Accessing Resources for Growth from

External Sources
Using External Parties to Help Grow a
Business
}  Some of the mechanisms entrepreneurs can use are:
}  Franchising.
}  Joint ventures.
}  Acquisitions.
}  Mergers.
Franchising

}  An arrangement whereby the manufacturer or sole

distributor of a trademarked product or service gives
exclusive rights of local distribution to independent
retailers in return for their payment of royalties and
conformance to standardized operating procedures.
}  The person offering the franchise is known as the franchisor.
}  The franchisee is the person who purchases the franchise.
Franchising (cont.)

}  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.
}  Knowledge of the market - Offers experience in business and
market.
}  Operating and structural controls – Helps in standardization and
administrative controls.
Franchising (cont.)

}  Advantages of Franchising—to the Franchisor

}  Expansion risk
}  Allows venture to expand quickly using little capital.
}  Business can be expanded nationally and even internationally.
}  Requires fewer employees than a non-franchised business.
}  Cost advantages
}  Supplies can be purchased in large quantities to achieve economies of
scale.
}  Ability to commit larger sums of money to advertising.
Franchising (cont.)

}  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.
}  Poor management can cause individual franchise failures.
}  The ability to maintain tight control over franchises becomes
difficult as their number increases.
Franchising (cont.)

}  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.
}  Changes that helped evolve franchising opportunities:
}  Good health.
}  Time saving or convenience.
}  Health care.
}  The second baby boom.
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.
}  Franchisors are required to make a full presale disclosure.
}  The franchise agreement contains the requirements and
obligations of the franchisee.
Information Required in Disclosure
Statement
Information Required in Disclosure
Statement (cont.)
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, etc.
}  Industry–university agreements.
}  Created for the purpose of doing research.
}  International joint ventures.
Joint Ventures (cont.)
}  Factors in Joint Venture Success:
}  The accurate assessment of the parties involved to best
manage the new entity.
}  The degree of symmetry between the partners.
}  The expectations of the results of the joint venture must be
reasonable.
}  The timing must be right.
Acquisitions
}  The purchase of an entire company, or part of a company;
the company no longer exists independently.
}  Advantages of an Acquisition
}  Established business.
}  Location.
}  Established marketing structure.
}  Cost.
}  Existing employees.
}  More opportunity to be creative.
Acquisitions (cont.)
}  Disadvantages of an Acquisition
}  Marginal success record.
}  Overconfidence in ability.
}  Key employee loss.
}  Overvaluation.
}  Synergy
}  “The whole is greater than the sum of its parts.”
}  Synergy should occur in both the business concept and the
financial performance.
Acquisitions (cont.)

}  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.
Acquisitions (cont.)

}  Locating Acquisition Candidates

}  Brokers, accountants, attorneys, bankers, business associates, and
consultants may know of candidates.
}  Business opportunities in newspapers or trade magazines.
Mergers
}  Key concern - Legality of the purchase.
}  Process:
}  Determine the merger objectives and resulting gains for both
companies.
}  Carefully evaluate the other company’s management.
}  Determine the value and appropriateness of the existing
resources.
}  Establishing a climate of mutual trust.
}  Determine the value of a merger candidate.
Merger Motivations
Leveraged Buyout

}  An entrepreneur (or any employee group) uses borrowed

funds to purchase an existing venture for cash.
}  Long-term debt financing is provided by banks, venture
capitalists, and insurance companies.
}  Acquired firm’s assets serve as collateral.
}  Evaluation procedure:
}  Determine whether asking price is reasonable.
}  Assess the firm’s debt capacity.
}  Develop the appropriate financial package.
Overcoming Constraints by
Negotiating for More Resources
}  Distribution task - Negotiating how the benefits of the
relationship will be allocated between the parties.
}  Integration task - Exploring possible mutual benefits from
the relationship so that the “size of the pie” can be
increased.
Overcoming Constraints by Negotiating
for More Resources (cont.)
}  Assessment 1: What will you do if an agreement is not
reached?
}  Best alternative to a negotiated agreement.
}  Determine a reservation price.
Overcoming Constraints by Negotiating
for More Resources (cont.)
}  Assessment 2: What will the other party to the negotiation
do if an agreement is not reached?
}  Difficult to assess reservation price.
}  Bargaining zone - Range of outcomes between the
entrepreneur’s reservation price and that of the other party.
Overcoming Constraints by Negotiating
for More Resources (cont.)
}  Assessment 3: What are the underlying issues of this
negotiation? How important is each issue to you?
}  Focus on achieving aspects most desirable by trading off aspects
of less importance.
Overcoming Constraints by Negotiating
for More Resources (cont.)
}  Assessment 4: What are the underlying issues of this
negotiation? How important is each issue to the other
party?
}  Provides the entrepreneur an opportunity to sacrifice aspects of
less importance to him/ her but of high importance to the other
party.
Overcoming Constraints by Negotiating
for More Resources (cont.)
}  Negotiation strategies:
}  Build trust and share information.
}  Ask lots of questions.
}  Make multiple offers simultaneously.
}  Use differences to create trade-offs that are a source of mutually
beneficial outcomes.