Chapter 05 – How to Form a Business
5-61
PPT 5-40
Make Way for the Newbies
Source:Entrepreneur,www.entrepreneur.com,accessedNovember2014.
MAKE WAY for the NEWBIES
Top New Franchises
Rank Company Industry
1Mac Tools Automotive tools
2 Bricks 4 Kidz Toys
3 Orange Leaf Frozen Yogurt Frozen yogurt
4Sears Hometown Appliances
5 Fitness Revolution Personal and group fitness
6 The Grounds Guys LLC Landscape management
7Paul Davis Emergency Services Restoration
8 Doc Popcorn Food
9 Title Boxing Club Personal and group fitness
10 Fuzzy’s Taco Shop Food
5-40
LO 4-5
1. New franchise opportunities pop up all the time and
this slide shows the top 10 new companies from Entre-
preneur’s 2014 Franchise 500.
2. Take notice that all the listed companies here are in the
service sector. This can promote discussion on the evo-
lution of American business.
3. Ask students: Why do you think there is growth in
these service franchises, such as fitness?
PPT 5-41
Advantages of Franchising
ADVANTAGES of FRANCHISING
5-41
LO 4-5
1. Management and
marketing assistance
2. Personal ownership
3. Nationally recognized
name
4. Financial advice and
assistance
5. Lower failure rate
Franchising has a lower failure rate because the franchisee
has support from the franchisor. This support can range
from marketing to financial.
PPT 5-42
Disadvantages of Franchising
DISADVANTAGES of
FRANCHISING
5-42
LO 4-5
1. Large start-up costs
2. Shared profit
3. Management regulation
4. Coattail effects
5. Restrictions on selling
6. Fraudulent franchisors
Chapter 05 – How to Form a Business
5-62
PPT 5-43
The Building Blocks of Franchinsing
THE BUILDING BLOCKS of
FRANCHISING
5-43
• Bricks 4 Kidz was created as
a way to help kids
understand engineering and
construction.
• Since the business was low
cost and easily reproduced,
this led to over 200
franchises in the U.S. and 11
other countries.
PPT 5-44
Women in Franchising
• Women own about half of U.S. companies, yet
ownership of franchises is about 21%.
WOMEN in FRANCHISING
5-44
LO 4-5
• More women are
becoming
franchisors.
Auntie Anne’s and
Jazzercise and are
owned by women.
PPT 5-45
Minority-Owned Franchises
MINORITY-OWNED
FRANCHISES
5-45
PhotoCredit:TomMagliery
LO 4-5
• DiversityFran is an initiative to
build awareness of
franchising opportunities
within minority communities.
• Domino’s Pizza launched a
minority franchise recruitment
program called Delivering the
Dream.
• Over 20% of franchises are
minority-owned.
Chapter 05 – How to Form a Business
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PPT 5-46
Home-Based Franchises
HOME-BASED FRANCHISES
5-46
LO 4-5
Advantages:
• Relief from
commuting stress
• Extra family time
• Low overhead
expenses
Main Disadvantages:
• Isolation
• Long hours
Home-based businesses are growing at an enormous rate.
This slide helps clarify some of the reasons why. Share
with the class some tips on getting started:
• Decide on a business idea.
• Set goals for the business.
• Determine how many hours you want to work.
• Decide how many employees you want to hire.
• Decide how much money you will need to get
started.
Visit www.e-myth.com for more online information re-
garding start-ups.
PPT 5-47
Home Sweet Home
Source:Entrepreneur,www.entrepreneur.com,accessedNovember2014.
HOME SWEET HOME
Top Home-Based Franchises
Rank Company Industry
1 Jan-Pro Disaster Restoration
2 Cruise Planners Travel
3 Vanguard Cleaning Systems Commercial Cleaning
4Snap-on Tools Professional Tools
5Matco Tools Professional Tools
6 Jazzercise Fitness
7 CleanNet USA Commercial Cleaning
8Budget Blinds Home Décor
9 Coverall Health-Based Cleaning Commercial Cleaning
10 Chem-Dry Carpet & Upholstery
Cleaning
Commercial and
Residential Cleaning
5-47
LO 4-5
1. Many franchisees are looking toward home-based
businesses.
2. These ten franchises have held their own despite the
recent economic crisis.
3. Some of these companies, like Jazzercise, require fran-
chisees to rent space for client-based activities. How-
ever, the businesses can be run from the home.
PPT 5-48
E-Commerce in Franchising
E-COMMERCE
in FRANCHISHING
5-48
LO 4-5
• Most brick-and-mortar franchises have expanded
online.
• Many franchisors prohibit franchisee-sponsored
sites because conflicts can erupt.
• Sometimes “reverse royalties” are sent to
franchisees who believe their sales were hurt by
the franchisor’s site.
• Other franchises are solely based online.
Chapter 05 – How to Form a Business
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PPT 5-49
Giving Entrepreneurs Options with
Digital Franchising
GIVING ENTREPRENEURS OPTIONS
with DIGITAL FRANCHISING
5-49
• Chris Jeffrey created OrderUp shortly after
graduating college.
• OrderUp links up restaurants with hungry patrons
and allows people to order online while OrderUp
takes a small commission.
• For a startup fee of
$42,000 franchisees
receive software and
training to launch OrderUp
in their area.
PPT 5-50
Global Franchising
GLOBAL FRANCHISING
5-50
LO 4-5
• Canada is the most popular target for U.S.-based
franchises.
• China, South Africa, the Philippines and the
Middle East are becoming popular despite high
cost.
• International franchising goes both ways – some
foreign franchises have come to the U.S.
PPT 5-51
What to Choose?
Source:RichardGibson,WallStreetJournal,www.wsj.com,accessedNovember2014.
WHAT to CHOOSE?
Picking Franchises that May Survive a Recession
5-51
LO 4-5
• Focus on tried-and-true name brands.
• Stick to core goods and services.
• Be choosy about the site.
• Don’t pinch pennies.
• Have a fallback choice.
• Don’t assume the franchise will pay off.
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 under-
stand that all franchise opportunities are not created
equal.
3. Suggest to the class that anyone interested in a fran-
chise should also follow these additional guidelines:
• 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.
Chapter 05 – How to Form a Business
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PPT 5-52
High Flyers
Source:Entrepreneur,www.entrepreneur,com,accessedNovember2014.
HIGH FLYERS
Ten High-Performing Franchises
5-52
PhotoCredit:InnisfreeHotels
LO 4-5
1. Anytime Fitness
2. Hampton Hotels
3. Subway
4. Supercuts
5. Jimmy John’s
6. 7-Eleven
7. Servpro
8. Denny’s
9. Pizza Hut
10. Dunkin Donuts
1. This slide lists ten high-performing franchises.
2. As mentioned earlier, not all franchises are created
equal and require careful investigation before consider-
ing an investment.
3. Websites like www.franchise.com provide information
such as the cost of thousands of franchise systems.
4. Ask students: What makes an effective franchisor?
(Answers will vary, but should include name recogni-
tion, financial stability, innovative product and effec-
tive business management.)
PPT 5-53
Cooperatives
COOPERATIVES
5-53
LO 4-6
• Cooperatives — Businesses owned and controlled
by the people who use them– producers, consumers,
or workers with similar needs who pool their
resources for mutual gain.
• Worldwide, co-ops serve one billion members!
• Members democratically control the business by
electing a board of directors that hires
professional management.
PPT 5-54
Test Prep
TEST PREP
5-54
• What are some of the factors to consider before
buying a franchise?
• What opportunities are available for starting a
global franchise?
• What is a cooperative?
1. Before buying a franchise be sure to check a compa-
ny’s (franchisor’s) resources and reputation. There are
many franchising scams. The checklist in this chapter
gives advice about things to consider before buying a
franchise.
2. Successful franchising in global markets offers the
same opportunities as in domestic markets. However,
franchisors must be careful to adapt to the region where
they wish to expand. McDonald’s for example has
more than 33,000 restaurants in 119 countries.
3. A cooperative is a form of business that is owned and
controlled by the people who use it—producers, con-
sumers, or workers with similar needs who pool their
resources for mutual gain. Cooperatives are a major
force in agriculture and other industries today.
Chapter 05 – How to Form a Business
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lecture
enhancers
“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 enhancer 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 2014.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.
2014 Most Admired Companies
1 Apple
2 Amazon
3 Google
4 Berkshire Hathaway
5 Starbucks
6 Coca-Cola
7 Walt Disney
8 FedEx
9 Southwest Airlines
10 General Electric
The Most Admired Companies in previous years:
2013
Apple
6
IBM
Google
7
Southwest Airlines
Amazon
8
Berkshire Hathaway
Coca-Cola
9
Walt Disney
Chapter 05 – How to Form a Business
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Starbucks
10
FedEx
2012
1
Apple
6
FedEx
2
Google
7
Berkshire Hathaway
3
Amazon
8
Starbucks
4
Coca-Cola
9
Procter & Gamble
5
IBM
10
Southwest Airlines
2011
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
2010
1
Apple
6
Procter & Gamble
2
Google
7
Toyota Motor
3
Berkshire Hathaway
8
Goldman Sachs
4
Johnson & Johnson
9
Walmart
5
Amazon
10
Coca-Cola
2009
1
Apple
6
Procter & Gamble
2
Berkshire Hathaway
7*
Southwest Airlines
3
Toyota Motor
7*
FedEx
4
Google
9
General Electric
5
Johnson & Johnson
10
Microsoft
Chapter 05 – How to Form a Business
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lecture enhancer 5-2
BRINGING BUSINESS BACK TO RURAL TOWNS
Over the past few decades farming towns across America have seen populations drop as more
young people leave their rural homes behind in favor of big cities. However, urban living today doesn’t
present as many opportunities as in the past. Not only do cities demand a higher cost of living, but also
chances for career advancement can diminish given the large talent pool.
That’s the situation systems manager Wallace Harwood encountered at his job with an energy
company in Lexington, Nebraska. Five years had gone by without a promotion, and the grueling 90–mile
commute between Lexington and his hometown of Kearney was beginning to take its toll. But just as
Harwood was ready to leave Nebraska for greener pastures, an Atlanta-based software company set up
three locations across the state, including one in Kearney. He landed a job with the firm and instantly
changed his life for the better. “I’m bringing in a good salary without the two-hour commute and with all
of the benefits that you get from rural Nebraska,” said Harwood.
After enduring sustained brain drains for many years, small rural communities like Kearney are
enticing more businesses to relocate within their borders. Many companies are all too happy to oblige
given the generous tax breaks and low operating costs offered by most small towns. And with more jobs
come more young people, who are also drawn by the low cost of living as well as other perks. For in-
stance, the Rural Sourcing Project in Kearney offers everything from student loan repayments to tax de-
ductions for people who accept jobs in the town. In Kansas a similar program waives out-of–towners’
state income taxes for five years if they move to one of the state’s designated “rural opportunity zones.”
So as cities become more expensive and jobs stay scarce, expect rural sourcing in America’s corn country
to continue growing.ii
lecture enhancer 5-3
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 was a railroad stationmaster and telegraph operator in Redwood, Minnesota, where a ship-
ment of watches remained unclaimed by the owner. Sears sold the watches to nearby farmers. This effort
was so successful and rewarding that he started ordering and “peddling” watches. He soon quit his rail-
road job and moved to Minneapolis, where he founded the R. W. Sears Watch Company.
In 1887, Sears moved to Chicago, placed the above ad, and he and Roebuck formed a partnership.
Sears was the hyperactive, brilliant advertiser, promoter, and salesman while Roebuck was the quiet, re-
served organizer. As their business boomed, they expanded into diamonds and general jewelry, general
household and farm goods, musical instruments, and anything else the customers ordered. The main busi-
ness was done by catalog and mail orders, which required extensive advertising, low prices, and a “mon-
ey-back guarantee.”
Chapter 05 – How to Form a Business
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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.
Largely as a result of the automobile and the mobility created by World War I, there was a migra-
tion from the farms to the cities in the 1920s. Sensing that this shift would vitally affect them, Rosenwald
shifted the firm’s emphasis from mail-order business to urban merchandising. Later, the firm opened up
stores outside the cities where there was plenty of parking space.
Realizing the effects of World War II’s “G.I. Bill” on U.S. business, General Wood started a
modernization and expansion program in the late 1940s that put Sears out in front of Montgomery Ward
and other competitors for over two decades. Wood also got Sears into auto service, operations in Latin
America, home and auto insurance, auto rental, pest control, gardening, and house decorating.
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.
The 1990s saw another crisis for Sears. In 1990 it slipped to the nation’s number three retailer
from number two the years before. Shareholder groups pressured Sears’s board to spin-off some busi-
nesses and undertake a makeover of the retail operations. The restructuring eventually resulted in the clo-
sure of Sears’s huge catalog operations and closing 113 stores.
In the 2000s and 2010s, Sears saw even further demise. More stores were closing as brick-and-
mortar stores started to take a hit from online retail. However, their outlets and appliance stores still re-
main relatively successful.
lecture enhancer 5-4
FORTUNE 500 LARGEST CORPORATIONS
Each year Fortune also lists the 500 largest corporations in the United States, based on annual
revenue. For 2014, the largest corporation was Walmart. The retail giant topped the revenue listing with
$476.2 billion. It also earned a $16 billion profit. That’s $16,000,000,000—nine zeroes.
Here are the top ten largest corporations in 2014:iii
Rank Company Revenues ($ millions)
1 Walmart $ 476,294.0
2 Exxon-Mobil 407,666.0
3 Chevron 220,356.0
4 Berkshire Hathaway 182,150.0
5 Apple 170,910.0
6 Phillips 66 161,175.0
7 General Motors 155,427.0
8 Ford Motor 146,917.0
Chapter 05 – How to Form a Business
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9 General Electric 146,231.0
10 Valero Energy 137,758.0
lecture enhancer 5-5
BENEFIT CORPORATIONS REDEFINE BOTTOM LINE
In the textbook we highlight one of economics’ age–old conflicts: are a company’s greatest stakehold-
ers their investors or society in general? For more than a generation of Wall Street operatives, the answer to
that question has doubtlessly been the former. But while this strategy has yielded unprecedented profits for the
financial sector, its frequent ruthlessness has driven many modern businesspeople to embrace altruism in re-
sponse. For instance, Namaste Solar co-founder and CEO Blake Jones gives 20 percent of the company’s after–
tax profits to charity.
While Namaste’s commitment to corporate social responsibility no doubt makes Jones proud, his
company’s giving spirit also puts him a little on edge. Due to corporate governance laws, all it would take is
one disgruntled investor for Jones and Namaste to end up in court fighting accusations of poor business prac-
tices. After all, the prevailing mode of thought in business today is that companies should do all they can to
maximize profits. If a company fails to do so, stakeholders can feasibly sue the company for negligence and
put the entire operation in jeopardy. That means Jones will have to be careful to look for sympathetic investors
as he expands his business, perhaps putting him at a disadvantage against other up-and-coming companies.
Then again, maybe Jones will get lucky and his home state of Colorado will soon pass a law recogniz-
ing the existence of “benefit corporations.” This new type of corporate structure has been adopted by more
than a dozen states seeking to provide legal protection for altruistic companies like Namaste. So far more than
200 for-profit companies have adopted the benefit corporation distinction, allowing them to specify their social
and environmental objectives in corporate charters and bylaws. Similar legislation has been slow to pass in
more states due to the difficulty in defining exactly what a benefit corporation should be. Since businesses
could apply for a “benefit” distinction only to brighten their reputation, some laws stipulate that benefit com-
panies donate a specific percentage of their profits. However, critics of this system feel businesses could be
shackled to their giving duties even if it becomes unprofitable. As of this writing, Colorado has yet to perfect
their version of the bill, which financial experts suspect could become the template for this type of legislation
in the future.iv
lecture enhancer 5-6
QUIZNOS COLLAPSES WHILE OTHER CHAINS SUCCEED
Over the past few years sandwich chains like Subway and Jimmy John’s have flourished as many
Americans try to eat healthy without sacrificing convenience. But while Subway boasts more than 26,000
locations in the U.S. with another 15,000 abroad, its once fierce competitor Quiznos has shuttered 3,000
stores over the last five years. Difficulties with franchisees and increased costs have seen the sandwich
chain sink nearly $600 million in the hole.
After peaking in 2008 with more than 5,000 stores across the country, Quiznos eventually became
trapped in a downward spiral from which it could not be freed. For years franchisees complained about
the steep rates charged by corporate for food and supplies. In fact, throughout the 2000s Quiznos was on
the receiving end of no fewer than five class-action lawsuits filed by franchisees. Although these cases
were all settled out of court, sky-high overheads coupled with decreasing sales led many stores to close.
Quiznos eventually relented and dropped supply costs, but by then it was too late. With fewer locations
paying into a national marketing fund, brand promotion became scant and even more stores shuttered.