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apter 4: Forms of Ownership & Franchising 1 Copyright 2005 Prentice Hall Inc. A Pearson Education Company Forms of Business Ownership and Franchising
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Chapter 4: Forms of Ownership & Franchising 1Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Forms of Business Ownership and
Franchising
Forms of Business Ownership and
Franchising
Chapter 4: Forms of Ownership & Franchising 2Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Factors Affecting the ChoiceFactors Affecting the Choice
Tax considerationsTax considerations Liability exposureLiability exposure Start-up capital requirementsStart-up capital requirements ControlControl Business goalsBusiness goals Management succession plansManagement succession plans Cost of formationCost of formation
Chapter 4: Forms of Ownership & Franchising 3Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Major Forms of Major Forms of OwnershipOwnership
Sole ProprietorshipSole ProprietorshipPartnershipPartnershipCorporationCorporationS CorporationS CorporationLimited Liability CompanyLimited Liability CompanyJoint VentureJoint Venture
Forms of OwnershipPercent of Businesses
Corporation20.2%
Partnership7.9%
Sole Proprietorship
71.9%
Source: Statistical Abstract of the United States, 2002, p.471.
Forms of OwnershipPercent of Sales
Corporation86.6%
Partnership8.8%
Sole Proprietorship
4.7%
Source: Statistical Abstract of the United States, 2002, p.471.
Forms of OwnershipPercent of Income
Corporation68.1%
Partnership16.7%
Sole Proprietorship
15.2%
Source: Statistical Abstract of the United States, 2002, p.471.
Chapter 4: Forms of Ownership & Franchising 7Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Advantages of the Sole Advantages of the Sole ProprietorshipProprietorship
Simple to createSimple to createLeast costly form to beginLeast costly form to beginProfit incentiveProfit incentiveTotal decision making authorityTotal decision making authorityNo special legal restrictionsNo special legal restrictionsEasy to discontinueEasy to discontinue
Chapter 4: Forms of Ownership & Franchising 8Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Disadvantages of the Sole Disadvantages of the Sole ProprietorshipProprietorship
Unlimited personal liabilityUnlimited personal liabilityLimited skills and capabilitiesLimited skills and capabilitiesFeelings of isolationFeelings of isolationLimited access to capitalLimited access to capitalLack of continuityLack of continuity
Chapter 4: Forms of Ownership & Franchising 9Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Advantages of the PartnershipAdvantages of the Partnership
Easy to establishEasy to establish Complementary skills of partnersComplementary skills of partners Division of profitsDivision of profits Larger pool of capitalLarger pool of capital Ability to attract limited partnersAbility to attract limited partners
Chapter 4: Forms of Ownership & Franchising 10Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Types of PartnersTypes of Partners
General partnersGeneral partners Take an active role in managing a business.Take an active role in managing a business. Have unlimited liability for the partnership’s Have unlimited liability for the partnership’s
debts.debts.Limited partnersLimited partners
Cannot participate in the day-to-day Cannot participate in the day-to-day management of a company. management of a company.
Have limited liability for the partnership’s Have limited liability for the partnership’s debts. debts.
Chapter 4: Forms of Ownership & Franchising 11Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Advantages of the PartnershipAdvantages of the Partnership
Easy to establishEasy to establish Complementary skills of partnersComplementary skills of partners Division of profitsDivision of profits Larger pool of capitalLarger pool of capital Ability to attract limited partnersAbility to attract limited partners Little government regulationLittle government regulation FlexibilityFlexibility TaxationTaxation
Chapter 4: Forms of Ownership & Franchising 12Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Disadvantages of the PartnershipDisadvantages of the Partnership
Unlimited liability of at least one partnerUnlimited liability of at least one partnerCapital accumulationCapital accumulationDifficulty in disposing of partnership Difficulty in disposing of partnership
interestinterestLack of continuityLack of continuityPotential for personality and authority Potential for personality and authority
conflictsconflicts
Chapter 4: Forms of Ownership & Franchising 13Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Types of CorporationsTypes of Corporations
DomesticDomestic – a corporation doing business – a corporation doing business in the state in which it is incorporated.in the state in which it is incorporated.
ForeignForeign – a corporation doing business in – a corporation doing business in a state other than the state in which it is a state other than the state in which it is incorporated. incorporated.
AlienAlien – a corporation formed in another – a corporation formed in another country but doing business in the United country but doing business in the United States. States.
Chapter 4: Forms of Ownership & Franchising 14Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Advantages of the CorporationAdvantages of the Corporation
Limited liability of stockholdersLimited liability of stockholdersAbility to attract capitalAbility to attract capitalAbility to continue indefinitelyAbility to continue indefinitelyTransferable ownershipTransferable ownership
Chapter 4: Forms of Ownership & Franchising 15Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Disadvantages of the CorporationDisadvantages of the Corporation
Cost and time of incorporatingCost and time of incorporatingDouble taxationDouble taxationPotential for diminished managerial Potential for diminished managerial
incentivesincentivesLegal requirements and regulatory “red Legal requirements and regulatory “red
tape”tape”Potential loss of control by founder(s)Potential loss of control by founder(s)
Chapter 4: Forms of Ownership & Franchising 16Copyright 2005 Prentice Hall Inc. A Pearson Education Company
S CorporationS Corporation
No different from any other corporation from a No different from any other corporation from a legal perspective.legal perspective.
For tax purposes, however, an S corporation is For tax purposes, however, an S corporation is taxed like a partnership, passing all of its taxed like a partnership, passing all of its profits (or losses) through to individual profits (or losses) through to individual shareholders.shareholders.
To elect “S” status, all shareholders must To elect “S” status, all shareholders must consent, and the corporation must file with the consent, and the corporation must file with the IRS within the first 75 days of its tax year.IRS within the first 75 days of its tax year.
Chapter 4: Forms of Ownership & Franchising 17Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Limited Liability Company (LLC)Limited Liability Company (LLC) Resembles an S Corporation but is Resembles an S Corporation but is notnot subject to subject to
the same restrictions.the same restrictions. Two documents required: the Two documents required: the articles of articles of
organization organization and the and the operating agreementoperating agreement.. An LLC cannot have more than An LLC cannot have more than twotwo of these four of these four
corporate characteristics:corporate characteristics: Limited liabilityLimited liability Continuity of lifeContinuity of life Free transferability of interestFree transferability of interest Centralized managementCentralized management
Chapter 4: Forms of Ownership & Franchising 18Copyright 2005 Prentice Hall Inc. A Pearson Education Company
The Franchising Boom!!!The Franchising Boom!!!
Sales of $1 trillion in virtually every Sales of $1 trillion in virtually every product or service imaginable.product or service imaginable.
More than 4,500 franchisers operating More than 4,500 franchisers operating some 600,000 outlets worldwide.some 600,000 outlets worldwide.
Franchise sales account for 44% of Franchise sales account for 44% of total retail sales.total retail sales.
A new franchise opens somewhere in A new franchise opens somewhere in the world every six-and-a-half minutes.the world every six-and-a-half minutes.
Boom!
Chapter 4: Forms of Ownership & Franchising 19Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Types of FranchisingTypes of Franchising
Trade-nameTrade-name
Product distributionProduct distribution
Pure (or Comprehensive or Business Pure (or Comprehensive or Business Format)Format)
Chapter 4: Forms of Ownership & Franchising 20Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Benefits of FranchisingBenefits of Franchising
Management training and supportManagement training and supportBrand name appealBrand name appealStandardized quality of goods and Standardized quality of goods and
servicesservicesNational advertising programNational advertising programFinancial assistanceFinancial assistance
Chapter 4: Forms of Ownership & Franchising 21Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Benefits of FranchisingBenefits of Franchising(continued)(continued)
Proven products and business formatsProven products and business formatsCentralized buying powerCentralized buying powerSite selection and territorial protectionSite selection and territorial protectionGreater chance for successGreater chance for success
Chapter 4: Forms of Ownership & Franchising 22Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Drawbacks of FranchisingDrawbacks of Franchising Franchise fees and profit sharingFranchise fees and profit sharing Strict adherence to standardized Strict adherence to standardized
operationsoperations Restrictions on purchasingRestrictions on purchasing Limited product lineLimited product line Unsatisfactory training programsUnsatisfactory training programs Market saturationMarket saturation Less freedomLess freedom
Chapter 4: Forms of Ownership & Franchising 23Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Ten Myths of FranchisingTen Myths of Franchising
1. Franchising is the safest way to go into business 1. Franchising is the safest way to go into business because franchises never fail.because franchises never fail.
2. I’ll be able to open my franchise for less money 2. I’ll be able to open my franchise for less money than the franchiser estimates. than the franchiser estimates.
3. The bigger the franchise organization, the more 3. The bigger the franchise organization, the more successful I’ll be. successful I’ll be.
4. I’ll use 80 percent of the franchiser’s business 4. I’ll use 80 percent of the franchiser’s business system, but I’ll improve upon by substituting system, but I’ll improve upon by substituting my experience and know-how. my experience and know-how.
Chapter 4: Forms of Ownership & Franchising 24Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Ten Myths of FranchisingTen Myths of Franchising
5. All franchises are the same.5. All franchises are the same.
6. I don’t have to be a hands-on manager. I can 6. I don’t have to be a hands-on manager. I can be an absentee owner and still be very be an absentee owner and still be very successful. successful.
7. Anyone can be a satisfied, successful franchise 7. Anyone can be a satisfied, successful franchise owner. owner.
(continued)(continued)
Chapter 4: Forms of Ownership & Franchising 25Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Ten Myths of FranchisingTen Myths of Franchising
8. Franchising is the cheapest way to get into 8. Franchising is the cheapest way to get into business for yourself. business for yourself.
9. The franchiser will solve my business problems 9. The franchiser will solve my business problems for me; after all, that’s why I pay an ongoing for me; after all, that’s why I pay an ongoing royalty fee. royalty fee.
10. Once I open my franchise, I’ll be able to run 10. Once I open my franchise, I’ll be able to run things the way things the way II want to. want to.
(continued)(continued)
Chapter 4: Forms of Ownership & Franchising 26Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Detecting Dishonest FranchisersDetecting Dishonest Franchisers
Claims that the contract is “standard; no need to Claims that the contract is “standard; no need to read it.”read it.”
Failure to provide a copy of the required disclosure Failure to provide a copy of the required disclosure documents.documents.
Marginally successful prototype or no prototype.Marginally successful prototype or no prototype. Poorly prepared operations manual.Poorly prepared operations manual. Promises of future earnings with no Promises of future earnings with no
documentation.documentation. High franchisee turnover or termination rate.High franchisee turnover or termination rate. Unusual amount of litigation by franchisees.Unusual amount of litigation by franchisees.
Chapter 4: Forms of Ownership & Franchising 27Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Detecting Dishonest FranchisersDetecting Dishonest Franchisers
Attempts to discourage your attorney from Attempts to discourage your attorney from evaluating the contract before signing it.evaluating the contract before signing it.
No written documentation.No written documentation. A high pressure sale. A high pressure sale. Claims to be exempt from federal disclosure laws.Claims to be exempt from federal disclosure laws. ““Get rich quick” schemes, promising huge profits Get rich quick” schemes, promising huge profits
with minimal effort.with minimal effort. Reluctance to provide a list of existing franchisees.Reluctance to provide a list of existing franchisees. Evasive, vague answers to your questions.Evasive, vague answers to your questions.
(continued)(continued)
Chapter 4: Forms of Ownership & Franchising 28Copyright 2005 Prentice Hall Inc. A Pearson Education Company
The The RightRight Way to Buy a Franchise Way to Buy a Franchise
Evaluate yourself - What do you like and dislike?Evaluate yourself - What do you like and dislike? Research your market.Research your market. Consider your franchise options.Consider your franchise options. Get a copy of the franchiser’s Uniform Franchise Get a copy of the franchiser’s Uniform Franchise
Offering Circular (UFOC) and read it.Offering Circular (UFOC) and read it. Talk to existing franchisees.Talk to existing franchisees. Ask the franchiser some tough questions.Ask the franchiser some tough questions. Make your choice.Make your choice.
Chapter 4: Forms of Ownership & Franchising 29Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Factors That Make a Franchise Factors That Make a Franchise AppealingAppealing
Unique concept or marketing approachUnique concept or marketing approachProfitabilityProfitabilityRegistered trademarkRegistered trademarkBusiness system that worksBusiness system that worksSolid training programSolid training programAffordabilityAffordabilityPositive relationship with franchiseesPositive relationship with franchisees
Chapter 4: Forms of Ownership & Franchising 30Copyright 2005 Prentice Hall Inc. A Pearson Education Company
Trends Shaping FranchisingTrends Shaping Franchising
Changing face of franchiseesChanging face of franchisees International opportunitiesInternational opportunities Smaller, nontraditional locationsSmaller, nontraditional locations Conversion franchisingConversion franchising Multiple-unit franchisingMultiple-unit franchising Master franchisingMaster franchising Piggybacking (Combination franchising)Piggybacking (Combination franchising) Serving baby boomersServing baby boomers
