SMALL BUSINESS MANAGEMENT

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SMALL BUSINESS MANAGEMENT
Read the Fine Print
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Girls Gymn
Ace Clear Defense

• Chapter 5 Buying a Business and Franchising

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Firehouse Sub
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Ace Clear Defense

• What advantages did this entrepreneur obtain as a
  result of buying an existing business?
• How would he determine the price to buy this
  business?

Ace Clear Defense
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Advantages of Purchasing an Existing Business

• Reduction of Risk
• Existing business records
• Less planning
• Experienced employees
• Reduction of Time and Setup Expenses
• Reduction of Competition
• Capitalization of Business Strength
• Possible Assistance from Previous Owner
• Easier Planning
• Existing customers/ suppliers
• Necessary equipment
• Bargain price

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Purchasing an Existing Business

• Disadvantages of Purchasing
• Physical Facilities
• Personnel
• Inventory
• Accounts Receivable
• Financial Condition
• Market
• Deciding on the Price
• Poor business image
• Modernization required
• Purchase price based on inaccurate data
• Poor business location

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Sources of Businesses For Sale

• Internet
• Trade Journals
• Government Departments
• Real Estate Brokers
• Other Professionals
• Matchmakers
• Accountants
• Lawyers
• Other experienced business owners
• Word of Mouth

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Why is owner selling?

• Owners reasons for selling the business
• Old age or illness
• Desire to relocate in a different section of the
  country
• Opportunity to start another business
• 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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Evaluating a Business For Sale

• Industry Analysis
• Sales and Profit Trends in the Industry
• The Previous Owner
• Financial Condition of the Business
• Validity of the Financial Statements
• Evaluation of the Financial Statements

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Evaluating a Business For Sale

• Condition of the Assets
• Liquid Assets (Cash and Investments)
• Accounts Receivable
• Inventory
• Building and Equipment
• Real Estate
• Goodwill

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Evaluating a Business For Sale

• Quality of Personnel
• External Relationships of the Business
• Conditions of the Records

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Determining the Price or Value of a Business

• Market Value
• Asset value
• Book Value
• Replacement Value
• Earnings Value
• Capitalization of Earnings Method
• Average Earnings/Predetermined Interest Rate
  Capitalized Value
• Times Earnings Method
• Arbirtraily multiplies earnings by a factor of
  between 1-10
• Small business usually between 4 or 5

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Calculating average earnings for a business
Average earnings
Last year 5,000
Two years ago 4,000
Three years ago 7,000
Four years ago 10,000
Five years ago 14,000
total 40,000
Average earnings 40,000/5 8000 8,000/10 80,000
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Calculating weighted average earnings for a
business
Average earnings
Last year 5,000 X 5 25,000
Two years ago 4,000 X 4 16,000
Three years ago 7,000 X 3 21,000
Four years ago 10,000 X 2 20,000
Five years ago 14,000 X 1 14,000
total 96,000 6,600/10
Weighted Average earnings 96,000/15 6,600 66,000
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Determining the Price or Value of a Business
cont.

• Combination Method
• Analytical Method
• Adjusted net worth, past earning, future earnings
• Historical Method use historical experience to
  determine relative indicators of value of a
  business

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Sally's Bar and Grill

• Sally's Bar and Grill is available for purchase.
  Sally's earnings for the past five years were as
  follows
• Last year 50,000
• Two years ago 60,000
• Three years ago 30,000
• Four years ago 40,000
• Five years ago 25,000
• Determine the value of the business using the
  following methods (using interest rates of 11)
  using both general and weighted average methods.
• Capitalized earnings method
• Time interest method

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The Purchase Transaction

• Coverage
• purchase price, including principal and interest
  amounts
• payment dates - when and to whom
• detailed list of assets included in the purchase
• conditions of the purchase - nonfinancial
  requirements
• provisions for noncompliance with conditions and
  penalties for breaches
• collateral or security pledged
• Negotiating the Deal

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History and Background of Franchising
Firehouse Sub

• Most rapid growth in North America since the
  1950s.
• 48 cents of every retail dollar goes to franchise
  business
• Franchise sector is Canada's largest employer
• One franchise for every 12 Canadians
• Franchise revenue in 100 billion range

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What Is Franchising?

• Manufacturer-Directed Franchise
• Ford Motor Company
• Wholesaler-Retailer-Directed Franchise
• Home Hardware
• Franchising Company
• Subway

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Franchising Terms

• Franchisee
• An entrepreneur whose power is limited by a
  contractual agreement with a franchisor
• Franchisor
• The party in the franchise contract that
  specifies the methods to be followed and the
  terms to be met by the other party

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Advantages of Franchising

• Proven market for the product or service.
• Services the Franchisor May Provide
• 1. Selection of Location
• 2. Purchase or Construction of Site, Buildings,
  and Equipment
• 3. Provision of Financing

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Advantages of Franchising

• Services the Franchisor May Provide (cont.)
• 4. Standardized Methods of Operating
• 5. Advertising
• 6. Purchasing Advantages
• 7. Training

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Potential Disadvantages of Franchising

• Lack of Independence
• Cost of the Franchise
• Unfulfilled Promises
• Restrictions of the Contract
• Product or Service Offered
• Line Forcing
• Termination

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Potential Disadvantages of Franchising (cont)

• Saturation of the Market
• Lack of Security
• Cost of Merchandise
• Effectiveness of Promotion
• Exaggeration of Financial Success

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Evaluation of a Franchise Opportunity

• 1.Unproven versus Proven Franchise
• 2.Financial Stability of Franchise
• 3.Potential Market for the New Franchise
• 4.Profit Potential for a New Franchise
• 5.Territorial Protection
• 6.Training and Operations Assistance
• 7.Contract Length and Renewal and Termination
  Terms
• 8.What current Owners are Saying About their
  Franchise

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The Entrepreneur as Franchisor

• What businesses can be franchised?
• Bull Dog Fitness
• Should franchise information provided by a
  franchisor be discounted? Why or why not?
• What problems might arise in con consulting
  previous franchisees in the process of evaluating
  a franchise?

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The Entrepreneur as Franchisor

• How does one become a franchisor?
• 1. Establish a prototype.
• 2. Prepare the necessary information.
• 3. Investigate the legal requirements.
• 4. Develop a planned and standardized program of
  operations.
• 5. Obtain adequate financing.

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Franchising in the Future

• Piggybacking Two or more franchise operating
  in one outlet.
• Branchising Converting existing chain outlets
  to franchises.
• Mini-franchises Small satellite versions of
  larger franchises.
• Growth of service-based and home-based franchises