Chapter 14
Accessing Resources for
Growth from External
Sources
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Hisrich
Peters
Shepherd
Using External Parties to Help Grow
a Business
 Some of the mechanisms entrepreneurs
can use are:




Franchising.
Joint ventures.
Acquisitions.
Mergers.
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Franchising
 An arrangement whereby the manufacturer
or sole distributor of a trademarked product
or service gives exclusive rights of local
distribution to independent retailers in
return for their payment of royalties and
conformance to standardized operating
procedures.
 The person offering the franchise is known as
the franchisor.
 The franchisee is the person who purchases the
franchise.
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Franchising
(cont.)
 Advantages of Franchising—to the
Franchisee
 Product acceptance - Has an accepted name,
product, or service.
 Management expertise - Managerial assistance
provided by the franchisor.
 Capital requirements - Up-front support can
save entrepreneur significant time and capital.
 Knowledge of the market - Offers experience in
business and market.
 Operating and structural controls – Helps in
standardization and administrative controls.
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Franchising
(cont.)
 Advantages of Franchising—to the
Franchisor
 Expansion risk
 Allows venture to expand quickly using little capital.
 Business can be expanded nationally and even
internationally.
 Requires fewer employees than a non-franchised
business.
 Cost advantages
 Supplies can be purchased in large quantities to
achieve economies of scale.
 Ability to commit larger sums of money to advertising.
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Franchising
(cont.)
 Disadvantages of Franchising
 Inability of the franchisor to provide services,
advertising, and location.
 Franchisor’s failing or being bought out by
another company.
 Difficulty in finding quality franchisees.
 Poor management can cause individual franchise
failures.
 The ability to maintain tight control over
franchises becomes difficult as their number
increases.
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Franchising
(cont.)
 Types of Franchises
 Dealership - Acts as a retail store for the
manufacturer.
 Franchise that offers a name, image, and
method of doing business.
 Franchise that offers services.
 Changes that helped evolve franchising
opportunities:




Good health.
Time saving or convenience.
Health care.
The second baby boom.
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Investing in a Franchise
 Factors to be assessed before making the
final decision:




Unproven versus proven franchise.
Financial stability of franchise.
Potential market for the new franchise.
Profit potential for a new franchise.
 Franchisors are required to make a full
presale disclosure.
 The franchise agreement contains the
requirements and obligations of the
franchisee.
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Table 14.2 - Information Required
in Disclosure Statement
14-9
Table 14.2 - Information Required
in Disclosure Statement (cont.)
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Joint Ventures
 A separate entity that involves a
partnership between two or more active
participants.
 Types of Joint Ventures:
 Between private-sector companies.
 Objectives - Entering new/ foreign markets, raising
capital, cooperative research, etc.
 Industry–university agreements.
 Created for the purpose of doing research.
 International joint ventures.
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Joint Ventures
(cont.)
 Factors in Joint Venture Success:
 The accurate assessment of the parties
involved to best manage the new entity.
 The degree of symmetry between the partners.
 The expectations of the results of the joint
venture must be reasonable.
 The timing must be right.
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Acquisitions
 The purchase of an entire company, or part
of a company; the company no longer
exists independently.
 Advantages of an Acquisition






Established business.
Location.
Established marketing structure.
Cost.
Existing employees.
More opportunity to be creative.
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Acquisitions
(cont.)
 Disadvantages of an Acquisition




Marginal success record.
Overconfidence in ability.
Key employee loss.
Overvaluation.
 Synergy
 “The whole is greater than the sum of its
parts.”
 Synergy should occur in both the business
concept and the financial performance.
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Acquisitions
(cont.)
 Structuring the Deal
 Involves the parties, the assets, the payment
form, and the timing of the payment.
 Two most common means of acquisition:
 Entrepreneur’s direct purchase of stock or assets.
 Bootstrap purchase of assets.
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Acquisitions
(cont.)
 Locating Acquisition Candidates
 Brokers, accountants, attorneys, bankers,
business associates, and consultants may know
of candidates.
 Business opportunities in newspapers or trade
magazines.
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Mergers
 Key concern - Legality of the purchase.
 Process:
 Determine the merger objectives and resulting
gains for both companies.
 Carefully evaluate the other company’s
management.
 Determine the value and appropriateness of the
existing resources.
 Establishing a climate of mutual trust.
 Determine the value of a merger candidate.
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Figure 14.1 - Merger Motivations
14-18
Leveraged Buyout
 An entrepreneur (or any employee group)
uses borrowed funds to purchase an
existing venture for cash.
 Long-term debt financing is provided by banks,
venture capitalists, and insurance companies.
 Acquired firm’s assets serve as collateral.
 Evaluation procedure:
 Determine whether asking price is reasonable.
 Assess the firm’s debt capacity.
 Develop the appropriate financial package.
14-19
Overcoming Constraints by
Negotiating for More Resources
 Distribution task - Negotiating how the
benefits of the relationship will be allocated
between the parties.
 Integration task - Exploring possible mutual
benefits from the relationship so that the
“size of the pie” can be increased.
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Overcoming Constraints by Negotiating
for More Resources (cont.)
 Assessment 1: What will you do if an
agreement is not reached?
 Best alternative to a negotiated agreement.
 Determine a reservation price.
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Overcoming Constraints by Negotiating
for More Resources (cont.)
 Assessment 2: What will the other party to
the negotiation do if an agreement is not
reached?
 Difficult to assess reservation price.
 Bargaining zone - Range of outcomes between
the entrepreneur’s reservation price and that of
the other party.
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Overcoming Constraints by Negotiating
for More Resources (cont.)
 Assessment 3: What are the underlying
issues of this negotiation? How important is
each issue to you?
 Focus on achieving aspects most desirable by
trading off aspects of less importance.
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Overcoming Constraints by Negotiating
for More Resources (cont.)
 Assessment 4: What are the underlying
issues of this negotiation? How important is
each issue to the other party?
 Provides the entrepreneur an opportunity to
sacrifice aspects of less importance to him/ her
but of high importance to the other party.
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Overcoming Constraints by Negotiating
for More Resources (cont.)
 Negotiation strategies:




Build trust and share information.
Ask lots of questions.
Make multiple offers simultaneously.
Use differences to create trade-offs that are a
source of mutually beneficial outcomes.
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