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Start-ups and Buyouts, Family Business and Franchising Opportunities. January 22, 2004. “Wherever you see a successful business, someone once made a courageous decision.” --Peter F. Drucker. Agenda. Startup and Buyout Opportunities Family Business Opportunities Franchising Opportunities.

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Wherever you see a successful business someone once made a courageous decision peter f drucker l.jpg

“Wherever you see a successful business, someone once made a courageous decision.”--Peter F. Drucker


Agenda l.jpg
Agenda a courageous decision.”

  • Startup and Buyout Opportunities

  • Family Business Opportunities

  • Franchising Opportunities


Part 1 startup and buyout opportunities l.jpg
Part 1: Startup and Buyout Opportunities a courageous decision.”

  • Why Startups?

  • Types of startups and sources of ideas

  • Evaluating investment opportunities

  • Why Buy an Existing Business?

  • How to evaluate how much a business is worth?


The startup creating a new business l.jpg
The Startup: creating a new business a courageous decision.”

  • What are the typical reasons for pursuing a startup rather than other alternatives?


Why startups l.jpg
Why Startups? a courageous decision.”

Developing a commercial market for a recently invented or newly developed product or service.

Taking advantage of available resources, ideal location, advances in equipment, employees, suppliers, and bankers

Avoiding precedents, policies, procedures, and legal commitments of existing firms


Types of startups l.jpg
Types of Startups a courageous decision.”


Slide8 l.jpg

Friends/Relatives a courageous decision.”5%

Personal Interest/Hobby16%

Family Business6%

Suggestion7%

Education/Courses6%

Prior Work Experience45%

Chance Happening11%

Other4%

Sources of Startup Ideas


Evaluating ideas opportunities l.jpg
Evaluating Ideas & Opportunities a courageous decision.”

  • Is there a clearly defined market need for the product or service, and is the timing right?

  • Can the proposed business achieve a durable or sustainable competitive advantage?

  • Is the venture financially rewarding, and does it have significant profit and growth potential?

  • Is there a good fit between the entrepreneur and the opportunity?

  • Is there a fatal flaw in the venture that could make the business unsuccessful?


Pros and cons of starting from scratch l.jpg
Pros and Cons of Starting from Scratch a courageous decision.”

Lower costs

Flexibility

New markets

Creativity

Higher Risk

No track record

No clients

Many decisions

Extensive planning


Why buy an existing business l.jpg
Why Buy an Existing Business? a courageous decision.”

  • To reduce some of the uncertainties and unknowns that must be faced in starting a business from the ground up.

  • To acquire a business with ongoing operations and established relationships with customers and suppliers.

  • To obtain an established business at a price below what it would cost to start a new business.


Pros and cons of buyouts l.jpg
Pros and Cons of Buyouts a courageous decision.”

Higher chance of success

Less planning

Existing customers/ suppliers

Necessary equipment

Bargain price

Experienced employees

Existing business records

Existing problems

Poor quality of current employees

Poor business image

Modernization required

Purchase price based on inaccurate data

Poor business location

Hidden financial aspects, liabilities

Customers tied to current owner


Why is the business for sale l.jpg
Why is the business for Sale? a courageous decision.”

  • Old age or illness

  • Desire to relocate in a different section of the country

  • 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


How much is it worth l.jpg
How much is it worth? a courageous decision.”

  • Asset-Based Valuation

    • Estimates the value of the firm’s assets

      • Modified book value

      • Replacement value

      • Liquidation value

    • Does not reflect the value of the firm as a going concern.

  • Market-Based Valuation

    • Considers the sale prices of comparable firms

    • Difficulty is in finding comparable firms


How much is it worth15 l.jpg
How much is it worth? a courageous decision.”

  • Earnings-based Valuation

    • Determines the value of the business based on its potential future earnings

    • Divide normalized earnings by an appropriate capitalization rate

      • Function of risk and projected growth

  • Cash-Flow-based Valuation

    • Compares the expected rate of return on investment to a required rate

    • Required rate = Risk free rate of return + risk premium


Nonquantitative factors l.jpg
Nonquantitative Factors a courageous decision.”

  • Competition

  • Market

  • Future community development

  • Legal commitments

  • Union contracts

  • Buildings

  • Product prices


The ideal business l.jpg
The Ideal Business a courageous decision.”

  • Requires no investment

  • Has a recognized, measurable market

  • A perceived need for the product or service

  • A dependable source of supply for required inputs

  • No government regulation

  • Requires no labour force

  • Provides 100% gross margin

  • Buyers purchase frequently

  • Receives favorable tax treatment


Part 2 family business opportunities l.jpg
Part 2: Family Business Opportunities a courageous decision.”

  • The family business: a unique opportunity

  • Advantages and special features of a family-run businesses

  • The process of leadership succession

  • Transfer of ownership


The family business a unique institution l.jpg
The Family Business: a unique institution a courageous decision.”

  • What is a family business

    • A company in whose ownership and/or functioning two or more members of the same family are directly involved.

    • A firm whose ownership passes from one generation of a family to another

  • Decisions affecting both business and family


The overlap of family and business concerns l.jpg
The Overlap of Family a courageous decision.”and Business Concerns


Advantages of a family business l.jpg
Advantages of a Family Business a courageous decision.”

  • Strength of family relationships during challenging periods of business change

  • Financial sacrifices that family members make for the good of the firm

  • Operation as a family business distinguishes the firm from its competitors.

  • Higher levels of concern for its community and non-family employees

  • Capability to plan and prepare for the long haul

  • Emphasis on quality and value


Special features of family run businesses l.jpg
Special Features of Family-Run Businesses a courageous decision.”

  • The founder’s imprint on the culture

  • The need for good management

  • Parent-child / couple relationships

  • Sibling rivalry

  • In-laws and Nonfamily employees

  • Family retreats and councils


The process of leadership succession l.jpg
The Process of Leadership Succession a courageous decision.”

  • Assessment of available family talent

  • Allowing only qualified competent family members to assume leadership roles in the firm increases the value of the firm for all who have an ownership interest in it

  • Mentoring

  • Reluctant parents and ambitious children


A model of succession in a family business l.jpg
A Model of Succession in a Family Business a courageous decision.”

Stage IIIIntroductoryFunctional

Stage IPre-Business

Stage IIIntroductory

Child becomes aware of facets of firm and/or industry. Orientation of child by family member is informal.

Child is exposed to business jargon, employees, and the business environment.

Child works as part-time employee. Work becomes more difficult. Includes education and work for other firms.

Entry of Successor

Stage IVFunctional

Stage VAdvanced Functional

Potential successor begins work as full-time employee. Includes all nonmanagerial positions.

Potential successor assumes managerial position. Includes all management positions prior to becoming president.

.

.

Transfer of Leadership

Stage VI

Early Succession

Stage VIIMature Succession

Successor assumes presidency.

Includes period in which the successor becomes dejure head of company.

Successor becomes defacto head of company.

Source: Adapted from Justin G. Longenecker and John E. Schoen, “Management Succession in the Family Business,” Journal of Small Business Management, Vol. 16 (July 1978), pp. 1–6.


Transfer of ownership l.jpg
Transfer of Ownership a courageous decision.”

  • Preserve a sound business entity

  • Assure equity among heirs

  • Minimize taxes


Part 3 franchising opportunities l.jpg
Part 3: Franchising Opportunities a courageous decision.”

  • Understanding the franchise option

  • Types of franchising

  • Pros and cons

  • Evaluating Franchise Opportunities

  • Selling a franchise

  • Understanding the franchisor/franchisee relationship


Understanding franchising l.jpg
Understanding Franchising a courageous decision.”

  • Franchising is a marketing system revolving around a two-party legal agreement, whereby the franchisee is granted the privilege (the franchise) to conduct business as an individual owner but according to the methods and terms specified by the franchisor ina contract


Types of franchising l.jpg
Types of Franchising a courageous decision.”

  • 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

  • Piggyback Franchising

    • The operation of a retail franchise within the physical facilities of a host store


Types of franchising30 l.jpg
Types of Franchising a courageous decision.”

  • Master Licensee

    • An independent firm or individual acting as a sales agent with the responsibility for finding new franchises within a specified territory

  • Multiple-Unit Ownership

    • 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


Structure of franchising l.jpg
Structure of Franchising a courageous decision.”

FranchiseParties

FranchiseFacilitators

Franchisor

Industry Associations(example: IFA)

Master Licensee/Area Developers

Federal/Provincial Agencies

Business/ConsultingFirms (example:Franchise Connections)

Franchisee-OwnedOperating Units

Company-OwnedStores


Pros and cons l.jpg
Pros and Cons a courageous decision.”

Probability of success

Proven line of business and marketing methods

Established brand

Quicker start-up time

Training

Financial assistance

Operational and management support

  • Franchise costs

    • Initial franchise fee

    • Royalty payments

    • Advertising costs

  • Restrictions on business operations and growth

  • Loss of independence and conformity to corporate policies

  • Exclusive supplier relationships


  • Franchisor assistance l.jpg
    Franchisor Assistance a courageous decision.”

    • Financing

    • Payment schemes

    • Site selection

    • Bulk purchasing of equipment and inventory


    Franchising restrictions on business operations l.jpg
    Franchising Restrictions on Business Operations a courageous decision.”

    • Restricting of sales territory

    • Requiring site approval and imposing requirement on the outlet’s appearance

    • Restricting the goods/services that can be sold

    • Restricting the resale of the franchise without their permission

    • Restricting advertising and hours of operation


    Evaluating franchising opportunities l.jpg
    Evaluating Franchising Opportunities a courageous decision.”

    • Locating a potential franchise

    • Global franchising opportunities

    • Investigating the franchise

      • Franchisors themselves

      • Existing and previous franchisees

      • Independent, third-party sources


    Understanding the franchisor franchisee relationship l.jpg
    Understanding the franchisor/franchisee relationship a courageous decision.”

    • Contract

    • Legal advice

    • Franchising Scams

      • The Rented Rolls Royce Syndrome

      • The Hustle

      • The Cash-Only Transaction

      • The Boast

      • The Big-Money Claim

      • The Couch Potato’s Dream

      • Location, Location, Location

      • The Disclosure Dance


    The franchisor s perspective l.jpg
    The Franchisor’s perspective a courageous decision.”

    Benefits

    Reduction of capital requirements

    Increase in management motivation

    Speed of expansion

    • Drawbacks

      • Reduction in control

      • Sharing of profits

      • Increase in operational support costs


    Franchisability of product service l.jpg
    Franchisability of product/service a courageous decision.”

    • Innovative and differentiated

    • Standard characteristics for control and purchasing

    • High gross margin

    • Wide geographic appeal

    • Capable of 20% annual market growth

    • Transferable formula

    • Reasonable initial franchise fee

    • Easily promoted idea


    Summary startup and buyout opportunities l.jpg
    Summary: Startup and Buyout Opportunities a courageous decision.”

    • Discussed reasons for starting new business rather than busing from an existing firm or acquiring a franchise

    • Distinguished the different types and sources of startup ideas

    • Identified factors that determine whether an ideas is a good investment opportunity

    • Discussed reasons for buying an existing business

    • Summarized four basic approaches for determining a fair value for a business


    Summary family businesses l.jpg
    Summary: Family Businesses a courageous decision.”

    • Described the basic concept of family businesses and its major advantages

    • Discussed some special features of family-run firms

    • Described a model of succession


    Summary franchising opportunities l.jpg
    Summary: Franchising Opportunities a courageous decision.”

    • Described basic concept of franchising and some of the important approaches

    • Identified the major advantages and disadvantages of franchising

    • Discussed process for evaluating a franchise

    • Discussed benefits derived from becoming a franchisor

    • Discussed the critical franchisor/franchisee relationship


    Next steps l.jpg
    Next Steps a courageous decision.”

    • Read:

      • textbook chapter 4

      • Bill Sahlman article on B-plans

    • Form teams to discuss business ideas and prepare 2 minute pitch

    • Next week’s guest speaker:

      • Sean O’Dea, founder of Second Cup and Proshred Security


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