraged buyouts and taking a firm private.

*

FRANCHISING

5-*

LO 4-5

  • Franchise Agreement -- An arrangement whereby someone with a good idea for a business (franchisor) sells the rights to use the business name and sell a product or service (franchise) to others (franchisees) in a given territory.
  • More than 770,000 franchised businesses operate in the U.S., employing approximately 8.5 million people.

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

*

Source: Entrepreneur, www.entrepreneur.com, accessed November 2014.

MAKE WAY for the NEWBIES
Top New Franchises

5-*

LO 4-5

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

  • New franchise opportunities pop up all the time and this slide shows the top 10 new companies from Entrepreneur’s 2014 Franchise 500.
  • Take notice that all the listed companies here are in the service sector. This can promote discussion on the evolution of American business.
  • Ask students: Why do you think there is growth in these service franchises, such as fitness?

*

ADVANTAGES of FRANCHISING

5-*

LO 4-5

  • Management and marketing assistance
  • Personal ownership
  • Nationally recognized name
  • Financial advice and assistance
  • Lower failure rate

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

Franchising has a lower failure rate because the franchisee has support from the franchisor. This support can range from marketing to financial.

*

DISADVANTAGES of
FRANCHISING

5-*

LO 4-5

  • Large start-up costs
  • Shared profit
  • Management regulation
  • Coattail effects
  • Restrictions on selling
  • Fraudulent franchisors

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

*

THE BUILDING BLOCKS of FRANCHISING

5-*

  • 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.

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

*

  • Women own about half of U.S. companies, yet ownership of franchises is about 21%.

WOMEN in FRANCHISING

5-*

LO 4-5

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

*

MINORITY-OWNED
FRANCHISES

5-*

Photo Credit: Tom Magliery

LO 4-5

  • 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.
  • Over 20% of franchises are minority-owned.

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

*

HOME-BASED FRANCHISES

5-*

LO 4-5

Advantages:

  • Relief from commuting stress
  • Extra family time
  • Low overhead expenses

Main Disadvantages:

  • Isolation
  • Long hours

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

Benefits of a Home-Based Franchise

Home-based businesses are growing at an enormous rate. This slide helps clarify some of the reasons why. Share with the class some tips on getting started:

  • Decide on business idea
  • Set goals for the business
  • How many hours do you want to work?
  • How many employees do you want?
  • How much money will you need to get started?

Visit www.e-myth.com for more online information regarding start-ups.

*

Source: Entrepreneur, www.entrepreneur.com, accessed November 2014.

HOME SWEET HOME
Top Home-Based Franchises

5-*

LO 4-5

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

  • Many franchisees are looking toward home-based businesses.
  • These ten franchises have held their own despite the recent economic crisis.
  • Some of these companies, like Jazzercise, require franchisees to rent space for client-based activities. However, the businesses can be run from the home.

*

E-COMMERCE
in FRANCHISHING

5-*

LO 4-5

  • Most brick-and-mortar franchises have expanded online.
  • Many franchisors prohibit franchisee-sponsored 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.

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

*

GIVING ENTREPRENEURS OPTIONS with DIGITAL FRANCHISING

5-*

  • 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.

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

*

GLOBAL FRANCHISING

5-*

LO 4-5

  • 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.

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

Franchising is successful when the product is convenient, high quality, great service is included and the franchisee adapts to the region.

*

Source: Richard Gibson, Wall Street Journal, www.wsj.com, accessed November 2014.

WHAT to CHOOSE?
Picking Franchises that May Survive a Recession

5-*

LO 4-5

  • Focus on tried-and-true 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.

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

What to Choose?

  • This is valuable information that must be examined by anyone wishing to purchase a franchise.
  • The number-one reason why franchises fail is due to miscalculation of start-up costs and operating costs. Examine all costs carefully. It is important to understand that all franchise opportunities are not created equal.
  • Suggest to the class that anyone interested in a franchise should also follow these additional guidelines:
  • Have an attorney experienced in franchise contracts review the agreement.
  • Hire a CPA to review all financial statements. This is commonly referred to as performing a “due diligence.”
  • Interview other franchise owners.
  • Have experience in the industry.

*

Source: Entrepreneur, www.entrepreneur,com, accessed November 2014.

HIGH FLYERS
Ten High-Performing Franchises

5-*

Photo Credit: Innisfree Hotels

LO 4-5

  • Anytime Fitness
  • Hampton Hotels
  • Subway
  • Supercuts
  • Jimmy John’s
  • 7-Eleven
  • Servpro
  • Denny’s
  • Pizza Hut
  • Dunkin Donuts

See Learning Objective 5: Outline the advantages and disadvantages of franchises, and discuss the opportunities for diversity in franchising and the challenges of global franchising.

  • This slide lists ten high-performing franchises.
  • As mentioned earlier, not all franchises are created equal and require careful investigation before considering an investment.
  • Websites like www.franchise.com provide information such as the cost of thousands of franchise systems.
  • Ask students: What makes an effective franchisor? (Answers will vary, but should include name recognition, financial stability, innovative product and effective business management.)

*

COOPERATIVES

5-*

LO 4-6

  • 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, co-ops serve one billion members!
  • Members democratically control the business by electing a board of directors that hires professional management.

See Learning Objective 6: Explain the role of cooperatives.

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TEST PREP

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  • 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?

1) Before buying a franchise be sure to check a company’s (franchisor’s) resources and reputation. There are many franchising scams. The checklist in this chapter gives advice about things to consider before buying a franchise.

2) Successful franchising in global markets offers the same opportunities as in domestic markets. However, franchisors must be careful to adapt to the region where they wish to expand. McDonald’s for example has more than 33,000 restaurants in 119 countries.

3) A cooperative is a form of business that is owned and controlled by the people who use it—producers, consumers, or workers with similar needs who pool their resources for mutual gain. Cooperatives are a major force in agriculture and other industries today.

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