Accessing Resources for Growth from External Sources Chapter 14 Accessing Resources for Growth from External Sources McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

Using External Parties to Help Grow a Business Some of the mechanisms entrepreneurs can use are: Franchising. Joint ventures. Acquisitions. Mergers.

Franchising An arrangement whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating procedures. The person offering the franchise is known as the franchisor. The franchisee is the person who purchases the franchise.

Franchising (cont.) 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. Knowledge of the market - Offers experience in business and market. Operating and structural controls – Helps in standardization and administrative controls.

Franchising (cont.) Advantages of Franchising—to the Franchisor Expansion risk Allows venture to expand quickly using little capital. Business can be expanded nationally and even internationally. Requires fewer employees than a non-franchised business. Cost advantages Supplies can be purchased in large quantities to achieve economies of scale. Ability to commit larger sums of money to advertising.

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

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

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. Franchisors are required to make a full presale disclosure. The franchise agreement contains the requirements and obligations of the franchisee.

Table 14.2 - Information Required in Disclosure Statement

Table 14.2 - Information Required in Disclosure Statement (cont.)

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, etc. Industry–university agreements. Created for the purpose of doing research. International joint ventures.

Joint Ventures (cont.) Factors in Joint Venture Success: The accurate assessment of the parties involved to best manage the new entity. The degree of symmetry between the partners. The expectations of the results of the joint venture must be reasonable. The timing must be right.

Acquisitions The purchase of an entire company, or part of a company; the company no longer exists independently. Advantages of an Acquisition Established business. Location. Established marketing structure. Cost. Existing employees. More opportunity to be creative.

Acquisitions (cont.) 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.” Synergy should occur in both the business concept and the financial performance.

Acquisitions (cont.) 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.

Acquisitions (cont.) Locating Acquisition Candidates Brokers, accountants, attorneys, bankers, business associates, and consultants may know of candidates. Business opportunities in newspapers or trade magazines.

Mergers Key concern - Legality of the purchase. Process: Determine the merger objectives and resulting gains for both companies. Carefully evaluate the other company’s management. Determine the value and appropriateness of the existing resources. Establishing a climate of mutual trust. Determine the value of a merger candidate.

Figure 14.1 - Merger Motivations

Leveraged Buyout An entrepreneur (or any employee group) uses borrowed funds to purchase an existing venture for cash. Long-term debt financing is provided by banks, venture capitalists, and insurance companies. Acquired firm’s assets serve as collateral. Evaluation procedure: Determine whether asking price is reasonable. Assess the firm’s debt capacity. Develop the appropriate financial package.

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.

Overcoming Constraints by Negotiating for More Resources (cont.) Assessment 1: What will you do if an agreement is not reached? Best alternative to a negotiated agreement. Determine a reservation price.

Overcoming Constraints by Negotiating for More Resources (cont.) 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.

Overcoming Constraints by Negotiating for More Resources (cont.) 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.

Overcoming Constraints by Negotiating for More Resources (cont.) 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.

Overcoming Constraints by Negotiating for More Resources (cont.) 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.