Franchises and Buyouts

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1 Franchises and Buyouts Part 2 Starting From Scratch or Joining an Existing Business PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. Franchising from the Franchisor s Perspective Benefits Drawbacks Reduction of capital Reduction in control requirements Sharing of profits Increase in management Increase in operational motivation support costs Speed of expansion Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 2 The Pros and Cons for Franchisee Pluses Formalized training Financial assistance Proven marketing methods Managerial assistance Quicker startup time Overall lower failure rates Minuses Franchise fees Royalties Restrictions on growth Less independence in operations Franchisor may be sole supplier of some supplies Termination/renewal clauses Fig. 6-2 Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 3

2 Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 4 Franchising Agreements Franchise contract The legal agreement between franchisor and franchisee Franchise The privileges conveyed in the franchise contract Franchising Arrangements Product and Trade Name Franchise Grants the right to use a widely recognized product or name Business Format Franchise Provides an entire marketing system and ongoing guidance from the franchisor Master Licensee An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 5 Franchising Arrangements (cont d.) Multiple-Unit Ownership The holding by a single franchisee of more than one franchise from the same company Area Developers Individuals or firms that obtain the legal right to open several franchised outlets in a given area Piggyback Franchising The operation of a retail franchise within the physical facilities of a host store Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 6

3 Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 7 Legal Considerations in Franchising The Franchising Contract Signed with legal counsel present Contains a termination and transfer provision Contains a statement of rights to renew contract Pros and Cons of Buying an Existing Business Pros High chance of success Less planning Existing customers/ suppliers Necessary equipment Bargain price Experienced employees Existing business records Cons Existing problems Poor quality of current employees Poor business image Modernization required Purchase price based on inaccurate data Poor business location Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 8 Investigating and Evaluating Available Businesses Due Diligence The exercise of prudence, such as would be expected of a reasonable person, in the careful evaluation of a business opportunity Relying on Professionals Accountants Attorneys Other experienced business owners Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 9

4 Copyright 2006 Thomson Business & Professional Publishing. All rights reserved Finding Out Why the Business Is For Sale Owner s reasons for selling the business Old age or illness Desire to relocate to a different section of the country Decision to accept a position with another company Unprofitability of the business Loss of an exclusive sales franchise Maturing of the industry and lack of growth potential Beware of sellers who may have cooked the books to make the business more attractive. Valuing the Business Asset-Based Valuation Estimates the value of the firm s assets; Does not reflect the value of the firm as a going concern. Market-Comparable Valuation Considers the sale prices of comparable firms; Difficulty is in finding comparable firms. Cash-Flow-based Valuation Compares the expected and required rates of return on the amount of capital to be invested in the business. Copyright 2006 Thomson Business & Professional Publishing. All rights reserved Competition Market Future Community Development Legal Commitments Union Contracts Buildings Product Prices Nonquantitative Factors in Valuing a Business Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 12

5 Copyright 2006 Thomson Business & Professional Publishing. All rights reserved Negotiating and Closing the Deal Terms of Purchase Assets purchase or total entity Indemnification clause Payment in full or partial payments over time Closing the sale Best handled by a third party Bill of sale Tax certifications Payment-to-seller agreements and guarantees Characteristics of Successful High-Growth Startups Begin as a team effort Are in service and manufacturing industries Have competent founders who: have related experience. have started other businesses. share in ownership of business. Are somewhat better financed Do not limit themselves to local markets Copyright 2006 Thomson Business & Professional Publishing. All rights reserved Key Terms franchising franchisee franchisor franchise contract franchise product and trade name franchising business format franchising master licensee multiple-unit ownership area developers piggyback franchising disclosure document Uniform Franchise Offering Circular (UFOC) matchmakers due diligence Copyright 2006 Thomson Business & Professional Publishing. All rights reserved. 4 15

CHAPTER 4 Franchises and Buyouts

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