Read the Fine Print
Lottery winner
Girls Gymn
Ace Clear Defense
SMALL BUSINESS
MANAGEMENT
Chapter 5: Buying a Business and
Franchising
Bulldog Fitness
Cerealisious
Firehouse Sub
Ace Clear Defense


What advantages did this
entrepreneur obtain as a result of
buying an existing business?
How would he determine the price
to buy this business?
Ace Clear Defense
Advantages of Purchasing
an Existing Business









Reduction of Risk
 Existing business records
 Less planning
 Experienced employees
Reduction of Time and Setup Expenses
Reduction of Competition
Capitalization of Business Strength
Possible Assistance from Previous Owner
Easier Planning
Existing customers/ suppliers
Necessary equipment
Bargain price
Purchasing an Existing Business

Disadvantages of Purchasing











Physical Facilities
Personnel
Inventory
Accounts Receivable
Financial Condition
Market
Deciding on the Price
Poor business image
Modernization required
Purchase price based on inaccurate data
Poor business location
Sources of Businesses For Sale





Internet
Trade Journals
Government Departments
Real Estate Brokers
Other Professionals





Matchmakers
Accountants
Lawyers
Other experienced business owners
Word of Mouth
Girls Gymn
Why is owner selling?

Owner’s reasons for selling the business







Old age or illness
Desire to relocate in a different section of the
country
Opportunity to start another business
Decision to accept a position with another
company
Unprofitability of the business
Discontinuance of an exclusive sales franchise
Maturation of the industry and lack of growth
potential
Evaluating a Business For Sale

Industry Analysis



Sales and Profit Trends in the Industry
The Previous Owner
Financial Condition of the Business


Validity of the Financial Statements
Evaluation of the Financial Statements
Evaluating a Business For Sale

Condition of the Assets






Liquid Assets (Cash and Investments)
Accounts Receivable
Inventory
Building and Equipment
Real Estate
Goodwill
Evaluating a Business For Sale



Quality of Personnel
External Relationships of the
Business
Conditions of the Records
Lottery winner
Determining the Price or Value of a
Business


Market Value
Asset value



Book Value
Replacement Value
Earnings Value

Capitalization of Earnings Method


Average Earnings/Predetermined Interest Rate =
Capitalized Value
Times Earnings Method


Arbirtraily multiplies earnings by a factor of between 1-10
Small business usually between 4 or 5
Calculating average earnings for a
business
Average earnings
Last year
$5,000
Two years ago
$4,000
Three years ago
$7,000
Four years ago
$10,000
Five years ago
$14,000
total
$40,000
Average earnings
40,000/5 = $8000
$8,000/10% =$80,000
Calculating weighted –average
earnings for a business
Average earnings
Last year
$5,000 X 5 = $25,000
Two years ago
$4,000 X 4 = $16,000
Three years ago
$7,000 X 3 = $21,000
Four years ago
$10,000 X 2 = $20,000
Five years ago
$14,000 X 1 = $14,000
total
$96,000
Weighted Average earnings $96,000/15 = $6,600
= $6,600/10%
= $66,000
Determining the Price or Value of a
Business cont.

Combination Method

Analytical Method


Adjusted net worth, past earning, future earnings
Historical Method – use historical experience to
determine relative indicators of value of a business
Sally's Bar and Grill

Sally's Bar and Grill is available for purchase. Sally's
earnings for the past five years were as follows:
Last year
$50,000
Two years ago
$60,000
Three years ago $30,000
Four years ago
$40,000
Five years ago
$25,000



Determine the value of the business using the
following methods (using interest rates of 11%) using
both general and weighted average methods.
Capitalized earnings method
Time interest method
The Purchase Transaction

Coverage







purchase price, including principal and interest
amounts
payment dates - when and to whom
detailed list of assets included in the purchase
conditions of the purchase - nonfinancial
requirements
provisions for noncompliance with conditions and
penalties for breaches
collateral or security pledged
Negotiating the Deal
Firehouse Sub
History and Background of Franchising





Most rapid growth in North America since
the 1950s.
48 cents of every retail dollar goes to
franchise business
Franchise sector is Canada's largest
employer
One franchise for every 12 Canadians
Franchise revenue in $100 billion range
What Is Franchising?

Manufacturer-Directed Franchise


Wholesaler-Retailer-Directed
Franchise


Ford Motor Company
Home Hardware
Franchising Company

Subway
Franchising Terms

Franchisee


An entrepreneur whose power is limited
by a contractual agreement with a
franchisor
Franchisor

The party in the franchise contract that
specifies the methods to be followed
and the terms to be met by the other
party
Advantages of Franchising


Proven market for the product or
service.
Services the Franchisor May Provide
1. Selection of Location
2. Purchase or Construction of Site,
Buildings, and Equipment
3. Provision of Financing
Advantages of Franchising

Services the Franchisor May Provide
(cont.)
4.
5.
6.
7.
Standardized Methods of Operating
Advertising
Purchasing Advantages
Training
Potential Disadvantages of Franchising




Lack of Independence
Cost of the Franchise
Unfulfilled Promises
Restrictions of the Contract



Product or Service Offered
Line Forcing
Termination
Read the Fine Print
Potential Disadvantages of Franchising
(cont)





Saturation of the Market
Lack of Security
Cost of Merchandise
Effectiveness of Promotion
Exaggeration of Financial Success
Evaluation of a Franchise Opportunity








1.Unproven versus Proven Franchise
2.Financial Stability of Franchise
3.Potential Market for the New Franchise
4.Profit Potential for a New Franchise
5.Territorial Protection
6.Training and Operations Assistance
7.Contract Length and Renewal and Termination
Terms
8.What current Owners are Saying About their
Franchise
The Entrepreneur as Franchisor

What businesses can be franchised?

Bull Dog Fitness
Should franchise information provided by
a franchisor be discounted? Why or why
not?
 What problems might arise in con
consulting previous franchisees in the
process of evaluating a franchise?

Bull dog Fitness
The Entrepreneur as Franchisor

How does one become a franchisor?
1. Establish a prototype.
2. Prepare the necessary information.
3. Investigate the legal requirements.
4. Develop a planned and standardized
program of operations.
5. Obtain adequate financing.
Cerealicious
Franchising in the Future




“Piggybacking”: Two or more
franchise operating in one outlet.
“Branchising”: Converting existing
chain outlets to franchises.
“Mini-franchises”: Small satellite
versions of larger franchises.
Growth of service-based and homebased franchises