Chapter 14

Accessing Resources for

Growth from External
Hisrich
Sources
Peters

McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved. Shepherd
Using External Parties to Help Grow
a Business
Some of the mechanisms entrepreneurs can
use are:
Franchising.
Joint ventures.
Acquisitions.
Mergers.

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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.
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Franchising (cont.)

Advantages of Franchisingto 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.
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 (cont.)

Advantages of Franchisingto the

Franchisor
Expansion risk
Allows venture to expand quickly using little capital.
Business can be expanded nationally and even
internationally.
Requires fewer employees than a non-franchised
business.
Cost advantages
Supplies can be purchased in large quantities to
achieve economies of scale.
Ability to commit larger sums of money to advertising.

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Franchising (cont.)

Disadvantages of Franchising
Inability of the franchisor to provide services,
advertising, and location.
Franchisors 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.
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Franchising (cont.)

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.
Changes that helped evolve franchising
opportunities:
Good health.
Time saving or convenience.
Health care.
The second baby boom.
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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.
Franchisors are required to make a full presale
disclosure.
The 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 (cont.)

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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, etc.
Industryuniversity agreements.
Created for the purpose of doing research.
International joint ventures.

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Joint Ventures (cont.)

Factors in Joint Venture Success:

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.

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Acquisitions

The purchase of an entire company, or part

of a company; the company no longer
exists independently.
Advantages of an Acquisition
Established business.
Location.
Established marketing structure.
Cost.
Existing employees.
More opportunity to be creative.
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Acquisitions (cont.)

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.
Synergy should occur in both the business
concept and the financial performance.

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Acquisitions (cont.)

Structuring the Deal

Involves the parties, the assets, the payment
form, and the timing of the payment.
Two most common means of acquisition:
Entrepreneurs direct purchase of stock or assets.
Bootstrap purchase of assets.

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Acquisitions (cont.)

Locating Acquisition Candidates

Brokers, accountants, attorneys, bankers,
business associates, and consultants may know
of candidates.
Business opportunities in newspapers or trade
magazines.

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Mergers

Key concern - Legality of the purchase.

Process:
Determine the merger objectives and resulting
gains for both companies.
Carefully evaluate the other companys
management.
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

An entrepreneur (or any employee group)

uses borrowed funds to purchase an
existing venture for cash.
Long-term debt financing is provided by banks,
venture capitalists, and insurance companies.
Acquired firms assets serve as collateral.
Evaluation procedure:
Determine whether asking price is reasonable.
Assess the firms debt capacity.
Develop the appropriate financial package.

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Overcoming Constraints by
Negotiating for More Resources
Distribution task - Negotiating how the
benefits of the relationship will be allocated
between the parties.
Integration task - Exploring possible mutual
benefits from the relationship so that the
size of the pie can be increased.

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Overcoming Constraints by Negotiating
for More Resources (cont.)
Assessment 1: What will you do if an
agreement is not reached?
Best alternative to a negotiated agreement.
Determine a reservation price.

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Overcoming Constraints by Negotiating
for More Resources (cont.)
Assessment 2: What will the other party to
the negotiation do if an agreement is not
reached?
Difficult to assess reservation price.
Bargaining zone - Range of outcomes between
the entrepreneurs reservation price and that of
the other party.

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Overcoming Constraints by Negotiating
for More Resources (cont.)
Assessment 3: What are the underlying
issues of this negotiation? How important is
each issue to you?
Focus on achieving aspects most desirable by
trading off aspects of less importance.

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Overcoming Constraints by Negotiating
for More Resources (cont.)
Assessment 4: What are the underlying
issues of this negotiation? How important is
each issue to the other party?
Provides the entrepreneur an opportunity to
sacrifice aspects of less importance to him/ her
but of high importance to the other party.

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Overcoming Constraints by Negotiating
for More Resources (cont.)
Negotiation strategies:
Build trust and share information.
Ask lots of questions.
Make multiple offers simultaneously.
Use differences to create trade-offs that are a
source of mutually beneficial outcomes.

14-25