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Chapter 05 - How to Form a Business
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A horizontal merger refers to a merger between two companies that serve entirely
different markets.
132. A horizontal merger refers to a merger between two companies in the same industry,
and serving the same markets.
133. A leveraged buyout is an attempt by top management to gain control of a company by
issuing a large amount of new stock.
134. When a group of investors take a firm private, they purchase all the company's
outstanding stock.
135.
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In recent years, foreign firms were reluctant to merge with or acquire American
corporations.
136. A merger is a mutual agreement where a firm joins together with another firm, whereas
an acquisition is when one firm purchases the assets and obligations of another firm.
Feedback: When companies merge, there is a mutual agreement to join forces. Although the
assets and obligations are combined, there is no offering of funds or stock by one company,
for the other, as in an acquisition.
137. One reason that a firm would choose to merge or acquire another company would be to
gain market share.
Feedback: Firms know that the fastest way, but not always the least expensive way to acquire
market share or expand their market is to merge with or buy-out a competitor.
138.
Chapter 05 - How to Form a Business
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One reason that a firm may choose to merge or acquire another company would be
diversity of products or services.
Feedback: When firms participate in conglomerate mergers, they purchase companies whose
products and services are different or unrelated to what they currently offer. They choose to
diversify the portfolio of business units and even the industries where they operate.
139. The strategy of a leveraged buyout is used when employee talent is at a minimum.
Feedback: If employees and/or management believe they can improve performance by
running the company themselves, they will seek financial backing (borrow funds) and take
ownership, by buying all available stock from the current stockholders.
140. Taking a firm private means turning a profit-seeking corporation into a nonprofit
corporation in order to avoid a hostile takeover.
Feedback: Taking a firm private involves an effort by a group of stockholders or managers to
gain control of all of a corporation's outstanding stock.
141.
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A major objective of a leveraged buyout is to enable investors to gain control of a
company by issuing new shares of ownership, thus minimizing the use of debt.
Feedback: Leveraged buyouts involve financing the acquisition of an organization through
the use of debt financing.
142. Hole In One Golf Company announced plans to purchase the property and assume the
obligations of Champion Golf, Inc., one of its major competitors. Hole In One Golf
Company's plans are an example of a merger.
Feedback: Hole In One Golf Company's actions are an acquisition rather than a merger. An
acquisition refers to one firm's purchase of the assets and obligations of another firm. Since
the firms are competing in the same market rather than at different stages, this is a horizontal
move.
143. Two competitors: Stanley's Food Mart and Bluejay Groceries recently issued a joint
announcement stating their decision to merge. The announcement claimed that the new
firm would have more financial resources, which would enable it to expand services and
broaden offerings to consumers. This proposed merger is an example of a horizontal
merger.
Feedback: A merger between two firms in the same industry, such as two grocery stores, is a
horizontal merger.
144.
Chapter 05 - How to Form a Business
Tech Solutions, Inc., a manufacturer of laptops, is considering a merger with Outtel, a
leading producer of microprocessors and other computer chips. Tech Solutions believes
such a merger would give them a guaranteed source of needed components, and enable
them to have better control over quality. If this merger occurs, it would be an example of a
horizontal merger.
Feedback: A merger between two companies at different stages of related business is known
as a vertical merger.
145. Cory Raider is leading a group of stockholders who wants to take the Bigbux
Corporation private. If Cory's group succeeds, Bigbux's stock will no longer be available
to investors on the open market.
Feedback: Taking a firm private involves gaining control of a firm's stock so that it is no
longer available to investors on the open market.
146. Due to several years of poor performance, Scrappy's Metal Fabrication, Inc., is closing.
Through the use of debt financing, workers plan to purchase the company's stock from
current shareholders, in order to buy the firm, improve company performance, and save
jobs.
Feedback: A leveraged buyout involves the use of debt financing to buy the stock of a
company. Skilled workers want to save their jobs and make their company profitable again.
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147. A franchise agreement is an arrangement where a franchisor sells the rights to a
business name and the right to sell a product or service within a given territory to a
franchisee.
148. A franchise may be organized as a sole proprietorship, partnership, or corporation.
149. Franchisees are not always pleased with management regulations handed down from
the franchisor. In some cases, franchisees have been known to band together to express
concern over marketing and management direction.
150. Franchisors give franchisees the right to use their name and product, with the
understanding that franchisees obtain all financing and develop all marketing strategies on
their own.
151.
Chapter 05 - How to Form a Business
The most popular businesses for franchising are restaurants.
152. In a franchise arrangement, ownership remains in the hands of the franchisor.
153. One of the major advantages for the franchisee is instant business name recognition and
important management assistance from the franchisor.
154. Franchisees must follow more rules, regulations, and procedures than if they operated
independently-owned businesses.
155. The "coattail effect" refers to the burden of corporate rules and regulations on
franchisees.
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156.
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The "coattail effect" refers to inevitable repercussions on your business if a fellow
franchisee should fail.
157. One drawback of franchises is that they have a higher failure rate than other types of
business ventures.
158. The franchisee pays the franchisor a share of profits or a percentage commission on
sales, known as a royalty.
159. Many franchisors have rules that prohibit franchisees from sponsoring their own
websites.
160.
Chapter 05 - How to Form a Business
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Because of the growth of minority-owned businesses in the U.S., franchisors are
becoming more focused on recruiting minority franchisees.
161. It is impossible to run a franchise completely from home.
162. Franchising is popular in the United States, but legal barriers have limited its popularity
in foreign countries.
163. Global franchising is unlikely to experience major growth due to the high costs of
operations in global markets.
164.
Chapter 05 - How to Form a Business
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Franchising in global markets has demonstrated that high operating costs are
counterbalanced by high profit opportunities.
165. Franchisors sometimes pay reverse royalties to franchisees if it is evident that the
franchisor's Internet sales have negatively impacted the profits of traditional bricks and
mortar franchisee businesses.
166. In a typical franchise agreement, the franchisor pays the franchisee a fee to manage its
company, and the two of them split the profits based on the percentages established in the
agreement.
Feedback: The franchisor, who owns the rights to the company's name and products, usually
does not pay the franchisee. More typically, the franchisee pays the franchisor a royalty to use
the company's name and sell its products or services in a given area.
167.
Chapter 05 - How to Form a Business
Although franchise arrangements are a good source of income for the franchisee, these
businesses do not contribute significantly toward job creation.
Feedback: Franchised businesses contribute in a big way to job creation in the U.S.
According to the International Franchising Association, the more than 825,000 franchised
businesses operating in the U.S. create approximately 17.5 million jobs.
168. It is correct to say that if a franchisor expects a 6% royalty fee on revenue, the
franchisor earns 6 cents on each dollar of revenue the franchisee generates.
Feedback: "Shared profits" is an important aspect of most franchise arrangements. The
franchise agreement will stipulate the percent of revenues that the franchisor will collect from
each franchisee. In this example, 6% of each dollar of revenue = 6 cents, or $.06 that will go
to the franchisor.
169. The financial advantage to the parent company (the franchisor) in a franchise
arrangement is the upfront franchise fee and the collection of royalties if franchisees are
successful.
Feedback: "Shared profits" is an important aspect of most franchise arrangements. The
franchisee will pay the franchisor an up-front fee for the opportunity to use the business name,
and the right to sell the product or service. Besides this fee, the franchise agreement almost
always includes royalty payments. The franchisee will pay the franchisor a percentage of
revenues or profits for the entire contract period.
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176. Leanne, a franchisee runs a chain of small restaurants with a well-known name. Due to
her hard work and people skills, her locations are doing quite well. She has noticed that
several other franchisees in the same franchise system have let their restaurants
deteriorate, especially in terms of lack of upgrades. Leanne should be concerned about this
trend, since it eventually could affect her own business.
Feedback: The actions of less successful franchisees can hurt the success of others in the
same franchise. This is known as the coattail effect.
177. Maria is already a successful franchisee with Nite Lite, a chain of "no frills" motels that
provide clean rooms and good service at affordable rates. The motel she currently operates
is located in Texas, but she is considering an opportunity to open another Nite Lite motel
in Canada. Although her costs of operating in a foreign nation may be higher, she has the
benefit of an expanding market and less competition.
Feedback: Franchisees often find that the costs of operating franchises in foreign countries are
high, but these costs are counterbalanced by expanding markets and less competition.
178.
Chapter 05 - How to Form a Business
According to the Thinking Green box, "Play Ball but Play Green", high profile sports
franchises are serious about the environment. The new Washington Nationals stadium is
LEED (Leadership in Energy and Environmental Design) certified.
Feedback: U.S.'s favorite past time is also a franchise system. Since baseball ownership and
baseball stadiums are big business, the city where they take-up residence may expect special
concessions from the owners. Washington D.C. asked the owners of the new Washington
Nationals team to go the extra mile and build a LEED certified stadium. MLB (Major League
Baseball) franchise system is cooperating with the trend toward going green by encouraging
its franchisees to initiate projects that protect the environment.
179. About 15 years ago, a well-known franchised food chain was brought to its knees when
several customers got sick from tainted beef. Although the food chain recovered due to its
quick and consistent action, several franchisees sued the parent company for loss of sales.
The franchisees experienced the coattail effects of the bad publicity this event received.
Feedback: The coattail effect occurs when bad publicity affects one or more of the businesses
associated with a franchise chain. The coattail effect can negatively impact growth and
profitability.
180. Alex's uncle recently passed away and left him an American Dream Real Estate
franchise business. Alex is not a licensed agent or broker, nor does he know anything
about the real estate business. He plans to sell his American Dream franchise to his friend,
Derek who recently got his real estate license. One of the advantages of owning a
franchise is that you can decide to sell-out to anyone you believe is suitable for the
business.
Feedback: Most franchisors reserve the right to approve or disapprove the sale of new or
existing franchises. A franchise owner usually cannot sell his/her business without the
approval of the parent company.
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181. Your friend, Brett called to tell you he just left a sales pitch for a new web site
development franchise where "he can get in for a few thousand dollars." He wants to
know if you are ready to invest too. Although you lack expertise in graphic design or html
programming, this should be a safe investment since it is already advertised as a franchise
system. It's probably too good to pass up.
Feedback: Fraudulent franchises exist. These are small, obscure companies that most
prospective franchisees know little about. Before buying, it is important to check out the facts,
the franchisor's offering circular, and even with the FTC (Federal Trade Commission).
182. A cooperative is simply another name for a corporation.
183. A cooperative consists of people with similar needs who pool their resources for
mutual gain.
184. It is not unusual for members of cooperatives to work for and help manage their
cooperative.
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185. Farm cooperatives were originally established to help farmers increase their economic
power by acting as a group rather than as individuals.
186. The following companies: Blue Diamond, Ocean Spray, and Land O'Lakes are well
known cooperatives.
187.
Chapter 05 - How to Form a Business
A disadvantage of farm cooperatives is that they are subject to higher tax rates than
corporations.
188. At one time there were many farm cooperatives, but more recently, they have been
replaced by other forms of business ownership.
Feedback: Farm cooperatives have expanded their role over time and have become a
multibillion-dollar industry.
189. Originally, food cooperatives were formed to provide better prices for farmers. These
groups now cooperatively buy farm equipment and other products, and realize economies
of scales by banding together for these things.
Feedback: By participating in a larger group, it is more affordable for farmers and other
business people to buy certain items that they would normally pay a lot more to purchase. By
forming a cooperative, they enjoy economies of scale.
190. Jocelyn belongs to a food cooperative in her community. As a member, she can expect
to have a vote in the election of the cooperative's board of directors.
Feedback: In cooperatives the members typically have the right to elect a board of directors.
Members democratically control these businesses by electing a board of directors that hires
professional management.
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191. Jane has always disliked the notion that the customers, managers and workers of a
business are separate individuals with competing goals. She has joined with many other
people in her community who share this view to become a member, and part owner, of a
child care center. Jane and the other members operate the center for their own benefit, and
each is expected to work at the center at least 12 hours each month. The type of
organization Jane belongs to is known as a joint venture.
Feedback: Jane belongs to a cooperative, which is a special form of business organization that
is owned by its members/customers, who operate the business for their mutual gain. Many
cooperatives expect their members/customers to work a certain number of hours per month
for the organization.
