Business
and
Labor
What is a Franchise?
What is a Franchise?
A
franchise is a business investment that
involves renting or leasing another firm's
successful business model.
Business Organization
How are businesses
formed?
Sole Proprietorships
 The
most common form of business
organization in the U.S.
A
business owned and run by a single
individual – one-person operations
 Comprise
the smallest form of business
 Relatively
profitable
Forming a Proprietorship

Easiest form of business to start

Requires almost no requirements except for
occasional business licenses

Most are ready for business as soon as they
set up operations

Can be run on the Internet, out of a garage,
or from an office in a professional building
Think-Pair-Share
Speak with your partner and
come up with some
advantages and
disadvantages for Sole
Proprietorships.
Be prepared to share your
examples with the class.
Advantages

If you have an idea or an opportunity to make a
profit, only have to decide to go into business

Decisions do not require the approval of a coowner, boss, or other “higher-up”

The owner can keep the profits of successful
management without having to share them with
other owners

Does not have to pay separate business income
taxes

Is the psychological satisfaction many people get
from being their own bosses

It is easy to get out of business
Disadvantages

The owner of the business has unlimited
liability (personally and fully responsible for all
losses and debts of the business)

Difficulty of raising financial capital

Small size, may not be able hire enough
people, stock enough inventory to be
efficient

Limited managerial experience

Difficulty of attracting qualified employees

Limited life – the firm legally ceases to exist
when the owner dies, quits or sells the business
Partnerships
 Business
that is jointly owned by two or
more persons
 The
least numerous form of business
 Second
smallest proportion of sales and
net income
Types of Partnerships
 General

Is the most common form of partnership,
partners are share the responsibility for the
management and financial obligations of
the business
 Limited

Partnership
Partnership
At least one partner is not active in the daily
running of the business and has limited
responsibility for the debts and obligations
of the business
Forming a Partnership
 Relatively
easy to start
 Formal
legal papers are usually drawn up
to specify the arrangements between
partners to state:


The way future partners can be added to
the business
The way the property of the business will be
distributed if partnership ends
Advantages

Easy start-up

Ease of management

Lack of separate taxes on a partnership’s
income

Partners can earn profits from the firm and then
pay individual income taxes on them at the end
of the year

Can usually attract financial capital more
easily than proprietorships

More efficient operations due to their slightly
larger size
Think-Pair-Share
Decide with your partner
what you think the biggest
disadvantage to Partnerships
would be.
Be prepared to share your
answer with the class.
Disadvantages
 General


Partnerships
Each partner is fully responsible for the
actions of all other partners
Limited Partnerships
 Partner’s
liability is limited by the size of his or her
investment in the firm
 Has
a limited life based on if a partner
dies or leaves the partnership
 Potential
for conflict between partners
Corporations
A
very formal and legal arrangement
 Must
file for permission from the national
government or the state where the
headquarters are located
 If


approved, a charter is granted
Government document that gives
permission to create a corporation
Specifies the number of shares of stock in
the firm
Stocks or
Ownership Certificates
 Shares
are sold to investors, called
stockholders or shareholders
 Stockholders
corporation
own a part of the
 Money
gained from the sale of stock is
used to set up the corporation
 If
profitable, may issue a dividend, a
check that transfers a portion of earnings
to stockholder
Corporate Structure
 When
investors purchase stock, they
become owners with certain ownership
rights
 Common

Basic ownership – each share has one vote
to elect a board of directors that set broad
policies and goals for the corporation
 Preferred

stock
stock
Nonvoting ownership shares – cannot vote
for the directors but they receive their
dividends before common stockholders
receive theirs
Advantages

Ease of raising financial capital

Corporation provides limited liability for its owners

Enables firms to undertake potentially profitable
venture that are inherently risky

Directors can hire professional managers to run
the firm

Unlimited life – the corporation continues to exist
even when ownership changes

Ease of transferring ownership of the corporation
Disadvantages
 Double
taxation – corporate profits are
taxed a first time when the corporations
pays income tax and a second time
when shareholders pay taxes on their
dividends
 Difficulty
and expense of getting a charter
 The
owners or shareholders have little
voice in how the business is run
 Subject
to more government regulation
than any other forms of business
Branding Ford
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MX9X19X17Q4NNY8M104MYD41;s=5325F9
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Franchises
A
temporary business investment that
involves renting or leasing another firm’s
successful business model
 Franchisor

Is the actual owner of the business that lets
other investors rent or lease its name,
business profile, and way of doing business
 Franchisee

The investor who rents or leases the business
model from the franchisor and then hopes
to recoup his or her investment by selling
the franchisor’s goods or services
Becoming an “Owner”
 People
who buy a franchise are usually
investors who always wanted to go into
business for themselves, but never did
 They
may also already own their own
business but are looking to earn more
income
Advantages
 Nationwide
 Respected
 Deep
network
product/service
product line
 Excellent
quality standards
 Nationwide
advertising
 Professional
advice whenever needed
Disadvantages
 Start-up
costs can be very expensive

For Example: the start-up costs alone for a
McDonald’s franchise can be as high as $2
million

There can also be fees if the franchise is
terminated before the term of the contract

Costs to renew the franchise when contract
expires
Business Growth
and Expansion
How do businesses
grow?
Growth Through Reinvestment
 Estimating
Cash Flows
 Reinvesting
Cash Flows
Estimating Cash Flows
 An
income statement shows a firm’s net
income
 Net
income is the funds left over after all
of the firms expenses, including taxes, are
subtracted from its sales
 Normal
business operations include
depreciation (a non-cash charge the firm
takes for the general wear and tear on its
capital goods)
Cash Flow
 The
sum of net income and noncash
charges such as depreciation
 It
is the bottom line
 Cash
flow represents the total amount of
after-tax income generated from
operations
Reinvesting Cash Flows

Business has a positive cash flow

Decides how to allocate the cash flow – pay
a dividend to shareholders, reinvested in new
equipment, etc.

Cash flows are reinvested in a business so that
a firm can produce new or additional
products

Concept of cash flow is also important to
investors because it demonstrates the
financial health of a firm
Growth Through Mergers
 Merger
is a combination of two or more
businesses to form a single firm
 When
two companies merge, one gives
up its separate legal identity
Types of Mergers
 There
are two types of mergers

Horizontal Merger

Vertical Merger
Horizontal Merger
 Takes
place when firms that produce the
same kind of product join forces
 One
example is the bank merger of JP
Morgan and Chase Manhattan to form
JPMorgan Chase
Vertical Merger
 Takes
place when companies involved in
different stages of manufacturing,
marketing, or sales join together
 One
example is the formation of the U.S.
Steel Corporation. At one time it mined its
own ore, shipped it across the Great
Lakes, smelted it, and made steel into
many different products
 Vertical
mergers take place when
companies seek to protect against the
potential loss of suppliers
Reasons for Merging
 Faster
Growth – by merging with another
firm, the company’s size and sales appear
to grow faster
 Synergy
– when firms combine, they will
take the best characteristics of each
other
 Economies
of Scale – when firms
combine, the larger size usually allows for
lower cost of production
Reasons for Merging
 Diversification
– some mergers are driven
by the desire to acquire new product lines
 Elimination
of Rivals – sometimes firms
merge to catch up with or even eliminate
rivals
 Change
or Lose Corporate Identity – a
merger may help a company change or
lose a corporate identity (goal is to
improve the corporate identity)
Conglomerates
 Is
a firm that typically has at least four
businesses, each making unrelated
products, none of which are responsible
for a majority of its sales
A
firm may become so large through
mergers and acquisitions that it becomes
a conglomerate
 Diversification
is one of the main reasons
for conglomerate mergers
Multinationals
 Is
a corporation that has manufacturing or
service operations in a number of
different countries
 Likely
to pay taxes in each country where
it has operations and is subject to the laws
of each
 Some
examples include General Motors,
Nabisco, Sony, British Petroleum
Multinationals
 Important
because they have the ability
to move resources, goods, services and
financial capital across national borders
 Have
been known to abuse their power
by paying low wages to workers,
exporting scarce natural resources, etc.
 An
advantage is the lower-cost
production and higher-quality output that
global competition causes
Business Growth - Cadbury
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518E049BE32F151D9DFFE9F354
Entrepreneurial Funding for
Start Ups
 Entrepreneurial
 Venture
 Angel
Education and Incubators
Capitalists
Investors
 Crowdfunding
Entrepreneurial Education and
Incubators
 Many
states and universities have begun
to promote start-up incubators
 Incubators
are places where potential
entrepreneurs can get training in
accounting, engineering, and managerial
skills, along with potential financing, to
give life to a business concept
Venture Capitalists
A
provider of investment funds to a new
or unproven business in exchange for an
equity (ownership) share
 Will
also offer helpful expertise and can
introduce the entrepreneur to other
industry firms to help solve problems
 May
expect as much as a 25 percent
annual return on his or her investment and
require ownership of at least half the
company
Angel Investors
 Like
to fund the start-ups of family, friends,
or others whose business ideas have
potential but cannot obtain enough seed
money
 The
term “angel” is due to the fact that
they are usually more interested in helping
the individual than getting a return on
their investment
 Usually
in the form of a one-time injections
of funds
Crowdfunding
 The
making of a direct funding appeal to
a “crowd” of possibly interested investors
on a social networking platform
 Also
 Has
known as crowdsourcing
its roots in Facebook and LinkedIn
 Earliest
crowdfunding sites include
Kickstarter, Fundable and Crowdfunder
3-2-1
At your desk, write down:
3 - new facts you know about how
businesses grow
2 - interesting things that you were not
aware of
1 - question that you may still have about
how businesses grow
The only number that is optional is 1
question, it is okay to not have any more
questions. Be prepared to share your 3-2-1.
Nonprofit Organizations
How does a market
economy support
nonprofit organizations?
Community Organizations
 Include
schools, churches, hospitals,
welfare groups, and adoption agencies
 They
are similar to profit-seeking business
but do not issue stock, pay dividends, or
pay income taxes
 If
their activities produce revenues in
excess of expenses, they use the surplus to
further their work
Cooperatives
A
voluntary association formed to carry
on some kind of economic activity that
will benefit its members
 Cooperatives
fall into three major
categories: consumer, service, and
producer
Consumer Cooperative
A
voluntary association that buys bulk
amounts of goods such as food or
clothing that can be sold to members at
prices lower than those charged by
regular businesses
Service Cooperative
 Provides
services such as insurance,
credit, or child care to its members, rather
than goods
A
credit union, a financial organization
that conducts banking business for
employees of a particular company or
government agency, is a service co-op
Producer Cooperative
 Mostly
made up of farmers and helps
members promote or sell their products
directly to central markets or to
companies that use the members’
products
Labor Unions
 An
organization of workers formed to
represent its members’ interests in various
employment matters
 Collective
bargaining is when a labor
union negotiates with management over
issues such as pay, working hours, healthcare coverage, vacations, and other jobrelated matters
 The
largest union in the United States is the
National Education Association (NEA)
Professional Associations
 Professional
societies, trade associations,
or academies
 Consist
of people in specialized
occupations interested in improving
conditions for their profession
 An
example is the American Medical
Association (AMA)
Business Associations

Organize to promote their collective interests

Chamber of Commerce is an organization
that promotes the welfare of its member
businesses

Industry and trade associations represent
specific kinds of businesses

The Better Business Bureau is a nonprofit
organization sponsored by local businesses
that provides general information on
companies and maintains records of
consumer inquiries and complaints
Direct Role of Government
 Many
government agencies produce
and distribute goods and services to
consumers
 The
role is “direct” because the
government supplies a good or service
that competes with those provided by
private businesses
Examples of Direct Role of
Government
 Tennessee
Valley Authority (TVA) –
supplies electric power to most of
Tennessee and parts of 6 other states and
competes directly with privately-owned
power companies
 U.S.
Postal Service (USPS) – became a
government corporation in 1970 and
competes directly with private firms like
FedEx and UPS
Indirect Role of Government
 The
government plays an indirect role
when it acts as an umpire or when it gives
a group of consumers a boost in
purchasing power
 The
role is “indirect” because a
government action does not encourage
direct competition with private sector
producers, but still has an impact on the
economy
Examples of Indirect Role of
Government

Antitrust Laws – laws that are passed to
prevent monopolies and illegal trade
restraints

College Scholarships – government grants
and scholarships to students may encourage
more students to go to college

Social Security Payments – people who
receive Social Security checks get purchasing
power that helps keep them out of poverty
Concentration Game
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