SMALL BUSINESS MANAGEMENT Chapter 5: Buying a Business and Franchising Ace Clear Defense Girls Gymn Lottery winner Read the Fine Print Bulldog FitnessCerealisiousFirehouse Sub

Ace Clear Defense  What advantages did this entrepreneur obtain as a result of buying an existing business?  How would he determine the price to buy this business? Ace Clear Defense

Advantages of Purchasing an Existing Business Reduction of Risk  Existing business records  Less planning  Experienced employees Reduction of Time and Setup Expenses Reduction of Competition Capitalization of Business Strength Possible Assistance from Previous Owner Easier Planning Existing customers/ suppliers Necessary equipment Bargain price

Purchasing an Existing Business  Disadvantages of Purchasing Physical Facilities Personnel Inventory Accounts Receivable Financial Condition Market Deciding on the Price Poor business image Modernization required Purchase price based on inaccurate data Poor business location

Sources of Businesses For Sale  Internet Internet  Trade Journals  Government Departments  Real Estate Brokers  Other Professionals Matchmakers Accountants Lawyers Other experienced business owners  Word of Mouth Girls Gymn

Why is owner selling?  Owner’s reasons for selling the business Old age or illness Desire to relocate in a different section of the country Opportunity to start another business Decision to accept a position with another company Unprofitability of the business Discontinuance of an exclusive sales franchise Maturation of the industry and lack of growth potential

Evaluating a Business For Sale  Industry Analysis Sales and Profit Trends in the Industry  The Previous Owner  Financial Condition of the Business Validity of the Financial Statements Evaluation of the Financial Statements

Evaluating a Business For Sale  Condition of the Assets Liquid Assets (Cash and Investments) Accounts Receivable Inventory Building and Equipment Real Estate Goodwill

Evaluating a Business For Sale  Quality of Personnel  External Relationships of the Business  Conditions of the Records Lottery winner

Determining the Price or Value of a Business  Market Value  Asset value Book Value Replacement Value  Earnings Value Capitalization of Earnings Method  Average Earnings/Predetermined Interest Rate = Capitalized Value Times Earnings Method  Arbirtraily multiplies earnings by a factor of between 1-10  Small business usually between 4 or 5

Calculating average earnings for a business Average earnings Last year$5,000 Two years ago$4,000 Three years ago$7,000 Four years ago$10,000 Five years ago$14,000 total$40,000 Average earnings40,000/5 = $8000$8,000/10% =$80,000

Calculating weighted –average earnings for a business Average earnings Last year$5,000 X 5 = $25,000 Two years ago$4,000 X 4 = $16,000 Three years ago$7,000 X 3 = $21,000 Four years ago$10,000 X 2 = $20,000 Five years ago$14,000 X 1 = $14,000 total$96,000= $6,600/10% Weighted Average earnings$96,000/15 = $6,600= $66,000

Determining the Price or Value of a Business cont.  Combination Method Analytical Method  Adjusted net worth, past earning, future earnings Historical Method – use historical experience to determine relative indicators of value of a business

Sally's Bar and Grill  Sally's Bar and Grill is available for purchase. Sally's earnings for the past five years were as follows: Last year $50,000 Two years ago $60,000 Three years ago$30,000 Four years ago$40,000 Five years ago$25,000 Determine the value of the business using the following methods (using interest rates of 11%) using both general and weighted average methods. Capitalized earnings method Time interest method

The Purchase Transaction  Coverage purchase price, including principal and interest amounts payment dates - when and to whom detailed list of assets included in the purchase conditions of the purchase - nonfinancial requirements provisions for noncompliance with conditions and penalties for breaches collateral or security pledged  Negotiating the Deal

History and Background of Franchising  Most rapid growth in North America since the 1950s.  48 cents of every retail dollar goes to franchise business  Franchise sector is Canada's largest employer  One franchise for every 12 Canadians  Franchise revenue in $100 billion range Firehouse Sub

What Is Franchising?  Manufacturer-Directed Franchise Ford Motor Company  Wholesaler-Retailer-Directed Franchise Home Hardware  Franchising Company Subway

Franchising Terms  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

Advantages of Franchising  Proven market for the product or service.  Services the Franchisor May Provide 1. Selection of Location 2. Purchase or Construction of Site, Buildings, and Equipment 3. Provision of Financing

Advantages of Franchising  Services the Franchisor May Provide (cont.) 4. Standardized Methods of Operating 5. Advertising 6. Purchasing Advantages 7. Training

Potential Disadvantages of Franchising  Lack of Independence  Cost of the Franchise  Unfulfilled Promises  Restrictions of the Contract Product or Service Offered Line Forcing Termination Read the Fine Print

Potential Disadvantages of Franchising (cont)  Saturation of the Market  Lack of Security  Cost of Merchandise  Effectiveness of Promotion  Exaggeration of Financial Success

Evaluation of a Franchise Opportunity  1.Unproven versus Proven Franchise  2.Financial Stability of Franchise  3.Potential Market for the New Franchise  4.Profit Potential for a New Franchise  5.Territorial Protection  6.Training and Operations Assistance  7.Contract Length and Renewal and Termination Terms  8.What current Owners are Saying About their Franchise

The Entrepreneur as Franchisor  What businesses can be franchised? Bull Dog Fitness  Should franchise information provided by a franchisor be discounted? Why or why not?  What problems might arise in con consulting previous franchisees in the process of evaluating a franchise? Bull dog Fitness

The Entrepreneur as Franchisor  How does one become a franchisor? 1. Establish a prototype. 2. Prepare the necessary information. 3. Investigate the legal requirements. 4. Develop a planned and standardized program of operations. 5. Obtain adequate financing. Cerealicious

Franchising in the Future  “Piggybacking”: Two or more franchise operating in one outlet.  “Branchising”: Converting existing chain outlets to franchises.  “Mini-franchises”: Small satellite versions of larger franchises.  Growth of service-based and home- based franchises