Buying Existing and Turnaround Businesses Opening Franchises. Patterns of Entrepreneurship Chapter 12

Buying an Existing Business Risks and reasons the business is for sale –  The Business is not Adequately Capitalized –  The Pressures of Business and Personal Finances –  The Owners Lose Interest or the Death of a owner – Choosing the Right Business

Primary Advantages to Consider when Buying an Existing Business.: uEstablished Business uLower Costs u Fewer Personnel Changes u More Established Policies

Primary Disadvantages to Consider when Buying an Existing Business. uNegative Motivation on the Part of the Seller uKey Employee Losses. uOvervaluation

BUYING A TURNAROUND BUSINESS There are three categories of a business that should be evaluated in the turnaround plan. The business assets that can be evaluated in terms of book or market value. The business operations to examine sale trends, credit policies, pricing, promotional activities, and distribution systems. Also, the buyer will want to understand human-resources issues, including how the owner’s personal skills and abilities influence operations and whether capable employees will stay after acquisition. The evaluation of the business environment.

Guidelines for Purchasing Turnarounds Market and Product Offering. The concept for what product or service the company will offer must become clear before the business can succeed Determining the Margin or Profit for the Business. Profit margins vary with the industry, but the product must sell to the end user for at least four to five times the direct costs and labor and materials needed to produce it. Achieving Sales. Obtaining a few sales or one big sale are not enough for a sustainable business

Guidelines for Purchasing Turnarounds uFinancial Controls. The projected financial statement is an important tool for managing the business successfully uAnalyzing Gross Profit Statements. The gross profit analysis will describe, by product line, where the gross profit is generated.

I Guidelines for Purchasing Turnarounds u Analyzing Income Statements. The income statement shows where the business is going by summarizing how much the entrepreneur is selling, spending, and earning from the operations u Analyzing Cash Flow Statements. No matter how profitable the business is, it is critical to manage the cash effectively.

Introduction to Franchising u What is franchising? u A franchise is “an arrangement by the manufacturer or sole distributor of a trademarked product or service that provides exclusive rights of local distribution to independent retailers in return for their payment of royalties.

Introduction to Datamark u  What is the franchiser’s reputation? u  Is the franchiser now involved in any litigation? u  Is training and start-up assistance available? u  What is the management structure of the organization? u  Is the location and territory protected? u  What are the operating practices of the franchise? u  What are the franchise’s start-up costs? u  How can the purchase be financed? u  What are the terms of renewal and termination of the contract or agreement? Evaluating a Potential Franchiser

Evaluation of a Franchise u A franchise can be a very attractive way to operate one’s own business because of the following advantages u Proven Product u Established Business Plan u Financing Assistance u Knowledge of Market and Capital Assistance u Attained success stories Buying a franchise

Disadvantages of Franchising u  Restrictions in Decision-Making. Unlike starting one’s own venture, the entrepreneur will not be “his or her own boss.” u  High Start-Up Expenses. The initial franchise fee is frequently non-refundable and is often a sizable amount.. u  Selection and Price Restrictions. The franchisee may be restricted in establishing selling prices, introducing new products and services, and adjusting the supply cycles to meet current demands..

u Initial franchise fees: the initial fee is a single payment by the buyer to acquire the franchise rights u Royalties: The heart of a franchise program is the ongoing income derived from sales. There are several ways to structure royalties, but the most common is a percentage of gross sales. u Service to franchisees: Franchise agreements can specify fees for which franchisees pay a retainer or periodic fee. Analyzing the Franchise Fee Structure

 Promotional fees:National promotion and advertising fees are specified in the franchise agreement. This can be a small percentage of sales, seldom any more than 1 percent, or a flat monthly fee.  Periodically, additional fees are collected for joint promotional campaigns.  Real estate income: New franchise outlets that require unique physical facilities are usually built by franchisers and leased to franchisees.  Examples include stand-alone 7-Eleven markets, Jiffy Lube garages, and McDonald’s restaurants.