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FHF
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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CHAPTER 5 Small Business, Entrepreneurship, and Franchising
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CHAPTER 4 Options for Organizing Business
FHF
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Starting and Starting and GrowingGrowingA BusinessA Business
FHF
Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership
Sole proprietorship Partnership Corporation
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Comparing Forms of Business Comparing Forms of Business OwnershipOwnership
Comparing Forms of Business Comparing Forms of Business OwnershipOwnership
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Sole Sole ProprietorshipProprietorshipSole Sole ProprietorshipProprietorship
Businesses owned and operated by one individual; the most common form of business organization in the United States
15-20 million in the U.S.
Nearly three-quarters of all businesses
Men 2x more likely than women to start own business
o Restaurants
o Hair salons
o Flower shops
o Dog kennels
o Independent grocery stores
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AdvantagesAdvantages DisadvantagesDisadvantages
Ease and cost of formation Unlimited liability
Secrecy Limited sources of funds
Distribution and use of profits Limited skills
Flexibility and control of the business
Lack of continuity
Government regulation Lack of Qualified Employees
Taxation Taxation
Sole Sole ProprietorshipProprietorshipSole Sole ProprietorshipProprietorship
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PartnershipPartnershipPartnershipPartnership
A form of business organization defined by the Uniform Partnership Act as “an association of two or more persons who carry on as co-owners of a business profit”
General partnership
Limited partnership
Articles of Partnership• Legal documents that set forth the basic agreement between
partners
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Two Types of PartnershipsTwo Types of PartnershipsTwo Types of PartnershipsTwo Types of Partnerships
General PartnershipA partnership that involves a complete sharing in both the management and the liability of the business
Limited PartnershipA business organization that has at least one general partner, who assumes unlimited liability, and at least one limited partner whose liability is limited to his or her investment in the business
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Articles of PartnershipArticles of PartnershipArticles of PartnershipArticles of Partnership
Name, purpose, location
Duration of the agreement
Authority and responsibility of each partner
Character of partners (i.e., general or limited, active or silent)
Amount of contribution from each partner
Division of profits or losses
Salaries of each partner
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Articles of PartnershipArticles of PartnershipArticles of PartnershipArticles of Partnership
How much each partner is allowed to withdraw
Death of partner
Sale of partnership interest
Arbitration of disputes
Required and prohibited actions
Absence and disability
Restrictive covenants
Buying and selling agreements
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PartnershipsPartnershipsPartnershipsPartnerships
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Advantages Disadvantages
Ease of organization Unlimited liability
Capital & credit Business responsibility
Knowledge & skills Life of the partnership
Decision making Distribution of profits
Regulatory controls Limited sources of funds
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CorporationsCorporationsCorporationsCorporations
Legal entities created by the state whose assets and liabilities are separate from its ownersHave most of the rights of people
Typically owned by shareholders /stockholders
A corporation is created (incorporated) under the laws of the state in which it incorporates
The individuals creating the corporation are called incorporators
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Articles of IncorporationArticles of IncorporationArticles of IncorporationArticles of Incorporation
Legal documents filed with basic information about the business with the appropriate state office (often the Secretary of State)Common elements:
Name & address of corporation
Objectives of the corporation
Classes of stock (common, preferred, voting, nonvoting) and number of shares of each class of stock
Financial capital required at time of incorporation
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Articles of IncorporationArticles of IncorporationArticles of IncorporationArticles of Incorporation
Provisions for transferring shares of stock
Regulation of internal corporate affairs
Address of business office
Names and addresses of the initial board of directors
Names and addresses of the incorporators
The state issues a corporate charter based on the information in the articles of incorporation.
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Types of CorporationsTypes of CorporationsTypes of CorporationsTypes of Corporations
A corporation doing business in the state in which it is chartered is a domestic corporation.
When a corporation does business in other states, it is then referred to as a foreign corporation.
If a corporation does business outside the nation in which it is incorporated, it is termed an alien corporation.
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Types of CorporationsTypes of CorporationsTypes of CorporationsTypes of Corporations
Private CorporationA corporation owned by just one or a few people who are closely involved in managing the business
Public CorporationA corporation whose stock anyone may buy, sell, or trade
Initial Public OfferingA private corporation who wishes to go “public” to raise additional capital and expand. The IPO is selling a corporation’s stock on public markets for the first time
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Types of CorporationsTypes of CorporationsTypes of CorporationsTypes of Corporations
Quasi-Public CorporationCorporation owned and operated by the federal, state, or local government
NASA, U.S. Postal Service
Non-Profit CorporationFocuses on providing a service rather than earning a profit but is not owned by a government entity
Mercy Corps., The Conservation Fund
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Elements of a CorporationElements of a CorporationElements of a CorporationElements of a Corporation
Board of Directors: A group of individuals, elected by the stockholders to oversee the general operation of the corporation, who set the corporation’s long-range objectives.
Inside Directors Individuals who serve on a board and are employed by the
corporation (usually executives of the corporation)
Outside Directors Individuals who serve on a board who are not directly
affiliated with the corporation (usually executives of other corporations)
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Stock OwnershipStock OwnershipStock OwnershipStock Ownership
Preferred StockA special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.
Common StockStock whose owners have voting rights in the corporation, yet do not receive preferential treatment regarding dividends.
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CorporationsCorporationsCorporationsCorporations
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Advantages Disadvantages
Limited liability Double taxation
Transfer of ownership Forming a corporation
Perpetual life Disclosure of information
External sources of funds Employee-owner separation
Expansion potential
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Other Types of Other Types of Business OwnershipBusiness Ownership
Other Types of Other Types of Business OwnershipBusiness Ownership
Joint Venture A partnership established for a specific project or for a limited time
Control can be divided equally, or with one party taking more responsibility for decision making
S-Corporation (S-Corp)Corporation taxed as though it were a partnership (no double-taxation) with restrictions on shareholders.
Very popular with entrepreneurs
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Other Types of Business Other Types of Business Ownership: Ownership:
S-CorporationsS-Corporations
Other Types of Business Other Types of Business Ownership: Ownership:
S-CorporationsS-Corporations
Subchapter S-CorporationPopular because the form eliminates double-taxation
Combines the taxation structure of partnerships with legal environment of C-corporations
Qualifications:
• Only 1 class of stock
• Less than 100 shareholders
• Shareholders must be U.S. citizens or residents
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Other Types of Business Other Types of Business Ownership: Ownership:
Limited LiabilityLimited Liability
Other Types of Business Other Types of Business Ownership: Ownership:
Limited LiabilityLimited Liability
Limited Liability Company (LLC)Form of ownership that provides limited liability and taxation like a partnership but places fewer restrictions on members
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Other Types of Business Other Types of Business Ownership: Ownership: CooperativeCooperative
Other Types of Business Other Types of Business Ownership: Ownership: CooperativeCooperative
Cooperative (Co-Op)An organization composed of individuals or small businesses that have banded together to reap the benefits of belonging to a larger organization
Can take many different forms (retail, housing, social, worker)
Co-ops are increasingly popular with small farmers and artisans
Gives small producers more power as a group
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Trends in Business OwnershipTrends in Business OwnershipTrends in Business OwnershipTrends in Business Ownership
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MergerThe combination of two companies (usually corporations) to form a new company
Horizontal merger: When firms that make and sell similar products merge.
Vertical merger: When companies operating at different but related levels of an industry merge.
Conglomerate merger: When firms in unrelated industries merge.
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Trends in Business OwnershipTrends in Business OwnershipTrends in Business OwnershipTrends in Business Ownership
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AcquisitionThe purchase of one company by another, usually by buying its stock and/or assuming its debt.
Corporate raider: A company or individual who wants to acquire or take over another company and first offers to buy some or all of its stock at a premium in a tender offer.
Poison pill: The firm allows stockholders to buy more shares of a stock at lower prices than the current market value to head off a hostile takeover.
Shark repellant: Management requires a large majority of stockholders to approve a takeover.
White knight: A more acceptable firm that is willing to acquire a threatened company.
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Trends in Business OwnershipTrends in Business OwnershipTrends in Business OwnershipTrends in Business Ownership
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Leveraged Buyout (LBO)A purchase in which a group of investors borrows money from banks and other institutions to acquire a company (or a division of one), using the assets of the purchased company to guarantee repayment of the loan.
Mergers and acquisitions (particularly the merger mania in the late 20th century) have been criticized
Executives have to focus excessively on avoiding takeovers, not on managing the business
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CHAPTER 5 Small Business, Entrepreneurship, and Franchising
2
CHAPTER 4 Options for Organizing Business
FHF
5-2
Starting and Starting and GrowingGrowingA BusinessA Business
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EntrepreneurshipEntrepreneurship
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The process of creating and managing a business to
achieved desired objectives
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What is Small Business?What is Small Business?What is Small Business?What is Small Business?
“Smallness” is relative Small business is any independently owned
and operated business, not dominant in its competitive area
Employs less than 500 people
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Impact of Small BusinessesImpact of Small BusinessesImpact of Small BusinessesImpact of Small Businesses
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Small Businesses RepresentSmall Businesses RepresentSmall Businesses RepresentSmall Businesses Represent
64% of new net jobs, annually, created in the last 15 years
99.7% of all businesses employ fewer than 500 people
89% of businesses employ fewer than 19 people
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Small Business InnovationSmall Business InnovationSmall Business InnovationSmall Business Innovation
Small businesses represent 55% of all innovationsAirplane
Audio tape recorder
Double-knit fabric
Fiber-optic examining equipment
Heart valve
Optical scanner
Personal computer
Soft contact lenses
Zipper … and much more
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Traits of Successful Traits of Successful EntrepreneursEntrepreneurs
Traits of Successful Traits of Successful EntrepreneursEntrepreneurs
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Popular Industries for Popular Industries for Small BusinessSmall Business
Popular Industries for Popular Industries for Small BusinessSmall Business
Especially attractive industries to entrepreneurs:Retailing and wholesaling
Services
Manufacturing
High technology
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Retailing and WholesalingRetailing and WholesalingRetailing and WholesalingRetailing and Wholesaling
Selling directly to consumersMusic stores
Sporting-goods shops
Dry cleaners
Boutiques
Drugstores
Restaurants
Hardware stores
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Services and ManufacturingServices and ManufacturingServices and ManufacturingServices and Manufacturing
ServicesService sector is 80% of U.S. jobs
Attracts individuals whose skills are not required by large firms
ManufacturingSmall manufacturers excel at customization
The Malcolm Baldridge National Quality Award rewards innovative small manufacturing firms
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High TechnologyHigh TechnologyHigh TechnologyHigh Technology
Businesses that depend heavily on advanced scientific and engineering knowledge.40% of high-tech jobs are with small businesses
The government offers small business grants for high-tech companies
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Small Business OwnershipSmall Business OwnershipSmall Business OwnershipSmall Business Ownership
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Advantages Disadvantages
Independence High stress level
Costs High failure rate50% of all new businesses fail within the first 5 years
Flexibility UndercapitalizationLack of funds to operate normally
Focus Managerial inexperience or incompetence
Reputation Inability to cope with growth
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Starting a BusinessStarting a BusinessStarting a BusinessStarting a Business
Start with a concept or general idea Create a business plan Devise a strategy to guide planning &
development Make decisions
• Form of ownership
• Financing
• Acquire existing business or start new business?
• Buy a franchise
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The Business PlanThe Business PlanThe Business PlanThe Business Plan
A precise statement of the rationale for the business and a step-by-step explanation of how it will achieve its goals. Acts as a guide and reference document.Explanation of the business
Analysis of competition
Income/Expense estimates
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Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership
Sole ProprietorshipPartnershipCorporation
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Financial ResourcesFinancial ResourcesFinancial ResourcesFinancial Resources
Provide your own personal capital Cash money
Obtain capital
Financing optionsLoans
Stocks
Equity financing
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Equity FinancingEquity FinancingEquity FinancingEquity Financing
Selling or borrowing against the value of an asset such as an (automobile,
insurance policy, savings account) to obtain funds to operate a business
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Venture CapitalistsVenture CapitalistsVenture CapitalistsVenture Capitalists
Persons/organizations that agree to provide funding for a new business in exchange for an ownership interest or stock. Usually requires a sharing of
ownership/control
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Debt FinancingDebt FinancingDebt FinancingDebt Financing
Borrowing financial resources typically from a bank or lending
institution– often collateral is needed
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Line of CreditLine of CreditLine of CreditLine of Credit
An agreement by which a financial institution promises to lend a
business a predetermined sum on demand
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Starting from Scratch vs. Starting from Scratch vs. Buying an Existing BusinessBuying an Existing BusinessStarting from Scratch vs. Starting from Scratch vs.
Buying an Existing BusinessBuying an Existing Business
Starting from scratch can be expensive and will require a lot of promotional efforts to familiarize customers with the businessExisting businesses have the advantage of a built-in network of customers, suppliers and distributors
Reduces guesswork
Involves taking on any problems the business already had
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FranchisingFranchisingFranchisingFranchising
A license to sell another’s products or to use another’s name in business, or bothFranchiser
The company that sells a franchise
Franchisee The purchaser of a franchise
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FranchisesFranchisesFranchisesFranchises
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Advantages DisadvantagesTraining & support Fees and profit sharing
Brand name appeal Standardized operations
National advertising Restrictions on purchasing
Financial assistance Limited product line
Proven products Possible market saturation
Greater chance for success Less freedom in decisions
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Help for Small Help for Small Business ManagersBusiness Managers
Help for Small Help for Small Business ManagersBusiness Managers
Organizations and programs exist to help small businesses
Small Business Administration Small Business Development Centers
Service Corps of Retired Executives
Active Corps of Executives
Small Business Institutes
U.S. and Local Departments of Commerce
Other small businesses
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The Future for Small BusinessThe Future for Small BusinessThe Future for Small BusinessThe Future for Small Business
Demographic TrendsThe Baby Boomers
Generation Y (Millennials)
Immigrants and shifting demographics
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The Future for Small BusinessThe Future for Small BusinessThe Future for Small BusinessThe Future for Small Business
Technological & Economic TrendsInternet usage continues to increase
Increase in service exports
Economic turbulence
Deregulation of the energy market & alternative fuels
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Big Businesses Acting SmallBig Businesses Acting SmallBig Businesses Acting SmallBig Businesses Acting Small
Common ApproachesLarge firms emulate smaller ones to improve bottom line
Downsizing (Rightsizing)• Acting small from inception – Southwest Airlines
Intrapreneurs• Individuals in large firms who take responsibility
for the development of innovations within the organization
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