Franchises and
Buyouts
Part 2 Starting From Scratch or
Joining an Existing Business
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Copyright © 2006 Thomson Business & Professional Publishing.
All rights reserved.
Franchising from the
Franchisor’s Perspective
• Benefits
– Reduction of capital
requirements
– Increase in management
motivation
– Speed of expansion
• Drawbacks
–Reduction in control
–Sharing of profits
–Increase in operational
support costs
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–2
The Pros and Cons for Franchisee
Pluses
Minuses
Formalized training
Franchise fees
Financial assistance
Royalties
Proven marketing
methods
Restrictions on growth
Managerial assistance
Quicker startup time
Overall lower failure
rates
Less independence in
operations
Franchisor may be sole
supplier of some
supplies
Termination/renewal
clauses
Fig. 6-2
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4–3
Franchising Agreements
• Franchise contract
–The legal agreement between franchisor and
franchisee
• Franchise
–The privileges conveyed in the franchise contract
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–4
Franchising Arrangements
• Product and Trade Name Franchise
–Grants the right to use a widely recognized product or
name
• Business Format Franchise
–Provides an entire marketing system and ongoing
guidance from the franchisor
• Master Licensee
–An independent firm or individual acting as a sales
agent with the responsibility for finding new franchises
within a specified territory
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4–5
Franchising Arrangements (cont’d.)
• Multiple-Unit Ownership
–The holding by a single franchisee of more than one
franchise from the same company
• Area Developers
–Individuals or firms that obtain the legal right to open
several franchised outlets in a given area
• Piggyback Franchising
–The operation of a retail franchise within the physical
facilities of a host store
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4–6
Legal Considerations in Franchising
• The Franchising Contract
–Signed with legal counsel present
–Contains a termination and transfer provision
–Contains a statement of rights to renew contract
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–7
Pros and Cons of Buying an
Existing Business
• Pros
• Cons
– High chance of success
– Existing problems
– Less planning
– Poor quality of current
employees
– Existing customers/
suppliers
– Poor business image
– Necessary equipment
– Modernization required
– Bargain price
– Experienced employees
– Purchase price based on
inaccurate data
– Existing business records
– Poor business location
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–8
Investigating and Evaluating
Available Businesses
• Due Diligence
–The exercise of prudence, such as would be expected
of a reasonable person, in the careful evaluation of a
business opportunity
• Relying on Professionals
–Accountants
–Attorneys
–Other experienced business owners
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–9
Finding Out Why the Business Is For Sale
• Owner’s reasons for selling the business
–Old age or illness
–Desire to relocate to a different section of the country
–Decision to accept a position with another company
–Unprofitability of the business
–Loss of an exclusive sales franchise
–Maturing of the industry and lack of growth potential
• Beware of sellers who may have “cooked the
books” to make the business more attractive.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–10
Valuing the Business
• Asset-Based Valuation
– Estimates the value of the firm’s assets;
– Does not reflect the value of the firm as a going concern.
• Market-Comparable Valuation
– Considers the sale prices of comparable firms;
– Difficulty is in finding comparable firms.
• Cash-Flow-based Valuation
– Compares the expected and required rates of return on the
amount of capital to be invested in the business.
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–11
Nonquantitative Factors in
Valuing a Business
• Competition
• Market
• Future Community
Development
• Legal Commitments
• Union Contracts
• Buildings
• Product Prices
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4–12
Negotiating and Closing the Deal
• Terms of Purchase
–Assets purchase or total entity
–Indemnification clause
–Payment in full or partial payments over time
• Closing the sale
–Best handled by a third party
• Bill of sale
• Tax certifications
• Payment-to-seller agreements
and guarantees
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–13
Characteristics of Successful High-Growth
Startups
• Begin as a team effort
• Are in service and manufacturing industries
• Have competent founders who:
–have related experience.
–have started other businesses.
–share in ownership of business.
• Are somewhat better financed
• Do not limit themselves to local markets
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–14
Key Terms
franchising
multiple-unit ownership
franchisee
area developers
franchisor
piggyback franchising
franchise contract
disclosure document
franchise
Uniform Franchise Offering
Circular (UFOC)
product and trade name
franchising
business format franchising
matchmakers
due diligence
master licensee
Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved.
4–15