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ENTREPRENEURIAL MANAGEMENT
CHAPTER 7
SELECT A TYPE OF OWNERSHIP

SUBMITTED BY:
COLEGIO, KRISTEL G.
LUCERO, JULIANA
MARASIGAN, SHANE ALEXIS
HRMGT-3201

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Purchase and Existing Business

When most people consider going into business fir themselves, they think about starting a
new business. But purchasing an existing business could be a good option. Owners sell
their business an existing could be a good option. Owners sell their business for a variety
of reason.
Advantages of Buying an Existing Business
1. The existing business already has the necessary equipment, suppliers and
procedures in place. It may also have built up good-will or customer loyalty. You may
want to change some of the policies and procedures established by the former owner.
2. The seller of a business may train anew owner. The previous owner or experienced
employees may be willing to help the new owner learn about the company.
3. There are prior records of revenues, expenses, and profits. This means that
financial planning will be easier and more reliable than it would be for a completely new
business.
4. Financial arrangement can be easier. The seller of the business may accept an initial
partial payment and allow the rest to be paid off in monthly installments. This can reduce
or eliminate the need for bank financing.

Disadvantage of Buying an Existing Business

Buying an existing business sounds like an easy way to become an entrepreneur, but it
can be risky.
1. Many business are for sale because they are not making a profit. Owners often try
to sell business that are not financially profitable.
2. Serious problems may be inherited. Business can have a poor reputation with
customers, have trouble with suppliers, or be poorly located.
3. Capital is required. Many new entrepreneurs just do not have the money to purchase
a mature business. Starting small may be their only option.
Steps in Purchasing a Business
1. Write specific objectives about the kind of business you want to buy,and identify
businesses for sale that meet your objectives. This will help you fin the right business
for what you want to do.
2. Meet with business sellers or brokers to investigate specific opportunities. Ask
about the history of the business, the reason for its sale. Its financial performance, and the
price the owner is asking for it.
3. Visit during business hours to observe the business 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 operation
for at least the past three years. Analyzing these report will help you see how much
profit you can make and how much you will probably be paying out in expenses.

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5. Ask how important information in written form. Get list of all assets to be
transferred to the new owner, a statement about any past or pending legal action against
the business, a copy of the business lease or mortgage, and a list of all the suppliers.
6. Determine how would you finance the business. Contact lending institutions, and
ask the seller if he or she would be willing to finance part all of the purchase.
7. Get expert help to determine a price to offer for the business. An accountant or a
valuator an expert on determining the value of a business can help.

Franchise Ownership
Purchasing a franchise is another route by which you can become an entrepreneur.
Franchise- a legal agreement that gives an individual the right to market a company’s
product or services in particular area.
Franchisee- the person who purchases a franchise agreement
Franchisor- the person or company that offer a franchise for purchase.
Operating Cost of a Franchise
Initial franchise fee- The amount the local franchise owner pays in return for the right to
run the franchise.
Start-up Costs- The cost associated with beginning a business, they include the cost of
renting a facility, equipping the outlet and purchasing inventory
Royalty Fees- Are weekly or monthly payments made by the local owner t franchise
company.
Advertising Fees- Paid to the franchise company to support television, magazine, or
other advertising of the franchise as a whole.
Investigate The Franchise Opportunity
The Federal Trade Commission’s (FTC) Franchise and Business Opportunity Rule
requires franchise and business opportunity sellers to give you specific information to
help yo make an informed decision about your purchase. The seller must give you a
detailed disclosure document at least ten business days before you pay any money or
legally commit yourself to a purchase.
The disclosure document should include the following:
* Names, address, and telephone numbers of at least ten previous purchasers who lived
nearest to you.
* The fully audited financial statements of the seller.
* Background and experience of the business key executives.
* Cost starting and maintaining the business.

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* The responsibilities you and the seller will have once you have invested in the
opportunity.

Evaluate a Franchise
Some of the things you should do when evaluating a franchise include the following:
1. Study the disclosure document and proposed contract carefully.
2. Interview current owners listed in the disclosure document carefully.
3. Investigate the franchisor’s history and profitability.
4. Investigate claims about your potential earnings.
5. Obtain from sellers in writing the number and percentage of owners who have done as
well as they claim you will.
6. Listen carefully to sales presentations.
7. Shop around.
8. Get the seller’s promises in writing.
9. Determine what will happen if you want to cancel the franchise
agreement.
10. Remember that it is okay to ask for advice from professionals.

Advantages of Owning a Franchise

When deciding whether to buy a franchise, you should also consider
the advantages and disadvantages of it. There are four main advantages:
1. 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 of Owning a Franchise

Although franchising sounds like a great idea, there are some disadvantages that you need
to consider.
1. Franchise fees can be costly and cut down on profits.
2. Owners of franchises have less freedom to make decisions than
other entrepreneurs.
3. Franchisees are dependent on the performance of other franchisees in the
chain.
4. The franchisor can terminate the franchise agreement.

Enter a Family Business

 The U.S. economy is dominated by family businesses. According to some
estimates, as many as 90 percent of all businesses, including the vast majority of
small- and medium-sized companies, are owned by families. Many large
companies, such as Wal-Mart and the Ford Motor Company, continue to be
owned largely by people who are related to the company founder.
Advantages of a Family Business

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 Entrepreneurs who work for their family businesses enjoy the pride and sense of
mission that comes with being part of a family enterprise. They also enjoy the fact
that their businesses remain in the family for at least one more generation. Some
enjoy working with relatives and knowing that their efforts are benefiting others
whom they care about.

Disadvantages of a Family Business

 Family businesses have several drawbacks. Family members, regardless of their
ability, often hold senior management positions. This sometimes means that poor
business decisions are made. It also makes it difficult to retain good employees
who are not members of the family. Also, the distinction between business life
and private life is blurred in family-owned businesses.

Starting Your Own Business

 For one reason or another, joining a family business or operating a franchise may
not be possible for you, or you might not be able to find a business to purchase.
This means that to be an entrepreneur you will have to establish a business of
your own. You need to consider the many advantages and disadvantages of
starting your own business.

Advantages of Starting Your Own Business

 Entrepreneurs who start their own business get to make decisions about
everything from where to locate the business to how many employees to hire to
what prices to charge. They are completely independent and create their own
destinies.

Disadvantages of Starting Your Own Business

 There are many risks to consider when you start your own business. You must
estimate demand for your product or service. There is no certainty that customers
will purchase what you offer.

7.2 Choose a Legal Form of Business

Sole Proprietorship
 A business that is owned exclusively by one person is a sole proprietorship. Sole
proprietorships enable one person to be in control of all business aspects.
Advantages of a Sole Proprietorship
 The government exercises very little control over sole proprietorships, so such
businesses can be established and run very simply. Accurate tax records and
certain employment laws must be met, but these are usually the only forms of
government regulation for a sole proprietorship.

Disadvantages of a Sole Proprietorship

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 It can be difficult to raise money for a sole proprietorship. You are the only
person investing money. You also bear the burden of all of the risks.

Partnership
 A business owned by two or more people is a partnership.
Advantages of a Partnership
 Running a business as a partnership means that you will not have to
come up with all of the capital alone. It also means that any losses the business
incurs will be shared by all of the partners.
Disadvantages of a Partnership
 Some entrepreneurs do not like partnerships because they do not
want to share responsibilities and profits with other people. They fear
being held legally liable for the errors of their partners.
Partnership Agreement
 When two or more entrepreneurs go into business together, they generally sign a
partnership agreement.
The sample partnership agreement identifies the following:
 Name of the business or partnership
 Names of the partners
 Type and value of the investment each partner contributes
 Managerial responsibilities to be handled by each partner
 Accounting methods to be used
 Rights of each partner to review and/or audit accounting documents
 Division of profits and losses among the partners
 Salaries to be withdrawn by the partners
 Duration of the partnership
 Conditions under which the partnership can be dissolved
 Distribution of assets upon dissolution of the partnership

Corporation
 A corporation is a business that has the legal rights of a person but is independent
of its owners. A share of stock is a unit of ownership in a corporation. There may
be many owners, who are called shareholders or stockholders.

Disadvantages of a Corporation
 Setting up a corporation is more complicated than setting up a sole proprietorship
or a partnership. To incorporate, you will need the assistance of a lawyer, who
will help you file articles of incorporation with the state official responsible for
chartering, or registering, corporations. Because of this, establishing a corporation
can be costly.

Advantages of Incorporation

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 If the corporate form of ownership is complicated and costly, why do

entrepreneurs set up corporations? Liability is the main reason. Liability is the
amount owed to others. The shareholders’ risk is limited to the amount of money
each shareholder invested in the company when he or she purchased stock.

S Corporation
 A small corporation can elect to be treated as an S corporation. An S corporation
is a corporation organized under Subchapter S of the Internal Revenue Code.

Limited Liability Company

 A limited liability company (LLC) is a legal form of business that offers the
limited liability protection of a corporation to its owners.

7.3 LEGAL ISSUES AND BUSINESS OWNERSHIP

Regulations That Promote Competition
Antitrust Legislation
 A monopoly is also called a trust, so these laws were called antitrust laws.
Antitrust laws also ban other types of business activities that do not promote
competition.
 SHERMAN ACT- This law makes it illegal for competitors to get together and
set prices on the products or services they sell.
 CLAYTON ACT- This law states that it is illegal for a business to require a
customer to buy exclusively from it or to purchase one good in order to be able to
purchase another good.
 ROBINSON-PATMAN ACT- This law protects small businesses from unfair
pricing practices. It makes it illegal to discriminate by charging different prices to
customers.
 WHEELER-LEA ACT- This law bans unfair or deceptive actions or practices
by businesses that may cause an unfair competitive advantage.

Government Agencies that Protect Competition

 JUSTICE DEPARTMENT- The Justice Department’s Antitrust Division takes
legal action against any business it believes has tried to monopolize an industry.
It also prosecutes businesses that violate antitrust laws, which can lead to large
fines and jail sentences.
 FEDERAL TRADE COMMISSION- The Federal Trade Commission (FTC)
deals with issues that touch the economic life of every American. The FTC
administers most of the laws dealing with fair competition and pursues vigorous
and effective law enforcement.

Intellectual Property
 Intellectual property is the original, creative work of an artist or inventor and may
include such things as songs, novels, artistic designs, and inventions.
Patents

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 A patent is the grant of a property right to an inventor to exclude others from

making, using, or selling his or her invention.
Copyrights
 A copyright is a form of intellectual property law that protects original works of
authorship, including literary, dramatic, musical, and artistic works.

Trademarks
 A trademark is a name, symbol, or special mark used to identify a business or
brand of product. Products that are trademarked are identified by the TM or ®
symbol.
Laws that Protect Consumers
Licenses
 State and local governments require some businesses to have licenses. Beauty
salons, restaurants, and health and fitness centers are just some of the companies
that must carry licenses.
Zoning Laws
 Local governments often establish zoning regulations that control what types of
buildings can be built in what areas. In many communities, certain areas are
zoned for residential use only. This means that business buildings may not be
built in those areas.

Consumer Protection Laws

 THE FEDERAL FOOD, DRUG, AND COSMETIC ACT OF 1938- This law
bans the sale of impure, improperly labeled, falsely guaranteed, and unhealthful
foods, drugs, and cosmetics.
 THE CONSUMER PRODUCT SAFETY ACT OF 1972- This law sets
safety standards for products other than food and drugs.
 THE TRUTH-IN-LENDING ACT OF 1968- This law requires all banks to
calculate credit costs in the same way. When a consumer gets a loan, the lender must
provide two types of information about the loan’s cost—the finance charge and the
annual percentage rate.
 THE FAIR CREDIT BILLING ACT OF 1974- This law is part of the Truth-in-
Lending Act and helps consumers correct credit card billing errors.

When to Get Legal Advice

 At some point, you probably will need to hire a lawyer. Other community
business owners may also be able to suggest a lawyer. Lawyers can help you with
a variety of legal issues.
HOW LAWYERS CAN HELP YOU
 Assist you in choosing a legal structure for your business
 Create documents such as leases, purchase agreements, and contracts
 Develop partnership agreements
 Inform you of regulations and licenses

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 Give advice on insurance coverage

 Advise you on taxes
 Prepare and file patent applications
 Help you plan for your future

Contracts
 One of the most common reasons that a business hires a lawyer is to assist with
contracts. A contract is a legally binding agreement between two or more persons
or parties.
For a contract to be considered legally binding, certain elements
must be included when the contract is created. These elements are
agreement, consideration, capacity, and legality.

 Agreement occurs when one party offers or agrees to do some-

thing and the other party accepts. .
 Consideration is what is exchanged for the promise.
 Capacity means the parties are legally able to enter into a binding
agreement.
 Legality means that a contract cannot have anything in it that is
illegal or that would result in illegal activities.

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