Entrepreneurship Chapter 14 Franchising, Licensing, and Harvesting: Cashing in Your Brand

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 2 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

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 3 Growth through Replication Licensing = “renting” your brand or other intellectual property to sell your products Franchising = replicating the business formula through others

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 4 Focus Your Brand A name, term, sign, logo, design that identifies a product/service Represents a promise to consistently meet customer expectations Tightly focused brands  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 don’t reinforce the brand Diversification can unfocus the company & damage the brand.

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 5 Licensing Licensor—sells license, which “rents” the right to use the licensor’s company name. Licensee—pays fee for the license & may also pay royalties (percentage of sales) to licensor. Licensing is effective when it does not tarnish image of licensee’s own company or products.

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 6 Franchising Franchisor Pros Can expand without huge capital investment Earn royalties Cons Franchisee may fail to operate franchise correctly, tarnishing reputation. Many federal, state regulations Franchisees who fail may try to sue. Costly to become a franchisor

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 7 Franchise Research Do your research before you decide to franchise your business Consult with a franchise attorney Visit the International Franchise Association & the American Association of Franchisee & Dealers websites Create a Franchise Agreement

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 8 The Franchise Agreement Contract between franchisor & franchisee Defines Standards of quality & performance Royalty rates Duration of the contract Assigns territories to prevent franchisees from competing with each other

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 9 Harvesting & Exiting Harvesting = obtaining cash or stock by selling, public offering, or merger of company you founded Usually takes at least 10 years to be ready Founder may remain with the business in the case of a merger Exiting = leaving the business through closure, liquidation or bankruptcy Loaded with debt No product or service of lasting value

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 10 How to Value a Business Popular methods of valuation:  Book value = Assets – Liabilities  Most common method  Future earnings = estimated future earnings stream  Best for businesses that are growing quickly  Market-based = P/E Ratio x Estimated Future Net Earnings  P/E = company stock price/earnings per share  Applies only to publicly traded stocks

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 11 Harvesting Options  Increase free cash flows  Management buy-out (MBO)  Employee stock ownership plan (ESOP)  Merging or being acquired  Initial public offering (IPO)

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 12 Exit Strategies for Investors Acquisition = someone buys the corporation & they 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. Merger = value is created through combining with another company.

Entrepreneurship, 2 nd Edition Mariotti and Glackin with NFTE © 2010 Pearson Education, Upper Saddle River, NJ All Rights Reserved. 13 Investors & Exit Strategies Investors care about your exit strategy because it will affect their investment & how they will eventually get their ROI. Spell out your exit strategy in your business plan. Simply claiming you will “go public” is not adequate.