Chapter 05 – How to Form a Business
PPT 5-49
Global Franchising
PPT 5-50
What to Choose?
1. This is valuable information that must be examined
by anyone wishing to purchase a franchise.
2. The number one reason why franchises fail is due
to miscalculation of start-up costs and operating
costs. Examine all costs carefully. It is important to
understand that all franchise opportunities are not
created equal.
3. Suggest to the class that anyone interested in a
franchise should also follow these additional guide-
lines:
• Have an attorney experienced in franchise
contracts review the agreement.
• Hire a CPA to review all financial state-
ments. This is commonly referred to as per-
forming a “Due Diligence.”
• Interview other franchise owners.
• Have experience in the industry.
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High Flyers
1. This slide lists 10 high-performing franchises.
2. As mentioned earlier, not all franchises are created
equal and require careful investigation before con-
sidering an investment.
3. Websites like www.franchise.com provide infor-
mation such as the cost of thousands of franchise
systems.
4. Ask the students, What makes an effective franchi-
sor? (Answers will vary, but should include name
recognition, financial stability, innovative product,
and effective business management.)
PPT 5-52
Cooperatives
PPT 5-53
Progress Assessment
1. Before buying a franchise be sure to check a com-
pany’s (franchisor’s) resources and reputation.
There are many franchising scams. The checklist on
page 136 of the text gives advice about things to
consider before buying a franchise.
2. Successful franchising in global markets offers the
same opportunities as in domestic markets. Howev-
3. A cooperative is a form of business that is owned
and controlled by the people who use it—
producers, consumers, or workers with similar
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lecture
links
“Opportunity is missed by most people because it is dressed in overalls and looks
like work.”
Thomas Edison
“Our first priority should be the people who work for the companies, then the customers,
then the shareholders. Because if the staff are motivated then the customers will be hap-
py, and the shareholders will then benefit through the company’s success.”
Richard Branson
“In times of change, learners inherit the Earth, while the learned find themselves beauti-
fully equipped to deal with a world that no longer exists.”
Anonymous
lecture link 5-1
THE FORTUNE LIST OF MOST ADMIRED CORPORATIONS
Each year Fortune magazine asks top executives, outside directors, and securities analysts to
evaluate the companies in their industries on each of eight criteria. These criteria are added together to
obtain an overall “admired” score. Below are the top 10 companies for 2011.i
For the 50 most admired companies overall, Fortune’s survey asked businesspeople to vote for
the companies that they admired most, from any industry.
2011 MOST ADMIRED COMPANIES
1 Apple 6 Coca-Cola
2 Google 7 Amazon
3 Berkshire Hathaway 8 FedEx
4 Southwest Airlines 9 Microsoft
5 Procter & Gamble 10 McDonald’s
.
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The Most Admired Companies in previous years:
2010
1
Apple
6
Proctor & Gamble
2
Google
7
Toyota Motor
3
Berkshire Hathaway
8
Goldman Sachs
4
Johnson & Johnson
9
Wal-Mart
5
Amazon
10
Coca-Cola
2009
1
Apple
6
Proctor & Gamble
2
Berkshire Hathaway
7*
Southwest Airlines
3
Toyota Motor
7*
FedEx
4
Google
9
General Electric
5
Johnson & Johnson
10
Microsoft
2008
1
Apple
6
Starbucks
2
Berkshire Hathaway
7
FedEx
3
General Electric
8
Proctor & Gamble
4
Google
9
Johnson & Johnson
5
Toyota Motor
10
Goldman Sachs
2007
1
General Electric
6
FedEx
2
Starbucks
7
Apple
3
Toyota Motor
8
Google
4
Berkshire Hathaway
9
Johnson & Johnson
5
Southwest Airlines
10
Procter & Gamble
2006
1
General Electric
6
Johnson & Johnson
2
FedEx
7
Berkshire Hathaway
3
Southwest Airlines
8
Dell
4
Procter & Gamble
9
Toyota Motor
5
Starbucks
10
Microsoft
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lecture link 5-2
THE DEVELOPMENT OF SEARS, ROEBUCK, AND COMPANY
WATCHMAKER WANTED
with references
who can furnish tools.
State age, experience, and salary required.
T39, Daily News
The above ad appeared in the Help Wanted section of the Chicago Daily News of April 11, 1887.
It was placed by Richard W. Sears of Chicago and was answered by Alvah Roebuck, a watch assembler
and repairman from Indiana.
Sears would take the orders and then rush around to find the goods to fill them. This pressure
caused Roebuck to sell out to Sears in 1895 for $25,000. Sears then required an organizer and manager.
He hired Julius Rosenwald, who played a key role in the firm’s development. Rosenwald, who was noted
for his business skills, became president in 1908 when Sears resigned after a disagreement with him.
Rosenwald brought in General Robert E. Wood, the quartermaster who had masterminded the Panama
Canal construction, to lead the firm into a new era.
After Roebuck went broke in the 1929 crash, his old company, now a thriving mail-order firm,
put him on the publicity department payroll to make goodwill tours.
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By the mid-1980s, Sears had become prominent in real estate and securities investing through ac-
quiring Dean Witter Reynolds, the nation’s seventh-largest securities brokerage firm, and Coldwell Bank-
er and Co., the largest independent real estate services company. It already was a force in the insurance
field through its Allstate Insurance subsidiary.
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FORTUNE 500 LARGEST CORPORATIONS
Each year Fortune also lists the 500 largest corporations in the United States, based on annual
revenue. For 2011, the largest corporation was Wal-Mart Stores. The retail giant topped the revenue list-
ing with $421.8 billion. It also earned a $16 billion profit. That’s $16,000,000,000—nine zeroes.
Here are the top ten largest corporations in 2011:ii
REVENUES PROFITS
RANK COMPANY ($ MILLIONS) ($ MILLIONS)
1 Wal-Mart Stores $421,849.0 $ 16,389.0
2 ExxonMobile 354,674.0 30,460.0
3 Chevron 196,337.0 19,024.0
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OUSTED FOUNDERS
Rod Canion and two friends founded Compaq Computers in 1981. However, in October of 1991
Rod Canion was replaced as president and CEO of the company. The move followed an announcement
that Compaq had lost $70 million in the third quarter and planned lay-offs of more than 1,400 employees.
The board of directors stated it “decided it was time for a change.” Canion eventually was paid $3.6 mil-
lion in severance pay. (Compaq merged with Hewlett-Packard in 2001.)
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In 1985, Jobs began NeXT Computers and bought Pixar, a computer animation company, from
LucasFilm. While the NeXT computer was not a commercial success, the company’s focus was changed
to software, and in 1997 it was bought by Apple. Pixar grew into Pixar Animation Studios and, in partner-
ship with Walt Disney Co., made blockbuster movies like the Toy Story series, Cars, Wall-E, and Finding
Nemo.
In an ironic twist of fate, Jobs returned to Apple in 1997. Apple also bought NeXT Computers
and its NeXT operating system. Jobs returned to his forte—developing cutting-edge products. The revolu-
tionary iMac was introduced in 1998, followed by the iPod. The company has become the single domi-
nant force in selling music online through its iTunes Music Store.
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MICROSOFT GAMBLES WITH SKYPE PURCHASE
In today’s hyper-valued tech world, it can be difficult to determine what a particular business is
actually worth. Although many tech companies don’t actually earn a profit, that doesn’t stop financial
experts from placing a figure on the “potential” worth of an up and coming enterprise. Nowhere was this
problem more apparent than during the popping of the dot-com bubble in the early 2000s. Companies that
had been given valuations in the billions one day became worthless the next. Now as today’s giants like
Facebook and Groupon sport multi-billion-dollar valuations of their own, the debate over the value of
future profits versus genuine assets rages on.
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JAM AND COFFEE
In a natural brand coupling, Smucker’s is adding Folgers coffee to its product line. J. M. Smuck-
er, the jelly and jam outfit, is buying the Folgers coffee business from Procter & Gamble, creating a
breakfast food combo. Sounds simple, but the $3.3 billion transaction is complex and sophisticated.
The purchase was structured as a “reverse Morris Trust,” an arcane financial vehicle used for a
sophisticated bit of financial planning.
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Then, a nanosecond after the Folgers company is created, Smucker’s will buy it for about 63 mil-
lion newly issued Smucker’s shares. That stock-for-stock deal will be tax-free, also. When the dust set-
tles, Smucker’s will own Folgers, and Folgers shareholders will own about 53% of Smucker’s.
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EMPLOYEE STOCK OWNERSHIP PLANS (ESOPs)
No matter how hard workers fight for better pay, they will never become as wealthy as the people
who actually own the company. At least that is the theory behind employee stock ownership plans
(ESOPs). An ESOP enables employees to buy part or total ownership of the firm. Louis O. Kelso, a San
Francisco lawyer and economist, conceived the idea of ESOPs about 50 years ago. His plan was to turn
workers into owners by selling them stock. Using this concept, he helped the employees of a newspaper
buy their company. Since then, the idea of employees taking over all or some of the ownership of their
companies has gained favor—there are approximately 11,500 ESOPs today.
The fact is, however, that not all ESOPs work as planned. When used correctly, ESOPs can be a
powerful strategy for improving company profitability and increasing employee satisfaction, participa-
tion, and income. But potential problems with ESOPs include:
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Things looked good initially. Weirton earned about $500 million profit between 1984 and 1990,
of which workers shared $170 million. The mill also provided 8,000 jobs. Several observers described the
mill’s participative practices in glowing terms.
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SUSTAINABLE FRANCHISING
Over the last few years, companies big and small have made a concerted effort toward conducting
business in a more environmentally friendly manner. “Going green” is becoming more and more accepta-
ble in the business world, so much so that the International Franchise Association has seen a significant
rise in inquiries regarding green-based franchises. More so than just a blanket term for any business that
separates out its recycling, green franchises base their entire enterprise around environmental sustainabil-
ity.
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FRANCHISING AROUND THE WORLD
For a small restaurant chain like the Atlanta-based Wing Zone, the thought of international ex-
pansion would have been laughable ten years ago. However, in November 2010 the company opened up
its first franchise outside the United States in Panama City, Panama. Although establishing a global busi-
ness presence is easier now than it once was, Wing Zone will likely have to wait 2 to 3 years before its
international business turns a profit.
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critical
thinking exercises
Name: ___________________________
Date: ___________________________
critical thinking exercise 5-1
PICKING PARTNERS
Did you ever think you might like to go into business for yourself? What kind of business would
you like to start? What resources (both personal skills and capital) would you need to make your business
a success? Sometimes it helps to have a partner to share the burdens of starting a business. What skills
would you need to look for in your partner?
Use the space below to list the personal skills and capital needed for your proposed business. Put
your initials next to the skills and capital you would bring to the business. Think of a friend who might be
interested in joining you as a partner. Put your friend’s initials next to the skills and capital he or she can
offer. What capital or skills are missing?
Type of business:____________________________________________________________
Proposed partner:____________________________________________________________
Personal skills needed: Capital needed: