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PowerPoint Presentation - Dr. Clive Vieland-Boddy


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									Growing and Managing
  a Small Business
  An Entrepreneurial Perspective

     Dr Clive Vlieland-Boddy

Acquiring a Business and Franchising

        Learning Outcomes
• 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
  small business
• Explain how to negotiate a small business
        Outline of this Session

                           Getty Images
• Franchising
   – A marketing system revolving around a two-party
     agreement, whereby the franchisee conducts
     business according to the terms specified by the
• Franchisee
   – An entrepreneur whose power is limited by a
     contractual agreement with a franchisor
• 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,
  or service
• 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
•   McDonald’s
•   Subway
•   Burger King
•   7-Eleven
•   Domino’s Pizza
•   Hardee’s
•   The UPS Store
•   KFC

       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
      • Franchisor-provided

  – 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
       Opportunity Includes
• 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
  associated policies
• 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

       Franchising Arrangements
• Product and Trade Name Franchise
  – Grants the right to use a widely recognized product
    or name
• 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

       Franchising Arrangements
• 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
  the industry?
• 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
           about Franchises
•   www.franchise1.com
•   www.franchising.com
•   www.en.wikipedia.org/wiki/franchising
•   www.franchising.org
•   www.franchiseinfosite.com

                                      Getty Images

Buying an Existing Business?
                  Acquisition of
Reduction of     Operations and
Uncertainties     Relationships

                          A Quick Start
 A Bargain

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
         Available Businesses
• Due Diligence
   – The exercise of prudence, such as would be expected
     of a reasonable person, in the careful evaluation of a
     business opportunity.
   – Economies of scale & Scope
• Relying on Professionals
   – Accountants
   – Lawyers
   – 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
  business.                                             27
       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
• Competition
• Market
• Future Community
• Legal Commitments
• Union Contracts
• Buildings
• 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
        and guarantees
      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.


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