SAV 22.31 Handouts _1-11_ by ashrafp


                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /

          Problems faced by Small Scale Enterprises

          Small scale enterprises quite often face distinctive problems. These are:

          1.            Difficulty in obtaining credit from commercial banks because of their general inability to
                        provide security.

          2.            Inability to offer liberal credit terms in the sale of their products.

          3.            Absence of management expertise. Often management is by one person who performs a
                        number of functions usually with no formal training.

          4.            Difficulty in competing with imported products due to high production costs.

          5.            Difficulty with competition from other local entrepreneurs in the same line of business
                        competing for the limited local market.

          6.            Difficulty in obtaining industrial land in towns and cities. The shortage of industrial land is
                        giving rise to more and more backyard operations.

          7.            Under capitalisation.

          8.            Difficulty in identifying appropriate technology and technical assistance.

          9.            The manner in which both the needs of the economy and linkage with existing industry can
                        best be served.

          10.           Bureaucratic red tape and regulations.

                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /

                                 Summary of the role of Small Firms in the Economy

          1.            The small firm provides a productive outlet for the energies of that large group of
                        enterprising and independent people who set great store by economic independence and
                        many of whom are antipathetic or less suited to employment in any organisation but who
                        have much to contribute to the vitality of the economy.

          2.            In industries where the optimum size of the production unit or the sales outlet is small, often
                        the most efficient ( as measured, say by profitability ) of business organisation is a small
                        firm. For this reason many important trades and industries consist mainly of small firms.

          3.            Small firms add greatly to the variety of products and services offered to the consumer
                        because they can flourish in a limited or specified market which it would not be worthwhile
                        or economic for a large firm to enter.

          4.            Many small firms act as specialist suppliers to large companies of parts, sub-assemblies,
                        components or services ( contracted-out labour, maintenance, etc. ) produced often at a
                        lower cost than the large companies could achieve. Small firms provide an important part
                        of the economic infrastructure upon which the economy depends.

          5.            In an economy in which even larger multi-product firms are emerging, small firms provide
                        competition, both actual and potential, and provide some check on monopoly profits and on
                        the inefficiency which monopoly might breed. In this way they contribute to the efficient
                        working of the economic system as a whole. Furthermore, big business knows that its
                        chance to continue under private auspices rest heavily upon the presence of many virile,
                        healthy small businesses, and so will aid their survival.

          SAV6/SAV22-SBM/H2-Role of SF/Nair/Sept99
6.          Small manufacturing firms, in spite of their relatively low expenditure on research and
            development in comparison to many sectors as a whole, are an important role in innovation
            because of the generally lower capital costs of development work.

7.          The small firm sector is a breeding ground for new industries.

8.          Small firms provide a means of entry into business for new entrepreneurial talent and the
            seed-bed from which new large companies can grow (although their numbers will be very
            small ) to challenge and stimulate the established leaders of industry.

9.          Small firms provide a means by which new resources, or resources which would otherwise
            lie dormant, can be brought into productive use and so increase output at a possibly
            marginal opportunity cost.     At the same time, small firms also provide an outlet for
            investment goods and investible funds.

10.         In a period of economic depression many unemployed people may go into self-employment
            ( and hence establish a new, small firm ) to tide themselves over until new employment
            opportunities develop.

11.         Small firms are important employers of skilled labour (e.g. engineering craftsmen) and
            many, as a result of their intensity, may help to maintain a skilled labour base in an area, or
            in an industry which largely routine semi and unskilled work is being provided in large

SAV6/SAV22-SBM/H2-Role of SF/Nair/Sept99
                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /

          COURSE                                  : SAV 22 SMALL BUSINESS MANAGEMENT/

          TERM                                    : 2/99 (September 1999)

          LECTURER                                : Dr Godwin Nair

                                       SAMPLE BUSINESS PLAN

          SAV6/SAV22-SBM/H3-Sample Business Plan/Nair/Sept99
                       A Business Plan for the Roaring '20s Museum

                                                     436 West Ontario Street
                                                      Chicago, Illinois 60610
                                                          (312) 555-5900


This Appendix presents the complete business plan for the Roaring '20s Museum, created by
Michael Y Graham. This plan was the international awardwitining business plan at the University of
Miami International Business Plan Competition. The business plan represents the hard work,
vision, and perseverance of an entrepreneur.

Michael Yore Graham personified a college professor's dream come true: a student dedicated to
doing whatever it takes to research, write, present, and defend an award-winning business plan, the
Roaring'20s Museum.
As you read Mike's plan, try to resist concluding that he must be a magician, creating the plan out of
smoke and mirrors. The plan's critical mass is Mike's vision, energy, and commitment blended
with his resourcefulness and willingness to adjust preconceived notions to the realities of business.

This plan was prepared and written by Michael Yore Graham, 345 Cleveland Avenue,
Libertyville, Illinois 60048. Reprinted with permission.

SAV6/SAV22-SBM/H3-Sample Business Plan/Nair/Sept99
                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /

          It is often difficult to figure out how to research your idea, especially if you have never been in
          business for yourself. You will need decide if your idea has profit potential.
          1. Use the following twenty steps as a guide to help you determine if your idea is worthwhile.

                 Create a profile of your paying customer.
                 List and describe the features/benefits of your product or service.
          2. Define the main geographic area you intend to sell to during your first year.
          3. What competitors are selling to this geographic area?
          4. What price do these competitors charge?
          5. Estimate what price you can charge, yet still remain competitive.
          6. Why would your customers buy from you instead of your competition?
          7. List and briefly describe trends in your market or industry.
          8. What is the growth potential of the market?
          9. How are you going to let your customer know you exist?
          10. Estimate Sales for the first year.
          11. List any government approvals necessary to launch your idea.
          12. Briefly describe your manufacturing or purchasing process.
          13. Briefly describe your fulfillment process.
                 Estimate the capacity of your operation in the first year.
          14. Make a list your potential suppliers
          15. Make a list of the resources you will require to start your business.
          16. Determine what resources you will finance, lease or rent.
          17. List your financial strengths and weaknesses.
          18. Prepare a monthly cash flow forecast for your first year of operation.

          SAV6/SAV22-SBM/H3-Sample Business Plan/Nair/Sept99
1. Create a profile of your paying customer.

Your customers might be consumers or retail stores, wholesalers or manufacturers, government or
other institutions. List as many points as you can about who you think will buy your product. If you
are selling to a consumer market, try collecting magazine pictures of what you think your customer
looks like. List their age, gender, marital status, income and try to describe their lifestyle.

If you expect to sell to another business or organization, estimate what industries they are in, what
kind of company, how long they have been in business, how many employees, their annual sales,
what department would be interested in your offer, who their customers are and anything else you
can identify.

2. List and describe the features of your product or service.
3. State how these features will benefit your customer. Defining the features of your idea and
   determine what these features do for your customer. You will create a list of the selling points
   that you can use in your advertising, your brochures, and in your sales presentation. This will
   help you establish why your customer might buy your product or service.

     Define the main geographic area you intend to sell to during your first year.
Are selling to your neighbourhood? Your community? HochiMinh City? Vietnam? By defining where you
are going to sell in your first year you immediately put yourself in focus. You will likely be able to figure out
how many potential customers are located in this area. If you are selling to a large geographic area, you
will probably need a good deal of money, marketing and resources. Defining this area makes it much
easier to figure out what your needs are going to be.

4. What competitors are selling to this geographic area?
Once you determine who and where your customers are, you must determine whom you have to
share them with. Find out if similar products are carried in retail outlets, similar companies
advertise in the yellow pages or are listed in industry directories.

5. What price do these competitors charge?
Establish what your competitors charge and list selling points of their product or service. Try to find
the industries wholesale and retail prices.

6. Estimate what price you can charge, yet still remain competitive.
Determining how competitive you can be is a big step toward how feasible your idea is. If your
product is superior to your competition and your market is not very price sensitive then you may be
able to charge considerably more than your competition. If you are selling to retailers or
wholesalers, you will have to leave enough room for others to mark your products up .

7. Why would your customers buy from you instead of your competition?
What is unique about your offer that would benefit your customer? There may be something
about your product, your price, the friendliness and speed of your service, your hours of
operation, your level of quality, the skills of your employees or other aspect of your business.

8. List and briefly describe trends in your market or industry.
Knowing trends in your market or industry will help you determine where it's going and how your
business can take advantage. Check business and industry/trade magazines for recent articles.
Some libraries have a "business periodicals index" to help you find these articles.

SAV6/SAV22-SBM/H3-Sample Business Plan/Nair/Sept99
9. What is the growth potential of the market?
Is your industry or market growing or declining? Are trends or fads new, peaking or declining?
Generally, you will be more successful being part of a growing market. Check business and
industry/trade magazines for recent articles.

10. How are you going to let your customer know you exist?
So now you know who your customer is, where they are and why they will buy your product. How
are you going to communicate your offer to them? Will you rely on having a good location? Will you
use advertising? Sales calls? Direct marketing? Yellow pages? You may find it helpful to examine
the Business Promotion Idea List.

11. Estimate Sales for the first year.
Base your estimates on the size of your market, level of competition, your price, your plans for
promotion and trends in your industry. Create a pessimistic, an optimistic, and a middle of the road

12. List any government approvals necessary to launch your idea.
There may be some extensive or expensive regulations involved with your type of business. The
Information Sources for Small Business Directory can assist you with determining provincial
regulations affecting your business.

13. Briefly describe your manufacturing or purchasing process.
State how you will make or acquire the goods you plan to sell. Use your sales forecast to help you
plan this part of your operation. Think about potential growth in future years.

14. Briefly describe your fulfillment process.
How does your customer get their order and how do you get paid.

15.      Estimate the capacity of your operation in the first year.

How big will your operation be? What is the limit of what you can produce, stock, service and sell.
Can you meet your sales forecasts? Have you taken future growth into consideration?

16. Make a list your potential suppliers
Your concept may rely heavily on the reliability of your raw material suppliers and/or your
subcontractors. How dependent will you be? Figure out who your suppliers will likely be and try to
find back-up suppliers.

17. Make a list of the resources you will require to start your business.
List the employees, floor space, leasehold improvements, equipment, vehicles, inventory, supplies
and services you will require to open your business. Estimate the costs of each item on your list.
You will need this list to determine your start up costs .

18. Determine what resources you will finance, lease or rent.
You will probably not pay for large purchases outright but will instead lease, rent or finance these
items. You will need to estimate your monthly payments to help you prepare a cash flow

SAV6/SAV22-SBM/H3-Sample Business Plan/Nair/Sept99
19. List your financial strengths and weaknesses.

How much of your own money do you have for this business? what assets can you use as
collateral to secure a loan? Do you already own the vehicles, computer equipment or tools needed
to start your business? Do you have family, friends or others who are prepared to invest in your
business? Do you have a strong personal credit rating?

20. Prepare a monthly cash flow forecast for your first year of operation.

SAV6/SAV22-SBM/H3-Sample Business Plan/Nair/Sept99
                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /


                Advertise in the classified advertising section of your community newspaper.
                Advertise in the Yellow Pages.
                Advertise on a grocery buggy.
                Approach your prospective customers over the phone.
                Approach your prospective customers in person.
                Approach your prospective customers through the mail.
                Be a guest speaker at seminars and present on your area of expertise.
                Be a guest speaker on radio talk shows.
                Build and maintain a customer mailing and contact list on database software.
                Build your image with well designed letterhead and business cards.
                Design a brochure that best explains the benefits of your services.
                Design a mail order campaign.
                Design a point of purchase display for your product.
                Design an image building logo for your company.
                Design and distribute a quarterly newsletter or an industry update announcement.
                Design and distribute company calendars, mugs, pens, note pads, or other advertising
                 specialties displaying your company name and logo.
                Design and distribute a free "how to do it" hand-out related to your industry (e.g. Tips for
                 conserving energy in your home).
                Design buttons, decals and bumper stickers or balloons with your company name, logo or
                Design T-shirts displaying your company name and logo.
                Explore cross promotion with a non-competing company selling to your target market.
                Explore the costs of advertising in newspapers, magazines, on radio, television, billboards, bus
                 shelters and benches.


    Explore ways to share your advertising costs using cooperative advertising.
    Follow up customer purchases with a thank you letter.
    Follow up customer purchases with Tet or birthday cards.
    Have your company profiled in a magazine or newspaper that is read by prospective
    Hire an advertising agency or public relations firm.
    Hold a promotional contest.
    Include promotional material with your invoices.
    Look for prospective customers at trade shows related to your industry.
    Look for prospective customers in associations related to your industry.
    Look for prospective customers at seminars related to your industry.
    Look for prospective customers in magazines and newspapers related to your industry.
    Package your brochure, price lists and letter in a folder for your customers.
    Place a sidewalk sign outside your store or office.
    Place flyers on bulletin boards and car windshields.
    Place promotional notes on your envelopes, mailing labels.
    Place signs or paint logos on your company vehicle(s).
    Prepare a corporate video.
    Prepare a list of product features and benefits to help you plan your advertising and promotional
    Provide free samples of your product or service.
    Provide public tours of your operation.
    Sponsor a charity event.
    Sponsor an amateur sports team.
    Sponsor a cultural event through a community arts organisation.


                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /


          A business structure is the legal form of ownership of a business. You must know about these
          forms of ownership, because they affect your business survival.

          Let’s imagine that you are happily working along, thinking your business is doing well. Your partner
          is buying all sorts of useless equipment costing so much that the partnership goes broke. What
          happens to you when the partnership is wound. You can’t say, “I didn’t know about legal aspects of
          partnership”. Ignorance is no defense at all under the law.

          Make it your business to know about business. The structural form of your business will influence,
          amongst other things:
                Your liability for debts
                Legal procedures for dealing with other people
                How you can sell your business and at what price

          There are three basic structures commonly used by small business:
                Sole proprietor – where only one person is the owner, trading in his/her own right.
                Partnership – where two or more people are the owners
                Company – shareholders are the owners of the company which is run by directors for the

          It’s up to you which form you choose, but you would be well advised to discuss the choices with an
          expert like an accountant or solicitor.



Choosing the type of ownership for your business requires that you examine many factors to
determine which type will best suit your needs. You should examine such factors as –
    start-up costs
    the amount of control you desire
    the amount of personal risk you are willing to assume
    need for assistance in particular areas
    need for continuity
    need of flexibility

Table 1 identifies some of these factors as advantages and disadvantages to the particular type of
ownership in which you may be interested.


        Forms of                                   Advantages                           Disadvantages

Sole Proprietorship                1.   Low star-up costs                       1. Unlimited liability
                                   2.   Greatest freedom from regulation        2. Lack of continuity
                                   3.   Owner in direct control                 3. Difficulty in raising capital
                                   4.   Minimal working capital requirements
                                   5.   Tax advantage to small owner
                                   6.   All profits to owner

Partnership                        1.   Ease of formation                       1. Unlimited liability
                                   2.   Low start-up costs                      2. Lack of continuity
                                   3.   Additional sources of venture capital   3. Divided authority
                                   4.   Broader management base                 4. Difficulty in raising
                                   5.   Possible tax advantage                     additional capital
                                   6.   Limited outside regulation              5. Difficulty in finding suitable

Company                            1.   Limited liability                       1. Close regulation
                                   2.   Specialized management                  2. Most expensive form to
                                   3.   Transferable ownership                     organize
                                   4.   Continuous existence                    3. Charter restriction
                                   5.   Legal entity                            4. Extensive recordkeeping
                                   6.   Possible tax advantages                 5. Double taxation
                                   7.   Ease of raising capitall


                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /


          The entrepreneur has many decisions to make once he or she decides to become engaged in a
          small business venture. One of the first and one of the most important - decisions is whether to
          start a new business or buy an existing business. The answer to this question may vary in each
          case, and there are many factors to consider.

          The following is a comparison between “Starting a New Business” and “Buying an Existing

                         Starting a New Business                                                               Buying an Existing Business
                Freedom of choice location                                                           Location may be good or bad - analyze
                Set your own 'style' of business no                                                   Lines of credit and supply
                existing restrictions of image and policy                                             Established with customers and suppliers;
                Develop at your own rate, especially when                                             vendor and employees can pass on
                capital is limited.                                                                    experience
                Slow start-up time                                                                   Purchasing total business must analyze all
                Initial outlay of money before                                                        aspects of business; goodwill charge
                Higher risk and uncertainty                                                          In business right away
                Financing can be more difficult                                                      Immediate cash sales to operative
                                                                                                      Established clientele
                                                                                                      Proven business history
                                                                                                      Financing easier when based on past
                                                                                                       performance and security

          Various Methods of Evaluation

          With purchase of a business, the purchaser gets its assets. The value of these assets can be
          calculated in at least four ways, namely:

          1.         Book Value - the balance sheet figure for assets, which gives the price paid for them minus


2.       Replacement Value - the cost of buying new or equivalent item to replace existing assets

3.    Liquidation Value - the value of assets if they were sold at auction

4.       Appraised Value - the value of an asset according to an objective assessment from
         someone familiar with the market. Because this price takes into account both the seller's
         side and the buyer's, it typically is somewhere between the replacement value (which can be
         above the original price due to inflationary pressures) and the liquidation value.

To illustrate the differences between the four methods, we will use the purchase of a small
automobile rental agency. Company accounting records show the book value of the cars to be $30,
000 (five cars, each worth $6,000). The cars are each 2 years old, and since they have a useful life
of 4 years, they are each worth one-half of their original cost of $12,000,

To replace the fleet of cars, we find we will have to spend $8,000 each. The replacement value of
the assets, then, is $40,000.

As the next part of our investigation, we determine the liquidation value. If we decided after buying
the business that it was a mistake and that we have to sell out for whatever we can get, we would
find the lowest price prevails. Each car is worth only $5,000, so the assets would bring only
$25,000. Finally, the appraised value is used, which in this case is $7,000 per car, giving a total of

Which of the four is best? It is seldom the book value; this is an accounting entry and only rarely
matches actual value. The replacement value is useful for the prospective buyer who has decided
definitely to go into the business being considered. It is necessary to buy the business with its
assets, or find them elsewhere. The liquidation value provides the best data for a "worst case"
scenario. That is, an entrepreneur can take some comfort in being able to salvage this amount
from the business if everything turns sour. Of course, the liquidation value figure changes, so the
$25,000 figure in our example will decrease steadily over time. The appraised value is the most
useful figure in negotiations between a buyer and seller who are both knowledgeable and interested
in completing the deal.

Determining the Price of a Business

Step 1              Determine the adjusted tangible net worth of the business. This is the total value of
                    the firm's assets, using the appraised value, minus its debts. For our car rental firm,
                    which has $5,000 in debts, this is $35,000 $5,000 or $30,000.

Step 2              Estimate how much the buyer could earn annually with an amount equal to the value
                    of the tangible net worth (from step 1), invested elsewhere at a level of risk similar to
                    that of the business being considered. In addition to risk, this figure will reflect the
                    current rate of interest. Let's use 10 percent here; that gives us $3,000.

Step 3              Add the normal salary for the owner-operator. That is, the income that the individual
                    could be expected to earn elsewhere. We will estimate $20,000.


Step 4              Determine the average annual net earnings of the business over the past few years.
                    This figure is before income taxes and the owner's salary have been subtracted. Our
                    real interest is in the likely level of earnings for the next few years, so trends in past
                    earnings are important. The car rental firm averaged annual net earnings of $30,000.

Step 5              Subtract the buyer's investment's earning power (step 2) and the owner-operator
                    salary (step 3) from the business's average annual net earnings (step 4). This is the
                    extra earning power of the business ($30,000 - $3,000 - $20,000), $7,000.

Step 6              Multiply the extra earning power by what is called the it years of profit" figure. This
                    years of profit figure is intended to reflect the "uniqueness" of the business. How
                    difficult and risky would it be to establish such a business? How long would it take to
                    do so? How much goodwill has the business -established? A well-established
                    business might warrant using a 5 here; a company that has just started might suggest
                    a 1. Here we will use a 2, giving us, for intangibles, $14,000.

Step 7              To arrive at the final price., we add the firm's adjusted tangible net worth and the value
                    of its intangibles (steps 1 and 6). This gives us $30,000 and $14,000 for a total price
                    of $44,000.


                                     Example                 Business A       Business B

1. Adjusted value of tangible net worthy (assets less            $100,000            $100,000

2. Earning power at 10% of an amount equal to the                  10,000              10,000
   adjusted tangible net worth, if invested in a
   comparable risk business.

3. Reasonable salary for owner-operator in the                     18,000              18,000

4. Net earnings of the business over recent years                  30,000              23,350

5. Extra earning power of the business (line 4 minus                2,000              (4,650)
   lines 2 and 3).

6. Value of intangibles-using three-year profit figure for          6,000                None
   moderately well-established firm (3 times line 5).

7. Final price (lines 1 and 6).                                  $106,000            $100,000
                                                                                      (or less)

   In example A, the seller receives a value for goodwill because the business is moderately well
established and earning more than the buyer could earn elsewhere with s imilar risks and effort.
Within three years, the buyer should have recovered the amount paid for goodwill in this example.
   In example B, the seller receives no value for goodwill because the business, even though it may
have existed for a considerable time, is not earning as much as the buyer could through outside
investment and effort. In fact, the buyer may feel that even an investment of $100,000 the current
appraised value of net assets- is too much because it cannot earn sufficient return.


                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /

          To understand fully what is meant by a franchise, it can be helpful to know the major differences
          between buying a franchise and starting your own business.

                                  Buying a franchise                                                              Starting your own business
          Operational training based usually provided by                                          Management ability on your own expertise
                                                          Time required to establish name. But more
          Right to use a known trade name or trade-       identification of owner to business.
          mark. Franchise operation completely identified
          with franchisor.                                Time required to product or establish name,
                                                          Products, and/or service
          Able to sell a proven service with established
          public acceptance.                              May have to start slowly.
                                                          Longer time to realize full potential.
          Buying a package , so ready to start full
          operations sooner.                              Risk of mistakes and longer time to start can
                                                          mean greater financing needs.
          Less working capital may be required because Terms may be terms of difficult to get with
          of tighter controls and franchisor's            suppliers.
          merchandise, supply.
                                                          Risk of errors in estimating expenses, sales,
          Profit and loss forecasts may be more           and profits especially for an unproven venture.
          accurate as based on proven similar
          operations.                                     Greater chance of failure due to time required
                                                          for establishment and possibility of mistakes
          Greater chance of initial success.              especially remarketing and planning.


          What do you check into when buying a franchise? An easy answer to that question is: everything.
          While it is impossible to list everything that you must investigate when contemplating the purchase
          of a franchise, we do list some main points. From these points, you should be able to develop other
          questions to ask.

          The franchisor


Find out who the principals are and what their business background is. Is their business history
connected with the product or service they are franchising? The answer should be yes if you are
depending on them for expertise in running your franchise. Have there been, or are there any, civil
or criminal actions against them? Are the franchisors successful business people in their own
rights? Is the franchiser a multinational company, a national company, or a comparatively small

The franchise

Exactly what does the franchiser own or control (trade name, trademark, product, process and
when will this ownership or control expire? How well-known is the franchise operation? How long
has the franchise operation been in existence? Is it a growing franchise, yet well established? Find
out the number of franchise already established and obtain the names and addresses of the
franchisees. This is invaluable in checking for candid facts. You should definitely evaluate at least
one of the established franchises to determine for yourself how successful the venture is. Have
any franchisees failed and, if so, why?

Sales and profit

Obtain an estimate of the amount of sales that the franchise will generate. These estimated figures
should be not only for your proposed first year of operation but for as many years ahead as is
realistically possible. The estimates that you obtain should be checked with the actual from existing
franchises. It is important that you undertake a market study of your own so as to assess your
share of the market. It may well be that the franchisor's estimate is overgenerous or does not
consider the time factor necessary for you to reach the potential of full earnings.

Location and premises

Who decides the location of the franchise - you or the franchiser? Will the franchiser help you find
a location in your territory? Make sure you are satisfied with the location for it must be the most
suitable one, from a market point of view, for you. Do your premises have to meet certain
standards such as square footage or street frontage? Can you adapt existing premises to house
your franchise operation or must you operate in new premises? If premises must have a standard
appearance to conform to the franchise image, do you know who pays for this? trust you construct
your own building (if new premises required) or does the franchiser do this and you only lease? If
you lease, is it specified for how long and can you sublease or move your franchise operations to
another location within your territory? Find out if it is advantageous to set the term of your lease to
the term of your franchise agreement.

Equipment, fixtures, layout

Check if the franchise agreement calls for specific equipment and fixtures. In many cases, this is
required so that each individual franchise operation presents a uniform appearance. If this is true
for your operation, find out if you must buy the items from a specified source (such as the


franchiser) or can shop around for the best deal. If you must buy from a named source, find out if
you can arrange terms. If leasing the equipment and fixtures from the franchisor, make sure you
understand the terms. What about warranties and repairs to equipment and fixtures? The layout of
your operations may also be specified. Verify what input you can have or what adaptations, if any,
you can make.

Protection of territory

Has your territory been defined? And is it clearly defined even to the point of being marked on a
map? For how long a period of time is this territory exclusively yours? What is the protection - that
no other franchise will be sold in your territory for so many years or, that you have first refusal on
any new franchise in your territory? Make sure that any offer for first refusal will not come too soon
before you have benefited fully from your first franchise operation. Also, check that the contract
does not specify that, in order to retain exclusive territory, you must buy more franchise operations.
Can your territory be reduced at any time by the franchiser? Can you expand your territory?

Purchase costs

You must know what all the purchase costs are. What is the total franchise fee and what are you
really buying? Does the "package" cover just the right to use a name or trademark, or are you also
buying initial inventory, equipment, and fixtures? Is the franchise fee a one-time payment or must
you pay again when renewing your contract? Are there service charges or royalties specified such
as a percentage of gross sales? Are terms available with the franchisor? Can the franchisor help
you arrange financing? Who pays the legal fees? Who pays for permits, licences, and insurance?
Are there penalty clauses? If you are leasing the premises or equipment from the franchisor, do
you have to make advance payments of leave a damage deposit? if buying equipment and fixtures,
when and         how do you pay for them?


Find out if the franchisor will give you training. If the answer is yes, find out who pays for it. The
training may be a “once only" affair or it may consist of an initial indoctrination followed by refresher
sessions. What does the training consist of - management skills, product or service skills,
operational skills, or a combination of all aspects? Are there training courses available for your
employees and, if so, who pays for them? Can you telephone the franchisor for quick advice?

Prices and sales

Do you have the right to adjust the prices or are they set by the franchisor? Can you offer specials
on your own? Are there sales quotas and are they realistic? What happened if you do not meet
minimum quotas?

Products and supplies


Is it specified in the contract what products you must carry? Can you stock product lines other than
the franchisor's? Are the sources specified for your purchases of products and supplies or can you
shop around for a better price? What are the payment terms? Is there a chance that your supplier
could run short? Are there minimums specified for order size?

Business controls

Usually, franchisors will spell out how a franchisee will operate his or her franchise. This may be
looked upon as a curtailment of freedom. Nevertheless, it must be recognized that this is the way
the franchisor obtains uniform standards of image from all his or her franchises. These controls
usually include advertising policies, insurance policies with the franchisor as beneficiary, hours and
conduct of business, accounting procedures, reports from the franchisee to the franchisor, and
even access to the franchisee's records and bank. Often, business controls can mean that the
franchisee must run the business in person and cannot designate a manager. The contract may
also state that the franchisor has the final word in any disagreement between the franchisee and
the franchisor.

The franchise contract
You must understand every clause of the contract. You must make sure that all obligations and
freedoms are specified in the agreement. Check, especially, clauses pertaining to termination,
bankruptcy, transfer, renewal, and sale of the franchise. What are the conditions under which the
franchisor has the right to revoke the franchise agreement?

Two important people who must help you when examining the purchase of a franchise are your
accountant and your lawyer. Have your accountant prepare a forecast of your franchise operation
and assess your return on investment. Remember, you are not just purchasing a franchise, you are
also going to operate one. Working capital is a definite requirement.What will your lawyer do? He or
she will explain every clause of the contract to you and, if necessary, will write in additional clauses
to be negotiated with the franchisor, and will be there to protect your rights.



What should you expect from the Franchisor in support of your business?

1 . Training                                   Specialized skills
                                               Marketing
                                               Book-keeping, and
                                               recording
2 . Field support                              From “troubIe shooter” to assisting you in implementing the
                                                'blueprint' operation.
3. Promotional support                         NationaI/local advertising
                                               Stationery
                                               PR material
4. Market research                             To help identify demands and new trends.
5. Administrative support                      Accountancy and legal services
6. Bulk purchasing                             Specially negotiated price for Franchisees
7. Initial support                             Finding suitable premises
                                               Preparation of plans, planning applications
                                               Obtaining finance
                                               Purchasing stock/equipment
                                               Getting the business off the ground

Remember you are paying for many of these services in the franchise fee - check carefully what is
included and what rights you have if promises of support are not forthcoming.


                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /

          COURSE                                  : SAV 22 SMALL BUSINESS MANAGEMENT/

          TERM                                    : 2/99 (September 1999)

          LECTURER                                : Dr Godwin Nair

                                                                                  HANDOUT 9

                                         ARTICLES ON FINANCE AND MARKETING

          1. Banks and Loans, Fiji Time, 1993

          2. Knowing the Rules, Fiji Time, 1994

          3. Know your customer, Fiji Time, 1994

          4. Unique sell: What you’re good at – and what your rivals don’t have, Fiji Time, 1989

                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /

          COURSE                                  : SAV 22 SMALL BUSINESS MANAGEMENT/

          TERM                                    : 2/99 (September 1999)

          LECTURER                                : Dr Godwin Nair

                                                                                HANDOUT 10

                                            IN VIETNAM

          1. SMEs to Play a Larger Role in Private Sector, Vietnam Investment
                 Review, 26 Oct – 01 Nov 1998.
          2. SMEs Stand to Benefit from Proposed Credit Guarantee Fund, Vietnam
                 News, 04 Oct 1999.
          3. SMEs Need Work Space, Capital and Policy Help, Vietnam News, 25
                 Sep, 1999
          4. SMEs “Need Advice”, but Pay no Heed to Advisors, Vietnam News, 13
                 Oct 1999.
          5. Consumers Start to Know They Have Rights: Watchdog, Vietnam News,
                 11 Oct 1999

          SAV6/SAV22-SBM/H10-SMEs in Vietnam/Nair/Sept99
                                       Swiss-AIT-Vietnam Management Development Programme
c/o HCMC University of Technology, 268 Ly Thuong Kiet, Dist.10, Ho Chi Minh City, Vietnam Tel: (84-8) 865 08 80 Fax: (84-8) 865 08 81 E-mail: /

          TERM                       : 2/99 (September 1999)
          LECTURER : Dr Godwin Nair

                                                                          FINAL EXAM BRIEFING

          The final exam paper consists of two parts:
          Part 1 (Closed Book) – 70.5 marks (70.5% )
          Short Answer and Application Questions (SAAQ), and Multiple Choice Questions (MCQ)
          Part 2 (Open Book) – 29.5 marks (29.5% )
          Case Study – 3 pages + Short Questions

          Breakdown of Questions
          Part 1 – consists of 2 sections
          Section A – 15 SAAQ x 2 marks each = 30 marks (30%)                                                                              70.5%
          Section B – 27 MCQ x 1.5 marks each = 40.5 marks (40.5%)
          Part 2 – consists of a Case Study
          Five (5) short questions (about one page answer for each question)
          Note: Marks for each question is listed after the question

          Time Allocation for Parts 1 and 2 and Instructions
          Part 1 – 2 Hours
          Part 2 – 1 Hour
          Reading instructions and checking through exam paper – 10 Minutes

          SAV6/SAV22-SBM/H11-Final Exam Briefing/Nair/Sept99
SAV6/SAV22-SBM/H11-Final Exam Briefing/Nair/Sept99
Areas covered for exam
1. Lecture notes and OHTs from weeks 7 to 11 (ie. Lectures 8, 9, 10 & 11)
2. Readings 10, 11, 12, 13, 14 & 15
3. Handouts – H 7 & H 8
4. Tutorial Activity – 6

Additional Notes
1. Read the instructions carefully at the beginning of each part and section.
2. Read the questions and its parts very carefully.

                                       ALL THE VERY BEST IN YOUR EXAM

                                                     Thank you !

SAV6/SAV22-SBM/H11-Final Exam Briefing/Nair/Sept99

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