PowerPoint Presentations for Small Business Management: Launching and Growing New Ventures, Fifth Canadian Edition Adapted by Cheryl Dowell Algonquin College

CHAPTER 4 Franchising and Buyouts

LOOKING AHEAD After studying this chapter, you should be able to: 1.Describe the significance of franchising in Canada. 2.Identify the pros and cons of franchising. 3.Discuss the process for evaluating a franchise opportunity. 4. Describe the critical franchisor/franchisee relationship. Copyright © 2013 by Nelson Education Limited 4-3

LOOKING AHEAD After studying this chapter, you should be able to: 5. Understand issues related to franchise regulation in Canada and franchise fraud. 6. List some reasons for buying an existing business. 7. Understand the merits of buying assets versus shares of an existing business. 8. Identify common ways to finance the purchase of a business. Copyright © 2013 by Nelson Education Limited 4-4

FRANCHISING Copyright © 2013 by Nelson Education Limited 4-5 A marketing system revolving around a two- party legal agreement, whereby the franchisee conducts business according to terms specified by the franchisor Canada is the most franchise-dense economy – New franchise outlet opens every two hours – There is one franchise for every 400 Canadians LO 1

UNDERSTANDING THE FRANCHISE CONCEPT Copyright © 2013 by Nelson Education Limited 4-6 an entrepreneur whose power is limited by a contractual relationship with a franchising organization Franchisee the party in a franchise contract who specifies the methods to be followed and the terms to be met by the other party Franchisor LO 1

EXAMPLES OF CANADIAN FRANCHISES Copyright © 2013 by Nelson Education Limited 4-7 Keg Restaurant First Choice Haircutters Kwik-Copy Printing Oxford Learning Centre See text Exhibit 4.1, p. 83 LO 1

THE LANGUAGE OF FRANCHISING franchise contractthe legal agreement between franchisor and franchisee franchisethe privileges in a franchise contract product and trade name franchising a franchise relationship granting the right to use a widely recognized product or name business-format franchising an agreement whereby the franchisee obtains an entire marketing system and ongoing guidance from the franchisor Copyright © 2013 by Nelson Education Limited 4-8 LO 1

THE LANGUAGE OF FRANCHISING multiple-unit ownership a situation in which a franchisee owns more than one franchise from the same company area developersindividuals or firms that agree to open up a certain number of franchises within a specific geographic area and time period master franchisora firm or individual that purchases the rights to sell franchises within a certain geographic area piggyback franchising the operation of a retail franchise within the physical facilities of a host store Copyright © 2013 by Nelson Education Limited 4-9 LO 1

THE PROS AND CONS OF FRANCHISING Copyright © 2013 by Nelson Education Limited 4-10 LO 2

FRANCHISING ADVANTAGES Copyright © 2013 by Nelson Education Limited 4-11 Proven marketing concept and customer base – use of an established, nation-wide brand Training – help alleviate managerial weaknesses Financial assistance – start-up business costs are high and by teaming up with a franchise, the individual can increase her/his chance of receiving financial help Operating assistance – franchisor provides operating services including site selection, bulk purchasing of equipment, and inventory LO 2

FRANCHISE COSTS Initial franchise fee Cash investment Royalty payments Advertising costs RESTRICTIONS Sales territory Site approval required Outlet appearance Goods/services to be sold Resale of franchise Advertising and hours of operation Copyright © 2013 by Nelson Education Limited 4-12 FRANCHISING LIMITATIONS: LO 2

EVALUATING FRANCHISE OPPORTUNITITES Copyright © 2013 by Nelson Education Limited 4-13 Locating a Franchise Opportunity Investigating the Potential Franchise – Information sources Independent, third-party sources Franchisors themselves Existing and previous franchisees LO 3

Copyright © 2013 by Nelson Education Limited 4-14 FRANCHISE COSTS LO 3

COST EXPLANATION Franchise fee First and last month’s rent Leasehold improvements Equipment Furniture and fixtures Signage Insurance, licenses and permits Training Initial inventory Working capital Royalty Copyright © 2013 by Nelson Education Limited 4-15 LO 3

GLOBAL FRANCHISING OPPORTUNITIES Canadian franchising enterprises are expanding into countries beyond North America – Yogen Fruz has 1,200 stores in 25 countries Attractive growth prospects: – Argentina, Brazil, China, Dubai, India, Indonesia, Mexico, Poland, South Korea, Turkey, and Vietnam – industrializing countries with large populations – countries with an expanding middle class and higher disposable income Copyright © 2013 by Nelson Education Limited 4-16 LO 3

INVESTIGATING FRANCHISE CANDIDATE Copyright © 2013 by Nelson Education Limited 4-17 Sources of information: – franchisors – independent third party sources – existing and previous franchisee LO 3

FRANCHISOR Copyright © 2013 by Nelson Education Limited 4-18 Disclosure Document – detailed statement of information such as: franchisor’s finances experience size involvement in litigation LO 3

FRANCHISEES CHECKLIST Copyright © 2013 by Nelson Education Limited Complete information package 2.Better Business Bureau, standing? 3.Local chamber of commerce? 4.Comprehensive system for evaluating the performance of franchisees 5.Proven success record? 6.Honest reputation 7.Comprehensive growth forecasts outline 8.Innovations? 9.Franchisee selection process 10.Extensive screening for financial capability 11.Effective advertising and promotional program 12. Service start-up support LO 3

THIRD-PARTY SOURCES OF INFORMATION Copyright © 2013 by Nelson Education Limited 4-20 The International Franchise Association (IFA) Franchise Annual Magazines: – Canadian Business Franchise, Franchise Canada, Profit, Canadian Business, Entrepreneur, The Globe and Mail, The Financial Post The Canadian Franchise Association (CFA) – The CFA’s Franchise Information Kit LO 3

SELLING A FRANCHISE Why would a businessperson wish to become a franchisor? Three benefits can be identified: 1.Reduction of capital requirements 2.Increase in management motivation 3.Speed of expansion Drawbacks associated with franchising from the franchisor’s perspective: 1.Reduction in control 2.Sharing of profits 3.Increase in operating support Copyright © 2013 by Nelson Education Limited 4-21 LO 3

UNDERSTANDING THE FRANCHISOR/ FRANCHISEE RELATIONSHIP 1.Legal counsel must be obtained 2.Consults an attorney 3.Discuss franchise proposal with banker 4.Seek a professional accounting firm 5.franchisee should be wary of contract provisions that contain overly strict cancellation policies Copyright © 2013 by Nelson Education Limited 4-22 LO 4

ONTARIO FRANCHISE DISCLOSURE Copyright © 2013 by Nelson Education Limited 4-23 LO 5

BUYING AN EXISTING BUSINESS Copyright © 2013 by Nelson Education Limited 4-24 REASONS: 1.To reduce uncertainties that must be faced when starting a business from the ground up 2.To acquire a business with ongoing operations and already established relationships 3.To obtain an ongoing business at a bargain price—a price below what it would cost to start a new business LO 6

INVESTIGATING AND EVALUATING AVAILABLE BUSINESSES Copyright © 2013 by Nelson Education Limited RELYING ON PROFESSIONALS 2.WHY THE BUSINESS IS FOR SALE – Old age or illness – Desire to relocate to 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 3.EXAMINING THE FINANCIAL DATA – Review the financial statements and tax returns for past 5 years – Appraisal, valuation, of the firm LO 6

BUYING ASSETS Copyright © 2013 by Nelson Education Limited 4-26 Advantages to an asset purchase: 1.less expensive to purchase assets 2.more flexibility in purchasing assets 3.leaves existing liabilities and potential liabilities with the seller instead of transferring them to the buyer as they would be in a share purchase LO 7

VALUATION OF THE BUSINESS Fair Value: 1. Asset-based: The value of a firm can be determined by estimating the value of its underlying assets 2. Market-based Relies on financial markets in estimating a firm’s value. 3. Earnings-based Firms value determined by future returns from the investment 4. Cash flow–based Based on the amount and timing of its future cash flows Copyright © 2013 by Nelson Education Limited 4-27 LO 8

NONQUANTITATIVE FACTORS Competition Market Future community development Legal commitments Union contracts Buildings Product prices Copyright © 2013 by Nelson Education Limited 4-28 LO 8

FINANCING THE PURCHASE Canadian Small Business Financing Program – Up to 90 percent of the value of the equipment, land, and buildings can be borrowed. – The buyer needs to come up with the difference from personal sources Copyright © 2013 by Nelson Education Limited 4-29 LO 9