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SMB18eCh04.ppt
1.
Small Business Management, 18e Longenecker/Petty/Palich/Hoy ©
2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
2.
Franchises and Buyouts Chapter
4 © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3.
Learning Goals Define
franchise and become familiar with franchise terminology. Understand the pros and cons of franchising and the structure of the industry. Describe the process for evaluating a franchise opportunity. List four reasons for buying an existing business, and describe the process for evaluating an existing business. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4.
What is a
Franchise? Franchising Involves a business owner who licenses trademarks and methods to an independent entrepreneur. Franchisor Party in contract that specifies methods to be followed/terms to be met by the other party. Franchisee An entrepreneur whose power is limited by a contractual agreement with a franchising organization. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
5.
Franchising Options © 2017
Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Area developers Product and trade name franchising Multiple-unit ownership Co-branding Types of Franchising Arrangements Piggyback franchising Multi-brand franchising Business format franchising Master licensee
6.
Probability of Success ◦
Proven line of business ◦ Pre-qualification of franchisee ◦ Training Support Franchisor-provided ◦ Financial assistance Franchisor assistance ◦ Operating benefits Franchisor-aided Franchise Costs ◦ Initial franchise fee ◦ Investment costs ◦ Royalty payments ◦ Advertising costs ◦ Restrictions on business operations ◦ Loss of independence ◦ Lack of franchisor support 4–6 © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Pros and Cons of Franchising
7.
© 2017 Cengage
Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Advantages of the Franchise Model 4.1
8.
Concerns About Franchising ©
2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1. Misleading or exaggerated earnings claims by franchisors 2. Opportunity behavior by which the franchisor becomes a competitive threat to franchisees 3. Restrictions on franchisees who desire to liquidate their holdings in favor of alternative investment opportunities 4. Conflicts of interest, such as when a franchisor forces franchisees to be captive outlets for other suppliers owned by the franchisor 5. Churning: terminating a successful franchise operation in order to resell it and gain additional franchise fees 6. Encroachment: locating a new outlet or point of distribution too close to an existing franchisee, causing a material loss of sales 7. Imposing noncompete clauses on franchisees 8. One-sided contracts devised by franchisors 9. The imposition of new restrictions as a requirement of contract renewal 10. Franchisor intimidation of franchisees who attempt to form franchisee associations, seek alternative sources for products, or make other efforts to create a more level playing field
9.
Franchisor Controls on Franchisees
Limiting sales territories Requiring site approval Imposing requirements on outlet appearance Limiting goods and services offered for sale Limiting advertising and hours of operation 4–9 © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
10.
Evaluating Franchise Opportunities Selecting
a Franchise Personal observation Advertisements Investigating the Potential Franchise Information sources Independent, third-party sources • Federal Trade Commission • Internet • Franchise consultants © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
11.
Evaluating Franchise Opportunities (cont.)
Investigating the Potential Franchise (cont.) Franchisors themselves • Disclosure documents Franchisors themselves • Disclosure documents Existing and previous franchisees © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
12.
Franchise Disclosure Requirements Franchise
Rule A rule issued by the Federal Trade Commission that prescribes that the franchisor must disclose certain information to prospective franchisees. • Franchise Disclosure Document (FDD) Is a detailed statement of the franchisor’s finances, experience, size, and involvement in litigation. Must inform potential franchisees of any restrictions, costs, and provisions for renewal, termination, or sale of the © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
13.
Buying an Existing
Business © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4–13 Reduction of uncertainties of startup Acquisition of ongoing operations and customer relationships A quick start in the business A bargain purchase price for the business
14.
Reasons for Buying
an Existing Business 1. Reduce uncertainties and unknowns when starting a business from the ground up 2. Acquire a business with ongoing operations and established relationships 3. Obtain an established business at a price below what it would cost to start a new one 4. Get in more quickly than by starting from scratch © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
15.
Finding a Business
to Buy 1. Identify your interests 2. Consider your talents 3. List conditions for your business 4. Quantify your investment © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
16.
Investigating and Evaluating Available
Businesses • Due Diligence The exercise of reasonable care in the evaluation of a business opportunity. • Business Brokers Specialized brokers that bring together buyers and sellers • Relying on Professionals Accountants Attorneys Other experienced business owners © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
17.
© 2017 Cengage
Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10. Advertisement materials 11. Inventory receipts/lists 12. Organization charts 13. Payroll, benefits, and employee pension/profit- sharing information 14. Employee roster 15. Certification by federal, state or local agencies 16. List of owners 1. Contracts and lease agreements 2. Financial statements 3. Tax returns 4. Real and personal property documents 5. Bank accounts 6. Customer lists 7. Sales records 8. Supplier/purchaser lists 9. Contracts Due Diligence for Purchasing a Business 4.4
18.
Examining the Financial
Data • Sign nondisclosure agreement to not reveal confidential information about the business. • Review financial statements and tax returns for the past five years. • Recognize that financial data can be misleading. • Adjust asset valuations to reflect the true state of the business (fair market value). © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
19.
Valuing the Business
(Quantitative Factors) • 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 price 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. © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
20.
Valuing the Business (Nonuantitative
Factors) • Competition • Market • Future community development • Legal commitments • Union contracts • Buildings • Product prices © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
21.
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 © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
22.
Key Terms area developers business
brokers business format franchising churning co-branding due diligence encroachment Franchise franchise contract Franchise Disclosure Document (FDD) Franchisee Franchise Rule franchisor master licensee multibrand franchising multiple-unit ownership nondisclosure agreement piggyback franchising product and trade name franchising © 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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