Special Issues in Corporate Ownership (contd)Mergers,
Acquisitions, Divestitures, and Spin-Offs:Merger: Two firms combine
to create a new companyAcquisition: One firm buys another
outrightDivestiture: Strategy whereby a firm sells one or more of
its business unitsSpin-off: A firm sells part of itself to raise
capital 2009 Pearson Education, Inc.
*Whats in this for you?By understanding the material discussed
in this chapter, youll be better prepared to:Understand the keys to
entrepreneurial or small business success, including the elements
of business planning.Discuss the reasons for the success or failure
of a small business.Evaluate the advantages and disadvantages of
different kinds of ownership.
Teaching Tips:Which of these three points will be most
interesting to you and why? Discuss in your teams, and we will
share with the class.Answers will vary.First, lets define a small
business:A small business is one that is independent or not part of
a larger business, and that has relatively little influence in its
market.There are a number of reasons why small business is
important in the U.S. economy. Lets see if the points you discussed
earlier are among these reasons:Job creation: Did you know that
more than half of all new jobs created in the U.S. are by small
businesses?Innovation: Most new innovative product or service ideas
come from small businesses.Contributions to big business: Small
businesses are suppliers of specialized services and raw materials
to big business. They are also retailers or distributors of the
larger firms products or services.Teaching Tips:Please return to
your student team and the list you prepared of the types of small
businesses you discussed. Please review your response as to why you
believe your small business example is important to the U.S.
economy. Please provide a connection to the three key reasons from
our review of the chapter. We will share the answers with the
class.Answers will vary.
Lets take a look at the number of small businesses by industry
in this graph.Services represent 50.07% of all small
businesses.Retail stores represent 13.06%.Construction firms
represent 12.70%.Wholesalers represent 6%.Finance and insurance
businesses represent 4.11%.Manufacturing represents
4.4%.Transportation represents 2.76%.Other types of small business
make up the remaining 6.90%.
Teaching Tips:In your student teams, please think of three
examples of small businesses that provide services.Answers will
vary. Lets define some terms relating to
entrepreneurship:Entrepreneurship is the process of seeking
business opportunities under conditions of risk.An entrepreneur is
someone who accepts the risks and opportunities of creating,
operating and growing a new business.A small business owner is a
person who independently owns a business that has relatively little
impact in its market . Teaching Tips:In your student teams, please
give an example of each one of the three definitions we just
reviewed.Answers will vary. A successful entrepreneur has a number
of characteristics that make him or her successful. Lets review
some of these. Successful entrepreneurs:Are resourceful.Are
concerned about good customer relationships.Desire to be their own
boss.Can deal with uncertainty and risk.Are open-minded.Rely on
networks, business plans and consensus.Have different views on how
to succeed, to automate a business, and when to rely on experience
or business acumen.
Teaching Tips:Please join with another class member. In your
team please review the list you made earlier of entrepreneurial
characteristics, when we were discussing learning objectives for
this chapter. First, see how on target you were. Second, prepare a
list of the characteristics that apply to you. Lets share our
examples with the class.Answers will vary but can build upon
examples presented earlier in the discussion of the chapter
learning objectives and from the list on this slide.Now we will
turn our attention to starting and operating a new business. The
first step is to craft a business plan. A business plan conveys a
description of the business strategy for the new venture and how it
will be implemented. It should also address three key areas:The
entrepreneurs goals and objectives.The strategies that will be used
to obtain them.The implementation of the chosen strategies.
How do we prepare a business plan?We set goals and objectives.We
forecast sales of our products or services.We undertake financial
planning.
In addition, there are three key questions every business plan
should answer. These will be easy for you to remember:Where is the
business now? How did it get to this point?Where do we want to go
with the business? (This addresses the first item we discussed
earlier.)How are we going to get where we want to go? (These
address the second and third items we reviewed earlier.)
Teaching Tips:In your same team, please think of an idea for a
new business. In your team, please answer the three questionswhere
are we now (or where is the idea now), where do we want to go with
this new business (what are our objectives) and how are we going to
get there (what strategies will we use). Please share your example
with the class.Answers will vary.Lets examine different ways of
starting a small business. One way is to buy an existing business.
This provides for less risk because it is an ongoing, viable
business.Another method is franchising. Franchising involves either
buying an existing franchise, such as a fast food restaurant or
store, etc., or buying the franchise to start a new branch or site
for an existing franchise. Lets look at the advantages and
disadvantages of franchising. Advantages include:A franchise is a
proven business opportunity for the franchisee.The franchise
provides access to the management expertise of the franchisor.
Disadvantages include:Start-up costs for the purchase of the
franchise. These can run from $50,000 to the hundreds of thousands
of dollars.Ongoing payments must be made to the
franchisor.Management of the franchise places rules and
restrictions on the franchisee.
Teaching Tips:In your student teams, pick a common franchise
that you frequent and discuss either advantages or disadvantages of
owning that particular franchise.Answers will vary but should
reflect on the advantages and disadvantages just discussed.
Lets review starting a business from scratch. First, the
disadvantage is that there is a higher risk of business failure
than if we purchase an existing business or franchise. Second,
starting from scratch avoids problems that may be inherent in an
existing business that we might purchase.There are a number of
questions that need to be answered when starting a business from
scratch:1. Who and where are my customers?2. How much will those
customers pay for my product?3. How much of my product can I expect
to sell?4. Who are my competitors?5. Why will customers buy my
product rather than the product of my competitors?
Teaching Tips:In your same student teams, remember the idea you
came up with for a new business a few minutes back. Now please
answer the questions we just asked about your new business idea.
These of course will only include your own ideas and best estimate.
Answers will vary.Once weve decided to start or buy a small
business, we need to determine how we are going to finance the
business. Here are some sources from which we can potentially
obtain loans:Personal resources (i.e., our own money)Loans from
family and friendsBank loansVenture Capital CompaniesSmall Business
Investment CompaniesMinority Enterprise Small-Business Investment
CompaniesThe Small Business Administration (SBA) and its financial
programs. These include guaranteed loans and immediate loan
programs, as well as management advice through its team of retired
business executives (called SCORE) and from Small Business
Development Corporations (SBDCs).
Teaching Tips:What is the first thing you need in order to
obtain most of these types of financing?A business plan!Now we will
focus on five largest growth trends for new small business
startups.The first is the emergence of e-commerce. The Internet
provides new ways of doing business, and entrepreneurs are jumping
on board. Internet sales have increased from $55.7 billion in 2003
to $125.1 billion in 2007.Crossovers from big business is another
big trend. What does this mean? It means that more people than ever
are leaving big business to start their own small business with
much success. Our text offers the example of John Chambers who
turned Cisco into a huge Internet connectivity firm, after first
spending years working for IBM and Wang.Opportunities for
minorities and women within the small business market have grown
rapidly. For example, African American small business owners own
1.2 million small businesses, an increase of 48% over the last five
years. Hispanic American small business owners own 1.6 million
small businesses, an increase of 31% over the last five years.
Asian American small business ownership has grown 24% and Asian
Pacific Islander American small business ownership has grown 64%
both in the last five years. Nearly 11 million small businesses are
now owned by women. Added together, these businesses generate $2.5
trillion in revenues each year.Women cited a number of reasons for
starting their own small business. Lets review them:46% of the
women started their own business to better control their own
schedule.24% of the women saw a market opportunity and decided to
pursue it.23% of the women were frustrated by the glass ceiling in
wages at big companies.And the remaining 7% cited other
reasons.Global opportunities represent another new market for small
business owners, such as software development companies, consulting
firms and higher education.44% of small businesses will succeed and
remain in operation after 4 years, offering better survival rates
than in the 1970s when nearly half of all new businesses
failed.
Teaching Tips:In your student teams, think of a new idea for an
e-commerce or Internet-based business. Discuss why you believe your
business idea could succeed. Then we will share our ideas with the
class.Answers will vary.There are a number of key reasons for the
failure or success of any new business. Many new businesses fail
due to:Poor management.Neglect.Weak control systems.Insufficient
capital.
Reasons why new businesses succeed include:Hard work, drive, and
dedication. Many small business owners spend 12 to 15 hours a day
in the initial stages of their new business start up working to
market, manage and promote their offerings.Market demand. You need
to have a market to whom you can sell your product or service, and
you need to add value to your product or service for it to be
accepted in the marketplace.Managerial competence. If you dont
understand why your general ledger accounting software does not
balance, you have a problem!Luck!!!!
Teaching Tips:In your student teams, take one of the new
business ideas you have discussed today and choose one of the small
business failure reasons. Please discuss what you as the owner
could do to make your business succeed if your firm were suffering
from one of the elements of failure. We will share our ideas with
the class.Poor Management: Join a local chamber of commerce and its
CEO small-business roundtable to share with other managers. Or take
classes at a local university or community college or the
SBA.Neglect: Pay attention to your business during each and every
day.Weak control systems: Attend seminars on business controls.
Hire a consultant to evaluate your control systems. Get help from
the SBA by working with a SCORE retired executive. Insufficient
capital: Cut back expenses, look at and focus only on your core
business.Answers will vary.There are a number of ways to structure
and own a business.
There are three main forms of legal ownership:The first is sole
proprietorship, which is owned and operated by one person.The
second is a partnership, where there is more than one
partner-owner, but the business the same status as a sole
proprietorship.The third is a corporation.
Why choose one over the other?The type of ownership a small
business owner chooses is based on the entrepreneurs needs/desires
for control, ownership participation, financing sources and
appropriateness of the chosen form for the industry in which the
firm will compete.
Teaching Tips:In your student teams, refer back to your new
internet business idea. What form of ownership would you choose?
Please discuss this and we will share with the class.Answers will
vary.Lets examine the advantages and disadvantages of each type of
ownership. We will start by looking at sole proprietorships. The
advantages of a sole proprietorship include:Freedom. There are only
the rules of the sole owner to follow.It is simple to form.There
are low start-up costs.There are tax benefits, since income and
expenses for a sole proprietorship flow through your personal
income tax.The formation of cooperatives, meaning the ability to
work with other sole proprietors.
There are also disadvantages of operating your small business as
a sole proprietorship.The biggest disadvantage is that there is
unlimited liability; in other words, the owners are responsible for
all the debts or liabilities of a business.In addition, sole
proprietors have limited resources unless, of course, they are
millionaires!They have limited fundraising capability.There is also
a lack of continuity, since they are the only person who knows the
business.
Teaching Tips:In your same student teams, please revisit your
example we just discussed. Please discuss which advantages or
disadvantages would apply to your new internet business.Answers
will vary, but should address the advantages and disadvantages just
discussed.
Lets examine the advantages and disadvantages of partnerships.
The advantages include:There is more talent and more money
available when there is more than one person working in a
business.There are more fundraising capabilities.Partnerships are
relatively easy to form.There is limited liability for limited
partners.There are also tax benefits.
The disadvantages of partnerships include:Once again, unlimited
liability for any general partner in the firm.There may be
disagreements among partners.There can also be lack of
continuity.
Teaching Tips:Continue to address the same Internet business you
have been discussing in your student teams. Please discuss whether
a partnership would be a better form of organization for your new
business than a sole proprietorship. Why or why not? We will share
our answers with the class.Answers will vary but should focus on
the advantages and disadvantages noted above.
There are also alternatives to general partnerships. We will
discuss two of these here: the Limited Partnership and the Master
Limited Partnership.The Limited Partnership:Allows for limited
partners who invest money and who are liable for debts, but only to
the extent of their investments.Must have at least one general or
active partner, who is usually the person who runs the business and
is responsible for its survival and growth.
The Master Limited Partnership differs in that:The organization
sells shares or partnership interests to investors on a public
exchange. Investors are paid back from the profits.The master
partner retains at least 50% ownership and runs the business, while
minority partners have no management voice.
Teaching Tips:Which form of partnership do you think is best for
your new Internet business example if you had to choose? Why?
Please discuss in your teams and then share with the class.Answers
will vary but should be based on the information on partnerships
just presented.Now lets look at cooperatives as a form of business.
Cooperatives combine the freedom of sole proprietorships or
partnerships with the financial power of corporations.Cooperatives
are groups of sole proprietorships or partnerships that agree to
work together for their common benefit.In the U.S., these are
usually agricultural in nature.
Teaching Tips:Please think of one example of a cooperative.Ocean
Spray cranberry growers, Florida citrus growers, and Wisconsin
dairy cooperatives are some examples.
Now we will examine corporations. First, lets define a
corporation. A corporation is a firm that has filed papers of
incorporation. There are 4.93 million corporations in the U.S. that
account for 20% of all U.S. businesses, but generate 85% of all
revenue.
Corporations may:Be small or large.Sue and be sued.Buy, hold and
sell property.Make and sell products.Commit crimes and be tried and
punished for them.Have limited liability for individuals who form
them, but as we know from the past few years, CEOs of corporations
can and do go to jail for committing fraud.
Teaching Tips:In your student teams, discuss the possibility of
incorporating your new Internet business. Please share your
discussion with the class.Answers may vary, but could address the
issues of limited liability for the individuals forming the new
internet corporation.
Lets examine the advantages and disadvantages of forming a
corporation. The advantages of incorporating include:Limited
liability: The owners responsibility is limited to their investment
in a business.Continuity.Stronger fundraising capability.
The disadvantages of incorporating include:Double taxation of
dividends.Fluid control: The corporation will generally have a
board of directors you need to serve.Corporations are complicated
and expensive to form.
Teaching Tips:In your student teams, please choose a corporation
with which you are familiar. Please discuss why you think this firm
chose to incorporate. Then we will discuss our examples with the
class.Answers will vary based on the corporation chosen, but should
address advantages and disadvantages just discussed.There are many
types of corporations. These can include both closely held, or what
is called private corporations, and they can also include publicly
held companies whose shares of stock are traded on a stock
exchange.
Within these two types of corporations there are four other
types of organization:Subchapter S Corporation: These firms are
corporations and they are organized like a corporation but they are
treated like partnerships for tax purposes. There are strict rules
for eligibility.Limited Liability Corporation (LLC): This is a
popular form of incorporation because owners are taxed like
partners but have the limited liability of a corporation.
Professional Corporation: These are usually doctors, lawyers, etc.
Their corporate status provides limited liability, but an
individuals negligent performance can make an individual within the
firm liable.Multinational or Transnational Corporation: The stock
of these corporations may be traded in stock markets in multiple
countries and they may be managed in more than one country.
Teaching Tips:Please join with another class member. In your
team, please come up with one example of a privately held
corporation and a publicly held corporation. Lets share our
answers.Answers will vary. Managing a corporation involves what is
called corporate governance. This includes the roles of
shareholders, directors, and other managers in corporate decision
making and accountability.Corporate governance is established by
the firms bylaws and involves three bodies:Stockholders or
shareholders: These are investors who buy ownership shares in the
form of stock.The board of directors: This is a group elected by
stockholders to oversee corporate management.Corporate officers:
These are a group of top managers hired by the board to run the
corporation.
Teaching Tips:Do you think small, privately held corporations or
small businesses issues shares of stock and have these three forms
of corporate governance? Why or why not?Yes, any small business can
incorporate as a C corporation and must then have bylaws and must
issue shares of stock to the key investors, which may be only one
or two people. In addition, they must have a board of directors and
top managers, and they must meet and keep minutes of their board
meetings.If you are not familiar with stocks and their dividends,
lets define them briefly:Stock is a share of ownership in a
corporation.Dividends are profits distributed among
stockholders.
Teaching Tips:Please take a minute and share with your student
partner whether you own any stock or have owned it in the past and
if you have received dividends.Answers vary.There are some special
issues in corporate ownership that we will discuss. The first of
these is the concept of joint ventures and strategic alliances.A
strategic alliance is the collaboration of two or more
organizations on a project for mutual gain. A joint venture is a
new enterprise in which partners share ownership.
The second of these are Employee Stock Ownership Plans or
sometimes called ESOPs. An ESOP allows employees to own a share of
the corporation through trusts established on their behalf.
The third issue is institutional investors. Institutional
investors control enormous resources and can buy huge blocks of
stock.
Teaching Tips:In your student teams, please choose one of the
three special issues we have just reviewed. Then please give two
examples of the type of special issue, for example, the name of two
organizations that fit that form.Answers will vary.Mergers,
acquisitions, divestitures and spin-offs are another special issue
in corporate ownership.Lets look at each one:A merger is achieved
when two firms combine to create a new company.An acquisition
occurs when one firm buys another outright.A divestiture is a
strategy used whereby a firm sells one or more of its business
units.A spin-off occurs when a firm sells part of itself to raise
capital.
Teaching Tips:Please work with a student partner and choose one
form of this last special issue we have just reviewed. In your
team, please come up with two examples of the type of issue your
team chose. We will share our answers with the class.Answers will
vary. Examples could include:Merger: Miller-Coors.Acquisition: When
Coors purchased all of The Stroh Brewing Company.Divestiture: When
Pepsi sold off the Doritos brand.Spin-off: Johnson Diversy, which
was spun off of S.C. Johnson Company because it was in the
industrial and not personal sector of the business.
