14-2Using External Parties to Help Growa Business Some of the mechanisms entrepreneurs canuse are: Franchising. Joint ventures. Acquisitions. Mergers.
14-3Franchising An arrangement whereby the manufactureror sole distributor of a trademarked productor service gives exclusive rights of localdistribution to independent retailers inreturn for their payment of royalties andconformance to standardized operatingprocedures. The person offering the franchise is known asthe franchisor. The franchisee is the person who purchases thefranchise.
14-4 Advantages of Franchising—to theFranchisee Product acceptance - Has an accepted name,product, or service. Management expertise - Managerial assistanceprovided by the franchisor. Capital requirements - Up-front support cansave entrepreneur significant time and capital. Knowledge of the market - Offers experience inbusiness and market. Operating and structural controls – Helps instandardization and administrative controls.Franchising (cont.)
14-5 Advantages of Franchising—to theFranchisor Expansion risk Allows venture to expand quickly using little capital. Business can be expanded nationally and eveninternationally. Requires fewer employees than a non-franchisedbusiness. Cost advantages Supplies can be purchased in large quantities toachieve economies of scale. Ability to commit larger sums of money to advertising.Franchising (cont.)
14-6 Disadvantages of Franchising Inability of the franchisor to provide services,advertising, and location. Franchisor’s failing or being bought out byanother company. Difficulty in finding quality franchisees. Poor management can cause individual franchisefailures. The ability to maintain tight control overfranchises becomes difficult as their numberincreases.Franchising (cont.)
14-7 Types of Franchises Dealership - Acts as a retail store for themanufacturer. Franchise that offers a name, image, andmethod of doing business. Franchise that offers services. Changes that helped evolve franchisingopportunities: Good health. Time saving or convenience. Health care. The second baby boom.Franchising (cont.)
14-8Investing in a Franchise Factors to be assessed before making thefinal 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 fullpresale disclosure. The franchise agreement contains therequirements and obligations of thefranchisee.
14-9Table 14.2 - Information Requiredin Disclosure Statement
14-10Table 14.2 - Information Requiredin Disclosure Statement (cont.)
14-11Joint Ventures A separate entity that involves apartnership between two or more activeparticipants. Types of Joint Ventures: Between private-sector companies. Objectives - Entering new/ foreign markets, raisingcapital, cooperative research, etc. Industry–university agreements. Created for the purpose of doing research. International joint ventures.
14-12Joint Ventures (cont.) Factors in Joint Venture Success: The accurate assessment of the partiesinvolved to best manage the new entity. The degree of symmetry between the partners. The expectations of the results of the jointventure must be reasonable. The timing must be right.
14-13Acquisitions The purchase of an entire company, or partof a company; the company no longerexists independently. Advantages of an Acquisition Established business. Location. Established marketing structure. Cost. Existing employees. More opportunity to be creative.
14-14 Disadvantages of an Acquisition Marginal success record. Overconfidence in ability. Key employee loss. Overvaluation. Synergy “The whole is greater than the sum of itsparts.” Synergy should occur in both the businessconcept and the financial performance.Acquisitions (cont.)
14-15 Structuring the Deal Involves the parties, the assets, the paymentform, and the timing of the payment. Two most common means of acquisition: Entrepreneur’s direct purchase of stock or assets. Bootstrap purchase of assets.Acquisitions (cont.)
14-16 Locating Acquisition Candidates Brokers, accountants, attorneys, bankers,business associates, and consultants may knowof candidates. Business opportunities in newspapers or trademagazines.Acquisitions (cont.)
14-17Mergers Key concern - Legality of the purchase. Process: Determine the merger objectives and resultinggains for both companies. Carefully evaluate the other company’smanagement. Determine the value and appropriateness of theexisting resources. Establishing a climate of mutual trust. Determine the value of a merger candidate.
14-19Leveraged Buyout An entrepreneur (or any employee group)uses borrowed funds to purchase anexisting 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.
14-20Overcoming Constraints byNegotiating for More Resources Distribution task - Negotiating how thebenefits of the relationship will be allocatedbetween the parties. Integration task - Exploring possible mutualbenefits from the relationship so that the“size of the pie” can be increased.
14-21 Assessment 1: What will you do if anagreement is not reached? Best alternative to a negotiated agreement. Determine a reservation price.Overcoming Constraints by Negotiatingfor More Resources (cont.)
14-22 Assessment 2: What will the other party tothe negotiation do if an agreement is notreached? Difficult to assess reservation price. Bargaining zone - Range of outcomes betweenthe entrepreneur’s reservation price and that ofthe other party.Overcoming Constraints by Negotiatingfor More Resources (cont.)
14-23 Assessment 3: What are the underlyingissues of this negotiation? How important iseach issue to you? Focus on achieving aspects most desirable bytrading off aspects of less importance.Overcoming Constraints by Negotiatingfor More Resources (cont.)
14-24 Assessment 4: What are the underlyingissues of this negotiation? How important iseach issue to the other party? Provides the entrepreneur an opportunity tosacrifice aspects of less importance to him/ herbut of high importance to the other party.Overcoming Constraints by Negotiatingfor More Resources (cont.)
14-25 Negotiation strategies: Build trust and share information. Ask lots of questions. Make multiple offers simultaneously. Use differences to create trade-offs that are asource of mutually beneficial outcomes.Overcoming Constraints by Negotiatingfor More Resources (cont.)