1. Hisrich
Peters
Shepherd
Chapter 14
Accessing Resources for
Growth from External
Sources
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 14-2
Using External Parties to Help Grow
a Business
 Some of the mechanisms entrepreneurs can
use are:
 Franchising.
 Joint ventures.
 Acquisitions.
 Mergers.

3. 14-3
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.

4. 14-4
 Advantages of Franchising—to 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.
Franchising (cont.)

5. 14-5
 Advantages of Franchising—to 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.
Franchising (cont.)

6. 14-6
 Disadvantages of Franchising
 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.
Franchising (cont.)

7. 14-7
 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.
Franchising (cont.)

8. 14-8
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.

9. 14-9
Table 14.2 - Information Required
in Disclosure Statement

10. 14-10
Table 14.2 - Information Required
in Disclosure Statement (cont.)

11. 14-11
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.
 Industry–university agreements.
 Created for the purpose of doing research.
 International joint ventures.

12. 14-12
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.

13. 14-13
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.

14. 14-14
 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.
Acquisitions (cont.)

15. 14-15
 Structuring the Deal
 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.
Acquisitions (cont.)

16. 14-16
 Locating Acquisition Candidates
 Brokers, accountants, attorneys, bankers,
business associates, and consultants may know
of candidates.
 Business opportunities in newspapers or trade
magazines.
Acquisitions (cont.)

17. 14-17
Mergers
 Key concern - Legality of the purchase.
 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.
 Determine the value of a merger candidate.

18. 14-18
Figure 14.1 - Merger Motivations

19. 14-19
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 firm’s assets serve as collateral.
 Evaluation procedure:
 Determine whether asking price is reasonable.
 Assess the firm’s debt capacity.
 Develop the appropriate financial package.

20. 14-20
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.

21. 14-21
 Assessment 1: What will you do if an
agreement is not reached?
 Best alternative to a negotiated agreement.
 Determine a reservation price.
Overcoming Constraints by Negotiating
for More Resources (cont.)

22. 14-22
 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 entrepreneur’s reservation price and that of
the other party.
Overcoming Constraints by Negotiating
for More Resources (cont.)

23. 14-23
 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.
Overcoming Constraints by Negotiating
for More Resources (cont.)

24. 14-24
 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.
Overcoming Constraints by Negotiating
for More Resources (cont.)

25. 14-25
 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.
Overcoming Constraints by Negotiating
for More Resources (cont.)