Entrepreneurship

1. Accessing Resources for Growth from
external sources
Entrepreneurship
Module 8

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

3. 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.
Royalties: An amount of money that is paid to the original creator of a
product, book, or piece of music based on how many copies have been
solved.

4. Cont.
Advantages of Franchising—to the Franchisee:
One of the most important advantage of buying a franchise is that the
entrepreneur does not have to incur all the risks associated with creating a
new business. Typically the areas that entrepreneurs have problems with in
starting a new venture are discussed under:
• Product acceptance: The franchisee usually enters into a business that has
an accepted name, product, or service. In case of subway, any person
buying a franchise will be using the subway name, which is well known &
established through the united states.

5. Cont.
• Management expertise: Another important advantage to the franchisee is
the managerial assistance provided by the franchisor. Each new franchisee
is often required to take a training program on all aspects of operating the
franchise. This training could include classes in accounting, personnel
management, marketing and production.
• Capital requirements: Starting a new venture can be costly in terms of
both time & money. The franchise offers an opportunity to start a new
venture with Up-front support can save entrepreneur significant time and
capital. Some franchisors conduct location analysis, market reconditions, &
competition. In some cases the franchisor will also finance the initial
investment to start the franchise operation.

6. Cont.
• Knowledge of the market: Any established franchise business offers the
entrepreneur years of experience in the business & knowledge of the
market. This knowledge is usually reflected in a plan offered to the
franchisee that details the profile of the target customer & the strategies
that should be implemented once the operation has begun.
• Operating and structural controls: Two problems that many entrepreneurs
have in starting a new venture are maintaining quality control of products
& services & establishing effective managerial controls. Helps in
standardization (maintain quality in products & services) and
administrative controls (financial decisions, criteria for hiring firing,
training) .

7. Cont.
Advantages of Franchising—to the Franchisor:
The advantages a franchisor gains through franchising are related to
expansion risk, capital requirements, & cost advantages that result from
extensive buying power. E.g. the success of Subway chath. Clearly Fred
DeLuca would not have been able to achieve the size & scope of his business
without franchising it.to use franchising as an expansion method , the
franchisor must have established value & credibility that someone else is
willing to buy.
• Expansion risk:
The most obvious advantage of franchising for an entrepreneur is that it
allows the venture to expand quickly using little capital. A franchisor can
expand a business nationally and even internationally by authorizing and
selling franchises in selected locations.

8. Cont.
Due to franchising it was easy for DeLuca to expand his business because
without franchising the capital that DeLuca would require to build 8,300
Subway sandwich shops would be a difficult task. Operating a franchised
business requires fewer employees than a non-franchised business.
• Cost advantages:
The franchisor can purchase supplies in large quantities, thus achieving
economies of scale that would not have been possible otherwise. One the
biggest cost advantages of franchising a business is the ability to commit
larger sums of money to advertising. Each franchisee contributes a
percentage of sales (1 to 2 percent) to an advertising pool. This pooling of
resources allows the franchisor to conduct advertising in major media across
a wide geographic area. If the business were not franchised, the company
would have to provide funds for the entire adverting budget.

9. Cont.
Disadvantages of Franchising:
Franchising is not always the best option for an entrepreneur. Any one
investing in a franchise should investigate the opportunity thoroughly.
Some of the disadvantages of franchising are:
• 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.

10. Cont.
Types of Franchises:
There are three types of franchising:
1. Dealership:
A form commonly found in automobile industry. Here, manufacturer use
franchises to distribute their product line. These dealerships act as a retail
store for the manufacturer. In some instances, they are required to meet
quotas established by the manufacturers, but as is the case of any franchise,
they benefit from the advertising & management support provided by the
franchisor.
2. Franchise that offers a name, image, and method of doing business:
This is the most common type such as McDonald’s, Subway, KFC. There are
many of these types of franchises.

11. Cont.
3. Franchise that offers services:
A third type of franchise offers services. These include personal
agencies, income tax preparation companies. These franchises have
established names & reputations & methods of doing business.

12. Investing in a Franchise
Franchising involves many risk to an entrepreneur. It requires effort & long
hours, as any business does, since duties like hiring, scheduling, buying &
accounting are still franchisee’s responsibility. Not every franchise is right for
every entrepreneur. A number of factors should 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.

13. Information Required in Disclosure Statement

14. Cont.

15. Joint Ventures
Two or more companies forming a new company is a joint venture. A
separate entity that involves a partnership between two or more active
participants.
Types of Joint Ventures:
• Between private-sector companies:
Although there are many different types of joint venture arrangements,
the most common is still between two or more private sector
companies. E.g. Boeing, Mitsubishi, Fuji & Kawasaki entered into a joint
venture for the production of small aircrafts to share technology & cut
costs. Objectives of this type of joint venture is entering new/ foreign
markets, raising capital, cooperative research, etc.

16. Cont.
• Industry–university agreements:
Created for the purpose of doing research are another type of joint venture that
has seeing increasing usage. However two major problems have kept these type of
joint ventures from increasing faster. A profit corporation has the objective of
obtaining tangible results, such as patent, from its research investments & wants all
proprietary rights. Universities wants to share in the possible financial returns from
the patent, but the University researchers want to make the knowledge available
through research papers. In spite of these problems many industry-university
teams have been established. In one joint venture agreement in robotics e.g.
Westinghouse retains patent rights while Carnegie-Mellon receives a percentage of
any license royalties. The university also has the right to publish the research
results as long as it withholds from publication any critical information that might
adversely affect the patent.
• International joint ventures:
These type of joint ventures are rapidly increasing in number due to their relative

17. Cont.
advantage. Not only can both companies share in the earnings & growth, but the joint
venture can have a low cash requirement if the knowledge or patents are capitalized as a
contribution to the venture. Also, the joint venture provides ready access to the new
international markets that otherwise may or be easily attained. E.g. the international joint
venture as established between Dow Chemical (US) & Asaki Chemicals (Japan) to develop
& market chemicals on an international basis. While Asaki provided the raw materials &
was a sole distributer, Dow provided the technology & obtained the distribution in the
Japanese market.

18. Cont.
Factors in Joint Venture Success:
Clearly not all joint ventures succeed. An entrepreneur needs to assess
this method of growth carefully & understand the factors that help
ensure success as well as the problems involved before using it. The
most critical factors for success are:
• 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.

19. Acquisitions
Another way the entrepreneur can expand the venture is by acquiring an existing
business. An acquisition is the purchase of an entire company, or part of a
company; by definition the company is completely absorbed & no longer exists
independently. The key issues in buying a business is agreeing on a price, successful
acquisition of a business actually involves much, much more.
Advantages of an Acquisition:
1. Established business:
the most significant advantage is that the acquired firm has an established image &
rack record. If the firm has been profitable, the entrepreneur need only continue its
current strategy to be successful with the existing customer base.
2. Location:
New customers are already familiar with the location.

20. Cont.
3. Established marketing structure:
An acquired firm has its existing channel & sales structure. Known suppliers,
wholesalers, retailers, & manufacturers are important assets to an
entrepreneur.
4. Cost:
The actual cost of acquiring a business can be lower than other methods of
expansion.
5. Existing employees:
The employees of an existing business can be an important asset to the
acquisition process. They know to run the business & can help ensure that
the business will continue in its successful mode.

21. Cont.
6. More opportunity to be creative:
Since the entrepreneur does not have to be concerned with finding
suppliers, channel members, hiring new employees, or creating
customer awareness, more time can be spent assessing opportunities
to expand or strengthen the existing business & tapping into potential
synergies between the businesses.

22. Cont.
Disadvantages of an Acquisition:
1. Marginal success record:
Most ventures that are for sale have an erratic, marginally successful,
or even unprofitable track record.
2. Overconfidence in ability:
Sometimes an entrepreneur may assume that he or she can succeed
where others have failed. This is why a self-evaluation is so important
before entering into any purchase agreement.

23. Cont.
3. Key employee loss:
Often when, a business changes hands, key employees also leave.
4. Overvaluation:
It is possible that the actual purchase process is inflated due to the established
image, customer base, channel members, or suppliers. If the entrepreneur has to
pay too much for a business, it is possible that the return on investment will be
unacceptable. It is important to look at the investment required in purchasing a
business & at the potential profit & establish a reasonable payback to justify the
investment.
Synergy:
The concept that “The whole is greater than the sum of its parts” applies to the
integration of an acquisition into the entrepreneur’s venture. Synergy should occur
in both the business concept and the financial performance.

24. Cont.
Structuring the Deal:
Once the entrepreneur has identified a good candidate for acquisition, an
appropriate deal must be structured. The deal structure 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.
Locating Acquisition Candidates:
Brokers (people who sell companies), accountants, attorneys, bankers,
business associates, and consultants may know of candidates. Many of these
professionals have a good working knowledge of the business, which can be
helpful in the negotiations. It is also possible to find business opportunities
in newspapers or trade magazines.

25. Mergers
Merger is a joining of two or more companies. The transaction
involving two, or possibly more, companies in which only one company
survives-is another method of expanding a venture.
• 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.

26. Cont.
Types of Merger:
There are 3 main types of merger.
1. Horizontal Merger:
Horizontal mergers are those mergers where the companies manufacturing
similar kinds of commodities or running similar type of businesses merge
with each other. E.g. Lipton India and Brooke Bond, Bank of Madura with
ICICI Bank, Associated Cement Companies Ltd with Damodar Cement.
2. Vertical Merger:
A merger between two companies producing different goods or services. E.g.
Time Warner Incorporated, a major cable operation, and the Turner
Corporation, which produces CNN, TBS, and other programming, Pixar-
Disney Merger

27. Cont.
3. Conglomerate Merger:
A merger between firms that are involved in totally unrelated business activities.
E.g. Walt Disney Company and the American Broadcasting Company.
Advantages of Merger:
• Does not require cash.
• Allows shareholders of smaller entities to own a smaller piece of a larger pie,
increasing their overall net worth.
• Merger of a privately held company into a publicly held company allows the
target company shareholders to receive a public company's stock.
• Allows the acquirer to avoid many of the costly and time-consuming aspects of
asset purchases, such as the assignment of leases and bulk-sales notifications.

28. Cont.
Disadvantages of Merger:
• Diseconomies of scale if business become too large, which leads to
higher unit costs.
• Clashes of culture between different types of businesses can occur,
reducing the effectiveness of the integration.
• May need to make some workers redundant, especially at
management levels - this may have an effect on motivation.
• May be a conflict of objectives between different businesses,
meaning decisions are more difficult to make and causing disruption
in the running of the business.

29. Leveraged Buyout
A leveraged buyout (LBO) occurs when an entrepreneur (or any
employee group) uses borrowed funds to purchase an existing venture
for cash. Most LBOs occurs because the entrepreneur purchasing the
venture believes that he or she could run the company more efficiently
than the current owners. 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.