Franchising and Acquisitions
Starting a Business using Non-Traditional Methods
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-1
Chapter Learning Objectives
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
1.
2.
3.
4.
5.
Entrepreneurship &
Economic
Development
To understand franchising from the perspective of both
the entrepreneur looking to reduce the risk of new entry.
To understand how to evaluate a franchise that is for
sale.
To be aware of the pros and cons of using acquisitions
as a start-up strategy.
To become aware of the different methods of evaluating
a business that is for sale.
To understand the tasks of negotiation and develop the
skills to more effectively conduct these tasks.
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-2
Chapter Opening Profile
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Greg Guy
Graduated university and wanted to be an
entrepreneur
•Purchased Buying in Bulk franchise for $100,000
•Liked the idea of a franchise with training and
assistance
•Did not practice due diligence to fully investigate
the opportunity
•Paid relatively high royalties and rent to franchisor
as per the franchise agreement
•Did not receive any marketing support for his area
•Walked away when agreement up for renewal
•Purchased Play More Pool franchise
•“The key is to do your homework in advance and buy
the right franchise.”
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-3
Franchising
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
•
•
•
Franchising (definition): the right or licence granted by a company
to an individual or group to market its products or services in a
specific territory
Franchisor: a person or corporation that offers a franchise
Franchisee: an entrepreneur who purchases a franchise
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-4
Advantages/Disadvantages to the Franchisee
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Advantages
Disadvantages
•
•
•
•
•
•
•
•
•
•
Less risk
Product acceptance
Management expertise
Capital requirements
Start-up assistance
Knowledge of the market
Operating and structural
controls
Ongoing marketing support
•
•
•
Loss of independence
Costs and determining price:
royalties
The franchise agreement
Over-saturation
Size/strength of network
matters
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-5
Advantages/Disadvantages to the Franchisee
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
Disadvantages
The franchise agreement:
•Control over the marketing mix
•Franchisor can force franchisee to sell
unprofitable products or set prices below
the breakeven point
•Renewal and termination
•Costs of supplies
•Some franchisors gouge franchisees and
force them to pay high prices for pizza
boxes and other supplies
•Remodeling Clauses
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-6
Advantages/Disadvantages to the Franchisee
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Disadvantages
Over-saturation
•Some franchisors have overly aggressive
expansion strategies
•Right of first refusal handicaps new franchisees in
existing markets
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-7
Advantages/Disadvantages to the Franchisee
Chapter 8
•
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
Franchising as an expansion strategy offers:
– Less risk due to using other peoples’ money
– Fewer employees required
– Cost advantages due to economies of scale: helps in
purchasing and marketing expenses
– Potential for problems
between franchisees and
franchisor
– Difficulty in finding quality
franchisees
– Weak performance of
franchisees reflects badly on
the whole network
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-8
Types of Franchises
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
• Dealership: act as retail stores for the manufacturer
• Branded business: name, image, and method of doing
business; such as fast food, automotive repair, hotels
• Branded Services:
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
established name, reputation,
and method of doing
business; real estate
agencies
•
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
Franchise Opportunities:
– Good health
– Time saving or
convenience
– Environmental
consciousness
– The second baby
boom
8-9
Investing in a Franchise
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Factors to be considered:
– Unproven versus proven franchise
• Price is inversely related to risk
– Financial stability of franchise
• Track record of existing franchisees
– Is the franchisor making money by selling franchisees
or
– operating a successful network of profitable
franchisees?
– Potential market for the new franchise
– Profit potential for a new franchise
– Territorial protection
– Training & Operations assistance
– Contract Length
– Contract Renewal
Do your research!
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-10
Information Potential Franchisees Should Ask For
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-11
Information Potential Franchisees Should Ask For
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-12
Acquisition of an Existing Business
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Advantages
Disadvantages
• Established business
• Location
• Established marketing
structure
• Cost
• Existing employees
• More opportunity to be
creative
• Reduce the number of
competitors
• Reduction in start-up time
• Marginal success record
– Location
– Facility
– Management
• Overconfidence in ability
• Key employee loss
• Business is over-valued
• Paying too much for
Goodwill
– Means the “favourable
reputation”
• Lack of financial disclosure
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-13
Acquisition of an Existing Business
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
•
•
•
•
•
Finding a business that is for sale
Current business contacts
Current personal contact
Commercial Real Estate Sales agents
Advisors
• Accountants
• Bankers
• Lawyers
• Websites
• Newspapers
• Trade magazines
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-14
Investigating a Potential Acquisition
Chapter 8
•
Financial assessment:
– Validity of the statements and accounting methods used
– Financial condition of the business
•
Industry and market
analysis:
– Competitors
– Trends in the industry
– Economy
– Market condition
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
•
Assets of the business:
– Condition
– Usage of assets
– Definition of assets
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-15
Investigating a Potential Acquisition
Chapter 8
•
Human resources:
– Are there any key employees?
– What do they intend to do upon the sale of the business?
– What is the management like? Will changes have to be
made?
•
Other considerations:
– Owner’s motive(s) for selling?
– Pending laws or regulations
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-16
Evaluating a Potential Acquisition
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
People can have varying opinions looking at the
same business:
This text focuses on
– Discuss factors entrepreneurs should look when
evaluating buying a business
– Discuss some evaluation methods
– Introduce a “combination method” that draws on
many other evaluation techniques
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-17
Investigating a Business for Sale
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
• Synergies between your existing business?
• Opportunity to complement each other?
• Can the business be integrated into existing
businesses?
• What resources can be
• Market capitalization or
brought into the business?
multiple method:
– Price of business
• Management capabilities
– Net income (weighted)
• Industry outlook
divided by the desired rate of
return based as a decimal
– $200,000/.25
– Equals $800,000
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-18
Combination Method
Chapter 8
•
Concept &
Development of
Entrepreneurship
Based on the premise that an entrepreneur is only interested
in how much cash can be earned and paying for tangible
assets
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-19
Combination Method (continued)
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-20
Combination Method (continued)
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-21
Structuring the Deal
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
• Only make an offer after inspecting all financial records
• The 2 most common means of acquisition are
– The entrepreneurs direct purchase of the firm’s entire
stock or assets
• The entrepreneur obtains funds from a lender
• Or the “bootstrap” purchase of these assets
– Acquire a small amount of the firm, eg 20% for cash
– Then purchase the remainder with a long-term note
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-22
Structuring the Deal
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
• Leveraged buyout (definition): purchasing an existing
venture by an entrepreneur or employee group
– Use of borrowed funds to buy undervalued assets,
improve the business, and then re-sell or hold
– Debt to equity usually
exceeds 5:1
• Looking for:
– Key success factor is the
– Reasonable asking price
for the business
new owner’s ability to
– Debt capacity of the
cover the debt payments
business
from the cash flow of the
– An appropriate financial
business
Entrepreneurship
package
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-23
Negotiating for More Resources
Chapter 8
Concept &
Development of
Entrepreneurship
• Distribution task (definition): negotiating how the benefits
of the relationship will be allocated between the parties
• Integration task (definition): exploring possible mutual
Entrepreneurial
Decision Process
Types of Start-up
Ventures
Entrepreneurship &
Economic
Development
benefits from the relationship so that the “size of the pie” can
be increased
• Reservation price (definition): the price (the bundle of
resources from the agreement) at which the entrepreneur is
indifferent about whether to accept the agreement or choose
the alternative
• Bargaining zone (definition): the range of outcomes
Ethics and Social
Responsibility
Entrepreneurship
between the entrepreneur’s reservation price and the
reservation price of the other party
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-24
Negotiating for More Resources (continued)
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
• Assessments:
– What will you do if an agreement is not reached?
– What will the other party to the negotiation do if an
agreement is not reached?
– What are the underlying issues of this negotiation?
Types of Start-up
Ventures
• How important is each issue to you?
• How important is each issue to the other party?
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-25
Negotiating for More Resources (continued)
Chapter 8
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
• Strategies:
– Build trust and share information
– Ask lots of questions
– Make multiple offers simultaneously
Types of Start-up
Ventures
– Use differences to create trade-offs that are a source
of mutually beneficial outcomes
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
8-26
Chapter Closing Comments
Chapter 8
1.
Concept &
Development of
Entrepreneurship
Entrepreneurial
Decision Process
Types of Start-up
Ventures
2.
Entrepreneurship &
Economic
Development
Ethics and Social
Responsibility
Entrepreneurship
To understand franchising
from the perspective of both
the entrepreneur looking to
reduce the risk of new entry
and from the entrepreneur
looking for a way to grow
his or her business.
To understand how joint
ventures can help an
entrepreneur grow his or
her business and
acknowledge the
challenges of finding, and
maintaining an effective
joint venture relationship.
3.
4.
5.
2nd Canadian Edition © 2009 McGraw-Hill Ryerson Ltd.
To be aware of the pros and
cons of using acquisitions as
a start-up or growth strategy.
To understand the
possibilities of achieving
growth through mergers and
leveraged buyouts and the
challenges associated with
each.
To understand the tasks of
negotiation and develop the
skills to more effectively
conduct these tasks.
8-27