1. Accessing Resources for Growth from External Sources
Chapter 14
Accessing Resources for Growth from External Sources
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
To understand how joint ventures can help an entrepreneur grow his or her business and acknowledge the challenges of finding, and maintaining, an effective joint venture relationship
To be aware of the pros and cons of using acquisitions to grow a business and to know what to look for in an acquisition candidate

3. Learning Objectives
To understand the possibilities of achieving growth through mergers and leveraged buyouts and the challenges associated with each
To understand franchising from the perspective of both the entrepreneur looking to reduce the risk of new entry and the entrepreneur looking for a way to grow his or her business

4. Learning Objectives
To understand the tasks of negotiation and develop the skills to more effectively conduct these tasks

5. Using External Parties to Help Grow a Business
Mechanisms
Joint ventures
Acquisitions
Mergers
Franchising

6. Joint Ventures
A separate entity that involves a partnership between two or more active participants
Types of joint ventures:
Between private-sector companies
Objectives - Entering new/ foreign markets, raising capital, cooperative research
Industry-university agreements
Created for the purpose of doing research
International joint ventures

7. Joint Ventures Factors in joint venture success
Accurate assessment of the parties involved to best manage the new entity
Degree of symmetry between the partners
Expectations of the results of the joint venture must be reasonable
Timing

8. Acquisitions Purchasing all or part of a company
Advantages of an acquisition
Established business
Location
Established marketing structure
Cost
Existing employees
More opportunity to be creative

9. Acquisitions Disadvantages of an acquisition Synergy
Marginal success record
Overconfidence in ability
Key employee loss
Overvaluation
Synergy
“The whole is greater than the sum of its parts”
Should occur in both the business concept and the financial performance

10. Acquisitions Structuring the deal
Involves the parties, the assets, the payment form, and the timing of the payment
Two most common means of acquisition
Entrepreneur’s direct purchase of stock or assets
Bootstrap purchase of assets

11. Acquisitions Locating acquisition candidates
Brokers: People who sell companies
Accountants, attorneys, bankers, business associates, and consultants may know of candidates
Business opportunities in newspapers or trade magazines

12. Mergers Joining two or more companies
Key concern - Legality of the purchase
Process:
Determine the merger objectives and resulting gains for both companies
Carefully evaluate the other company’s management

13. Mergers Determine the value of a merger candidate
Determine the value and appropriateness of the existing resources
Establishing a climate of mutual trust
Determine the value of a merger candidate

14. Figure 14.1 - Merger Motivations

15. Leveraged Buyout Purchasing an existing venture by any employee group
Acquired firm’s assets serve as collateral
Long-term debt financing is provided by banks, venture capitalists, and insurance companies
Evaluation procedure:
Determine whether asking price is reasonable
Assess the firm’s debt capacity
Develop the appropriate financial package

16. Franchising
Franchisor gives exclusive rights of local distribution to:
A franchisee in return for payment of royalties and conformance to standardized operating procedures
Franchisor: Person offering the franchise
Franchisee: Person who purchases the franchise

17. Franchising Advantages of franchising - To the franchisee
Product acceptance
Has an accepted name, product, or service
Management expertise
Managerial assistance provided by the franchisor
Capital requirements
Up-front support can save entrepreneur significant time and capital

18. Franchising Advantages of franchising - To the franchisee
Knowledge of the market
Offers experience in business and market
Operating and structural controls
Helps in standardization and administrative controls

19. Franchising Advantages of franchising - To the franchisor
Expansion risk
Allows venture to expand quickly using little capital
Business can be expanded nationally and internationally
Requires fewer employees than a non-franchised business
Cost advantages
Supplies can be purchased in large quantities to achieve economies of scale
Commit larger sums of money to advertising

20. Franchising Disadvantages of franchising
Inability of the franchisor to provide services, advertising, and location
Franchisor’s failing or being bought out by another company
Difficulty in finding quality franchisees

21. Franchising Poor management can cause individual franchise failures
The ability to maintain tight control over franchises becomes difficult as their number increases

22. Franchising Types of franchises
Dealership - Acts as a retail store for the manufacturer
Franchise that offers a name, image, and method of doing business
Franchise that offers services

23. Franchising Changes that helped evolve franchising opportunities:
Good health
Time saving or convenience
Health care
The second baby boom

24. Investing in a Franchise
Factors to be assessed before making the final decision:
Unproven versus proven franchise
Financial stability of franchise
Potential market for the new franchise
Profit potential for a new franchise

25. Investing in a Franchise
Franchisors are required to make a full presale disclosure
Franchise agreement contains the requirements and obligations of the franchisee

26. Table 14.2 - Information Required in Disclosure Statement

27. Table 14.2 - Information Required in Disclosure Statement

28. Overcoming Constraints by Negotiating for More Resources
Distribution task: Negotiating how the benefits of the relationship will be allocated between the parties
Integration task: Exploring possible mutual benefits from the relationship so that the “size of the pie” can be increased

29. Overcoming Constraints by Negotiating for More Resources
Assessment 1: What will you do if an agreement is not reached?
Best alternative to a negotiated agreement
Helps to determine a reservation price
Reservation price: Price at which the entrepreneur is indifferent about whether to:
Accept the agreement or choose the alternative

30. Overcoming Constraints by Negotiating for More Resources
Assessment 2: What will the other party to the negotiation do if an agreement is not reached?
Difficult to assess reservation price
Bargaining zone: Range of outcomes between the entrepreneur’s reservation price and that of the other party

31. Overcoming Constraints by Negotiating for More Resources
Assessment 3: What are the underlying issues of this negotiation? How important is each issue to you?
Focus on achieving aspects most desirable by trading off aspects of less importance

32. Overcoming Constraints by Negotiating for More Resources
Assessment 4: What are the underlying issues of this negotiation? How important is each issue to the other party?
Provides the entrepreneur an opportunity to sacrifice aspects of less importance to him/ her but of high importance to the other party

33. Overcoming Constraints by Negotiating for More Resources
Negotiation strategies
Build trust and share information
Ask lots of questions
Make multiple offers simultaneously
Use differences to create trade-offs that are a source of mutually beneficial outcomes