1. Entrepreneurship and Small Business Management
Chapter 21
Franchising, Licensing, and Harvesting: Cashing in Your Brand

2. Ch. 21 Performance Objectives
Determine how you want to grow your business and eventually exit from it.
Describe how businesses use licensing to profit from their brands.
Explain how a business can be franchised.
Learn methods of valuing a business.
Discuss five ways to harvest a business.

3. What Do You Want From Your Business?
Sell
Sell to others
Merge
Maintain
Close
Cease Operations
Bankrupt
Grow
Internal growth
Acquire other companies
License your brand
Franchise the business

4. Growth Through Replication
Replication strategies—ways to obtain money from your business by letting others copy it for a fee
Licensing—”renting” your brand or other intellectual property to increase product sales
Franchising—replicating the business formula through others

5. Focus Your Brand
A brand is a name, term, sign, logo, or design that identifies a product/service.
A brand represents a promise to consistently meet customer expectations.
Tightly-focused brands have better performance.
Line extension—using an established brand to promote different kinds of products
Can work if brand is very strong & new products relate well
Potential damage if products do not reinforce the brand

6. Licensing Review of terms:
Licensor—sells license, which “rents” the right to use the licensor’s company name
Licensee—pays fee for the license and may also pay royalties (percentage of sales) to the licensor
A company can profitably license its brand when it has a core group of loyal customers.
Licensing can be effective as long as it does not tarnish the licensor’s company or product image.

7. Pros & Cons to Being a Franchisor
Benefits
Drawbacks
Growth with minimal capital investment
Lower marketing and promotional costs
Royalties
Tarnished reputation if franchisee fails to operate business properly
Can be difficult to find qualified franchisees
Potentially, withheld payments or lawsuits if franchisee is unsuccessful
Many federal and state regulations

8. Before You Franchise… Carry out extensive research
Consult with a franchise attorney
Visit resource Web sites for information:
International Franchise Association
American Association of Franchisees and Dealers
Create a franchise agreement which establishes standards of uniformity

9. Harvesting Your Business
Act of selling, taking public, or merging a company to yield proceeds for the owner(s)
Usually takes at least 10 years to be ready
Entrepreneur not usually involved after harvesting
In mergers, founder(s) may work in the new organization for a specified time period
Not possible if firm has heavy debt, or no product/service of lasting value; alternatives:
Liquidation (selling all assets)
Bankruptcy

10. Business Valuation Methods
Book value
Simplest, most commonly-used method
Net Worth = Assets – Liabilities
Future earnings
Based on estimated future earnings stream
Best for quickly growing companies
Must take into account the time value of money, as well as the rate of return

11. Business Valuation Methods (continued)
Market-based approach
Business value is compiled from the price/earnings (P/E) ratio of comparable public companies.
P/E ratio is determined by dividing a company’s stock price by its earnings per share.
Value = P/E Ratio × Estimated Future Net Earnings

12. Five Ways to Harvest a Business
Increase the free cash flow—reduce investment and take cash out
Management buyout (MBO)—sell the firm to its managers
Employee stock ownership plan (ESOP)
Establish a plan that allows employees to buy company stock as part of their retirement.
When you are ready to exit, the ESOP borrows money and uses the cash to buy your stock.

13. Five Ways to Harvest a Business (continued)
Merging or being acquired—sell the company to another company
Initial public offering (IPO)—sell shares of your company in the stock market:
Choose an investment banker to develop the IPO.
Make sales presentations to brokers and institutional investors.

14. Exit Strategy Options
Acquisition—someone buys the company and investors are bought out or paid back
Earn out—investors are bought out with company cash flow over time
Debt/equity exchange—trade equity for portions of debt over time to change lenders into owners
Merge—value is created by combining strengths with another company

15. Investors & Exit Strategies
Investors care about your exit strategy because it lets them know up front how their investment should eventually be turned into cash or stock.
Include your exit strategy in your business plan. Be specific about timing.