Chapter 14

Accessing Resources for Growth from External Sources

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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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

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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

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Learning Objectives

• To understand the tasks of negotiation and develop the skills to more effectively conduct these tasks

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Using External Parties to Help Grow a Business

• Mechanisms• Joint ventures• Acquisitions• Mergers• Franchising

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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

© 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

Historic Joint Ventures

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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

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Acquisitions

• 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”• Should occur in both the business concept and the

financial performance

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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

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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

© 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

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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

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Mergers

• Determine the value and appropriateness of the existing resources

• Establishing a climate of mutual trust• Determine the value of a merger candidate

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Figure 14.1 - Merger Motivations

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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

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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

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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

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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

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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

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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

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Franchising

• Poor management can cause individual franchise failures

• The ability to maintain tight control over franchises becomes difficult as their number increases

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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

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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

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Investing in a Franchise

• Franchisors are required to make a full presale disclosure

• Franchise agreement contains the requirements and obligations of the franchisee

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Table 14.2 - Information Required in Disclosure Statement

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Table 14.2 - Information Required in Disclosure Statement