Choosing a Form of Ownership

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Choosing a Form of Ownership
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Forms of Ownership

• Sole Proprietorship
• Partnership
• Corporation
• S Corporation
• Limited Liability Company
• Joint Venture

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Advantages of the Sole Proprietorship

• Simple to create
• Least costly form to begin
• Profit incentive
• Total decision making authority
• No special legal restrictions
• Easy to discontinue

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Disadvantages of the Sole Proprietorship

• Unlimited personal liability
• Limited skills and capabilities
• Limited access to capital
• Lack of continuity

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Advantages of the Partnership

• Easy to establish
• Complementary skills of partners
• Division of profits
• Larger pool of capital
• Ability to attract limited partners
• Little government regulation
• Flexibility
• Taxation

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Disadvantages of the Partnership

• Unlimited liability of at least one partner

• Capital accumulation
• Difficulty in disposing of partnership interest
• Lack of continuity
• Potential for personality and authority conflicts
• Partners bound by the law of agency

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Advantages of theCorporation

• Limited liability of stockholders

• Ability to attract capital
• Ability to continue indefinitely
• Transferable ownership

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Disadvantages of the Corporation

• Cost and time of incorporating
• "Double taxation"
• Potential for diminished managerial incentives
• Legal requirements and regulatory "red tape"
• Potential loss of control by founder(s)

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S Corporation

• No different from any other corporation from a
  legal perspective.
• For tax purposes, however, an S corporation is
  taxed like a partnership.
• To elect S status, all shareholders must
  consent, and the corporation must file with the
  IRS within the first 75 days of its tax year.

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Criteria for an S Corporation

• Must be a domestic corporation
• No nonresident shareholders
• Limited to only one class of stock (Which can be
  voting and nonvoting)
• Shareholders limited to individuals, estates, and
  certain trusts
• Cannot have more than 75 shareholders

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Limited Liability Company (LLC)

• Resembles an S Corporation but is not subject to
  the same restrictions.
• Two documents required the articles of
  organization and the operating agreement.
• An LLC cannot have more than two of these four
  corporate characteristics
• Limited liability
• Continuity of life
• Free transferability of interest
• Centralized management

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MQM 225Franchising and the Entrepreneur
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Types of Franchising

• Tradename
• Product distribution
• Pure (Business format)

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Benefits of Franchising

• Management training and support
• Brand name appeal
• Standardized quality of goods and services
• National advertising program
• Financial assistance
• Proven products and business formats
• Centralized buying power
• Site selection and territorial protection
• Greater chance for success

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Drawbacks of Franchising

• Franchise fees and profit sharing
• Strict adherence to standardized operations
• Restrictions on purchasing
• Limited product line
• Unsatisfactory training programs
• Market saturation
• Less freedom

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Franchising and the Law

• Key protection is the Uniform Franchise Offering
  Circular (UFOC).
• Franchisers must deliver a copy of UFOC before
  any offer or sale of a franchise.
• The UFOC contains information on 23 topics,
  including the franchisers business experience,
  the franchise fees, and the financial assistance
  offered.

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How to Buy a Franchise

• Preparation, common sense, and patience are vital
  ingredients in choosing the right franchise.

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How to Buy a Franchise

• Evaluate yourself - What do you like and dislike?
• Consider your franchise options.
• Get a copy of the franchisers Uniform Franchise
  Offering Circular (UFOC) and study it.
• Talk to existing franchisees.
• Ask the franchiser some tough questions.
• Make your choice

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Franchise Contracts
40 of New Franchisees Sign Contracts Without
Reading Them !!!

• Specifically look at
• Termination
• Renewal
• Transfers and Buybacks

Contract
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Buying An Existing Business
For Sale
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Buying a Business

• Advantages
• Business may continue to be successful
• Can use experience of previous owner
• Hit the ground running
• Business may have best location
• Employees and suppliers are in place

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Buying a Business

• Advantages
• Equipment is installed
• Inventory is in place and trade credit exists
• Easier time finding financing
• Its a bargain

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Buying a Business

• Disadvantages
• Its a loser
• Possible ill will from previous owner
• Employees may not be suitable
• Location may be unsatisfactory
• Equipment may be obsolete

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Buying a Business

• Disadvantages
• Change and innovation can be difficult
• Inventory may be obsolete
• Accounts receivable may be worth less than face
  value

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Buying a Business

• Disadvantages
• Change and innovation can be difficult
• Inventory may be obsolete
• Accounts receivable may be worth less than face
  value

• Business may be overpriced

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How to Buy a Business

• Analyze your skills, abilities, and interests.
• Develop a list of criteria.
• Prepare a list of potential candidates (Remember
  the hidden market).

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How to Buy a Business

• Investigate and evaluate candidate businesses and
  select the best one.
• Negotiate the deal.
• Explore financing options.
• Ensure a smooth transition

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Five Critical Areas for Analyzing an Existing
Business

• Why does the owner want to sell.... the real
  reason?
• What is the physical condition of the business?

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Five Critical Areas for Analyzing an Existing
Business

• What is the potential for the company's products
  or services?
• Customer characteristics and composition.
• Competitor analysis.
• What legal aspects must I consider?

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Valuing An Existing Business

• Balance Sheet Technique
• Adjusted Balance Sheet Technique
• Earnings Approaches
• Considers Net Present Value of Future Earnings
• Considers Opportunity Costs
• Considers Both Tangibles and Intangibles

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Earnings Approaches

• Excess Earnings Method
• Capitalized Earnings Method
• Discounted Future Earnings Method

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Market Approach

• Price/Earnings
• Biggest advantage is its simplicity
• It is a necessary comparison for publicly traded
  companies