Franchising and Buyouts

1. Franchising and Buyouts PART 2 Starting from Scratch or Joining an Existing Business

2. Franchising • Franchising • A marketing system involving a legal agreement, whereby the franchisee conducts business according to the terms specified by the franchisor. • Franchisor • Party in franchise contract that specifies methods to be followed and terms to be met by the other party. • Franchisee • An entrepreneur whose power is limited by a contractual agreement with a franchisor.

3. Franchising Options • Franchise Contract • The legal agreement between franchisor and franchisee • Franchise • The privileges conveyed in the franchise contract

4. Exhibit 4.1Economic Impact of Franchising Economic Activity in Franchised Businesses There were 909,253 businesses in franchise systems in the United States in 2005, accounting for 3.3 percent of all U.S. business establishments. These businesses directly provided • 11.0 million jobs, • an annual payroll of $278.6 billion, and • output worth $880.9 billion. Their economic activity accounted for • 8.1 percent of all private-sector jobs, • 5.3 percent of all private-sector payrolls, and • 4.4 percent of all private-sector output. Economic Activity Because of Franchised Businesses The economic significance of franchising is greater than indicated by the activity in franchised businesses alone, for it stimulates still more activity and supports the growth of many nonfranchised businesses. If we include economic results from both inside and outside of franchising, franchised businesses in the United States were the source of • 21.0 million jobs, or 15.3 percent of private-sector jobs, • $660.9 billion of payroll, or 12.5 percent of private-sector payrolls, and • $2.31 trillion of output, or 11.4 percent of private-sector output. Source: PriceWaterhouseCoopers, The Economic Impact of Franchised Businesses, Volume II (Washington, DC: International Franchise Association, 2008).

5. Advantages Probability of success Proven line of business Pre-qualification of franchisee Reduced risk of failure Use of a valuable trade name and trademark Economies of scale Training Franchisor-provided Financial assistance Franchisor assistance Operating benefits Management training provided by the franchisor Limitations Franchise costs Initial franchise fee Investment costs Royalty payments Advertising costs Restrictions on business operations Loss of independence Lack of franchisor support The Pros and Cons of Franchising

6. Franchisor Controls on Franchisees • Restricting of sales territory • Requiring site approval and imposing requirement on the outlet’s appearance • Restricting the goods/services that can be sold • Requiring specific operating hours • Controlling advertising

7. Evaluating Franchise Opportunities • Selecting a Franchise • Personal observation • Advertisements • Investigating the Potential Franchise • Information sources • Independent, third-party sources • Federal Trade Commission • Internet • Franchise consultants • Franchisors themselves • Disclosure documents • Existing and previous franchisees

8. Becoming a Franchisor The Business Model Financial Considerations Required Assistance FranchisorConsiderations Government Regulations Operations Manual Development Adding Long-Term Value

9. Benefits Reduction of capital requirements Increase in management motivation Speed of expansion Drawbacks Reduction in control Sharing of profits Increase in operational support costs Becoming a Franchisor

10. Legal Issues in Franchising • The Franchising Contract • Signed with legal counsel present • Contains a termination and transfer provision • Contains statement of rights to renew contract

11. Franchise Disclosure Requirements • Rule 436 of the Federal Trade Commission • A rule that prescribes that the franchisor must disclose certain information to prospective franchisees • http://www.ftc.gov/bcp/franchise/16cfr436.shtm • Franchise Disclosure Document (FDD) • A document accepted by the Federal Trade Commission as satisfying its franchise disclosure requirements • Investment requirements • Conditions that would affect renewal, termination, or sale of the franchise

12. Buying an Existing Business? Reduction of Uncertainties of Startup Acquisition of Ongoing Operations and Relationships A Bargain Price A Quick Start

13. 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 Pros and Cons of Buyingan Existing Business

14. Finding a Business to Buy • Due Diligence • The exercise of prudence, such as would be expected of a reasonable person, in the careful evaluation of a business opportunity. • Matchmakers • Specialized brokers that bring together buyers and sellers • Relying on Professionals • Accountants • Attorneys • Other experienced business owners

15. Exhibit 4.9Documents Required for Due Diligence • Term Sheets, Corporate Summary Fact Sheet • Business Plan • Marketing Plan • Key Personnel Resumes • Financial Planning, Cash Flow Model, Analysis Reports, Glossary • Financial Statements • Profit and Loss Statements • Balance Sheets, Intercompany Transfers • Accounts Receivable/Accounts Payable Aging Summaries • Tax Returns • Asset Ledger • Client List and Actual Sales • Shareholder Statements • Credit and Security Agreements • Book of Meeting Minutes • Summary of Litigation • Non-Competition, Non-Solicitation, or Non-Disclosure Agreements • Filings with agencies (U.S. and foreign) having jurisdiction over business operations • Customer and Vendor Contracts • License or Royalty Agreements • Promissory Notes, Bonds or Debentures • Options or Rights for Capital Stock or Company Assets • Partnership, Joint Venture, Marketing, or Similar Agreements • Material Contracts and Agreements • Cost-Sharing Agreements, Intercompany Transfers (Company Affiliates) • Contracts or Other Documents Affecting the Business Assets • Development or Technology Agreements and Documents Relating to Business Assets • Corporate Policies (Insurance, Operational, Health, Safety, HR) • Summary of Pending or Proposed Assessments or Tax Liens • Listing of Sales and Use Tax Returns (All Affected Jurisdictions) • Implementation Plan Source: http://alwayson.goingon.com, accessed on January 24, 2009.

16. Finding Out Why a Business Is For Sale • Owner’s Reasons for Selling • 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 • 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.

17. Examining the Financial Data • Review financial statements and tax returns for the past five years. • Recognize that financial data can be misleading. • Assets overvalued • Expenses overstated/understated • Income underreported • Unrecorded debts • Adjust asset valuations to reflect the true state of the business.

18. 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.

19. Nonquantitative Factors in Valuing a Business • Competition • Market • Future communitydevelopment • Legal commitments • Union contracts • Buildings • Product prices

20. 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