Paul Bazzano and Mary Ann Boone are lifelong friends and have decided to go into business. They are not sure what form of business ownership and control to use. Paul would like to invest his savings of $25,000, but he does not want to take an active role in managing the day-to-day operations of the business. Mary Ann is a self-starter, enjoys cooking and baking, and has a vast number of pizza recipes. An existing pizza business is for sale for $50,000.
Paul and Mary Ann both like the idea of investing in a business. Mary Ann has $5,000 she would like to contribute and believes that buying an existing business has certain advantages. She likes the idea that Paul will not be an active owner and that she will have full control of the pizza operation. The existing business has sales of $150,000 and generates earnings after taxes of $32,500. Mary Ann believes the business can be expanded and foresees future growth by expanding into different locations throughout the Boston area. She projects two more stores in the next five years.
Questions
1. What form of business ownership would you recommend for this business?
2 Would Mary Ann's form of ownership be any different from Paul's?
3. How could Paul and Mary Ann determine the return on their investment after their first year of business? Assume that Paul and Mary Ann can borrow the remaining $20,000 needed to finance the purchase when answering this question.
4. Describe the risk of this business.