This Document Contains Chapters 7 to 8 Chapter 7: Marketing: Distribution and Location I. Business Plan Building Block (SLIDE 7-2) This chapter will help you select the location and distribution strategy that is best for the customer, your type of business, and the options that may be available. It will also help you to draft the location section of the business plan. II. CHAPTER LEARNING OUTCOMES (SLIDE 7-3 and SLIDE 7-4) After completing this chapter, students should be able to: • Understand the contribution of location to small business success. • Begin to develop a multiple distribution strategy. • Understand the uniqueness of your business location needs. • Focus on customer needs when evaluating a location. • Develop a checklist for evaluating potential sites for your business. • Think about if and when you should locate your business out of the home. • Use both secondary and primary sources of information in locating your business. • Understand and negotiate a lease contract. III. LECTURE OUTLINE 1. The Importance of Location (SLIDE 7-5 and SLIDE 7-6) One of the most important decisions an entrepreneur has to make relates to the business location—the place where they distribute the goods and services for their business. Marketing people often refer to this location decision as the “4th P” (place) in the marketing mix. Location considerations are also important in the development of an entrepreneur’s operational strategy—especially when it comes time to think about how they will distribute their product or service. We have now entered the age of the “gold-collar,” or home-based, worker. More and more of us are working out of the home like Gloria Brookstone who was profiled in the opening vignette, page 157, and Sheila Mather, who is profiled later in this chapter, page 165. Ask students that If they are planning to set up a business at home, their location analysis is still just as important as if they were to lease in a store-front or manufacturing operation. Explain that Chapter 7 will lead them through the steps involved in finding a good location for their business using primary and secondary research—and if necessary, in negotiating a lease that will serve them well. To a large extent then, their location decision will depend on how the plan to distribute their product or service—given their product or service and their customer needs. Explain that we begin this chapter by getting them to think about their various distribution choices or channels. 2. Distribution Channels (SLIDE 7-7, SLIDE 7-8, SLIDE 7-9, SLIDE 7-10, and SLIDE 7-11) Explain that a distribution channel is the method or way in which a producer makes a product or service available to the consumer. There are two broad channel options—either directly through retailing or indirectly through wholesaling or franchising. • Retailing is the selling of goods and services directly to the consumer or end user. There are two basic types of retailing channels—store and non-store. • Wholesaling is the selling of products to retailers for resale to the end user or consumer. • Franchising is a distribution system in which one company (termed the franchisor) grants the right to sell its products or services to another company or individual (termed the franchisee). We’ll talk a lot more about franchises and the various types of franchises in Chapter 14. Explain to students that their distribution strategy will depend on a number of factors such as their type of business (B2C or B2B), customer needs, the type of product/service, transportation costs, and their competition. Successful entrepreneurs take advantage of more than one distribution channel and an entrepreneur’s physical location will depend on a multiple distribution strategy. 3. What Is Your Best Location? (SLIDE 7-12) Explain that the “perfect” or best location will be different for every enterprise. It will depend, to a large extent on their primary or major distribution channel. Explain to students that should they decide on store retailing—like Close Connections, for example (page 161)—they are going to have to look for a location that is convenient for your retail customers. A home-based business might be a strong consideration if they choose a business in which their primary distribution channels are online, or directly through home parties. If entrepreneurs manufacture a product, then their wholesaling channel of distribution may be dictated by warehousing space and transportation costs. Encourage your students to do Action Step 36, page 162, were they are encouraged to use their new eyes to reinforce the importance of location. Explain that in Action Step 37, page 163, we want them to brainstorm the “perfect” location for their business. 4. A Location Filter (SLIDE 7-12) Explain to your students that they will need to decide what they really want from their location. A location filter or checklist will help them zero in on the criteria that are important to their business. Ask your students to decide what you really need in a location. Encourage them to use a location checklist to establish their priorities. The following location factors should be considered, pages 162–163: • local/municipal licensing • neighbourhood mix • competition • security, safety • labour pool • services • costs • • ownership • property owner/landlord • past tenants • space • accessibility • professional advice • parking • history of the property • physical visibility • life cycle stage of the area • image • hours of operation • utilities • local zoning by-laws • taxes • approvals • transportation • your target customers Explain to your students that their target customers are the most important criterion. Their location must satisfy the needs of the customer, not their own personal needs. This is a particularly important consideration if they‘re planning to operate out of their home. 5. The Rise of the Gold-Collar Worker (SLIDE 7-13, SLIDE 7-14, SLIDE 7-15, SLIDE 7-16, and SLIDE 7-17) Businesses operate out of about 2 million Canadian households. Working at home has become a major trend and is one of the golden industries of the 21st century. Myths about home-based businesses are provided in Box 7.2, page 166. Ten major reasons for the home-based trend include (SLIDE 7-13): 1. cocooning 2. computerization 3. two-income families 4. growth of the service industry 5. higher productivity 6. increased efficiency 7. improved service 8. vigilant consumer 9. downsizing 10. mobility Some advantages and disadvantages of operating out of the home are shown in SLIDE 7-14. (Note that this information was not provided in the textbook.) A location checklist for home-based business is shown in Box 7.3, page 168, (SLIDE 7-15). Explain that the best home-based businesses to go into depend on your student’s ability to connect their values, experience, and knowledge to current market trends—as we discussed back in Chapter 2 (SLIDE 7-16). A list (page 167) of home-based opportunities based on growing market trends includes (SLIDE 7-17): • technology coach • upmarket travel advisor • catering for a healthy lifestyle • eco friendly cleaning service provider • elder services provider • concierge service agent • personal health or fitness trainer • pet sitting/grooming provider • life balance, personal, or business coach • financial advisor • energy efficiency contractor/consultant • home improvement/décor contractor/advisor Encourage your students to complete Action Step 38 (page 167)—which is to help them decide whether a home-based business is in their future. 6. Getting the Information You Need to Find the Right Location (SLIDE 7-18, SLIDE 7-19) Secondary Sources of Location Information (SLIDE 7-18). Explain to students that data collected by Statistics Canada, and in particular census information, could be one of their major sources of secondary information. Other Statistics Canada sources are provided in Chapter 4, page 87. Also encourage them to get on the Net. Strategis (strategis.ic.gc.ca) is probably their best place to begin. Other sources of secondary information include local and regional governments, potential suppliers, private research companies (MapInfo, for example), and commercial real estate agents. Primary Sources of Location Information (SLIDE 7-19). Finding the right location is a real opportunity to practise new-eyes and primary research. Examples of these types of research are provided for the dry cleaning business, gift store business, the restaurant business, the travel business, and the home renovation business (page 169). There is no specific formula for primary or new-eyes research. Students are encouraged to use the examples in the textbook and discover their own creative location research techniques. 7. Some Things You Must Know About Leases (SLIDE 7-20 & SLIDE 7-21) Explain that a lease document is normally drawn up by the property owner’s lawyer. The terms spelled out are provisional—they are proposed as a starting point for negotiation. The terms will probably favour the property owner. Suggest to students to discuss the lease with their own lawyer and with others who have experience in leases to determine how best to begin negotiations. Explain that as shown in the Mick Beatty and Bette Lindsay cases (pages 172–173), entrepreneurs should anticipate the unexpected, read the lease, and make no assumptions. Explain to your students that they will live with a lease (and a landlord) for a long time. Therefore their lease should protect their interest. Encourage your students to rewrite the lease if they need to. Advise them to get professional help. A checklist to help your students start to rewrite their lease is contained on SLIDE 7-20 (Box 7.6, page 176), Suggest to your students that before signing on the dotted line, that they be certain they understand the language of leases. Some common terms are provided in Box 7.5, page 175 (SLIDE 7-21). 8. Think Points for Success Review the following think points with your students: √ The irony of the search for a start-up location is that you need the best site when you can least afford it. √ Think about your distribution strategy and your customer needs before searching for a location. √ Take your time selecting a location. If you lose out on a hot site, don’t worry; another one will eventually turn up. √ Even if you start up your business at home, you will need a location analysis. √ A site analysis for a street-side location should include everything that is unique to a specific building or space. Many successful centres have some dead traffic areas. √ Who are your business neighbours? Are they attracting your type of customers or clients? What will happen if they move or go out of business? √ Know the terms and buzzwords—net, gross, triple net, industrial gross, and so on—and be aware that they may mean slightly different things in each contract or lease agreement. √ Everything is negotiable: free rent, signage, improvement allowances, rates, maintenance. Don’t be afraid to ask; a dollar saved in rental expenses can be worth more than $10 in sales. √ Talk to former tenants; you may be amazed at what you learn. 9. Checklist Questions and Actions to Develop Your Business Plan (SLIDE 7-23 and SLIDE 7-24) Review the following Checklist Questions and Actions to Develop Your Business: √ What is your distribution strategy? √ What criteria are important to your location? √ What secondary research do you need to make a decision about location? √ If you plan to operate a home-based business, be sure to answer all the questions in Box 7.3. √ Define the importance of location for your target customer. √ Do you have a plan for your store layout? √ If you are a home-based business, how have you separated work from home? √ Why have you chosen the site that you have selected? √ If you have a home-based business, identify any zoning issues you face. IV. SUGGESTIONS FOR GUEST SPEAKERS Some guest speakers to consider include: 1. A commercial real estate broker. Have the broker talk about great locations, anchor tenants, traffic flow, lease regulations, rent per square metre, etc. 2. A property manager. In many areas of the country, large firms act as developers of malls or other commercial properties and then act as property managers. The class can learn a lot by listening to a representative from a large landlord. 3. A real estate lawyer. Have the lawyer talk about lease language, pitfalls, ways a lease can be changed, etc. V. CLASS PROJECTS 1. Ask students to bring in a copy of a lease document. Write the objectionable sections on the board and then spend some time rewriting the language to favour the tenant. 2. Have the class apply the life-cycle yardstick to different local areas: • The neighbourhood. Students can start with the neighbourhood where they live. They should talk to people who have lived there for a long time in order to get an idea of the history of the place. (e.g., Was it built during the forties? The fifties? Or has it been there since the days of Sir John A. MacDonald?) • The nearest shopping area. How old is it? How many times has it had a “facelift”? What’s the demographic make-up of the shoppers? Is it “going downhill”? What could be done to recycle it? • The largest shopping centre or mall in their area. Send students on the hunt for consumer energy and anything that “feels” like marketplace momentum. How old is the centre? Who maintains it? How much does space rent for? Where are the major anchor tenants? Which stores are crowded? Which are empty? 3. Have your students draw diagrams of the areas that would be good for the business they are thinking about. Refer to the checklist on pages 162 (labour pool, transportation, neighbour mix, etc.). 4. Have students invite a local businessperson to talk about his or her experience with leasing. VI. INTERNET EXERCISES 1. Which location would you recommend? (Box 7.1, page 165) Link on to Newtown: www.marketingteacher.com/Lessons/exercise_place.htm Floor-Mart is considering where to put their new store. You must recommend a location. Which one would you choose? 2. Store layout quiz (Box 7.1, page 165) http://crimeprevention.rutgers.edu/crime/shoplifting/layoutquiz.htm Many shop owners, eager to sell their wares, jam a lot of stuff into a small space. The store illustrated on this site sells fabric and sewing supplies. It has many problems with poor sight lines and hidden corners. Take the Store Layout Quiz. What are the problems? How would you correct these problems? 3. Home business insurance (Box 7.4, page 169) Learn more about home-based business insurance. Click on to Business Insurance from the Co-operators, Home-based Business Insurance Link: www.cooperators.ca/english/products/business/homebased.html • How do you know if you qualify as a home business? • What coverages are available to protect your business? V. SUGGESTED LESSON PLAN VIII. SUGGESTED ACTIVITIES ACTIVITY 1: Review and Overview 1. Review Chapter 6 and answer any questions (Show SLIDE 6-2, SLIDE 6-3, SLIDE 6-4, SLIDE 6-22, and SLIDE 6-23 of Chapter 6 if necessary). 2. Introduce Chapter 7 and show and explain SLIDE 7-2, SLIDE 7-3, and SLIDE 7-4. Activity 2: Business Location—Introduction Show and briefly explain SLIDE 7-5 and SLIDE 7-6. Activity 3: Distribution Channels and Strategy Show and briefly explain SLIDE 7-7, SLIDE 7-8, SLIDE 7-9, SLIDE 7-10, and SLIDE 7-11. Optional class discussion, case study exercise (15–25 minutes) Note: This exercise is based on Case Study, Question 3 (d) and (e), page 173, answers of which are provided below in Section IX. 1. Show and explain SLIDE 7-7, SLIDE 7-8, and SLIDE 7-9. 2. Ask students to go back and revisit the QuestVest case study in the opening vignette, page 157. 3. Gloria Brookstone’s major distribution channel was wholesaling. She sold her QuestVests directly to high-end boutiques. But she also had three sub-distribution channels and had come up with five more possible sub- distribution channels. Get students to help you list these eight different sub-distribution channels. (Answer is contained below in Section IX, case study 3 (d).) 4. Adrienne Armstrong, owner of Arbour Environmental used four distribution channels. Ask students what were these four channels? (Answer is contained in Section IX, case study 3 (e) below.) 5. Show SLIDE 7-10 and SLIDE 7-11 and emphasize that successful entrepreneurs take advantage of more than one distribution strategy. Activity 4: The Best Location See NETA Lesson Plan #1 Activity 5: Networking Break Encourage students to network and learn more about each other during the break. Activity 6: The Gold-Collar Worker Show and briefly explain SLIDE 7-13, SLIDE 7-14, SLIDE 7-15, SLIDE 7-16, and SLIDE 7-17. Optional class discussion and group activity (25–40 minutes) 1. Explain briefly “The Rise of the Gold-Collar Worker,” page 165. Show and explain SLIDE 7-13. 2. Ask the class to recall the case of Sheila Mather, page 165. Where was Sheila’s location? Why? 3. Emphasize that Sheila Mather worked out of the home, but her real location was where she “meets and greets her customer.” Ask students what the real location was for Mina Cohen, page 170, and Ron Taylor page 170. 4. Students should be aware of the myths of home-based business (Box 7.2, page 168). 5. Ask students to get into groups and list the advantages and disadvantages of home-based business. Have each group present their results 6. Show and briefly explain SLIDE 7-14. Note: This information is not contained in the textbook. 7. Show SLIDE 7-15 and encourage those students who intend to establish a business out of the home to consider the checklist provided in Box 7.3, page 168, and the information in Box 7.4, page 169. 8. Show and briefly explain SLIDE 7-16 and SLIDE 7-17. Activity 7: Getting the Information You Need Show and briefly explain SLIDE 7-18 and SLIDE 7-19. Optional group discussion activity (25–35 minutes) 1. Show and explain the secondary sources of information in SLIDE 7-18 (based on page 168). Explain that major government sources of information are the Statistics Canada (esp. Census) and Industry Canada (esp. Strategis). You may want to refer students to Chapter 4, page 87, for more detail. There are, of course, private sources of secondary information (e.g., banks, shopping centres, real estate firms, and so on). Here, you may want to draw students’ attention to the discussion on page 170. 2. Emphasize that most students will have to do a great deal of primary research before they find the right location. There is no formula or logical framework to follow. But this is a real opportunity for students to practise their new-eyes and primary research. 3. Get students into groups of 4–7. 4. Assign one business (dry cleaning, gift store, restaurant, travel, and home renovation, as shown in SLIDE 7-19) to each group. For example, group #1 would be assigned dry cleaning and so on. 5. Ask each group to present their results to the class. 6. Explain that primary research is particularly important for home-based businesses. 7. Lastly, encourage students to find creative ways to do their own location analysis based on the needs of their customer and business. Activity 8: Before You Sign the Lease (SLIDE 7-20 & SLIDE 7-21) See NETA Lesson Plan #2 Activity 9: Summary, Q&A, and Preparing for Chapter 8 1. Recap the key points for each objective (using SLIDE 7-2, SLIDE 7-3, and SLIDE 7-4 if necessary). 2. Encourage students to complete the Business Plan Building Block, page 171. 3. Show SLIDE 7-23 and SLIDE 7-24 and encourage students to complete the Checklist Questions and Actions to Develop Your Business Plan, page 178. You may also want to briefly review the Think Points for Success, page 177. 4. Show SLIDE 7-25 and encourage students to complete the case study questions. Answers to the case study questions are contained below in Section IX. 5. Respond to any questions that students may have. 6. Encourage students to go to the Nelson Small Business site: www.knowlescastillo6e.nelson.com. Click on to the Test Yourself link and complete the true or false/multiple choice, short answer, and matching exercise for Chapter 7. 7. Have students read Chapter 8 in preparation for the next lesson. Some instructors may want to encourage students to also prepare a mind map of key points contained in Chapter 8. IX. CASE STUDY Case Background Revisit the QuestVest case study in the opening vignette. Gloria Brookstone was in the “safety for travellers business.” She established QuestVest—a business operating out of the home that designed and sold vests for women. These stylish vests came with secret inside pockets to place money and valuables safely. Case Study Questions and Answers Note: This case study based on a true story. 1. Entrepreneurial skills In the first seven chapters we have talked about and provided numerous examples of the “E” personality traits and “E” skills of successful entrepreneurs. a. List at least five “E” personality traits displayed by Gloria Brookstone. Answer: 1. Creativity: Gloria designed innovative vests with hidden pockets for valuables. 2. Passion: She was deeply committed to enhancing safety for travelers. 3. Determination: Brookstone persistently pursued her vision despite challenges. 4. Resourcefulness: She utilized home-based resources effectively to launch her business. 5. Customer Focus: Gloria understood and addressed the specific needs of her target market. Note: This might be a good opportunity to have students work in groups and mind-map Gloria’s entrepreneurial “E” personality traits. The basic list of traits provided below draws heavily from the list provided in Chapter 1, pages 7-8. • Passionate. Gloria knew she wanted to work with cloth—this had become her passion. • Persistent. Gloria did not give up easily. For example, she had a bad experience with a garment maker in Montreal; but she persisted and found a different way to make her QuestVests. • Opportunity seeking. Gloria, like most entrepreneurs, was an opportunist. Her problem—a stolen purse—became her opportunity to create “the perfect travel vest—one with hidden pockets, panache, style, and rich colours. • Visionary. Gloria’s compelling vision was to create one vest at a time while picturing a woman travelling the world wearing her vest. It would come with secret inside pockets to place money and valuables safely. • Independent thinker. Entrepreneurs like Gloria have a need for freedom—a need to control their own destiny and “be their own boss.” • Idea generator. Gloria used her entrepreneurial skills to get and test her ideas. Even after she started her business she was still trying to improve—examples include, adding a hemp line of vests, and expanding her distribution channels. • People-oriented. Gloria was not a loner. She networked and listened to her husband, professor, friends, suppliers, and business associates such as Adrienne Armstrong. Remember, for example, how she got help from her husband and her business professor when it came time to prepare her business plan. • Doer. Gloria was a dreamer, but she was also a doer. She was determined to make her dream come true. True entrepreneurs are defined by their actions, not their dreams. • Moderate risk-taker. Gloria did not just quit her job and start her business. She took six months, and gathered as much information and support as possible before making her move. b. List five “E” skills that helped Gloria start and grow her QuestVest business. Answer: 1. Market Research: Gloria conducted thorough research to identify the need for travel safety products and tailor her vests accordingly. 2. Product Development: She developed and refined the vest design to ensure functionality and appeal. 3. Sales and Marketing: Gloria effectively marketed her product through appropriate channels to reach potential customers. 4. Financial Management: She managed budgeting and expenses to ensure the business remained financially viable. 5. Networking: Gloria built relationships with suppliers and potential clients to support and expand her business. Note: This might be a good opportunity to have students work in groups and mind-map Gloria’s entrepreneurial skills. Have each group present their results to the class. Possible skills could include: • Brainstorming. Gloria brainstormed with her husband and their friends. Gloria also brainstormed with Adrienne Armstrong. • Mind mapping. She filled her 24/7 Adventure Notebook with mind maps. • New-eyes research. She first got her idea when her purse was stolen on a trip to Venice, where she was travelling with her husband, Jim • Visioning. Instead of thousands of vests for a faceless mass market, her vision was to create one vest at a time while picturing a woman travelling the world wearing her vest. • Primary research/secondary research. When Gloria returned home to Vancouver and her job, she talked to her friends and read a number of reports on safety in the travel business. • Networking. At a craft show in Calgary, for example, she met and networked with Adrienne Armstrong of Environmental Shoppe. • Planning. With the help of Jim and a local college professor, she created a detailed business plan. 2. Trends create opportunities In Chapter 3, we learned that trends create market opportunities. Briefly describe four market trends that helped Gloria Brookstone grow her business. Answer: 1. Market Research: Identified a need for safety-oriented travel products and tailored her vests accordingly. 2. Product Development: Created and improved vest designs to meet functional and aesthetic needs. 3. Sales and Marketing: Promoted her vests effectively to target customers through strategic channels. 4. Financial Management: Oversaw budgeting and expenses to maintain financial health and viability. Note: You might want to get students into groups and ask them to do a group mind map of the various trends that helped Gloria grow her business. Here are a number of possible trends. • Safety and travel. Two of the most dominant trends that Gloria took advantage of were safety and travel (especially for the aging baby boomers). • Home-based business. Gloria worked out of her home benefiting from the home-based business trend. She also relied on the skills of home-based seamstresses to supply her product. • Technology and the Internet. Gloria took advantage of the technology and Internet trend. For example, she employed a computerized clothing design program, used the Internet to help her find suppliers and build a Web site to help market and sell her QuestVests online. • Outsourcing and B2B. Gloria benefited from the outsourcing trend—contracting out her work to home-based seamstresses—for example. She also took advantage of the B2B trend by selling her QuestVests to retailers. • International. Gloria took advantage of the international trend. Not only did she purchase her cloth from countries such as Bhutan, the Kashmir, China, and Kenya, she is even exported her QuestVests to two American outlets. • Environmental. At the end of the vignette we find Gloria thinking about designing QuestVests made of hemp, to help her business link on to the fast growing environmental trend • Women entrepreneurs. Women business owners are a recognized and powerful business fabric our economy. Gloria is one example of this fast growing trend for women to own their own business. 3. Distribution channels a. What is a distribution channel? Answer: A distribution channel is the method or way in which a producer makes a product or service available to the consumer. It is the route or path a product or service follows as it makes its way from the producer to the consumer. b. Briefly explain the difference between direct and indirect distribution. Answer: Distribution can be grouped into two broad categories—directly through retailing or indirectly through wholesaling. • Direct distribution through retailing includes B2C businesses that sell goods and services directly to the consumer or end user. • Indirect distribution through wholesaling includes B2B businesses that sell products or services to retailers for resale to the end user or consumer. c. Within the two broad direct and indirect distribution channels, list five possible types of sub distribution channels or ways in which you could distribute your product or service. Possible Answers: • direct selling • e-retailing • e-wholesaling • television or “tele” home shopping • vending machine retailing • mail order • catalogue sales • trade fairs • home parties • office parties • trunk shows Answer: 1. Direct Sales: Selling directly to consumers through company-owned stores or online platforms. 2. Retail Distribution: Partnering with retail stores to sell products on their shelves. 3. Wholesalers: Using intermediaries to purchase in bulk and distribute to smaller retailers. 4. Franchising: Allowing independent operators to sell products or services under your brand. 5. Distributors: Engaging third-party distributors who manage logistics and regional sales for your products. d. Gloria Brookstone’s major distribution channel was wholesaling. She sold her QuestVests directly to high-end boutiques. But she also had three sub-distribution channels and had come up with five more possible sub-distribution channels. List these eight different sub-distribution channels. Answer: Gloria used three sub-distribution channels—home parties, trunk shows and e-retailing. In her brainstorm with Adrienne Armstrong, she came up with five more possible channels—e-wholesaling, tele-shopping, mail order, cataloguing, and special event office parties. e. What four distribution channels did Adrienne Armstrong, owner of Arbour Environmental Shoppe, use? Answer: Four distribution channels used by Adrienne Armstrong were: store retailing, e-retailing, trade fairs, and wholesaling. 4. Home-based business Gloria Brookstone chose to operate her business out of her home. She also chose to contract out her sewing to home-based seamstresses. What were the five advantages of this home-based strategy? Answer: • Service and quality. Gloria knew that her vigilante customers would not tolerate the mediocrity of mass production and sameness. With home-based seamstresses she would be able to both customize her QuestVests and control the quality. • Improved work/life balance. Operating out of the home gave Gloria more time to balance her busy social schedule and family responsibilities. • Cost efficiency. She could save oodles of money on rent, office charges, and transportation charges to and from work. • Time efficiency. She would save time travelling back and forth to her office. In addition, she would have the flexibility to close the business for a few hours, should the need arise. • Higher productivity. Gloria spent little time travelling to and from work, for example. • Safety. Given her “E” type personality, she often chose to work late into the night. Her creative juices seemed to work better in the early hours of the morning. Working at home meant that she did not have to venture out late at night. • Flexible hours. Since she often liked to work late at night, a home office would provide that flexibility. A home office also allowed her the flexibility to go out and meet and greet her customers at such events as home parties and trunk shows. It also gave her more time to meet and network with possible B2B customers such as Adrienne Armstrong. 5. Store layout a. Complete the “Store Layout Quiz” provided in Box 7.1, page 165 (http://crimeprevention.rutgers.edu/crime/shoplifting/layoutquiz.htm). How many store layout problems do you see? How would you correct these problems? Answer: Nine layout problems are found. Each of these is discussed in the case study. (http://crimeprevention.rutgers.edu/crime/shoplifting/layoutquiz.htm ). The quiz identifies several store layout problems, typically including issues like poor visibility, inadequate lighting, unorganized product placement, and confusing store navigation. To correct these problems, ensure clear sightlines throughout the store, enhance lighting to highlight products, organize merchandise logically for easy access, and design intuitive store layouts to guide customers efficiently. b. Familiarize yourself with the techniques to protect you and your business against the common business crimes such as break-ins, fraud, employee theft, shoplifting and vandalism. Link on to: http://crimeprevention.rutgers.edu/crimes.htm. List 10 ways you plan to protect your business. Answer: Answers to this question are provided on the Web site provided in the above question (http://crimeprevention.rutgers.edu/crimes.htm). This question also provides good material for class discussion. One teaching suggestion is to get students into groups. Have them do group mind maps of all their answers. Have each group present their results. 1. Install Surveillance Cameras: Monitor premises to deter and record criminal activities. 2. Use Alarm Systems: Employ motion detectors and alarms for break-in prevention. 3. Implement Access Control: Restrict entry to sensitive areas with keycards or codes. 4. Conduct Regular Audits: Monitor inventory and financial records to detect fraud. 5. Train Employees: Educate staff on recognizing and reporting suspicious behavior. 6. Secure Cash Handling: Use safes and secure cash registers to prevent theft. 7. Use Anti-Shoplifting Devices: Install security tags and sensors on merchandise. 8. Enhance Lighting: Ensure well-lit exterior and interior areas to reduce vandalism risk. 9. Establish a Reporting System: Create a clear process for reporting theft or suspicious activities. 10. Maintain Good Relationships with Local Law Enforcement: Foster communication with police to enhance security and response times. 6. Business plan location description In your business plan, you will be required to write a section about your store location. We provide you with a “Sample Location Description.” in Chapter 15, Box 15.9, page 410. On the book’s support Web site, we also provide you with a sample Store Overview for Annie’s Business Plan Proposal. Using these examples as templates, briefly describe the location for your business. Answer: Some instructors may want to use this question as a term assignment. Answers will differ according to the location selected. Location Description: Our business is located in a bustling, high-traffic retail district in downtown, known for its vibrant shopping environment and foot traffic. The store occupies a 1,200-square-foot space with large display windows and ample interior layout for customer engagement. It is easily accessible via public transportation and has convenient parking for customers. The area is well-lit, safe, and surrounded by complementary businesses, driving both visibility and customer traffic. Chapter 8: Legal Concerns I. Business Plan Building Block (SLIDE 8-2) Chapter 8 will introduce you to the legal issues of small business. It will help you decide which legal form of business—sole proprietorship, corporation, or cooperative—is best for you. It will also help you to complete the management and personnel sections of your business plan. II. CHAPTER LEARNING OUTCOMES (SLIDE 8-3 and SLIDE 8-4) After reading this chapter, students should be able to: • Decide which legal form (sole proprietorship, partnership, corporation, or cooperative) is best for your business. • Anticipate potential surprises if you are going into business with someone else. • Explore the pros and cons of incorporating. • Conduct secondary research into corporations and incorporating. • Explore the various municipal, provincial, and federal legal regulations that may affect your business. • Develop tactics for finding the right lawyer and accountant. • Develop questions for probing the mind of a lawyer and accountant. • Understand the importance of having a will and succession planning. • Describe and understand the bankruptcy process. III. LECTURE OUTLINE 1. Legal Forms for Small Business (SLIDES 8-5 to 8-14) Generally, a small business can exist in one of four basic legal forms (SLIDE 8-5): sole proprietorship, partnership, corporation, or cooperative. For each of these standard forms of ownership (summarized in Table 8.1, page 182), describe some of the important business realities—and paperwork—students should be aware of. Other types of legal agreements, like joint ventures, also exist. Explain that before selecting a legal form of business, it is advisable to do research on corporations (Action Step 39, page 197). Sole Proprietorship (SLIDE 8-6). Most small businesses start out as a sole proprietorship. A sole proprietorship is owned by one person. The business is not a separate entity from the person. Advantages and disadvantages of a sole proprietorship are provided on pages 182 and 183. More details are provided in Table 8.1, page 182, Box 8.1, page 183, and Box 8.2, page 184. Some advantages are: • It is relatively easy and inexpensive to set up. • It is directly controlled by the owner or operator. • It is flexible with little paper work. • Some business losses can be deducted from other income (Box 8.1, page 183) Some disadvantages are: • The owner can be held personally liable for debts and obligations of the business. • Opportunity for continuity is restricted. • To some extent, the owner’s ability to raise capital is restricted. • Income is taxed at a personal rate. Partnership (SLIDE 8-7, SLIDE 8-8, and SLIDE 8-9). A partnership is an association of two or more individuals carrying on a business to earn income Generally, partnerships can be formed through written or even oral agreements. There are two types of partnerships—general and limited (SLIDE 8-7). In a general partnership each partner has a hand in managing the business and (like a sole proprietorship) each partner assumes unlimited personal liability for debts and obligations. A limited partnership is composed of one or more limited partners and at least one general partner. The general partner assumes management duties and the downside risk. A limited partner's liability is limited to the amount of his or her original investment. Partnership agreements should be in writing and each partner should get his or her own legal advice. Advantages and disadvantages of a partnership (SLIDE 8-8) are provided on pages 183 and 184. Some advantages are: • It is easy to set up. • New partners can be easily added. • It involves few legal requirements. • Risk is generally shared. Some disadvantages are: • Tax and estate planning options are limited. • Partners, to a large extent, are personally liable. • Decision-making and dissolution can be difficult. Partnerships, like marriages, do not always last (SLIDE 8-9). While a partnership agreement may not be legally required, it is highly recommended. Secondly, professional advice is strongly recommended. A written partnership agreement (and a shareholders’ agreement) must contain a clear process in which the partnership can be equitably disbanded. There are numerous methods of dispute resolution. Many small businesses choose a “shotgun” method of resolution stating that one partner can make a buyout offer to the other partner for his/her share of the business. The receiving partner has the option (within a set period of time) of either accepting this offer or buying out the partner who proposed the offer under the exact same terms. Some experts claim that a shotgun clause is fair and efficient for most small businesses because it removes subjectivity. However, a shotgun clause does not work in every case. Corporation (SLIDE 8-10, SLIDE 8-11 and SLIDE 8-12). A corporation is a legal entity with the authority to act and have liability separate from its owners. A company can incorporate either federally or provincially. There are a number of advantages to incorporating federally. Advantages and disadvantages of incorporation (SLIDE 8-10) are provided on pages 186. Some major advantages are: • There is greater potential for limited liability. • There are possible tax advantages. • It can upgrade image. • It offers ease of continuity. Some major disadvantages are: • There are potentially fewer tax write-offs at the beginning. • There are higher start-up costs. • There is increased paper work and complexity. The issue of incorporation is somewhat complicated. Some of the most frequently asked questions are provided on pages 189. Good sources of additional information are provided in Box 8.2, page 184 and Box 8.6, page 211. Students are advised to seek legal and financial advice if they want to incorporate. A shareholders agreement (SLIDE 8-11 and SLIDE 8-12) establishes the rights of shareholders (owners) and the duties and powers of the board of directors and management. A shareholders agreement is not necessary, but we strongly advise that you have one, except, of course, if you are a one-person corporation. The best advice is to keep your agreement as simple as possible but we strongly suggest that you consult your professional advisors before signing any shareholders agreement. A shareholders agreement should (although not legally required) include a buy-sell option that clearly states what happens if one partner should die, become disabled, or want to sell his or her interest in the business. Shareholders agreements often contain a shotgun clause as discussed above. Cooperative (SLIDE 8-13 and SLIDE 8-14). A cooperative is an organization owned by the members who use its services. Cooperatives can provide virtually any product or service, and can be either a nonprofit or for-profit enterprise. Cooperatives exist in every sector of our economy and can touch every aspect of our lives. All cooperatives in Canada and around the world are guided by seven basic principles (SLIDE 8-13). Explain to students that they should give some consideration to this form of ownership, particularly if they are considering a home-based business that can benefit from a group pooling of talents and the trend toward social entrepreneurship—not-for-profit businesses who are adapting creative “profit” approaches to satisfy social and community needs. Cooperatives must incorporate either federally or provincially. Legal advice must be sought when forming a cooperative. Advantages and disadvantages of cooperatives are provided on pages 195 (SLIDE 8-14). Some advantages are: • There are potentially more sources of start-up capital. • As owners, members are potentially more motivated than employees. • There is increased opportunity to network and share ideas. • There is limited liability. Some disadvantages are: • It is sometimes difficult to get agreement among members. • There may be management conflicts. • External financing may be difficult. Ask students that if they are thinking about establishing a cooperative, strongly advise them to consult with provincial or federal authorities and a lawyer. Also encourage them to network with coops in their area to understand how they are managed, and to learn firsthand the advantages and disadvantages of the cooperative form of business. They may also want to visit the web pages listed under “Cooperatives” in Box 8.2, page 184. 2. Your Business Name and “Red Tape” (SLIDE 8-15) Business Name (page 193). Explain to students that if they have come up with a name for their business, consider applying for legal protection. The process of protecting their business name will depend, in part, on the province where they want to conduct business and their legal form. Under certain conditions, a sole proprietorship or partnership may not have to register its name. All incorporated businesses (and in some cases, sole proprietorships and partnerships) must register their corporate name with any province in which they do business. Provincial registration does not require the business name to be unique. Thus, in some cases, you can register your business name without a search, but we advise that you do a search since you may later find out that there are other businesses with similar names. Explain that in searching a name, entrepreneurs have two choices: doing a provincial search or doing a federal search. Doing a federal name search is advisable before starting a business. Explain that entrepreneurs should request a NUANS (Newly Upgraded Automated Name Search), which lets them know of any existing businesses that could prevent them from using their business name. It also lets them know whether their proposed trademark is already in use by another business. A NUANS report is obtained from private businesses known as Search Houses. Naming a business can become complicated, so suggest that it is recommended that entrepreneurs seek professional advice, particularly if they have a unique name they wish to protect. Red Tape (page 204). When you start your business, you will be subjected to all kinds of federal, provincial, and local regulations. A checklist of many of these requirements is provided in Box 8.4, page 205. This section focuses on some of the major Canada Revenue Agency (CRA) requirements. Box 8.5, page 208, provides more details on CRA requirements. Business Number (BN) Your first step in doing business with the Canada Revenue Agency is your business number (BN). You will need a BN if you require one of the four CRA business accounts: corporate income tax, import/export, payroll deductions, or the Goods and Services Tax (GST) or Harmonized Sales Tax (HST). According to the government, businesses will eventually be able to use their BN for other CRA accounts and other government programs. Payroll Deductions. According to the Canada Revenue Agency, you are an employer if you: pay salaries, wages, bonuses, vacation pay, or tips to people working for you; or if you provide benefits such as lodging or room and board to the people working for you. If you are an employer, you will be responsible for deducting the following from your employees’ paycheques: • income tax, • Canada Pension Plan (CPP) contributions, and • Employment Insurance (EI) premiums. As a sole proprietor, you are not eligible to be covered by Employment Insurance, but you will have to pay income tax and Canada Pension Plan (CPP) premiums on the self-employment income reported on your personal tax return. Depending on the province in which you operate, Workers' Compensation premiums may be payable. Federal Income Taxes. Generally, business income includes any money you earn with the reasonable expectation of making a profit. If you are not incorporated, i.e. you are a sole proprietor, business income (or loss) forms part of your overall personal income for the year. You will be taxed on your net earnings from the business, which you will include on your personal tax return as self-employment income. As a sole proprietor, you must file financial statements with your personal income tax return. A partnership by itself does not file an annual income tax return. Each partner must include a share of the partnership income or loss on a personal, corporate, or trust income tax return. A corporation must file a corporation income tax return (T2) within six months of the end of every taxation year, even if it doesn’t owe taxes. If your small business is incorporated, whether or not you pay yourself a salary is a tax planning decision. Another option is to pay yourself (and other shareholders, depending on share structure) a dividend—an amount distributed out of a corporation's retained earnings (accumulated profits) to shareholders—which is not deductible for the corporation. Corporate tax is complicated and you definitely should get professional help. But, if you really do want to try it yourself, a good place to start is the “Setting Up Your Business” page on the CRA website (see Box 8.5, page 208). GST/HST. If your taxable revenues exceed $30,000, you will be required to register for the Goods and Services Tax (GST) or the Harmonized Sales Tax (HST). The GST is a tax that applies a rate of 5 percent to the supply of most goods and services in Canada. The HST is a sales tax that applies a single rate of 14 percent to taxable supplies provided in the three participating provinces of Newfoundland and Labrador, Nova Scotia, and New Brunswick. Although the consumer ultimately pays the GST/HST, businesses are normally responsible for collecting and remitting it to the government. If your taxable revenues do not exceed $30 000, you do not have to register for the GST or HST. However, you can register voluntarily and, in general, we suggest you do. Provincial Sales Taxes (PST). Provincial sales taxes (PST) are charged in many provinces on retail sales of many goods and services. Businesses which sell taxable goods and/or services in each province are required to register as a vendor to collect the provincial retail sales tax. Each province has its own regulations and rates. Newfoundland and Labrador, Nova Scotia, and New Brunswick charge a "Harmonized Sales Tax", or HST—a 14% tax rate that includes both PST and GST. More about the PST rules and regulations can be found on the two PST sites provided in Box 8.5, page 208. 3. Patents, Copyrights, and Trademarks (SLIDE 8-16 and SLIDE 8-17) Explain that patents, copyrights, and trademarks are the three major forms of intellectual property that can be protected through federal legislation. In Canada, intellectual property is largely the responsibility of the Canadian Intellectual Property Office (CIPO). Because intellectual property laws are complex and subject to change, students should consult with a lawyer who has experience in the area. Patent. A patent is a federal government grant that gives an inventor exclusive rights to his or her inventions. Patents cover new inventions, or any new and useful improvement of an existing invention. Ten things you should know about patents are provided on pages 202. Action Step 40, page 200, encourages students to carry out an online tutorial on a patent application. Copyright. Copyright is the exclusive right to copy a creative work or allow someone else to do so. Copyrights provide protection for artistic, dramatic, musical or literary works (including computer programs), as well as performance, sound recordings, and communication signals. Ten things you should know about copyrights are provided on pages 201. Trademark. A trademark is a word, symbol, or design, or a combination of these, used to distinguish the goods or services of one person or organization from those of others in the marketplace. There are three basic types: ordinary marks, certification marks, and distinguishing guise. Ten things you should know about trademarks are provided on pages 202. 4. Get a Lawyer and an Accountant (SLIDE 8-18) Explain that as an entrepreneur, they can’t possibly be expected to know and understand all the laws and their tax implications. So take the time to find a lawyer and accountant who can help them with their specific needs. Suggest to students to network their contacts for a professional with experience in their industry. Students should also consider including a lawyer and accountant in their team of advisors. 5. Get a Will (SLIDE 8-18) Explain to students that if they want their property, business, or shares transferred a certain way after your death, they must say so in a will. If they have partners or other owners, make sure they too have a will and that they all understand what is going to happen if someone dies. Suggest to students that they get professional advice. There are many issues to consider in a will, both from a business and a personal perspective. 6. Succession Planning—Especially for the Family-owned Business (SLIDE 8-19) In small business, succession planning refers to the process in which an owner establishes the procedures to change or transfer ownership or control of the business. The succession process—especially with the family-owned business—requires owner/managers, like Mr. Beever, (page 210) to deal proactively with a slew of sticky questions such as: How can they choose among several capable successors? What happens if no one in the family is really interested in taking over? Key succession issues that you must prepare to confront are provided on page 200 and SLIDE 8-17. Encourage students to complete Action Step 41, page 211, which will help them to start looking for professional advice. 7. Bankruptcy (SLIDE 8-20) Explain that Bankruptcy is a legal process, regulated by the Bankruptcy and Insolvency Act, by which entrepreneurs may be discharged from most of their debts. Business failures do happen and it is not too early to learn about some of the legal concerns arising from them. If nothing else, an understanding of the bankruptcy process should encourage entrepreneurs to be proactive and avoid debt problems in the first place. Ten questions about bankruptcy entrepreneurs should be able to answer are (pages 212): 1. What is bankruptcy and what are the benefits to the debtor? Bankruptcy is a legal process, regulated by the Bankruptcy and Insolvency Act, by which you may be discharged from most of your debts. 2. How does one become bankrupt? You are considered a bankrupt only when a trustee in bankruptcy files forms with the Official Receiver. 3. What happens to my property? Your property is given to a trustee in bankruptcy who then sells it and distributes the money among your creditors. You do not have to assign to the trustee exempt property such as basic furniture. 4. What kind of forms will I have to sign? You will have to sign at least two forms. One is an “Assignment,” and the other is your “Statement of Affairs.” 5. Does the bankruptcy affect my co-signers? Your bankruptcy does not cancel the responsibility of anyone who has guaranteed or co-signed a loan on your behalf. 6. When is a bankrupt discharged? There will be an automatic discharge for first-time bankrupts nine months after they became bankrupt unless the trustee recommends a discharge with conditions or it is opposed by a creditor, the trustee, or the Superintendent of Bankruptcy. 7. What is the effect of a bankruptcy discharge? The bankrupt is released of most debts. However, some debts are not released, such as an award for damages in respect of an assault, a claim for alimony, spousal or child support, a debt arising out of fraud, any court fine, or debts or obligations for student loans. 8. How does bankruptcy affect employment? For the most part, bankruptcy should not affect your employment. However, there are some special cases. 9. Is there anything I can do to improve my credit record? Should you wish to improve your credit record after obtaining your discharge from bankruptcy, you could, for instance, contact your banker and request a meeting. 10. Does it cost anything to go bankrupt? Yes. There is a filing fee to be paid to the Superintendent of Bankruptcy. In addition, the trustee is entitled to be paid. These fees are prescribed by the Bankruptcy and Insolvency Rules. More information on bankruptcy is provided in Box 8.7, page 212. 8. Think Points for Success Review the following think points with your students: √ Know the advantages and disadvantages of the basic legal forms when you establish your business. √ Get a lawyer and a partnership agreement drawn up before you form a partnership. √ Incorporation can help limit your liability. √ Protect your business name and do a NUANS search to make sure you have not infringed on another business’s name or trademark. √ Get a will and start thinking about a succession plan. 9. Checklist Questions and Actions to Develop Your Business Plan (SLIDE 8-22 & SLIDE 23) Review the following Checklist Questions and Actions to Develop Your Business: √ Explain why you selected your legal form of ownership. √ Do you plan to protect your idea, product, or service by obtaining a patent or copyright and/or by registering a trademark? √ What professionals have you referenced in your business plan, and did you allow for the appropriate cost? √ What are the major legal risks for your industry, and how will you address them? √ Do you have a will and a succession plan? IV. SUGGESTIONS FOR GUEST SPEAKERS Some guest speakers to consider include: 1. A small business lawyer. Have the lawyer run through the pros and cons of incorporating. He or she could outline the process, list the costs, etc. What are the advantages or disadvantages of provincial vs. federal incorporation? 2. A tax accountant. Ask the accountant to run through a few case studies illustrating tax strategies for businesses with different legal forms. Have him or her talk about the fees that are charged by accountants. 3. An insurance agent. Invite this speaker to talk about various forms of protection. 4. A Canada Revenue Agency representative. Have this speaker discuss tax regulations (e.g., the GST), rules, forms to fill out, sources of information, and so on. 5. A sole proprietor or partner. Have your guest talk about how he or she pays taxes and deals with red tape; what forms his or her business needs to fill out; and why he or she chose this particular legal form of business. 6. An executive from a new corporation. Ask the executive to talk about when and why the business was incorporated, the benefits, etc. V. CLASS PROJECTS Class Project 1 1. Form class into teams of 4–7. Choose a typical business. Then develop a personal financial profile for the owners or operators as well as a business profile for the business. Teams can also use a case from the real world or make one up. Here’s an example: • Personal: Married couple. The wife is the division manager for a large corporation, earning $55,000 a year. They own a nice home and a condo in Aspen. She is in a stock purchase plan with her corporation and owns $65,000 in stock. He recently quit his job as a sales manager for a mid-sized corporation. • Business: The husband plans to start a carpet and drape-cleaning business with two trucks and crews. This business will lose money for 12 to 18 months. 2. Ask this question: What is the liability? What do they stand to lose if something goes wrong? What can they do about that 12 to 18-month loss? 3. List the liabilities. For example: • Damage to expensive homes • Employees stealing from customers • Truck accident • Someone injured by equipment or cleaning solutions • Business failure 4. What is the best form of ownership? 5. Try another profile, another industry, and another set of circumstances. Class Project 2 Develop a list of small business lawyers and then select a team of students to do some interviews. Make up the questions in advance. Make sure students ask what kind of legal form the lawyer would recommend for a specific kind of business. Class Project 3 Send your students to the bank to open a business account. Have them come back to the class with a list of what they had or didn’t have. VI. INTERNET EXERCISES 1. Setting Up Your Business (Box 8.5, page 208) 1. Get your students to go to the Canada Revenue Agency’s (CRA) Web site. Have the students click on Setting Up Your Business, the first chapter of CRA’s A Guide for Canadian Small Business: http://www.cra-arc.gc.ca/E/pub/tg/rc4070/README.html 2. Have students write a report on the following major CRA start-up requirements: a) How does a sole proprietor pay taxes? b) How does a partnership pay taxes? c) Your first step to doing business with the CRA d) Legal requirements for keeping records e) Why it pays to plan ahead 3. Have students report their findings to the class. 2. Patent tutorial (Action Step 49, page 200) Get students to link on to the CIPO “Tutorial: Write an Application” link at: http://strategis.gc.ca/sc_mrksv/cipo/patents/e-filing/menu.htm . Have them explain how they would protect their idea and then prepare a patent application. Next have them complete the “How your patent application is processed” quiz. 3. Dealing With Debt (Box 8.6, page 211) 1. Explain to students that the best way to deal with financial problems is to gain control of the problems before they get out of hand. 2. Have them go to the Office of the Superintendent of Bankruptcy Web site “Dealing with Debt: A Consumer’s Guide” http://strategis.ic.gc.ca/epic/internet/inbsf-osb.nsf/en/br01035e.html 3. Answer the following questions: a) What are the danger signals of potential bankruptcy? b) Explain some possible options to bankruptcy. c) If you have a debt of $10,000 in student loans, will bankruptcy relieve you of the debt load? 4. Have students report their findings to the class. 4. Canadian Tax and Financial Information (Box 8.5, page 208) 1. Have students link on to Taxtips.ca: http://www.taxtips.ca/ . 2. Here is just a limited selection of questions you can get them to answer. a. What books and records must be kept for a business? b. How does a self-employed person choose a year-end when starting a business? 3. What is the deadline for filing a tax return for a self-employed person? 4. Where can I get the forms to file a corporate tax return? 5. If I have a small business, do I have to file both a personal and a business tax return? 6. Do my small business financial statements have to be audited? 7. As the owner of a small business, should I pay myself a salary? What deductions would apply? 8. Can I write off my business losses against my other income? 9. Should you incorporate your small business? VII. SUGGESTED LESSON PLAN VIII. SUGGESTED ACTIVITIES ACTIVITY 1: Review and Overview 1. Review Chapter 7 and answer any questions (Show SLIDE 7-2, SLIDE 7- 3 and SLIDE 7-4 and SLIDE 7-22 and SLIDE 7-23 of Chapter 7 if necessary.). 2. Introduce Chapter 8 and show and explain SLIDE 8-2, SLIDE 8-3 and SLIDE 8-4. A good way to introduce the chapter is by asking students to recall the experience of Henry Bemis in the opening vignette, page 175. Henry had the good sense to incorporate. He also had plenty of liability insurance. 3. You may want to remind students that they may be meeting a lawyer in this lesson if you choose the optional exercise in Activity 2. Activity 2: Legal Forms for Small Business See NETA Lesson Plan #1 Activity 3: Networking Break Encourage students to network and learn more about each other during the break. Activity 4: You’re Business Name Show and briefly explain the first section (Your Business Name) of SLIDE 8-15. The issue of NUANS may be new to students, so you may have to spend a little time on this. Advise students that if they have a unique name that they want to protect, they should seek professional advice. Activity 5: Patents, Copyrights and Trademarks See NETA Lesson Plan #2 Activity 6: Get a Lawyer and a Will Show and explain SLIDE 8-18. You may want to emphasize the following: 1. Take the time to find a lawyer and accountant who can help you with your specific needs. 2. Network your contacts for a lawyer/accountant with experience in your industry. You should also consider including a lawyer/accountant in your team of advisors. 3. You are encouraged to get a will, even if you don’t plan to start a business. You are also encouraged to get professional advice. Activity 7: Succession Planning Show and briefly explain SLIDE 8-19 Activity 9: Learn About Bankruptcy Show and briefly explain SLIDE 8-20. Optional class discussion activities 1. It has been our experience that students are very interested in learning more about bankruptcy—from both a personal and business perspective. If you feel uncomfortable with this topic (because it can become quite technical) you may want to invite an expert such as a lawyer or trustee in bankruptcy into the class. 2. Alternatively, you may wish to ask for the student opinion on each of the major questions shown in SLIDE 8-20. Answers to these questions are provided in the textbook, pages 212 and in the Instructor notes that accompany this slide. Activity 10: Summary, Q&A, and Preparing for Chapter 9 1. Recap the key points for each objective (using SLIDE 8-2, SLIDE 8-3 and SLIDE 8-4 if necessary). 2. Encourage students to complete the Business Plan Building Block, page 214. 3. Show SLIDE 8-22 and SLIDE 8-23 and encourage students to complete the Checklist Questions and Actions to Develop Your Business Plan, page 214. You may also want to briefly review the Think Points for Success, page 214. 4. Show SLIDE 8-24, SLIDE 8-25, and SLIDE 8-26. Encourage students to complete the case study questions. Answers to the case study questions are contained below in Section IX. 5. Respond to any questions that students may have. 6. Encourage students to go to the Nelson Small Business site: www.knowlescastillo6e.nelson.com. Click on to the Test Yourself link and complete the true or false/multiple choice, short answer, and matching exercise for Chapter 8. 7. Have students read Chapter 9 in preparation for the next lesson. Some instructors may want to encourage students to also prepare a mind map of key points contained in the Chapter IX. CASE STUDY Case Questions and Answers 1. Partnership agreements a. What is a partnership agreement? Answer: According to the text, page 183, a partnership is an association of two or more individuals carrying on a business to earn income. Legal requirements for forming a partnership vary from province to province, but generally a partnership can come into existence either through a written or oral agreement or, in some cases, even by implication. b. Briefly explain the two basic types of partnership agreements. Would a partnership agreement necessarily have protected Phil from Steve’s actions? Answer: According to the text, page 183. There are two types of partnerships: general and limited: 1. General partnership. Each partner has a hand in managing the business and assumes unlimited personal liability for any debts or obligations. 2. Limited partnership. This type is composed of one or more limited partners and at least one general partner—the general partner assumes both management duties and the downside risk. A limited partner’s liability is limited to the amount of his or her original investment as long as he or she has had no role in management decisions. In this case, it appeared that Phil and Steve had a “de facto” or non-written general partnership. Even though nothing was in writing, Phil would be responsible for Steve’s fraudulent actions. To some extent, a written partnership agreement may have, at the very least, partially protected Phil from Steve’s actions. For example, a partnership agreement may have stated that any withdrawals, or cheques, in excess of $1,000 would require the approval of both partners. In addition, a partnership agreement could have required personal guarantees or limited liability on large expenses such as a boat. However, it should be noted that a legal agreement cannot fully protect someone from unethical and fraudulent actions. So, a partnership agreement may not have necessarily protected Phil from Steve’s actions. Nonetheless, for personal and tax reasons, both Phil and Steve should have each received independent legal and accounting advice, regarding both their partnership and purchase of the Ninja. c. What are the advantages and disadvantages of a partnership agreement? What was Phil’s major reason for wanting to establish an unwritten partnership agreement as opposed to a corporation? Answer: According to the text, pages 183, the major advantages and disadvantages of a partnership are: Major advantages of a partnership: • It is easy to set up. • New partners can be added (some claim that this structure is more flexible and has a greater chance of continuity than a sole proprietorship). • It involves few legal requirements. You can form a partnership with a handshake and dissolve it without one (though this is not a wise endeavour). • Risk is generally shared equally among partners—except in the case of a limited partnership. • Partners can provide mutual support and different skills. One of the best things about a partnership is the psychological benefit. It offers the moral support and contribution of teammates. • It offers more potential sources of capital. • Partners are taxed as individuals, and in some cases, (as is with proprietorships) this can be advantageous (see Box 8.1, page 183). Major disadvantages of a partnership • Tax and estate-planning options are more limited relative to a corporate structure. • Partners and all their assets—personal and business—are, to some extent, at risk for any losses suffered. The reality is that sometimes business and personal liabilities of a particular partner aren’t kept entirely separate. This can have potentially disastrous consequences to other partners whose shared business liability could result in unexpected personal losses. • Decision-making may be difficult because each partner may want to have equal rights. • One partner can make decisions that bind all others. • Dissolution can be ugly, sometimes resulting in the closing of the business or damaged feelings. Phil and Steve had been friends for a long time. Phil trusted Steve and felt no legal agreement was necessary. They worked well together. It was a trusting relationship where a “handshake” was thought to be good enough. Phil did not consider a corporate structure since he did not seek legal advice to help him decide on various legal alternatives. Apparently, Phil trusted his partner and preferred to limit the red tape and legal cost associated with a formal corporate structure. d. Suppose that Phil had approached his lawyer to draft a written partnership agreement. List the major items that should be included in this agreement that may have protected Phil. Answer: The main point of this question is to get students to look at a typical partnership agreement. Encourage students to review the sections of typical partnership agreement. Here, they will find the sections relating to the capital of a partnership agreement and banking that may have given Phil some protection against Steve’s actions. No agreement can provide full protection against fraudulent or unethical actions. However, Phil’s lawyer may have been able to help protect his capital investment and potential liability in two specific sections of a partnership agreement—capital and banking: • Capital Phil and Steve could have been required to maintain separate capital accounts. Each partner could have been required to purchase their share of the Ninja from their separate capital accounts. Phil, may have been able to limit his risk through a personal guarantee limited to his own capital investment. In this way he would not be personally responsible for the entire expenditure. Secondly, as partnership security, the agreement may have required both partners to maintain separate minimum capital balances—of which no money could be withdrawn without the written consent of both partners (or dissolution of the partnership). If this were the case, eventually Phil, may be able to get legal access to Steve’s account to fund his partner’s obligation for the Ninja. Thirdly, any major capital investments could have required personal guarantees by both partners. Phil’s lawyer may have been able to access Steve’s personal accounts to protect Phil’s investment. • Banking The banking section of the partnership agreement may also have helped Phil, although perhaps not significantly in this case. Some agreements, for example, allow withdrawals only by cheques signed by both partners. 2. Corporate structures a. What would be the major advantages and disadvantages for Phil to have established a corporate structure? Answer: Major advantages and disadvantages of a corporate structure are provided in the text, pages186. Advantages of a corporate structure The two major reasons for incorporating will depend on the extent to which Phil could reduce personal risk or liability and whether or not there are any significant tax advantages. • Liability. A corporate structure could potentially limit Phil’s liability and personal risk. For example, if Phil had been able to purchase the boat as a corporate expense, he may not have been liable for Steve’s actions. Provided no personal guarantees were given, the company could even technically declare bankruptcy and Phil would not be personally responsible for any additional payments. • Tax advantages. It is possible that Phil could enjoy some tax advantages but he would first of all have to review his situation with his lawyer and accountant. Other reasons for incorporation include: • Image upgrade. • Simplify the division of multiple ownership • Guarantee continuity • Improved ability to offer internal incentives • Incorporation helps in the event of estate planning Disadvantages of a corporate structure • Increased complexity requiring a lawyer and accountant • Potentially fewer tax write-offs at the beginning • Higher start-up costs • Increased paper work and ongoing administrative costs b. If Phil had established a corporate structure, would a shareholders’ agreement have been required by law? Answer: There is no legal requirement to have a shareholder’s agreement, but Phil would be strongly advised to have one. A shareholders’ agreement is not required by law but is highly recommended for establishing a corporate structure. It outlines the rights, responsibilities, and obligations of shareholders, helping to prevent disputes and clarify decision-making processes. While not legally mandatory, it provides legal clarity and protection for all parties involved. c. Would you have advised Phil to have a shareholders agreement? Why? Why not? Answer: If Phil had decided to incorporate, he should have a shareholders agreement. A shareholders agreement, like a partnership agreement, clarifies how a business will be managed and financed. This agreement should include a buy-sell option. Note: Here you may want to discuss the “shotgun” arrangement explained on page 185, d. List five key issues a shareholders agreement should address. (Here, in addition to the text, your might want to link on to “Understanding the Shareholder Agreement”: http://strategis.ic.gc.ca/sc_mangb/stepstogrowth/engdoc/step8/ssg-8-7.php Answer: Eight key issues a shareholders agreement should address are provided below (pages 192.) Any five are acceptable. • Describes the duties and responsibilities of the board of directors. • States who manages the company and what are the management rights and duties • Provides rules for transfer, buying, and selling of shares. • Establishes procedures for death and retirement of shareholders. • Outlines procedures and process for how money will be raised. • States the process by which profits will be divided. • Establishes provisions and rules for non-competition and confidentiality. • Provides procedures for resolution of disagreements among shareholders. e. Briefly explain the type of legal structure—a partnership or corporation— that would have provided Phil with the most protection against Steve’s actions. Answer: In theory, a corporate structure would have provided Phil with the most protection. A partnership agreement, under most circumstances, would mean that Phil would still remain personally responsible for many of Steve’s actions. The main reason for choosing a corporate structure is to potentially limit Phil’s liability and personal risk against any action by Steve. Secondly, Phil should make every effort to properly insure the company. Lastly, he should meet with his lawyer to draft up a shareholders agreement. 3. Cooperatives a. What are the major reasons for considering a cooperative legal structure? Would this legal form have been of benefit to Phil? Answer: The main purpose of this question is to get students thinking about the cooperative option. Although, this business format may not have been appropriate for Phil, some students may latch on to this idea as a viable option for their business. Below are the major advantages of a cooperative, page 193. Although there are many good reasons for considering a cooperative structure, few of these reasons would appear to be of interest or benefit Phil—given his situation and type of business. Major reasons for considering a cooperative or advantages of a cooperative are: • Given the number of members, there are potentially more sources of capital than in other business forms. In addition, government regulations for raising start-up capital generally favour coops. • Members are owners and are therefore more motivated to produce and be successful. • Cooperatives offer members plenty of opportunity to network and share ideas and expertise. • Generally, cooperatives are entitled to receive the standard corporate protection such as limited liability. • In most cases, it is relatively easy for members to sell their shares to other members. b. Mountain Equipment Co-op (MEC) is an example of a successful cooperative (page 193). What are the major reasons why MEC established a cooperative form of ownership? How do these MEC objectives differ from Phil’s business objectives. Answer: Founding members of MEC believed in the definition, values and principles of The International Cooperative Alliance (see, for example, http://www.mec.ca/Main/content_text.jsp?FOLDER%3C%3Efolder_id=2534374302642961&bmUID=1136226891450). As a result, MEC formed a cooperative to provide its members with quality products at reasonable prices. MEC’s goal is to cover its costs and stay in business, not maximize profits, in an attempt to provide equitable prices on exceptional gear for its members. Phil’s major business objective was to satisfy customer needs and earn a profit (or maximize revenue) to the owners(s). His goal was to maximize owner investment not to provide products and services to its owners. In contrast, MEC’s objective is to provide its members (owners) with exceptional gear at reasonable prices. MEC’s goal is to provide products and services to its owners (membership customers) and cover its costs. The members of MEC do not buy shares to earn a financial return on their investment. A share entitles the member to the purchasing benefits of the cooperative. c. As an owner of MEC, you would be entitled to receive subscription shares and patronage shares. Briefly explain these two types of share options. (Hint: Click on to “About MEC Shares” (http://www.mec.ca/Main/content_text.jsp?FOLDER%3C%3Efolder_id=2534374302642997&bmUID=1131633919406). Answer: MEC has two types of shares: 1. Subscription shares. This is the one share ($5.00) purchased when a member joins MEC. Anyone who shops at MEC must be a member before they purchase products or services at MEC. 2. Patronage Shares. These are shares that are allocated to members based on their patronage (purchases) of MEC products in a given year—if there is a surplus that year. If revenues exceed expenses at year-end, some of the surplus is returned to members in the form of patronage shares. These are awarded in proportion to the amount members have spent in that year. Solution Manual for Small Business: An Entrepreneurs Plan Ron Knowles, Chris Castillo 9780176501808, 9780176252403
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