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Chapter 05 - How to Form a Business
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By 2012, Quiznos’ obligations to its creditors became too large to ignore any further, forcing the
company to seek outside help to restructure its debt. An out-of-court deal saw the chain’s debt cut down
by more than a third to $570 million as it was taken over by an investment firm. A new CEO and other
fresh hires hoped to turn Quiznos around, but so far their efforts haven’t met much success. For instance,
a change to the sandwich-making line last year led to more confusion among customers than anything
else. Quiznos tweaked its production process so that condiments were added to a sandwich after it had
gone through the toaster. However, regular customers soon began to voice frustration as miscommunica-
tion on the line led to unwanted ingredients appearing on many sandwiches. If Quiznos wants to resusci-
tate its ailing brand, it can’t afford to make any more missteps like this one.v
lecture enhancer 5-7
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.
Still, it is well worth the time and risk for the company to hedge its bets on foreign soil. For years
the world’s rising middle class has been turned on to Western tastes by large chains like McDonald’s and
KFC. These big brands paved the way for smaller companies to break through as well, but several other
factors have also contributed to the global franchising push. Economic stagnation at home has made the
United States less appealing for businesses wanting to expand their brand. Also, in America Wing Zone
has to compete head to head with a number of domestic competitors such as Wing Stop, Buffalo Wild
Wings, Hooters, and many others. By going global, companies can gain access to a largely untapped mar-
ketplace.
Setting up shop in just any international market won’t do, however. For Wing Zone, it needed a
country with a strong middle class that enjoyed spicy tastes and poultry. The company also gave itself a
wide 18-month window to correct any problems that might come up before the grand opening. Wing
Zone’s careful planning paid off. The Panama City restaurant’s first week of operation was the busiest
week for any location in the history of the company. Wing Zone’s initial success spurred an expansion
spree with stores opening soon in England, Saudi Arabia, and El Salvador. The company even has plans
to open up as many as 50 restaurants in and around Tokyo.vi
Chapter 05 - How to Form a Business
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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:
__________________________________________ _______________________________________
__________________________________________ _______________________________________
__________________________________________ _______________________________________
__________________________________________ _______________________________________
__________________________________________ _______________________________________
What skills and/or capital are missing? ___________________________________________________
____________________________________________________________________________________
What can you do to get what is needed? __________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
Chapter 05 - How to Form a Business
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Name: ___________________________
Date: ___________________________
critical thinking exercise 5-2
INDEPENDENT RESEARCH: SMALL-BUSINESS OWNERSHIP
Choose a business in either your hometown or a town or city near your school. Approach the
owner and request an interview about his or her business. Here are a couple of tips:
• Offer to submit questions in advance.
• A businessperson is very busy—use allotted time wisely.
• Ask permission to talk with employees or visit parts of the business.
• Recognize the need for secrecy.
• Don’t assume that you, as a business student, are the expert.
1. What type of business ownership does the business use?
2. Why was this form of ownership chosen?
3. If sales were to double, would the business then choose another form?
a. If so, which form?
b. Why?
4. How many hours per week does the owner spent at his or her business?
5. Does the owner plan to have the business continue in the family? If yes, describe the plan.
6. If the owner could change one thing in building his or her business, what would that be?
7. What advice does he or she have for a new entrepreneur?
8. Prepare a short recommendation about business ownership in this specific business for presenta-
tion to the class.
Chapter 05 - How to Form a Business
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Name: ___________________________
Date: ___________________________
critical thinking exercise 5-3
CHOOSING A FORM OF BUSINESS OWNERSHIP
The needs of the businessperson starting a new business are a major consideration when deciding
the best form of business ownership. The kind of business being started is also important to consider
when deciding to make your new business a sole proprietorship, partnership, or corporation. Look at the
list of new businesses below. Indicate the form of ownership you think would be best for each business.
Give the reason for your selection.
Business
Form
Reason
Swimming pool repair
Flower shop
Internet-based specialty
store
Termite control service
Textbook publishing
company
Law firm
Underwear manufacturer
Child care center
Chapter 05 - How to Form a Business
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notes for critical thinking exercise 5-3
SWIMMING POOL REPAIR
A swimming pool repair company would probably operate best as a sole proprietorship or part-
nership initially. There is no great need for capital at first, so a partner may not be needed. A good way to
start would be to hire a few good people and begin work. If many jobs came in, you could hire more
workers. If the managerial task became too much, you could hire an accountant or office manager. A
partner would be good if you wanted an expert in marketing or some other function. Also, it is often fun
to have a partner to share ideas and successes with.
FLOWER SHOP
A flower shop would likely do best as a partnership. The reason is that retail stores demand that
someone be there all the time. Since stores are open as much as seven days a week, 12 hours a day, it
helps to have a partner to share the managerial responsibilities. A partner is also helpful in raising the ini-
tial capital. A sole proprietor could succeed if he or she found an excellent manager or two to help.
INTERNET-BASED SPECIALTY STORE
The answer to this would depend on the size envisioned for the specialty store. A small seller of a
few specialty products could operate as a sole proprietorship, if the owner had the necessary skills. Orders
could be taken without human assistance. Initial investment, excluding inventory, would be low.
If the store were larger and carried more extensive product lines, the owner would need assis-
tance, perhaps from a partner. Maybe the best choice would be the limited liability partnership. Without
limited liability, the owner(s) would be liable for all the business’s debts, and personal assets would be at
risk.
TERMITE CONTROL SERVICE
A termite control service is much like the swimming pool company, a consumer service. One can
start out small with little capital and build as the business grows. A sole proprietor can do fine with some
good employees. A partner can be of assistance in marketing and sharing the burden if the business grows
rapidly. A partner is good for sharing thoughts and worries and joys, but is not necessary.
TEXTBOOK PUBLISHING COMPANY
A textbook publishing company calls for a corporate type of structure because the costs of pub-
lishing a text are so high. The cost of publishing this text plus all the supplements—instructor’s manual,
study guide, test bank, videos, computer projects, and so on—comes to $1 million dollars or so. It is very
difficult for a sole proprietor or a partnership to raise such funds. The production facilities and other phys-
ical spaces are subject to accidents that could lead to lawsuits. A corporation protects its owners from
losses beyond what they invest. All in all, a corporate form is probably best in this situation.
LAW FIRM
Law firms can be sole proprietorships, but the growth would be severely limited. Besides, there
would be no one to cover when the owner gets sick or goes on vacations. In this case, it is best to have a
partner or several partners. In fact, that is what most law firms do. Whether or not the partners decide to
incorporate has much to do with taxes and liability. The need for capital is not that great.
Chapter 05 - How to Form a Business
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UNDERWEAR MANUFACTURER
An underwear manufacturer would likely need buildings and equipment that could not be ob-
tained without much capital. That calls for incorporating and raising those funds through the sale of stock.
This is much like the publishing case.
CHILD CARE
A child care center could very well be a sole proprietorship if it was small enough. Employees
could be hired to do all that was necessary. On the other hand, a partner may be needed to help finance
the building, if the building is not rented. A partner could help in many other ways as well, being there
when you can’t be, sharing ideas, and so on. Incorporation would be necessary only to protect against lia-
bility, which can be important, or for tax purposes if the center expands to make lots of money. An S cor-
poration may be a good idea in that case. Of course, a child care center could also be a cooperative if the
parents are willing.
S corporations could be used for the swimming pool company, the flower shop, and the Internet
specialty store as well. The basic goal is to minimize taxes. Such a decision is best left to a small-business
expert who is also a lawyer or accountant or both.
Chapter 05 - How to Form a Business
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bonus
case
bonus case 5-1
FRANCHISE OR INDEPENDENT? WHAT FITS YOUR MOLD?
In 2003, Rusty and Beth Adcock opened up the fourth franchised unit of Country Fisherman, a
small, Mississippi-based, family-owned restaurant group. Rusty and Beth were switching gears from the
corporate worlds of electrical wholesale distribution and retail marketing. Obviously there would be a
learning curve.
They had looked at several business opportunities and decided on the restaurant business because
it was a cash-basis business. There was not going to be a lot of money tied up in inventory and there
would be minimal to no accounts receivables. This would bode well for cash flow.
The Country Fisherman Restaurant originated in 1987 in Prentiss, a small town in south central
Mississippi. Peggy Tuma started it and built it with hard work and a deep background in food preparation.
By the time her new husband Harold came along in the early 1990s, Peggy had worked out enough kinks
that Harold encouraged and assisted her in expanding. Gradually they expanded into two other markets—
Mendenhall and Jackson, Mississippi. It was at this time they realized the need to formulate franchise
agreements.
When the Adcocks and Tumas worked out their deal with the Brookhaven franchise, it was the
first franchise agreement sold subsequent to the restaurant being established. At the time, the Tumas had
initially owned all of the first three restaurants. Later they sold the Mendenhall unit to a relative. So, basi-
cally, the deal being done with the Adcocks was the first independently run unit the Tumas would be sell-
ing.
While the Tumas had created a franchise model for their enterprise, the Adcocks were in charge
of their own destiny. The Tumas provided simple menu plans, inventory guidelines, and volume pricing
contracts with their franchise agreement. During the first week or two after opening the Brookhaven unit,
the Tumas did help with hands-on assistance to make sure the unit got under way as the others they had
opened. However, once the “wheels were in motion,” the Adcocks were virtually on their own. The
Tumas would provide answers to questions and solutions to problems when called upon.
As time went by, Rusty and Beth picked up on the ins and outs of the restaurant business. Moreo-
ver, through nobody’s efforts but their own, Rusty and Beth became fairly well known in the community.
And in 2007, it became evident that the franchise business model the Adcocks were a part of might not be
the best answer for them now. There were some inconsistencies in the decision making for all Country
Fisherman units. Therefore, Rusty and Beth felt poor decisions independently made by the other fran-
chisees could adversely affect their unit. If the consistency was not going to be upheld by the Tumas,
maybe it was time to disassociate their Brookhaven unit from the others.
In March of 2008, Rusty and Beth took the plunge. After coming to an agreement with the Tumas
on terms for separation, the Country Fisherman restaurant became Rusty’s Family Restaurant. Though
there were some patrons of the restaurant who were confused of the change at first, it quickly became ap-
parent that the restaurant’s loyal supporters were truly more worried about who was in charge than what
the name was. Once they realized Rusty and Beth were still operating the business, any concerns slipped
away. It seemed that the people who operate businesses can create a very strong bond with the customers
who support that business. In Rusty and Beth’s case, that turned out to be a good thing.
Chapter 05 - How to Form a Business
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Being independent has its drawbacks. There’s no support system to lean on such as large fran-
chise systems. Of course, as small as Country Fisherman was, the support system was not that large. Be-
cause of the relationships Rusty had built with the food suppliers, the volume discounts given up with the
franchise system were basically negated with other promotions he could take advantage of that he
couldn’t before.
Staying involved in the community your business is a part of is important. Over time it will be
apparent to those people in that community that you are a part of them. In turn, they will support you. It is
sometimes as simple as “do unto others as you would have them do unto you.” Of course, this means
hours of hard work, too.vii
discussion questions for bonus case 5-1
1. What are the advantages of buying a franchise operation? What are the disadvantages?
2. What do you think is key to any business, whether franchise or independent?
3. What are the advantages of owning your own independent business? What are the disadvantages?
4. If you decided to start your own or buy a business, which route would you take? Franchise or
uniquely you? Cash-based, service-based, or inventory retail/wholesale? Why?
notes for discussion questions for bonus case 5-1
1. What are the advantages of buying a franchise operation? What are the disadvantages?
When buying a franchise, the buyer is paying for a system that is in place and proven to work.
The initial setup work has been tried and tested. Once the buyer learns the system, he or she
should be able to clone it and mimic it to produce similar results. Disadvantages would be that the
of their offering through all of their franchisees, it can be a detriment to the whole organization.
2. What do you think is key to any business, whether franchise or independent?
The key to any business is how that business treats their customers. Customer service in any mar-
automatic.
3. What are the advantages of owning your own independent business? What are the disad-
vantages?
No question—if you are the owner, it’s simple, the buck stops with you. The inventory you buy,
Chapter 05 - How to Form a Business
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sponsibility and must suffer the consequences of any bad decisions.
4. If you decided to start your own or buy a business, which route would you take? Franchise or
uniquely you? Cash-based, service-based, or inventory retail/wholesale? Why?
Chapter 05 - How to Form a Business
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endnotes
i Source: “Most Admired Companies,” Fortune, www.fortune.com, accessed December 2014.
ii Source: Jeanna Smialek, “Home Is Where the Jobs Are,” Bloomberg BusinessWeek, January 3, 2014.
iii Source: “Fortune 500 Companies,” Fortune, May 2012.
iv Source: Angus Loten, “Can Firms Aim to Do Good If It Hurts Profits?” The Wall Street Journal, April 10, 2013.
v Source: Julie Jargon and Emily Glazer, “Crisis Quickens at Quiznos,” The Wall Street Journal, December 6, 2013.
vi Source: Jason Daley, “Despite the Slowdown at Home, U.S. Franchises Expand Abroad,” Entrepreneur, May
2011.
vii Sources: Rhonda Abrams, “Focus on Success, Not Failure,” USA Today, May 6, 2004; “New Study Finds Restau-
rants’ Failure Rate Lower than Expected,” Entrepreneur, September 22, 2003; “Adcocks come home to Mississippi,
Get ‘Hooked’ on Restaurant,” Brookhaven Daily Leader, April 30, 2004, page 13P; interviews with the owners.
