Startups and Buyouts, Family Business and Franchising Opportunities

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Start-ups and Buyouts, Family Business and
Franchising Opportunities

• January 22, 2004

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

• Startup and Buyout Opportunities
• Family Business Opportunities
• Franchising Opportunities

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Part 1 Startup and Buyout Opportunities

• 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?

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The Startup creating a new business

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

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Why Startups?
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
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Types of Startups
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Sources of Startup Ideas
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Evaluating Ideas Opportunities

• 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?

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Pros and Cons of Starting from Scratch

• Lower costs
• Flexibility
• New markets
• Creativity

• Higher Risk
• No track record
• No clients
• Many decisions
• Extensive planning

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Why Buy an Existing Business?

• 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.

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Pros and Cons of Buyouts

• 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

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Why is the business for Sale?

• 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

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How much is it worth?

• Asset-Based Valuation
• Estimates the value of the firms 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

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How much is it worth?

• 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

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Nonquantitative Factors

• Competition
• Market
• Future community development
• Legal commitments
• Union contracts
• Buildings
• Product prices

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The Ideal Business

• 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

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Part 2 Family Business Opportunities

• The family business a unique opportunity
• Advantages and special features of a family-run
  businesses
• The process of leadership succession
• Transfer of ownership

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The Family Business a unique institution

• 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

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The Overlap of Family and Business Concerns
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(No Transcript)
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Advantages of a Family Business

• 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

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Special Features of Family-Run Businesses

• The founders imprint on the culture
• The need for good management
• Parent-child / couple relationships
• Sibling rivalry
• In-laws and Nonfamily employees
• Family retreats and councils

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The Process of Leadership Succession

• 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

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A Model of Succession in a Family Business
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. 16.
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Transfer of Ownership

• Preserve a sound business entity
• Assure equity among heirs
• Minimize taxes

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Part 3 Franchising Opportunities

• Understanding the franchise option
• Types of franchising
• Pros and cons
• Evaluating Franchise Opportunities
• Selling a franchise
• Understanding the franchisor/franchisee
  relationship

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Understanding Franchising

• 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 in a contract

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Types of Franchising

• 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

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Types of Franchising

• 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

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Structure of Franchising
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Pros and Cons

• 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

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Franchisor Assistance

• Financing
• Payment schemes
• Site selection
• Bulk purchasing of equipment and inventory

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Franchising Restrictions on Business Operations

• Restricting of sales territory
• Requiring site approval and imposing requirement
  on the outlets appearance
• Restricting the goods/services that can be sold
• Restricting the resale of the franchise without
  their permission
• Restricting advertising and hours of operation

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Evaluating Franchising Opportunities

• Locating a potential franchise
• Global franchising opportunities
• Investigating the franchise
• Franchisors themselves
• Existing and previous franchisees
• Independent, third-party sources

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Understanding the franchisor/franchisee
relationship

• Contract
• Legal advice
• Franchising Scams
• The Rented Rolls Royce Syndrome
• The Hustle
• The Cash-Only Transaction
• The Boast
• The Big-Money Claim
• The Couch Potatos Dream
• Location, Location, Location
• The Disclosure Dance

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The Franchisors perspective

• Benefits
• Reduction of capital requirements
• Increase in management motivation
• Speed of expansion

• Drawbacks
• Reduction in control
• Sharing of profits
• Increase in operational support costs

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Franchisability of product/service

• 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

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Summary Startup and Buyout Opportunities

• 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

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Summary Family Businesses

• Described the basic concept of family businesses
  and its major advantages
• Discussed some special features of family-run
  firms
• Described a model of succession

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Summary Franchising Opportunities

• 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

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Next Steps

• Read
• textbook chapter 4
• Bill Sahlman article on B-plans
• Form teams to discuss business ideas and prepare
  2 minute pitch
• Next weeks guest speaker
• Sean ODea, founder of Second Cup and Proshred
  Security