2. Seller of a business may train a new owner- experienced employees may be available to help the new owner learn about the company.

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1 CHAPTER 4, SELECT A TYPE OF OWNERSHIP Run and Existing Business- Most people consider going into business for themselves, they think about starting a new business. Two other ways of becoming an entrepreneur: purchase an existing business or entering a family business. Purchase an Existing Business- Owners sell their businesses for a variety of regions. Insufficient sales or profits, worry about new competition, fear of new economic conditions, retirement, a dispute between partners, death or illness of a partner and the desire to do something different. How to find Existing Businesses- through advertisement, newspaper, business broker,(sells businesses for a living) landlords, leasing agents, lawyers and bankers. Advantages of Buying an Existing Business l. Already has customers, suppliers, and procedures. Fine-turning systems that are already in place is likely to be much easier than creating systems from scratch. 2. Seller of a business may train a new owner- experienced employees may be available to help the new owner learn about the company. 3. Prior records of revenues, expenses and profits. Financial planning is easier and more reliable than a new business. 4. Financial arrangements can be easier.- seller may accept an initial partial payment and allow the rest to be paid off in monthly installments. This can eliminate bank financing or getting it may be easier since banks are more likely to lend to an established business. Disadvantages of Buying an Existing Business l. For sale because they are not making a profit. Owners try to sell when a business is not financially viable. 2. Problems may be inherited- May have a poor reputation with customers, trouble with suppliers or poorly located. 3. Capital is required- not all entrepreneurs have the money to purchase a business. Starting small may be their only option. Steps to Purchase a Business l. Write objectives about the kind of business you want to buy and identify businesses for sale that meet your objectives.

2 2. Meet with business sellers or brokers to investigate specific opportunities.. History of the business, reason for its sale, financial performance and price the owner is asking for the business. 3. Visit during business hours to observe the company in action. Inspect the facility closely to make sure that it meets your needs. 4. Ask the owner to provide you with a complete financial accounting of operations for at least the past three years. Analyze these reports will help you see how much profit you can make. 5. Ask for important information in written form. Get a list of all assets to be transferred to the new owner. Any legal actions or pending against the business, copy of lease or mortgage and a list of all suppliers. Accountant or lawyer should help you review material. Be suspicious if the owner refuses to provide all information. 6. Determine how you would finance the business. 7. Get expert help to determine a price to offer for the business. An accountant or a valuator- determine the value of a business. Present an offer in writing to seller. Once an agreement is reached, have a lawyer draw up a sales contract. Enter a Family Business- Advantages l. Pride and sense of mission also enjoy that the businesses remain in the family. 2. Enjoy working with relatives. Efforts are benefiting the family. Disadvantages- l. Senior management positions are often held by family members, regardless of ability. 2. Poor business decisions may be made. Family politics often enter into business decisions. 3. Difficult to retain good employees who are not members of the family. 4. Distinction between business life and private life is blurred. Business problems end up affecting family lives. Own a Franchise or Start a Business Jiffy Lube, McDonald s are a franchise owned by private entrepreneurs who operate them as their own businesses.

3 Franchise- legal agreement that gives an individual the right to market a company s products or services in a particular area. Franchisee person who purchases a franchise agreement. Franchisor- person or company who offers a franchise for purchase. More than 500,000 people in US own franchises. Opportunities are available in virtually every field, motels to pet stores to video outlets. The Franchise Opportunities Handbook, A Consumer Guide to Buying a Franchise, The Wall Street Journal, Forbes, Barron s Business Start-Ups and Entrepreneur Operating Costs of a Franchise: Initial Franchise fee- Owner pays in return for the right to run the franchise. Pay start-up costs, royalty fees, and advertising fees. May also have a nationwide advertising fee. Can be a few thousand to few hundred thousand. Start Up costs associated with beginning a business. Costs of renting a facility, equipping the outlet, and a purchasing inventory. Royalty fees- weekly or monthly payments made by the owner of the franchise to the seller of the franchise. Advertising fees paid to support television, magazine, or other advertising of the franchise as a whole. Advantages of Owning a Franchise l. An entrepreneur is provided with an established product or service. 2. Franchisors offer management, technical and other assistance. 3. Equipment and supplies can be less expensive. 4. A guarantee of consistency attracts customers. Disadvantages l. Franchises can cost a lot of money and cut down on profits. 2. Owners have less freedom to make decisions than other entrepreneurs. 3. Franchisees are dependent on the performance of other franchises in the chain. 4. Franchisor can terminate the franchise agreement.

4 Evaluating a Franchise l. What is the projected demand for the franchised product or service. Will I be guaranteed an exclusive territory for the duration of the franchise. 2. What are the costs and royalty fees associated with the franchise. 3. How profitable have other franchises in the area been. 4. How long has the franchisor been in business? How profitable is the franchisor? 5. What services does the franchisor. Will the franchisor help with with marketing, merchandising and site selection. 6. Are the benefits provided by the franchisor worth the loss of independence and the cost of purchasing the franchise? 7. What happens If I want to cancel the franchise agreement. Never sign legal documents without consulting an attorney. Let your attorney know what promises were made to you orally. Advantages of Starting Your Own Business Staring your own business you get to make decisions about everything for where to locate the business to how many employees to hire and what prices to charge. Many are attracted to challenge of creating something entirely new. Disadvantages Many risks: Consider demand for your product or service, location, what employees to hire and other decisions. Decisions are not always positive. Choose the Legal Form of Your Business Sole Proprietorship-enables one person to be in control of all business aspects. Small business or very large. Government exercises very little control over sole prop. Can be established and run very simply. Tax records and certain employment laws must be met. The most common form of ownership in US. Disadvantages- difficult to raise money. Only person contributing money, Private assets can be taken to pay what is owed, if the business fails. Partnership- share decision-making and management responsibilities. Not all the capital alone. Losses are shared by all partners. Face very little government regualations.

5 Disadvantages- Do not like partnerships, they do not want to share responsibilities and profits with other people. Legally liable for the errors of partners. Partnerships can also lead to disagreements and end bitterly. Partnership agreement- set down in writing the rights and responsibilities of each of the owners. Pg. 83/84. Corporation-Treated independently of its owners. Corporation has legal rights of a person, the corporation, not owners pay taxes. Ownership of a corp. is in the form of shares of stock. Share of Stock is a unit of ownership in a corporation. People who own shares are called shareholders or stockholders. Board of Directors-group of people who meet several times a year to make decisions affecting the company. Dividends- distributions of profits to shareholders by corporations. Disadvantages- More complicated to set up. To incorporate needs the assistance of a lawyer who will help you file articles of incorporation. More paper work is involved. More government regulations. Taxed twice, corporation pays taxes on its income and shareholders pay taxes on the dividends they receive from the corporation. Liability is the amount owed to others. The shareholders liability is limited to amount of money each shareholder invested. Incorporation allows businesses to raise money through selling more stock. Lenders are more willing to lend money to corporations. Shareholders do not affect the management of a corporation. S corporation- is a corporation organized under subchapter S who income is taxed as a partnership. S corporation is not taxed as a business. Individual shareholders are taxed on the profits they earn. Many companies lose money in the early years. Any losses suffered by S corporation can be used to offset other sources of taxable income.

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