Growing and Managing
a Small Business
An Entrepreneurial Perspective
Dr Clive Vlieland-Boddy
Acquiring a Business and Franchising
• List the reasons why entrepreneurs choose to
purchase existing businesses
• Discuss the criteria for finding the right
• Explain how to research a potential business
• Compare and contrast franchising with buying
an existing independent business
• Discuss the various techniques for valuing a
• Explain how to negotiate a small business
Outline of this Session
• FINDING THE RIGHT BUSINESS
• VALUING A SMALL BUSINESS
• NEGOTIATING THE ACQUISITION
– A marketing system revolving around a two-party
agreement, whereby the franchisee conducts
business according to the terms specified by the
– An entrepreneur whose power is limited by a
contractual agreement with a franchisor
– The party in the franchise contract that specifies
the methods to be followed and the terms to be
met by the other party
What is a FRANCHISE?
A form of business where the franchisor sells or
provides to a franchisee:
• the right to do business under a particular trade
name or brand
• the right to use/sell a proprietary product, process,
• training and assistance in setting up the business
• a business and marketing plan
• economies of scale for purchasing and marketing
• a financial (accounting) system
• regular inspection and quality checks once the
business is established 6
Most Successful Franchises
• Burger King
• Domino’s Pizza
• The UPS Store
The Pros and Cons of Franchising
• Advantages • Limitations
– Probability of success – Franchise costs
• Proven line of business • Initial franchise fee
• Pre-qualification of franchisee • Investment costs
• Overall lower failure rates • Royalty payments
– Training • Advertising costs
– Financial assistance – Restrictions on business
• Loans & loan guarantees
• Products sold
– Operating benefits • Hours of operation
• Location feasibility study • Restrictions on expansion/growth
• Marketing assistance • Franchisor only source of supplies
• Quick start-up time
– Loss of independence
– Lack of franchisor support
• Termination/renewal clauses
Franchisor Controls on Franchisees
• Restricting of sales territory
• Requiring site approval and imposing requirement
on the outlet’s appearance
• Restricting the goods or services that can be sold
• Requiring specific operating hours
• Controlling advertising
An Attractive Franchise
• Registered trademarks
• Successful prototype stores with a track
record of profitability and a positive
• A business that can be systematized so
that it can be easily replicated.
• A product or service that can be
successful in many different geographic
An Attractive Franchise
Opportunity Includes – Contd…
• An operations manual that specifies all the
functions of the business and their
• A training and support system
• Site selection criteria and architectural
• A detailed prospectus that spells out the
franchisee’s rights, responsibilities, and
Three Types of Franchise Opportunities
and their Associated Risks and Benefits
• Product and Trade Name Franchise
– Grants the right to use a widely recognized product
• Business Format Franchise
– Provides an entire marketing system and ongoing
guidance from the franchisor
• Master Licensee
– An independent firm or individual acting as a sales
agent with the responsibility for finding new
franchises within a specified territory
• Multiple-Unit Ownership
– The holding by a single franchisee of more than one
franchise from the same company
• Area Developers
– Individuals or firms that obtain the legal right to
open several franchised outlets in a given area
• Piggyback Franchising
– A retail franchise operation within the physical
facilities of a host store
Before Buying a Franchise
Questions to Ask Before Buying a Franchise
• Does the franchisor have an excellent reputation in
• Is the franchisor in partnership or any other legal
relationship with another franchisor? If so, how will
the franchisee be protected should that relationship
• Is the franchisee required to do anything that
appears questionable from a legal or ethical
• Under what circumstances can the franchisee or
franchisor terminate the franchise agreement and
what are the consequences to either party?
• Will the franchisor grant an exclusive territory? Is
that area subject to reduction or modification? If so,
under what conditions?
More Questions to Ask
Before Buying a Franchise
• Will the franchisor reveal the certified financial
figures for one of its franchises and can those
figures be verified with the franchisee?
• Will the franchisor provide a management training
program, an employee training program, public
relations and advertising support, or credit?
• Does the franchisor assist in finding a suitable
• What is the financial health of the franchisor? Can
financial statements be verified?
Even More Questions to Ask
Before Buying a Franchise
• What is the track record of the franchise?
• Has the franchisor conducted an in-depth
investigation of the franchisee to assure that he
or she has the necessary skills and financial
requirements to operate the business
• How much capital will be required to start and
operate the business to a positive cash flow?
Does the initial fee include an opening inventory
of products and supplies? What do royalties pay
for and how are they calculated?
Where to Find out
Buying an Existing Business?
Reduction of Operations and
A Quick Start
Good Reasons to Purchase an Existing
• It is less risky than starting from scratch, because facilities,
employees, and customers are likely to be in place.
• To acquire a business with ongoing operations and
established relationships with loyal customers and reliable
• The business has established trade credit, which is crucial
because relationships with suppliers and others take a long
time to develop.
• It is an easier route to owning a business if the entrepreneur
has limited business experience, especially if the owner
stays on for a time to help with the transition.
• To begin a business more quickly than starting from scratch.
• To obtain an established business at a price below what a
new business or franchise would cost
Summary of Pros and Cons of Buying
an Existing Business
• Pros • Cons
– Higher chance of – Inherited problems
success – Poor quality of current
– Less planning employees
– Existing customers/ – Poor business image
suppliers – Modernization required
– Necessary equipment – Purchase price based
– Bargain price on inaccurate data
– Experienced – Poor business location
– Existing business
What to Look For in a Business
• A business that had a broad scope that would
insulate it from market downturns.
• A business with existing customers and vendors.
• A low-tech business but with high growth.
• A market that was not so large so as to
encourage major players but not so small that
the company couldn’t grow.
• Available float from suppliers; in other words,
leeway in having to pay vendors.
• Manageable seasonality.
• Cost cutting potential
Investigating and Evaluating
• Due Diligence
– The exercise of prudence, such as would be expected
of a reasonable person, in the careful evaluation of a
– Economies of scale & Scope
• Relying on Professionals
– Other experienced business owners
Find Out Why the Business Is For Sale
• Owner’s stated reasons for selling the
– Poor health or illness in the family
– Wants to retire while he can still enjoy life
– Desires to relocate to a different section of the country
– Has accepted a position working for another company
– Wants to start a new business in a different industry
– Has to sell the business to generate funds to settle a
divorce, lawsuit, etc.
Beware of sellers who may have priced the business at more
than its worth, or who have “cooked the books” to make the
business appear to be more attractive than it really is.
The REAL reason the Business Is For Sale
• Larger companies are squeezing the firm out of the
• Key employees have been leaving
• Reaching end of product life cycles. Lack of R & D
• The industry is very mature and there aren’t any
new ways or places to grow
• Competitors’ products (or services) are superior
• The business has developed a negative reputation
in the community
• The firm is facing a pending lawsuit
• The business is just not profitable
• The physical facilities are old or obsolete and in
need of major renovation/repairs 26
Examining the Financial Data
• Review financial statements and tax returns for the
past five years.
• Recognize that financial data can be misleading.
– Assets overvalued
– Expenses over-stated or under-stated
– Income under-reported or over-reported
– Unrecorded debts
– Order Book & Customer Base
• Adjust asset valuations to reflect the true state of the
Valuing the Business
• Asset-Based Valuation
– Estimates the value of the firm’s assets; does
not reflect the value of the firm as a going
• Market-Comparable Valuation
– Considers the sale prices 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. 28
Non-quantitative Factors in
Valuing a Business
• Future Community
• Legal Commitments
• Union Contracts
• Product Prices
• Product life cycles
Placing a Value on a Service
• The biggest asset of a service company is its employees,
including senior management, followed by customers and
the business system.
• The value of a service company is found in the quality of the
relationship between its management (staff) and customers.
Without those relationships, there is no business.
Negotiating and Closing the Deal
• Negotiating the Terms of the Agreement
– Continuation agreement
– Non-competition clause
– Seller financing
• Earn-outs and Indemnification agreements
– The final price
– Full payment Vs installments
• Closing the sale
– Best handled by a third party
• Bill of sale
• Tax certifications
• Payment agreements
Do Your RESEARCH!
• Develop a set of criteria for judging the
business based on the entrepreneur’s
needs and goals.
• Understand the industry and the market
niche in which the business will operate.
• Examine the records of the business
More Ways to RESEARCH!
• Talk to employees, suppliers, and customers
• Examine equipment and facilities to make certain
they are current and in good working order
• Examine all contracts
• Verify the value of the business based on
industry statistics and perhaps the advice of a
professional business appraiser.