SMALL BUSINESS MANAGEMENTChapter 5: Buying a Business and

Franchising

Ace Clear DefenseGirls Gymn

Lottery winnerRead the Fine Print

Bulldog Fitness Cerealisious Firehouse Sub

Ace Clear Defense

What advantages did this entrepreneur obtain as a result of buying an existing business?

How would he determine the price to buy this business?

Ace Clear Defense

Advantages of Purchasing an Existing Business

Reduction of Risk Existing business records Less planning Experienced employees

Reduction of Time and Setup Expenses Reduction of Competition Capitalization of Business Strength Possible Assistance from Previous Owner Easier Planning Existing customers/ suppliers Necessary equipment Bargain price

Purchasing an Existing Business

Disadvantages of Purchasing Physical Facilities Personnel Inventory Accounts Receivable Financial Condition Market Deciding on the Price Poor business image Modernization required Purchase price based on inaccurate data Poor business location

Sources of Businesses For Sale

Internet Trade Journals Government Departments Real Estate Brokers Other Professionals

Matchmakers Accountants Lawyers Other experienced business owners

Word of Mouth

Girls Gymn

Why is owner selling?

Owner’s reasons for selling the business Old age or illness Desire to relocate in a different section of the

country Opportunity to start another business Decision to accept a position with another

company Unprofitability of the business Discontinuance of an exclusive sales franchise Maturation of the industry and lack of growth

potential

Evaluating a Business For Sale

Industry Analysis Sales and Profit Trends in the Industry

The Previous Owner Financial Condition of the Business

Validity of the Financial Statements Evaluation of the Financial Statements

Evaluating a Business For Sale

Condition of the Assets Liquid Assets (Cash and Investments) Accounts Receivable Inventory Building and Equipment Real Estate Goodwill

Evaluating a Business For Sale

Quality of Personnel External Relationships of the

Business Conditions of the Records

Lottery winner

Determining the Price or Value of a Business

Market Value Asset value

Book Value Replacement Value

Earnings Value Capitalization of Earnings Method

Average Earnings/Predetermined Interest Rate = Capitalized Value

Times Earnings Method Arbirtraily multiplies earnings by a factor of between 1-10 Small business usually between 4 or 5

Calculating average earnings for a business

Average earnings

Last year $5,000

Two years ago $4,000

Three years ago $7,000

Four years ago $10,000

Five years ago $14,000

total $40,000

Average earnings 40,000/5 = $8000 $8,000/10% =$80,000

Calculating weighted –average earnings for a business

Average earnings

Last year $5,000 X 5 = $25,000

Two years ago $4,000 X 4 = $16,000

Three years ago $7,000 X 3 = $21,000

Four years ago $10,000 X 2 = $20,000

Five years ago $14,000 X 1 = $14,000

total $96,000 = $6,600/10%

Weighted Average earnings

$96,000/15 = $6,600 = $66,000

Determining the Price or Value of a Business cont.

Combination Method Analytical Method

Adjusted net worth, past earning, future earnings

Historical Method – use historical experience to determine relative indicators of value of a business

Sally's Bar and Grill

Sally's Bar and Grill is available for purchase. Sally's earnings for the past five years were as follows: Last year $50,000Two years ago $60,000Three years ago $30,000Four years ago $40,000 Five years ago $25,000 Determine the value of the business using the following

methods (using interest rates of 11%) using both general and weighted average methods.

Capitalized earnings method Time interest method

The Purchase Transaction

Coverage purchase price, including principal and interest

amounts payment dates - when and to whom detailed list of assets included in the purchase conditions of the purchase - nonfinancial

requirements provisions for noncompliance with conditions and

penalties for breaches collateral or security pledged

Negotiating the Deal

History and Background of Franchising

Most rapid growth in North America since the 1950s.

48 cents of every retail dollar goes to franchise business

Franchise sector is Canada's largest employer

One franchise for every 12 Canadians Franchise revenue in $100 billion range

Firehouse Sub

What Is Franchising?

Manufacturer-Directed Franchise Ford Motor Company

Wholesaler-Retailer-Directed Franchise Home Hardware

Franchising Company Subway

Franchising Terms

Franchisee An entrepreneur whose power is limited

by a contractual agreement with a franchisor

Franchisor The party in the franchise contract that

specifies the methods to be followed and the terms to be met by the other party

Advantages of Franchising

Proven market for the product or service.

Services the Franchisor May Provide1. Selection of Location2. Purchase or Construction of Site,

Buildings, and Equipment3. Provision of Financing

Advantages of Franchising

Services the Franchisor May Provide (cont.)4. Standardized Methods of Operating5. Advertising6. Purchasing Advantages7. Training

Potential Disadvantages of Franchising

Lack of Independence Cost of the Franchise Unfulfilled Promises Restrictions of the Contract

Product or Service Offered Line Forcing Termination

Read the Fine Print

Potential Disadvantages of Franchising (cont)

Saturation of the Market Lack of Security Cost of Merchandise Effectiveness of Promotion Exaggeration of Financial Success

Evaluation of a Franchise Opportunity

1.Unproven versus Proven Franchise 2.Financial Stability of Franchise 3.Potential Market for the New Franchise 4.Profit Potential for a New Franchise 5.Territorial Protection 6.Training and Operations Assistance 7.Contract Length and Renewal and Termination

Terms 8.What current Owners are Saying About their

Franchise

The Entrepreneur as Franchisor

What businesses can be franchised? Bull Dog Fitness

Should franchise information provided by a franchisor be discounted? Why or why not?

What problems might arise in con consulting previous franchisees in the process of evaluating a franchise?

Bull dog Fitness

The Entrepreneur as Franchisor

How does one become a franchisor?1. Establish a prototype.2. Prepare the necessary information.3. Investigate the legal requirements.

4. Develop a planned and standardized program of operations.

5. Obtain adequate financing.

Cerealicious

Franchising in the Future

“Piggybacking”: Two or more franchise operating in one outlet.

“Branchising”: Converting existing chain outlets to franchises.

“Mini-franchises”: Small satellite versions of larger franchises.

Growth of service-based and home-based franchises