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Accessing Resources for Growth from External Sources

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1 Accessing Resources for Growth from External Sources
Chapter 14 Accessing Resources for Growth from External Sources McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Learning Objectives To understand how joint ventures can help an entrepreneur grow his or her business and acknowledge the challenges of finding, and maintaining, an effective joint venture relationship To be aware of the pros and cons of using acquisitions to grow a business and to know what to look for in an acquisition candidate

3 Learning Objectives To understand the possibilities of achieving growth through mergers and leveraged buyouts and the challenges associated with each To understand franchising from the perspective of both the entrepreneur looking to reduce the risk of new entry and the entrepreneur looking for a way to grow his or her business

4 Learning Objectives To understand the tasks of negotiation and develop the skills to more effectively conduct these tasks

5 Using External Parties to Help Grow a Business
Mechanisms Joint ventures Acquisitions Mergers Franchising

6 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 Industry-university agreements Created for the purpose of doing research International joint ventures

7 Historic Joint Ventures

8 Acquisitions Purchasing all or part of a company
Advantages of an acquisition Established business Location Established marketing structure Cost Existing employees More opportunity to be creative

9 Acquisitions 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” Should occur in both the business concept and the financial performance

10 Acquisitions 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

11 Acquisitions Locating acquisition candidates
Brokers: People who sell companies Accountants, attorneys, bankers, business associates, and consultants may know of candidates Business opportunities in newspapers or trade magazines


13 Mergers Joining two or more companies
Key concern - Legality of the purchase Process: Determine the merger objectives and resulting gains for both companies Carefully evaluate the other company’s management

14 Mergers Determine the value of a merger candidate
Determine the value and appropriateness of the existing resources Establishing a climate of mutual trust Determine the value of a merger candidate

15 Figure 14.1 - Merger Motivations

16 Leveraged Buyout Purchasing an existing venture by any employee group
Acquired firm’s assets serve as collateral Long-term debt financing is provided by banks, venture capitalists, and insurance companies Evaluation procedure: Determine whether asking price is reasonable Assess the firm’s debt capacity Develop the appropriate financial package

17 Franchising Franchisor gives exclusive rights of local distribution to: A franchisee in return for payment of royalties and conformance to standardized operating procedures Franchisor: Person offering the franchise Franchisee: Person who purchases the franchise

18 Franchising 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

19 Franchising Advantages of franchising - To the franchisee
Knowledge of the market Offers experience in business and market Operating and structural controls Helps in standardization and administrative controls

20 Franchising Advantages of franchising - To the franchisor
Expansion risk Allows venture to expand quickly using little capital Business can be expanded nationally and internationally Requires fewer employees than a non-franchised business Cost advantages Supplies can be purchased in large quantities to achieve economies of scale Commit larger sums of money to advertising

21 Franchising 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

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

23 Franchising 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

24 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

25 Investing in a Franchise
Franchisors are required to make a full presale disclosure Franchise agreement contains the requirements and obligations of the franchisee

26 Table 14.2 - Information Required in Disclosure Statement

27 Table 14.2 - Information Required in Disclosure Statement

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