Transcript CHAPTER 5
CHAPTER FIVE Forms of Business Ownership McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-1 World’s Largest Public Companies Company General Electric Royal/Dutch Shell Coca-Cola Nippon Tele. Exxon Microsoft McGraw-Hill/ Irwin Country U.S. Britain/Holland U.S. Japan U.S. U.S. © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-2 America’s Oldest Companies J. E. Rhoads & Sons Covenant Life Ins. Philadelphia Contributorship Dexter 1702 1717 1752 Conveyer Belts Insurance Insurance 1767 D. Landreth Seed Bank of New York 1784 1784 Adhesives & Coatings Seeds Banking McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-3 Largest U.S. Companies Market Capitalization (In Millions) 1. 2. 3. 4. 5. Microsoft General Electric Cisco Systems Wal-Mart Stores Intel $602,432 507,216 366,498 307,865 275,008 Source: Wall Street Journal McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-4 Basic Forms of Ownership Sole Proprietorship Partnership Corporation McGraw-Hill/ Irwin Number Sales 74% 5% 8% 5% 18% 90% © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-5 Forms of Business Ownership McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-6 Sole Proprietorship Advantages Ease of start/end Disadvantages Be your own boss Pride of ownership Retain profit No special taxes McGraw-Hill/ Irwin Unlimited liability Limited financial resources Difficulty in mgmt. Time commitment Few fringe benefits Limited growth Limited life span © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-7 Partnership Advantages More financial resources Shared mgmt. Longer survival Disadvantages Unlimited liability Division of profits Disagreements among partners Difficult to terminate McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-8 Types of Partnerships General Limited GP GP GP Passive Investor Passive GP Investor GP Passive Investor McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-9 Uniform Partnership Act Common Ownership Shared Profits & Losses Management Participation McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-10 Types of Corporations Regular ‘C’ Subchapter ‘S’ Limited Liability Corporation McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-11 Corporation Advantages More money for investment Limited liability Separation of ownership/mgmt. Ease of ownership change Perpetual life Size McGraw-Hill/ Irwin Disadvantages Initial cost Paperwork Two tax returns Termination difficult Double taxation © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-12 S Corporations S No more than S <25% of 75 shareholders income can be passive S Shareholders S Individuals S Estates S U.S. citizens or residents S 1 class of stock McGraw-Hill/ Irwin S Tax rate = +5% S Slower-growing companies S Benefits change with new tax rules © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-13 Figure 5.4 How Owners Affect Management McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-14 Make-up of Corporate Boards Corporate boards average 11 Directors. Most Directors by percentage are: Retired office of another firm CEO at another company Major company shareholder Ex-government official Academicians McGraw-Hill/ Irwin 89% 87% 73% 53% 50% © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-15 External Corporate Growth Merger/Acquisition Horizontal Vertical Conglomerate Leveraged (LBO) McGraw-Hill/ Irwin Buyout © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-16 Types of Mergers/Acquisitions A Horizontal B = AB Conglomerate Vertical McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-17 Leveraged Buyout Individual + Loan = Purchase of Company Purchase Loan Company = Collateral McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-18 Top U. S. Mergers Acquirer Target Value Time Warner AOL $120 World Com MCI $30 Bell Atlantic NYNEX $26 KKR RJR/Nabisco $25 Disney CAP/Cities ABC $19 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. Bil Bil Bil Bil Bil 5-19 Top Growth Franchises #New Stores in 1999 Kumon Math & Reading Centers McDonald’s 7-Eleven Convenience Stores Jackson Hewitt Tax Service Taco Bell Corp. KFC Corp. Coverall Cleaning Concepts Yogen Fruz Worldwide 4,586 3,288 1,023 884 841 567 548 520 Source: Entrepreneur, March 2000 McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-20 Survival After Startup Franchise vs. Independent 100 90 80 70 60 50 40 30 20 10 0 McGraw-Hill/ Irwin Independent Franchise 1st Year 5th Year 10th Year © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-21 Franchises Disadvantages Advantages + + + + + Management & marketing ass’t Personal ownership Recognized name Financial advice & ass’t Lower failure rate McGraw-Hill/ Irwin - High start-up costs Shared Profit Management regulation Coattail effects Restrictions on selling Fraudulent franchisors © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-22 Franchise System Franchiser Franchisee Franchise McGraw-Hill/ Irwin Agreement © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-23 Franchise Contract Franchisor, Inc. Branded Product/Service Performance Monitoring $$$$$ Franchisee McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-24 Franchisor Assigns Territory Provides Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price McGraw-Hill/ Irwin Provides Training/Support Business Expansion Using O.P.M. © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-25 Franchisee Pays Up-Front Costs Makes Monthly Payment to Franchisor Runs Business by Franchisor’s Rules/Procedures Buys Materials from Franchisor/ Approved Supplier McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-26 How to Avoid a Franchise Lemon 1) 2) 3) 4) Research officers & their business experience Get summary of any bankruptcy & litigation Estimate all costs to set up franchise Review franchise contract & three most recent financial statements McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-27 Benefits of a Home-Based Business Flexible . work hours Quality lifestyle Doing the work of your choice Opportunity to expand using technology Self-motivation McGraw-Hill/ Irwin © 2002 by The McGraw-Hill Companies, Inc. All Rights Reserved. 5-28