Pathways to Entrepreneurial Ventures Entrepreneurial Thought Every large and successful company wos once @ startup struggling to survive. Some of these successful companies were conceived in @ flash of inspiration and planned on the back of « napkin in a coffe shop. Others took shape poinstokingly over time in a base- iment oF a goroge. Some startups were created and then flourished overnight, while others achieved success only through along series of painful its and stort. Bhe point is, every company thot exists today began rather small — Jon Kunrzuan Startups thot Work | Chapter Objectives 1 Todescibe the major pathways and Todefieafanchise and autine it structures for entrepreneurial structure ventures 6 Tocxamine the benefits and 2 Topresent the factors involved In drawbacs of franchising crcating anew venture i 7 To present the Uniform Franchise 2 Toidenty and dacs the elements Offering Circular (UFOCI os 3 key invched in aemuicing an established iter in Franchises 4 To outine ten key questions to ask when buying an ongoing venture180 CHAPTER @ Pathways to Entrepreneurial Ventures The Pathways to New Ventures for Entrepreneurs Every prospective entrepreneur wants to know he best methods for entering business. In ‘other words, what are the ideal pathways to starting a venture for oneself? In this chapter, ‘we examine the three most common methods: creating a new venture, acquiting an existing venture, or obtaining a franchise. Fach pathway has its own particular advantages and dis. advantages. In addition, each method bas a variety of issues that need to be understood by the entrepreneur. Iris always unwise for an entrepreneur to rush into a decision fora venture without the proper understanding of the pacticular form of entry. This chapter is devoted to outlining some of the particular issues celated to each form. Creating New Ventures ‘The most effective way to approach a new business venture is to create a unique product or service—one that is not being offered today but would be in great demand if it were. The next-best way is to adape something that is currently on the market or extend the offering into an area in which itis not presently available, The first approach is often referred to as nnew-new, the second as nev-old. New-New Approach New products or services frequently enter the market, Typical examples include smartphones, MP3 players, plasma televisions, and global positioning systems (GPS). All ofthese products and more have been introduced as a result of research and development (R&D) efforts by major corporations (see Table 6.1 fora list of emerging ideas). What we must realize, how- eves, is that unique ideas are not produced only by large companies. Moreover, the tate at which new products enter the market has caused the public to expect many of their house- hold goods to improve continually. How does one discover or invent new products? One of the easiest ways is to make a list of annoying experiences or hazards encountered with vacious products or serviees during a sven period of ime, Common examples include objects that fall out of one’s hand, house. hhold chores that are difficult ro do, and items that are hard to store. Can certain innovations alleviate these problems? This is how some people ge ideas for new products. For example, an engineer once observed the mechanism for recording the revolutions of a ship's propellee ‘As he watched the device tally che propellee’s revolutions, he realized thatthe idea could be adapted co the recording of sales eransactions—a problem he had been teying to solve for some time. The result led eventually to development ofthe traditional cash registec ‘Most business ideas tend to come from peoples experiences. Figuee 6.1 illustrates the sources of new business ideas from a study conducted by the National Federation of Inde~ pendent Business, One hot areais Inrernet social uiities, such as Facebook and MySpace. Facebook was founded by Mack Zuckerberg, a Harvard University student who was frustrated by the lack of network ing facilities on campus. The company was founded in February 2004 and is now the largest soures for photos and one of the most trafficked sites on the Internet. In ewo short year, the company has attracted offers of $750 million from Viacom! and $900 rnlion from Yahoo. fn general, the main sources for both men and women are prior jobs, hobbies or interests, aid personally identified problems. This new-new approach indicates the importance of people's ‘awareness of their daily lives (work and free rime) for developing new business ideas. New-Old Approach Most small ventures do not state with a otally unique ida. Instead an individual “piggy backs” on someone else's ides by either improving a product or offetny a sence i a a in which is noc cucenlyavalable-hence te term newold approach Some of te eneCreating New Ventures 151 ‘Trends Creating Business Opportunities Emerging Opportunities Green Products Orgone fonds Organic fiversteaties Alternative Energy Solar Biofuel Fue ells Eneray conservation Health Care Healthy food SSehaol- and govt -sponsored programs Exercise oss che gyms Chileen Nonmedical Pre-assistd living Assisted living transition services Niche Consumables Wine Chocote Burgers Coffee houses Exotic salads Home Automation and Media Storage Lighting contro! Security systems Energy management ‘Comfort management Entertainment systems Networked kitchen appliances Emerging Internet Opportunities ‘Mobile Advertising 1 Cal phones ors Concierge Services Niche Social Networs Seniors Music fans Groups of local users Pot owners Dating groups Virtual Economies ~ Online ations Sducationat Tutoring ‘Huron Resources Services Matchmaking Viral HR Online Stating \ Emerging Technology Opportunities Nanotechnology WireessFeomolasy Sonne: Seve Coop, Amando C, Koos Ket Oban, Katen E. Spd Nichole Tare and Sa ilnon, "2007 Hoe List Entepreenr (December 2006) 80-93452 CHAPTER 8 Pathways to Entraprenaurial Ventures. yess Ideas Among len and Women Chance Education Happening hance | EaucatonHBPPENINE. Someone Courses Suggested Suggested Hobiy’ Other Someone other Interest Hobby! Interest Prior Job rie Job Men Women Source: Wiliam Dennis, A Small Busnes Primer (Washington, DC: National Federation of Independent Busines, 1999), 27. Repenel wich permission common examples are setting up restaurants, clothing stores, or similar outlets in sprawling suburban areas that do not have an abundance of these stores. Of course, these kinds of ‘operations can be risky beeause competitors can move in easily. Potential owners considering this kind of enterprise should try to offer a product oz service that is difficult to copy. For ‘example, a computerized billing and accounting service for medical doctors can be successful | if the business serves a sufficient number of doctors to caver the cost of computer operators and administrative expenses in order to tura an adequate profit. Or perhaps another type of enterprise is likely 0 be overlooked by other would-be entrepreneurs. Regardless of whecher the business is based on a new-new or a new-old idea the prospec I tive owner cannos rely exclusively on gut feeling or intuition to get started. As we demon. strate in Part Ill of this book, proper planning and analysis are the keys to any successful | Examination of the Financial Picture | 1f, chrough a thorough analysis and business plan (covered in detail in Chapter 12), a pro- spective entrepreneur decides that a new venture is a wise one, iis imperative 10 remember | thar the plan may nor work perfectly. Some modification may be necessary. Thus, the entre- preneue has to be flexible. f something does not work ou, contingency oe backup plan shouldbe available. The worst thing the entrepreneur could do is adopt at “aloe nothing” strategy The prospective entrepreneur of a aew venture must evaluate the enterprise naa cial picture, low much will c cost o stay in busines forthe fist year? How tmuch revense will the firm generate during this time period? Ifthe outflow of cash is greater than the inflow, how long will i tke before the business earns the cornee? Answering these questions requires consideration of two kinds of expenses: startup and monthly. Table 6.2 illustrates a typical worksheet for making the necessary calcula. tions of start-up expenses. Notice that this worksheet is based om the assomption that no | ‘money will flow in for about chree months. Also, all start-up costs ave coally covered. Té the firm isin the manufacturing business, however, it will be three to four months before «any goods are prosced and sold, so the factors in Column 3 have to be doubled, and the | amount of cash aceded for start-up will be greatez. Much of the infocmation needed to fll inthis workshecr already should have been gathered and atleast pactially analyze Now, however, it can be put into a format chat allows the owner to look atthe overall financial pictureCreating New Ventures entrepreneurship The “Real” Opportunities in Virtual Worlds JA si etn ang papain continues to sree epnertunies for entrepreneurs wt \jruw as well, Approsiselely 34 percent of adult Interact users play online games on a weekly hich is more than the percentage of adults who use social networking sites and watch videos, according to a report from Parks Associates. AS casual and hard-core gamers continue to move to the Internet, virtual economies have begun to develop, allowing them to buy virtual goods with virtual euerency converted from real money; herein Ties the business opportunity. Historically, gamers have informally traded, bought, ‘and sold their vetual wares, but companies like Spater are changing the landscape, The company provides 1 formalized market in which players of games lke Everquest and World of Warcraft ean exchange viral currencies from virtual worlds and online games. The ‘Web site was offcialy hucched in February 207, with $289.00 in expected sales forthe fst year The company’s founders, Ban Kelly and Boris, Patan, atbibute ther sucesso conducting significant ‘market research, They discoverod that peopl already can stford fo offer the service to buyers at no charge The founde's dacided to offer the service for multiple tnlina games and to provide service for international transactions, hich asallowed the company ta diversity ‘and hedge against Sagging interest in any one game oF from 2 given county ‘Sparx chose to focus on viral currency exchange; however, ths is just one business need that gamars will have as theiccommunities continua to grow. Kelly suggests that micropayments and eyber-curroncy fraud will reagent now challenges and, n urn, new appartnitis. [Another apportunity that Kelly blioves will aways axis is providing informational services for games, such as forums and guides. For those entrepraneurs interested in stating 2 business secving online gamers, the fllowing stops wl help to enaure sueooae in the induc: 1. Keep the international noture of the industry in ‘mind. One of the beneits of vietwal worlds is the ‘complete anonymity that is provided to gi which allows nat only for greater freedom in socal interactions but also for the sisappearance fall territorial boundaries. Companies that hope to adress the needs of these customers must be aware of the glabal community 2. Be prepared for @ ropidly changing marketplace. Another benefit of virtual worlds is their almost ramplate Axiility After all, they are digital representations of real-world items, but the only engineering limitations are those imposed by the companies hosting the games. This versatility makes for a better gaming experience, but it complicates the process of tracking "he market for ‘businesses that hope to have gamers as customers Putanee suggests building a scalable business to take advantage of the currently fragmented market and to allow for better positioning when tuends present themseives. 2. Be willing to speok withthe online game developers The gots ofthese virtual words are the developers, who create the environments and artifacts available togamers.Itisin the best interest ofthese developers to encourage new service providers to enter the scene, given that such services will enfuance the ‘game play. By getting their feedhacleregaing your business concept, you will not only yet an expert's opinion, which is useful in honing your offerings, ‘but you might even get an endorsement from an industry insier. ‘Some: Adapr rom: Amand C. Koos, “Out of This ‘World Exinprene (Eebsy 2008) 178 153,154 CHAPTER @ Pathways to Entrepranourial Ventures 6.2 | Checktist for Estimating Start-Up Expenses CASH WEEDED TO WAT TO UT IN vrowtity EXPENSES START THE BUSINESS COLUMN 2 hee ges are stint Te omer bce Conn 3) manager ee ot Estimate based on any mons lon teem sales oF 5 per year eer Solo owe aage Toone Cuma can ‘ ‘ 2 ies aun 1 Oe sass and wages 2 es Coun pent 2 ines Coin Abvetsng 2 ne ann 1 Deter expense $m om Seppe 2 ies Cum Teepone and eaph 2 ties Clima athe ates 2 es Come ounce 6 ies Clan Toes, Sc Seery 4 ies Cot 1 terest 2 ees Clam Mainteance 2 nes Coun Leal and ater pofesinl 2 ies Colima a 2 ie om 1 stanr-up costs tem Estimate TO ARRWE Ar ESTIMATE Fire an lpm $ Determine what ol ris nd af ns Decorating and remodeling Installation offoxtres, equipment Starting iaventory Deposits with pubic uities Lega and other professional fees Licenses and permits tak to supplies. Talk toa contractor Talk to suppliers Talk t suppliers. Talk to utity companies. “Tok to lawyer, accountant, o ater professional, Contact appropriate city officesCreating New Ventures 185 ae, ‘Checklist for Estimating Start-Up Expenses (Continued) START-UP COSTS Item ‘Advertsing and promation Aecounts receivable (ther Expenses TOTAL CASH NEEDED TO START ‘owen: US, Sal BosnersAdminiestion, *Managenene Ave” MA 2.025 (Washington, DC: US. Goverment Pring Of) Estimate TO ARRIVE AT ESTIMATE Decide what willbe used; tlk to media, Estimate how much wil be ted up in eecehables by credit customers and for hove long, low fr unexpected expres and losses. special purchases, nd other expenaltures st them and estima costs. Add al estimated amounts. AC this point, the individual should be concerned with what is called upside gain and downside loss. This term refers to the profits the business can make and the losses it can i suffer How much money will the enterprise take in if everything goes well? How much will a tt grossa operations run as expected? How much wil fose i operations donor work ou well? Answers 0 these questions provide a composite piecure of the most eptimistic, che ost likely, and the most pessimistic results. The owner has to keep in mind that the upside i feain may be minimal, whereas the downside loss may be great. Ie is necessary to examine overall gains and losses. This kind of analysis is referred to as | isle vs. reward analysis and points out the importance of getting an adequate return om the i amount of money risked. ¢ & Taking Cues from the Third World [J ndian consumers currently use smart cards in fcectin tte ote psone ome financial transactions, a technological development that currently eludes consumers in the United States and Europe. this phenomenot more than a fluke. Surprisingly, consumers in the third world are beginning to demonstrate to those in the frst the radical effects such developments can have. From buying groceries to withdrawing cash from an ATM, mobile technologies are destined to revolutionize the way people think about money. ow are countries such as Aca, Latin America, and India leading tho charg in introducing new echnologies ‘when-—untl receny—thase same countries were using the antiquated technology abandoned by more developed counties? Ironically, their lock of infrastructure has lod to theie ably to quckdy adapt more exile optiens. For instance, as counties without basie phone sevice have begun 10 consider technical solutions, the eost savings Continued ———________<41188 CHAPTER 6 associated with implementing a all-mobile systom has mae instaling «network of telephone wires unattractive ‘Moreover, now that LEDs end fluorescent bulbs are readily avaiable as. more eco-friendly aternavetoincandescent bulbs, counties that need to electify rural areas ae ina posion to embrace the most advanced offing. ‘An intorosting result of this transition has boon companies’ wilingnoss to shift ther focus away from consumers inthe mare developed counties. For instance, Intl has been working on a wireless broadband standrd designed to connect blions uf citizens in the developing world costefectively to tho intomet. Ifthe project is ' success, the standard will soon be implemantod in the United States and Europe. Another example ofthis unprocadontedshiteonbo feunduith Motorola's Motoone. The phono designed to provide upto 40D hours of standby Pathways to Entrepreneurial Ventures ton a single batery charg, end i retails for ony 30. The lack feleoia! infastuctre in developing cous ed the company to engineer the phone without an internal lamp, resulting ina sigriicant reduetonin energy use Despite the new focus on relatively undeveloped countries, companies will continue to consider \dovelooed countries when innovating; yet, the influence that consumers in the third world now have on now product development will forever change the pracess of how products are brought to market, Companies that refuse to acknowledge this transition wil risk ignoring bilions of potential customers. Sonres:Adapd fom Jaen Kaba, “Pied World ise The Rise of Call Phone Banking in Tia Highligh 2 New “Tro” Reston Globe, January 20, 2008, sec. ea, I Acquiring an Established Entrepreneurial Venture [A prospective entrepreneur may seck co purchase a business venture rather than start an enterprise, This can be a successful method of getting into business, bur numerous factors need to be analyzed. Purchasing a business venture is a complex transaction, and the advice of professionals always should be sought. However, a few basic steps that can be easily understood are presented here, including the entrepreneur's personal preferences, examina- tion of opportunities, evaluation of che selected venture, and key questions to ask. Personal Preferences Entrepreneurs need to recognize certain personal factors and to limit theie choices of ventures accordingly. An encrepreneut’s background, skills, interests, and experience are all important factors in selecting the type of business to buy. In addition, personal preferences for location and size of a business should guide the selection process. Ifn entrepreneur always has desired to own a business inthe South or West, then that is exactly where the search should begin. Examination of Opportunities Entrepreneurs in search of a possible venture to buy need to examine the available oppor nities through various sources: + Business brokers. Professionals specializing in business opportunities often can provide leads {and assistance in finding a venture forsale. Howaver, the buyer should evaluate the broker's raputation, services, and contacts. The entrepreneur also should remember thatthe broker usually represents—and gets a commission on tha sale from—the salar. © Newspaper ads. “Business Opportunity” classified ads are another source. Because an ad often wil appear in ane paper and nat another, it may be necessary to check the classified sections of al the papers inthe area. © Trade sources. Suppliers, distributors, manufacturors, rade publications, trade associations, and trade schools may have information about businesses fr sale, * Professional sources. Professionals such as management consultants, attorneys, and accountants often know af businesses available for purchase. 2 arenAcquiring an Established Entrepreneurial Venture Advantages of Acquiring an Ongoing Venture Df he numerous advantages to buying an ongoing venture, three of the most important are ss follows: 1. Because the enterprise is already in operation, its successful future operaticn is likely. 2, ‘The time and effort associated with starting a new enterprise ate eliminated 3, Tesometimes is possible ro buy an ongoing husiness at a bargain price. Each of these three advantages is discussed next. LESS FEAR ABOUT SUCCESSFUL FUTURE OPERATION Anew business faces two great dangers: the possibility chat ic will not find a racket for ies t00d8 or services, and the chance that i will nr be able to control it costs If either event sccus, the new business will go bankrupt Buying an existing conceen, howeves, alleviates most of chese fears. A succesful business alceady has demonsteated the ability to attract customers, control costs, and malke a profit. Addltionaly, many ofthe problems a newly formed fiem faces are sidestepped. For example: Where should the company be located? How should it advertise? What type of plant o merchandise layout will be the most effective? How much should be reordered every three sonths? What types of customers wl this busines attrac? What pricing strategy should the fiom use? Questions such as these already have been asked and answered.Thus, when a new owner buys an ongoing operation, he of she is often purchasing a known quantity. OF «course itis important to check whether hidden problems exist in the operation. Barring comehing nf thie nanier, however the purchase of an exisring successful operating venture can be a wise investment. REDUCED TIME AND EFFORT ‘An ongoing enterprise already has assembled the inventory, equipment, personnel, and facili- ties necessary to run it. In many eases, this has taken the owners a long time to do. They have spent countless hours “working out the bugs” so that the business is as efficient as possible. Likewise, they probably have gone through a fair number of employees before getting the right type of personnel. Except for the top management in an operating venture, the person- sel usually stay with che sale. Therefore, if che new owners treat the worker: fairly, they should not have ro worry about hiring, placing, and training personnel. Ii addition, the previous owners undoubtedly have established celations with suppliers, bankers, and other businesspeople. These individuals often can be relied on to provide assis- tance co the new owners. The suppliers know the type of merchandise the business orders end how often it needs to be replenished. They can be a source of advice about managing the operation, as can the bankers with whom the enterprise has been doing business. These individuals know the enterprises capital needs and often provide new owners with the same credit line and assistance they gave the previous owners. The same holds true fur the acco tant, the lawyer, and any ocher professionals who seeved the business in an advisory capacity. "Naturally, the new owners may have eheit own bankers, accountant, or lawyer, but these ald relacionships are there if the new owners need them. A GOOD PRICE Sometimes it s possible o buy an ongoing operating venture at a very good price. The owner may want to sell quickly because of a cetirement decision oF illness. Or the owner may be forced to sell the business to raise monzy lor some emergency that has occurred. Or the ‘owner may seek a greater opportunity in another eype of business and therefore he willing ‘sell at a low price in order co take advantage of the new opportunity, Ideally, when one is looking to buy an ongoing, successful operating venture, one of these ‘ree advantages (especially the last one) is present. However, seldom does someone in business sella successful firm at an extraordinarily low price. The owner of a successful small venture tui the entecprise through skillful business practices, knows how to deal with people, and has 1 good idea of the operation's fair market value. That person will rarely sell for much below 187188 CHAPTER 6 Pathways to Entrepreneurial Vanturos the fair marker value, Therefore, the prospective owner must avoid bidding high on a poor investment or walking away from a good bargain because “it smells fishy.” The way to prevent ‘mucking the wrong decision isto evaluate the existing operation in a logical mannec Evaluation of the Selected Venture After the entrepreneur considers personal preferences and examines information sources, the next step isto evaluate the specific factors of the venture being offered forsale * The business environment. The local environment for business should be analyzed to estab- lish the potential ofthe venture in its present location. * Profits, sales, ond operating ratios. The business's profit potential isa key factor in evaluating ‘the venture’ attractiveness and in later determining a reesonable price frit To estimate the ‘otential earning power of the business, the buyer should review past profits sales, and opar= ating ratios, and project sales and profits for the next ane to two years. Valuation will be fre ther discussed later in the chapter. + The business assets. The tangible (physical and intangible (for example, reputation) assets of the business need to be assessed. The following assets should be examined: = Invontory (age, quality, salebiity, condition) + Furniture, equipment, fixtures (value, condition, leased or owned) * Accounts receivable (age of outstanding debts, past collection periods, credit standing of customers} © Trademarks, patents, copyrights, businass name (value, role in the business's success, degree of compatitive edge) + Goodwill (reputation, established clientele, trusted name) A lot of headaches can be avoided by taking the approach of purchasing an existing ven- ‘ure, For example, start-up problems will have been taken care of by previous owners, Addi- tionally, the business has a track record the buyer can examine to determine the types of products to sell, the prices to charge, and so on. But buying an existing business also has potential pitfalls. Examples include buying a company whose success has been due to the personality and charisma of the owner/manager, buying a company when the mare for its produc has peaked, and paying too much for a company. Key Questions to Ask ‘When deciding whether to buy, che astute prospective owner needs to ask and answer a series ‘of “right questions."? The following section discusses questions and provides insights into the types of actions to take for each response WHY IS THE BUSINESS BEING SOLD? One of the first questions chat should be asked is why the owner is selling the business. Quite often, a difference exists between the reason given to prospective buyers and the real reason. Typical responses include “I'm thinking about retiring,” “ve proven to myself that ‘ean be successful inthis line of business, so now I'm moving to another operation that will provide me with new challenges,” and “I wane to move to California ad go into business with my brother-in-law there.” Any of these statements may be accurate, and—if they can be substantiated—the buyer ‘may find that the business is indeed worth purchasing. However, because itis difficult to substantiate this sore of personal information, the next best thing to da is to check around and gather business-related information. Is the ovener in trouble with the suppliers? Is the lease on che building due for renewal and the landlord planning to triple the rent? Worse yee, is the building about to be torn down? Other ste-location problems may relate to competi tion in the nearby area or zoning changes. Is a new shopping mall about to be buile nearby that will take much of the business away from this location} Flas the city council passed a ‘new ordinance that ealls for the closing of business on Sunday, the day of the week when this store does 25 percent of its business?Acquiring an Established Entrepreneurial Venture Finauclaily what is che owner going to do after selling the business? Is the seller planning to stay in coven? What employment opportunities does he or she have? The reason for asking these questions is thac the new owner's worst nightmare is to find that the previous owner hhas set up a similar business a block away and is drawing back all of the csstomers. One ‘way to prevent his from happening is to have an attomey write into the contract an agree ‘ment that the previous owner will refrain from conducting the same business within 2 rea. sonable distance for a period of at least five years. This is known as a legal restraint of frade—an agreement not to compete or “non-compete clause”. Doing this helps the new owner cetain the business's customers. WHAT IS THE CURRENT PHYSICAL CONDITION OF THE BUSINESS? Even if the asking, price for che operation appears to be fait itis necessary to examine the physical condition of the assets. Does the company own the building? IF it does, how much repair work needs to be done? Lf the building is leased, does the lease provide for the kinds of repairs that will enhance the successful operation of the business? For example, if a flower shop has a somewhat large zelrigerator for keeping flowers cool, who has to pay to expand the size of the refrigerator? If che landlord agrees to do so and to recover ‘he investment through an increase in the lease price, the total cost of the additional refrigerated space rust be compared to the expected increase in business. Meanwhile, ifthe landlord dors nor wane to make this type of investment, the new owners must realize that any permanent addi tions to the property remain with the property. This means that if something simply cannot be carried out of the building, i stays, Pictures on the walls, chairs, and desks the previous business owner purchased can be removed. However, new bookshelves nailed ro the wall, carpeting attached t0 the floos, a new acoustic ceiling installed to cut down on noise in the chan, and the new refrigerated aren all hecome permanent property of the building ownes ‘Therefore, the overriding question while examining the physical facilities is, “How rauch will it cost co get things in order?” WHAT iS THE CONDITION OF THE INVENTORY? How much inventory does the current owner show on the books? Does a physical check show that inventory actually exists? Additionally, is inventory salable, or is it out-of-date oF badly deteriorated? WHAT IS THE STATE OF THE COMPANY'S OTHER ASSETS? ‘Most operating ventures have assets in addition to the physical facilities anc the inventory. ‘A machine shop, for example, may have various types of presses and other machinery: An office may have computers, copiers, and other technology that belong to the business. The question to ask about all of this equipment is, “Is i still useful, or has it been replaced by more modern technology?” In short, are these assets obsolete? ‘Another often overlooked asset is the firm’s records. If the business has kept careful records, it may be possible to determine who is a good credit risk and who is not. Addition- ally, these records make it easy for a new owner to decide how much credit t9 extend ro the prior customers. Likewise, sales records can be very important because they show seasonal demands and peak periods, This ean provide the new owner with information for inventory control purposes and can greatly reduce the risks of over- or under-stocking. ‘Suil anther commonly overlooked asset is past concracts, What type of lease does the current owner have on the building? Ifehe lease was signed three years ago and is a seven: ‘year lease with a fixed rent, it may have been somtewhat high when it came into effect but Could be somewhat on the low side for comparable facilities today. Furthermore, ovet the next four years the rent shauld prove to be quite low considering what competitors will be paying. OF course ifthe lease is about to expire, this is a different story. Then the prospec- tive owner has to talk co the landlord to find out what the tecms of the lease will be ‘Additionally, a prospective owner's Iawyer should look atthe old lease to determine if it can be passed on to a new owner and, regardless ofthe rent, how difficult it is to break the lease if che business should start ro fail, Finally, the prospective buyer must look at an intangible asset called goodwill, Goodwill is often defined as the value of the company beyond what is shown on the books. For 169180 CHAPTER 6 Pathways to Entrepreneurial Ventures example, if a sofeware company has 2 reputation for quick and accurate secvice, the com: pany has buile up goodwill among its customers. Ifthe owners were to sell the business che ‘buyer would have to pay not only for the physical assets in the software company (oltice | furniture, computers, etc.) but also for the goodwill the firm has accumulated over the yeare ‘The reputation of the business has a value.” j HOW MANY OF THE EMPLOYEES WILL REMAIN? I Its often difficul to give customers the good service they have come to expect if seasoned \ employees decide they do not want to remain with the new owner. The owner is certainly an ‘important asset of the fiem, but so are the employees; they play a role in making the business 4 success. Therefore, one question the prospective buyer must ask i, “If some people will be Jeaving, will enough be left to maintain the type of secvice the customer is used to getting?” In particulag the new owner must be concerned about key people who are not staying. Key ‘employees are part of the value of the business. If itis evident that these people will not be staying, the prospective buyer must subtract something from the purchase price by making some allowance for the decline in sales and the accompanying expense associated with replacing key personnel, ‘When purchasing an existing business, the prospective owner should conduct an assess- ‘ment of the current group of employees. He or she should review existing performance evaluations and ralle with the current owners abour the quality of each employee and his or her value to the business. It may be easier to retain valuable employees by secking them out before the purchase to ensure their feelings of security. The incoming owner should interview all of the current employees and make decisions about who to keep and who to lee go before actually taking over the enterprise | WHAT TYPE OF COMPETITION DOES THE BUSINESS FACE? No matter what goods or service the business provides, the number of people who will want itand the total amount of money they will spend for itis limited. Thus, the greater the corm. Petition, the less the business chance of earning large profits. As the number of competitors increases, the cost of fighting them usually goes up. More money must be spent on adverts, ing. Price competition must be met with accompanying reductions in overall revenue. Simply too many companies are pursuing the same market. | Additionally, the quality of competition must be considered. If nine competitors exist, a ‘new owner could estimate a market share of 10 percent. However, some of these competitors undoubtedly will be more effective than others. One or wo may have very good advertising | and know how to use it to caprure 25 percent of the market. A few others may offer out standing service and use this advantage to eaprure 20 percent of the market. Meanvhile, the i remsining six fight for what is left. ‘Then the location of the competition must be considered. In many instances, a new ven. | ture does not offer anything unique, so people buy on the basis of convenience, A service | located on the corner may get most of the business of local residents. One located across town will get virtually none. Because the product is the same at each location, no one is going to drive across town for it. This analogy holds erue for groceries, notions, drugs, and hardware. If competitors are located near one anothes, each will take some of the business the others could have expected, but none is going to maximize its income. But if the mer. chandise isan item that people shop for very carefully—furniture, for example--a competi tor in the immediate area can be a distinct advantage. For example, two furnigure stores located near each other tend to draw a greater number of customers than they would if located ten blocks apart. When people shop for furniture, they go where a large selections available. With adjacent stores, customers will reason that ifthe furniture they are looking for is not in ong, it might be in the other, Additionally, since they can step from one store 10 the next, they can easily compare prices and the sale terms Finally, any analysis of competition should look for unscrupulous practices, How cut- throat are the competitors? If they are very cutthroat, the prospective buyer will have to be continually alert for practices such as price fixing and kickbacks to suppliers for special seevices. Usually, ifthe company has been around for a couple of years, ithas heen successful dealing wich these types of practices. However, if some competitors are getting bad seceemenneemecemiAcquiring an Esteblished Entrapraraurial Venture reputations, the new ownee will want to know this. After all, over time the customers are likely to form a stereotyped impzession of enterprises in a given geographic area and will simply refuse to do business with any of them (“Its no use looking for clothing in the Bighth Street area”). In this case, the customers retaliate against unethical business practices by Boycotting che entire area in which these firms are located. In shore, an unethical business competitor can drag down other firms as well. WHAT DOES THE FIRMS FINANCIAL PICTURE LOOK LIKE? Irmay be necessary for a prospective buyer to hire an accountant to look over the company’s books. I is important to get an idea of how well the firm is doing, financially. One of the primary areas of interest should be the company’s profitability Is the business doing any- thing wrong chat ca be spotted fioi che seslemieuts? I'v, can the prospective buyer elimi nate these problems? Individuals who are skilled in buying companies that are in trouble, st cout, and selling them at a profi know what 10 look for when examining food accountants. Both also know that the seller's books alone should aot be raken as proof of sales or profits. One should insisc on seeing records of bank deposits for the past two 10 three yeats. Ifthe current owner has held the ficm for only a shore time, the records of the previous owner algo should be examined. Infact, i is not out of line to ask for the owner's income tax return. The astute buyer knows that the firm’s records reflect its condition. ‘Another area of interest isthe fms peoft trend. Is it making more money year after year? ‘More important are profits going up as fast as sales, or is mote and more revenue necessary to attain the same profit? Ifthe latter is true, this means the business may have to increase sales 5 t0 10 percent annually ro net as much as it did the previous yeas. Ths spels trouble and is lften a sign that the owner 18 selling because “there are easier Ways to make a ving.” Finally, even if the company is making money, the prospective buyer should compare the firm's performance to that of similar companies. For example ifa small retail shop is making 22 percent return in investment this year in contrast to 16 percent two years ago, is this {good or bad? Ie cercainly appears to be good, but what if competing stores are making a 52 percent return on investment? Given this information, the firm is no doing as well. One way to compare 2 company to the competition is to obtsin comparative information put out by firms such as Dua & Bradstreet that gather data on retail and whotesale firms in various fields and provide businesspeople with an overall view of many key financial ratios. For ‘example, one ofthe most important is the comparison of current assets (cash, or items that can be turned into cash in dhe short run) to current liabilities (debts thae will come due in the short ran). Ths key ratio reflects a business's ability co meet ts current obligations. A second key ratio is the comparison of net profits to net sales (ner profi margin). How much profit is the owner making for every dollar in sales? 4 third key ratio is net profic co net worth (return on act worth), How much profit is the individusl making for evecy dollar invested in the firm? By comparing the accounting information obtained from a business’ books to external financial comparison data (industry ratios, industry multiples used for valuation, et.) itis possible ro determine how well che business is doing. Ifthe facts look ood, then the prospec five buyer ean turn to the question of how much to offer the seller, Negotiating the Deal The potential buyer must negotiate the final deal.’ This negotiation process, however, involves a number of factors. Four erica elements should be recognized: in‘ormation, time, presmre and alternatives Information may be the mos x gotations. The pesformance of the company the nature of is competion, the condition ofthe market, and clesr answers 0 all of the key questions presented earlier ae all vital components in the determination of he business eal poten. Without eliable information, che buyer is ata costy disadvantage. “The seller never should be relied on asthe soe information source. Although the seller may sot falsify any informacion, he or she is ikely to make avaiable only the information that presents the business in the most favorable light. Therefore, the buyer should develop as fay sources as posible. The rule should be to investigate every possible source. clement dit 161mm Pathways to Entrepreneurial Ventures ‘Time is also a critical element. If che seller already has purchased another business and a potential buyer is the only prospect to buy the existing firm, chen that buyer has the power to win some important concessions from the seller. If, however, the owner has no such dead- line but simply is headed to retirement, or ifthe buyers financial sources wish to inves in the project quickly, then the buyer is at a serious disadvantage. In shore having more time than the other party can be very beneficial. Pressure from others also will affect the negotiation process. Ifthe company is owned by several partners, thea the individual who is selling the company may not have complete autonomy. If one of the owners is in favor of accepting an offer, the negotiator forthe com- ppany must decide whether to accept the bid on behalf ofall owners or ateemp to hold out for more money. This causes a distraction during the negotiation process. Finally, the alternatives available to each party become important factors. The party with no other alternatives has great deal of interes in concluding negotiations quickly. Table 6.3 outlines some additional considerations that 2 person should keep in mind when purchasing a business. For the seller, alternatives include finding another buyer in the near future or not selling at all, He or she may continue to run the business, ite a manager to do so, oF sll off parts ‘of the company. Likewise, the buyer may choose not to purchase the business or may have altemative investment opportunities available. In any event, ehe negotiating parties alterna- tives should be recognized because they impact the ability to reach an agreement. Dos and Don'ts of Buying a Business Buying an ongoing business provides many advantages fora prospective purchase, such asa proven track record, esteblished credit, ongoing operations, and a significantly lower chance for fale However, without careful analysis, a person buying an ongoing business may suffer fom hidden problems inherited with the business. The Following list oF dos and don'ts provides some practical tips to consider before signing over the chee. 1. Hove a seller etn o minority interest in the busines. eller valks with 100 percent ofthe Purchase money, its highly unlikely that he or she wil give you any help running the business in the future. Another option would be to have the ultimate purchase price of the business dependent on the performance of the busines aver the next the-to-five-yarpetod. 2. Never rely on orl sttements Get everything in writing; oral promises cunt fr litle after you have tought the business. 3. Hove am accountant exomine the books and check the cashflow Your accountant must recon Struct the seller’ financial statements co determine exaetly how much cash is avalablet0 you 4. Investigate, investigate, investigate! Find out as much 2s yeu can about the business before you fork over your hard-earned cash Talk to vendors, suppliers, customers, and even the competition to get the real stry. Go beyond the list of references the sel provides you. Investigate the entre industry, looking for possible major shifts that could affect future business. The more time you devote to such research, the beter decision you'll mak, ‘5. Interview the employees Al employees have valuable information about the company they work for If the seller is serious about selling, he or she should nat be afraid to let buyers communi- cate with employees. Try to do interiews in 2 confidential situation; otherise, any information you gaia may be incorrect or misleading, 6. Find out the reat reason the compony i or sale Tue, many people want out ofa succesful ‘business fr legitimate reasons. Just make sure the reasons are legitimate Sonree Adare from Brac | Blechrsan, "Good Buy” Entrepreneur (Febmsry 1994: 22-25 Repvned ‘with permission fram Eatreprenear magazine, Febrsy 1994‘eranchising: The Hybrid Franchising: The Hybrid 183, (ne form of business that incorporates some ofthe independence of an entrepreneur with the larger umbrella of a corporation isthe franchise. Thus it isa “hybrid” form of entering business for oneselé. Today, more than a third of all retail sales and an increasing parc of the gross domestic product are generated by private franchises A franchise is any arrange rent in which the owner of a trademark, tade name, or copyright has licensed others to tse ic in selling goods or services. A feanchisee (a purchaser ofa franchise} generally is legally independent but economically dependent on the integrated business system of the franchisor (the seller of the franchise) In other words, a franchisee ean operate as an inde- pendent businessperson but sill scalize the advantages of a regional or national bxganization How a Franchise Works ‘Business franchise systems for goods and services generally work the same way. The franchi- see, an independent businessperson, contracts for a complete business package. This usually requires the individual to do one oF more of the following: 1. Make a financial investment in the operation 2. Obtain and maintain a standardized inventory and/or equipmene package usually pur chased from the franchisor 4, Follow a franchise fee as well as a percentage of the gross revenues 5. Engage in a continuing business relationship In tuen, the franchisor provides the following types of benefits and assistance: 1. The company name. For example, if someone bought a Burger King franchise, this would provide the business with drawing power. A well-known name, such as Buzger King, ensures higher sales chan an unknown name, such as Ralph's Big, Burgers. 2. Identifying symbols, lagos, designs, and facliies. For example, all McDonal’s units have the same identifying golden arches on the premises. Likewise, the facies are similar inside. 3. Professional management training for each independent units staff 4, Sale of specific merchandise necessary for the woit’s operation at wholesale prices ‘Usually provided is ll of the equipment to run the operation and the fooe or materi als needed for the final product. 5. Financial assistance, if needed, 9 help the nit in any way possible. 6. Continuing aid and guidance to ensure that everything is done in accordance with the Advantages of Franchising A number of advancages are associated with franchising In the following sectior, we describe four of the most well-known advantages: training and guidance, brand-name appeal, a proven track record, and financial assistance. ‘TRAINING AND GUIDANCE echaps the greatest advantage of buying a franchise, as compared to starting a new business ‘or buying an existing one, is that the franchisor usually will provide both training and guid- ance to the franchisee. As a cesult, the likelihood of success is much greater for national164 Pathways to Entrepreneurial Ventures entrepreneurship Top 10 Franchises 1. TBleven In. 6. Sonic Drive-in Restaurants 2. Subway 7. KFC Corp 3. Dunkin’ Donuts 8, IntecContinental Hotes 4. Pia Hut 8. Domino's Pizza LLC 5, MeDonald's 10, REMAX ‘Sonnet: “op 10 (accesed Ape ins for 20087 Enteprane, beptwenteesencucconifnochislopist2008 ha 2008), franchisees who receive this assistance than for small-business owners in general. For exam- ple, it has been reported that the ratio of failure for small enterprises in general to franchised businesses may be as high as 4:1 or 5:1 BRAND-MAME APPEAL ‘An individual who buys a well-known national franchise, especially a big-name one, has {good chance to succeed. The franchisor’s name is a drawing card for the establishment, People are often more aware of the product or service offeced by a national franchise and prefer ic to those offered by lesser known outlets A PROVER TRACK RECORD Another benefit of buying a franchise is that the franchisor has already proved that the ‘operation can be successful, Of course, if someone isthe fist individual to buy a franchise, this is not the case. However, if che organization has been around for five to ten years and hhas 50 or more units, it should not be difficult ro see how successful the operations have been. If all of the units ace still in operation and the owners report they are doing wel finan- cially, one can be certain the franchisor has proved that the layout and location of the store, the pricing policy, che quality of the goods or service, and the overall management system are successful. FINANCIAL ASSISTANCE Another reason a franchise can be a good investment is that the franchisor may be able 10 help the new owner secure the financial assistance needed to run the operation. Infact, some franchisors have personally helped the franchisee get started by lending money and not ‘equiring any repayment until che operation is running smoothly. In short, buying a franchise is often an ideal way to ensure assistance from che financial community. Disadvantages of Franchising The prospective franchisee must weigh the advantages of franchising against the accompany: ing disadvantages. Some of the most important drawbacks are franchise fees, che control ‘exercised by the franchisor, and unfulfilled promises by some franchisors. The following sec- tions examine each of these disadvantages.Eronchising: The Hybrid 185. FRANCHISE FEES In business, no one gets something for nothing. The larger and more successful the franchi- sor, the greater the franchise fee. Fora franchise from a national chain, it is not uncommon for a buyer to be faced with a fee of $5,000 to $100,000. Smaller franchisors or those who | have not had great success charge less. Nevertheless, entrepreneurs deciding whether or not to rake the franchise route into small business should weigh the fe against the return they could gee putting the money into another type of business. Also, remember that this fee cov- rs only the benefits discussed in the previous seation, The prospective franctisee also must pay to build the unit and stock i, although the franchisor may provide assistance in securing a bank loan, Additionally, a fee is usually tied to gross sales. The franchise buyer typically pays an intial franchise fee, spends his or her own money to build a store, bys the equip- ‘ment and inventory. and then pays a continuing royalty based on sales (usually between 5 and 12 percent). Most franchisors require buyers to have 25 to 50 percent of the initial costs in cash. The rest ean be borrowed-—in some cases, from the franchising organization itself Table 6.4 presents a list of the costs involved in buying a franchise. FRANCHISOR CONTROL In a large corporation, the company controls the employee's activities. If an individual has a personal business, he or she controls his or her own activities, A franchise operator is aa ‘Tho Cost of Franchising fee may be $75,000, the actual cost of “opening yout doors for business” can be mare than $200,000! Depending on the type of fanchis, the following expenditures are possible: 1. The base Feancising fee. For this, you may receive 2 wide range of services: personnel training, Tcenses, operations manuals, taining material, site selection and location preparatien assis tance, and mare. Or you may receive none of these 2, Insurance. You wll need coverage for 2 variety of items such as plate alas, office contents, vehicles, and others You also should obtain so-called “umbrel insurance. It is inexpensive and is meant to help out in the event of crippling milion- or mutimilion-dollarlaesuis 8. Opening product inventory. If initia inventory snot ineuded in your franchise Fe, yoo wil have to obtain enaugh to open your franchise. 4, Remedeling ond leosehold improvements. Under most commercial leases, you are responsible for these costs. sity eborges. Deposits to cover the First month or two are usually required fr electricity, ga, oil telephone, and water 6, Poyroll. This should include the costs of training employees before the store opens. You should i include reasonable salary for yourselt Debt sevice: This includes principal and interest payments. Bookkceping and accounting Fes. In addition to the services the franchisor may supply in this area, i is alas wise fo use your own accountant 9. Lega and professional Fes. The cost of ting an attomey to review the Fanchise contact, 10 fie for and obtain any neecaary zoning a planning ordinances, ond to handle eny unforeseen conflicts must be factored into your opering costs projections. 10, State ond loco licenses, permits, and certificates. These run the gamut fom liquor esses to building permits for renovations, Sowee: Donald F Kura, “Achieving the American Dream a Franchi (ly 1957) 2 ypdted by autho Api 20081668 Pathways to Entrepreneurial Ventures, entrepreneurship To Franchise or Not to Franchise: That Is the Question with entrepreneurial tendencies but without the desire to base a business on their avn idea. Given this fact, Franchising would seem a logical ft for young enteepreneurs fresh from college. Experts differ on the merits of such an approach. Following are reasons for and against becoming a franchisee Straight out of college: Fes are a vehicle for those individuals For © Students Sear best in structured learning environments, as provided by franchising. The suppart steucture provided by franchisors makes franchising an ideal option for students looking to experience entrepreneurship with 2 proven Formula, The educational materials provided to ‘new franchisees extend the classroom environment ta real-world application + Students are experienced customers and, in many cases, employees of franchises. Because fewer families have stay-at-home parents, today's students have experienced an active childhood, which often involved relying on “fast” food between appointments, Many students also have taken part-time positions with these franchises, which has given them a behind-the-scenes look at hhow they are run. So-called “helicopter parents" often continue to provide support beyond college. The support that students roquire when starting ther fist business ‘extends beyond finial neds. Having parents who are actively involved can give students the boost they need to venture out on their own, knowing that there is a safely net in the event that they fail Although some would argue that the limited Financial contribution of the students inevitably leads to a lack of accountability, others argue that having the investments from family and friends on the line further motivates the students to succeed © Stucents are accustomed to being visionary, whieh Fuels innovation. The Internet has given students venue For self-expression on a grand scale. The immediacy of results from the digitization of society has taught students how to generate an idea, implement it, and assess the results. This enthusiasm often translates to ambition that franchisors look for in their franchisees. Against Few college students hove the financial where- withal fo start a franchise. Although the costs associated with starting 2 franchise in the long run can be less than those for developing a new concept, the upfront franchising fees can cust several hundred thousand dollars, making the financial requirements a significant hurdle for individuals without the credit history to acquie a bank loan without 2 cosigne. Students usvaly find staying motivated difieut hen the business struggles. Business concepts that initially were exciting can quickly lose their luster whea they lose momentum, Given that most Students will have had financial assistance from family or friends, they have litle to no Financial commitment to the busines, which can lead to a lack of ovmership when problems ais. © Lack of management experience mokes dealing with employees a challenge, Franchisors will provide marketing materials, supplier connections, and operational plans, but the responsibility for ‘managing employees failssquarelyon the shoulders ‘of the franchisees. The recruitment, management, and retention of employees can be stressful for ‘even the most seasoned mariager, so students with no experience in management Find it difficult to keep employees motivated and committed Gaining experience theough trial and error as 3 manager in a large corporation is unlikely to fead 1 the collapse of the entire organization, whereas franchises ae far mare susceptible to management rmistakes In he end, students have to determine what makes the most sense for tir career aspirations a5 well 3s for their management style. Although there is moreFranchising: The Hybrid 167 rik inherent wth anew concept. franchising is not for begins when an entrepreneur decides what franchise 0 everyone, Sane entraprenaurs have concluded that purchase franchisor agreomants ato too rositve,eelagating thom to what thay consider to be mere employees; ——————— homevr al tania ple dituran pois and Sow Akl om A in ni Khe brocedures, Deciding whether to purchase a franchise cyryieneuscom/maasineoerenc'/2008 naar is only the beginning of the process. Tho roal work 187674. (accessed March 16,2008, somewhere becween these extremes. Under franchisor control the franchisor generally exer- cises 2 fair amount of control over the operation in order to achieve a degree of uniformity, i H entrepreneurs do not follow franchisor directions, they may not have thei franchise license renewed when the contract expires, UNFULFILLED PROMISES 4 In some cases, especially among less-known franchisors, the franchisees have not received all they were promised." For example, many franchisees have found themselves with trade names that have no drawing power. Also, many franchisees have found that the promised assistance from the franchisor has not been forthcoming. For example, instead of being able to purchase supplies more cheaply through the franchisor, many operators have found them- selves paying exorbitant prices for supplies. If franchisees complain, they risk having their agreement with the franchisor terminated or not renewed, Franchise Law { ‘The growth in franchise operations has outdistanced laws about franchising. A solid body i of appellate decisions under federal or seate laws that relate to franchises has yet to be developed. In the absence of case law that precisely addresses franchising, the courts tend to apply general common-law principles and appropriate federal or state statutory defini- I tions and rules. Characteristics associated with a franchising relationship are similar in ‘some respects to those of principal/agent, employer/employee, and employeelindependent- contractor relationships, yet a franchising relarionship dos nor realy fir inte: any of these traditional classifications. (See The Enteepreneurial Process: The Uniform Franchise Offer ing Circular) ‘Much franchise litigation has arisen over termination provisions. Because the franchise ‘agreement is normally a form conteact the franchisor draws and prepares, and because the bargaining power of the franchisee is rarely equal to that of the franchisor, che termination, provisions of contracts are generally more favorable to the franchisor. This means that the franchisee, who normally invests a substantial amount of time and money in the franchise operation to make it successful, may receive litle or nothing for the business upon termina~ 1 tion. The franchisor owns the trademark and hence the business.» i Evaluating the Opportunities Hiow can the average entrepreneur evaluate a franchise operation and decile f 118 2 good deal? Unfortunately, no mathematical formula exists (althongh the best valuation methods are presented in Chapter 14). Nor is it possible simply to ask a friend, beccuse the most popular franchises, which are probably the only ones the individual i familiar with, do nor Bive franchises to people seeking to enter the field, This leaves only the smaller, lesser-known, and more risky franchise operations." \ One research study examined the elationship between the base fees and royalties paid to the franchise's overall value. The findings indicated that the age of a franchise, number of retail units, concentration in the tate, and national represencation are all reflected inthe sizefreer et ae ane cave eal eheremnare seer reeres the entrepreneurial The Uniform Franchise Offering Circular a Franchise Disclosure Rule that required franchisors to make full presale disclosure nationwide. To comply with this ruling, the Uniform Franchise Offering Circular (UFOC) was developed. | 191979, the Federal Trade Commission established ‘TheUFOCis divided into23itemsthat provide diffrent ‘segments of information for prospective franchisees. In summary form, the major sactions are as follows: Sections 1-1: Cover the franchisor, the franchisor’s background, and the franchise being offered Sections V-VI: Dalineate the franchise fees, both initial and ongoing Section Vil: Sets forth all of the initial expenses Involved to establish the entre franchise Soctions Vill-IX: Qetal the franchisees obligation to purchase specific goods, supplies, services, and so forth irom the franchisor. Section X: Provides information on eny financing ‘rrangenients available to franchisees, Section XI: Describes in detail the contractual ‘obligations ofthe feanchigor to the franchisee. Section XI Cleerly outlines the geographic markot within which the franchisee must operate Sections XII-XIV- Disclose all pertinent information rogarding trademarks, rade names, patents, and so font, Section XV: Outinas the franchisors expectations of the franchisee (day-to-day operatinsh. Section XVI: Explains ony restrictions or Fntations Section XVII: Sots forth tha conditions for the Iranchises ronawa, termination, o sa Section XVII: Discloses the actual relationship betwen the franchise and any ealebity figure used in adverisng forthe franchise, Section XIX: Provides a factual description of ‘any potential “earnings claims,” including their ‘assumptions and actual figures, Section XX: Lists the names and addresses of all existing franchises in the state where the proposed franchise fs a be locate. Sections XXI-XXINE: Provides certified financial statements forthe previous thrae fiscal years and a copy ofthe actual franchise contract. The UFOC must be given toa prospective franchisee at least ten days prior tothe payment of any fees or contracts signed. Itis the responsibilty ofthe franchisee 10 read and understand the various sections delineated in this document Snmce: Adapt roo the Federal Trae Comevision, 2008 of base fees and royalties. Flowever, the key to examining the value of a prospective franchise is a proper information search." In addition, o ensure an adequately protected investment, ‘an evaluation of all franchise opportunities must be undertaken. Figure 6.2 illustrates 2 complete process model for analyzing the purchase of a franchise, LEARN OF OPPORTUNITIES ‘One of the first things a prospective franchisee must do is to find a reliable source of information about franchising opportunities. Some of the most readily available sources are newspapers, trade publications, and the Internet (see Table 6.5 for a list of useful Wed sites). Entrepreneur magazine carries advertisements of franchise opportunities, and exhibitions and trade shows are held by franchisors from time to time in various cities Entrepreneur.com annually lists the cop franchises and the fastest-growing franchises, Finally, franchisors themselves offer information on specific opportunities although, in this case, one needs to beware of promises that exceed what may be delivezed |woisks sc 9p ey camer won oo =e ‘wonemis om raist a ae (Con aS saan | | uae | Sues an [aweiea | ta suave / zen | fn ‘ans is oeo8d sea a | || steer = fas ne ES “= ssauieng co reoueuly | [ Gia oud wripeu omiing era ra 169The Intemet has become the foremost source of information for people ofall ages, trades, and inter ests. Short of handing ove the funds, the prospective franchisee can find everything he ashe needs to ensure the successful research, selecting, and planning ofa franchise business inthe comfort of his oF her ov heme. You can search fr the perfect match by location, category, investment, and actual franchise at htpll wivncbetheboss.com, Ths ste allows you to obtain pertinent information about certain franchises via “Showcases” that provide histories, business summaries, Fequently asked questions, and investment Fequirements. Basic franchise information, including interactive financial worksheets, ways to select the right franchise, expo information, and inks to other valuable Web resources are also availabe ‘Multiple links from htt:ffranchise1.com, the Franchise Handbook, offer the serious person serious ansivers to his or her questions. Directories, associations, a message baard, and industry news are jut 2 few of the resourees available the Web's most popular franchise site. Franchise Works can be found at http:}fwmeronchiseworks coml. Here you wil find diferent fran= hiss listed by category, a5 well as other available business opportunities Also on the site are resources that can be used to cover all aspeets of the star ofa business, The Intemstional Franchise Association isa premier source for industry data. Browse http} | franchise.org to stay on top of the latest government developments and hot topics that affect fan- chisees and franchisors world, Other Valuable Sites: American Bar Association forum on Franchising wmwabanet.orgHorumsfranchisng USS. Small Business Adminstration wvra.sba gov Statistes—USA winestat-usa.gov Entrepreneur Magazine wwacentrepreneurcomsfranchises/bestofthe- bestindexhtml IMinorty Business Entrepreneur Magazine ‘weewariberag.com Franchise Times wu ranchisetimescom Franchise Upote wuuteanchise-update.com Restouront Business Magazine ‘rt sestaurantbiz.com Source Book Publiestions envefranchisordatabasecom Federal Trade Commision hueptiwwatte govfopitranchiseietfian shim Franehisecom htepwenufranchise.com World Franchising httpd weortdfrancising com Franchise Solutions hutpfewoctranchisesolutions.com Franchise Opportenites httpfiwerfranckiseopportunities com Franchise ade hnaprunetranchisetadescom The Franchise Magazine http:nwvetherenchisemagazine.net Franchise Info tall hetpsfeewctranchiseinfomalcom Franchise Advantage hitpifwna franchiseadvantage.com US. Fanchise News bttpfawwwustranchisenews.com INVESTIGATE THE FRANCHISOR ‘The prospective investor should get as much information as possible on the franchisor So ‘many people have lost ther life savings in franchise schemes that, except when dealing with a long-established franchisor, one is best advised to enter the investigation prepared for the a |Summary 171 ‘worst In particulag ifthe franchisor seems t00 eager to sell dealerships or units, is cause ; for alarm, Likewise ifthe franchisor does not make a vigorous effort ro check out prospective investors, itis usually a sign that the seller does not think the operation will last long and probably is interested in just taking the franchise fees and absconding with them. Remember: No reputable franchisor will sell a franchise without ensuring that the buyer is capable of operating it sucessfully. MeDonald’s—one of the most cautious of all franchisors—carefully screens all applicants, and ir elaims it has never had a unit go bankeupt. SEEK PROFESSIONAL HELP the franchisor passes the initial investigation and offers a franchise contract, the prospective franchisee should frst take it toa qualified attorney. The attorney will understand the terms of the ageeement and can explain any penalties or restrictive clauses that limit what the franchisee can do. OF major importance are contract provisions related to cancellation and renewal of the franchise. Can the franchisor take away the franchise for some minor rule infraction? More important, i the agreement is canceled, how much ofthe initial franchise fee will berefunded to the individual? Ifthe feanchise can be purchased back by the franchisor at 20 percent of the initial fe, the lawyer will need to examine carefully how easily the feanchisor can termi- nate the agreement. Other considerations include the franchise fee, the percentage of gross revenues 1 be paid to the franchisog, the type and extent of training to be provided, the territorial linits of the feanchise, and the provisions for supplying materials to the unit. In addition, the lawyer needs co mol the franchisor will have over operations, including maviarde, and the eequiced daye and hours of operation ‘The individual also should seek financial counsel. A good banker should be able to ook over the fraachisor’s prospectus and give an opinion regarding its feasibility. Is the projected rev- nue :00 high for a new unit? Is the retuen on investment overly optimistic? Would the bank be prepared to advance a loan on this type of business undertaking? Firally, the investor should talk to a certified public accountant (CPA), who can review the data and construct a projected income statement for the first few years. Does the invest~ ‘ment look promising? What might go weong and jeopardize the investment? How likely are those developments? Is this che type of investment chat constitutes an acceptable rise for the prospective buyes, or should the individual walk away from the deal? Legal and financial professionals will help the prospective franchisee answer some very important questions. In particular, they will force the individual to face the risks irhesent in 1 fearchise and answer the question, “Am I willing to take this type of risk?” aa ‘THE DECISION: 17'S UP TO THE ENTREPRENEUR After che prospective entrepreneur has gathered all of the necessary information, tis up 10 him ce her to make the final decision on ehe matter. As with buying an ongoing business, however, the series of “right questions” outlined previously can help. summary “The easiest and best way to approach a new business venture isto design a unique produce or service. Sometimes this involves what is called a new-new approach—that is, the develop- ment of an entirely new idea for a product or service (as was the ease with MySpace and Google). In mose instances, however, the prospective owner/manager must be conteat to use a new-old approach by “piggybaeking” on someone else's ideas. This involves either expand ing on what the competition is doing or offering a product or service in an area in which it is not presently available. On the financial side, the prospective owner/manager needs to examine the enterprise's financial picture and determine the costs of setting up the operation and the amount of rev- i enue that wll be generated during the initial period. Finally, che prospective ownesimanager must review a series of other operational considerations ranging from the >uilding, i et172 CHAPTER 6 Pathways to Entrepreneurial Ventures merchandise, and equipment needed for operations to record keeping, insurance, legal, ma ting, and personal matters. | Another opportunity is the purchase of an existing succesful firm, which has a number of advantages. Three of the most important are that its successfal futace operation is likely, | the time and effort associated with starting a new enterprise are eliminated, and a bargain price may be possible Before deciding whether to buy, however, the prospective owner needs to ask and answer a series of “right questions.” These include: Why is the business being sold? What isthe physical condition ofthe business? What is che condition ofthe ventory? What isthe sate of the company’s other assets? How many’ ofthe employees will remain? What competition does the business face? What isthe fiom’ financial picture? ‘Ales all questions have been answered saistactorily, the prospective buyee must negotiate for the business. n che final analysis, however, the prospective owner should he conceened with buying the company’s assets at market unlue and then paying something for gooduill ificis deemed an asset. Valuation is discussed further in Chapter 14 Key Terms and Concepts business broker goodwill risk vs. ceward franchise legal restraint of teade Uniform Franchise Offering franchisee new-new approach Creer (CHOC) franchise fee new-old approach ee franchisor non-compete clause pee galt and doweside lose franchisor control profit rrend Review and Discussion Questions 1. Identify the three main pathways to entering 9. In a franchising agreement, what isthe franchisee business for a prospective entrepreneuc often called on to do? What responsibilty does 2. What isthe new-new approach to starting a new the franchisor assume? venture? How does this appeoach differ from a 10, What are some of the major advantages of ssew-old approach? Jeanchising? Cite and explain three 3. How can aa individual who is thinking of going 11. What are some of the major disadvantages of into business evaluate the financial pieture of the franchising? Cite and explain atleast cw enterprise? Use the methodology of Table 5.2 t0 12, How can a prospective franchisee evaluate @ prepare your answer franchise opportunity? Explain. 4. In addition to personal and financial issues, 13, In evaluating whether or noe co buy a franchise what other factors should the prospective ‘operation, the potential investor should ask a ‘owner be concerned with? Describe at least seties of questions. What quescions should the fous. potential investor ask about the franchisor, the 5. What are the advantages of buying an ongoing franchise, the marker, and the potential investor business? Explain them, (himself or herself}? 6, What “right questions” need to be answered 14, What are che advantages and disadvantages of when deciding whether co buy a business? franchising? 7. How should a prospective buyer examine the 15. Identify the UFOC. Explain why ici important assets of a company? Explain, in franchising. 8, What is meant by the term franchise?cxporantal eerie 178 i 1 Experiential Exercise ' ‘THE PERSONAL ENTREPRENEURIAL ACTION PLAN Tefore making the final decision about going into business, prospective eneeprencur nes 9 Bore mal queons Ten of she mest important ones ar sed here. As youready thar he response that best describes you. 1. Are you aslfstarcet? Tsun get going without help from others 1B Gre someone gets me going am just ie TF Leake tungs easy and do x move uns Thave 2. Hos do you fel about others? £2 Team gee along with jus about anyone. 1 To noc need anyone ele. 1 Teopleirsitate me 3. Canyos lead people? 1 ean gt mone people ro go along with me ones I star sormeshing | 1D ean give ce orders if someone tel me what should be done. 1D Lier someone ele get things done and go along if like 4, Car you take responsibility? TH Lake charge and sce ihiiga b=oush 1D Pil eake over if necessary bur would rather lee someone else be responsible. fo mp4 fof) SP 5: A you en ogee? Ll Se ae ei a Coane eles hing ge 0 config which case 1 cd Bore ar ave ching alc up, something always comes along to disrupt ce an, | 7 ‘so I take things as they come. q | 6. Are you a hard worker? | 2 eo kep going a long a nee. Ty tow aed or es ut shen ait yt comot ce ha bard work ge ou anywhere. | 1.Can you make deisons? cries make decons, and hey sy sen on pet wel Co a rome it hve semy of me, bt fast ddison making WIS | F haasoe tke be he one who hast ide hing 8. Can people lyon your word? oe es eee Fe raise ath people bat omens aay whats eset | 11 Why bother? The other person does not ‘know the difference. 4 9, Can you sick with i? | hen Tae up ny ind do someting, axing sons | Laval ih wha / 1 ings saeco g awe uly aie 140. How good is your health? 1 Excellent i 1B Pretty good, 1 Okay, but i has been beter nen NEN |174 CHAPTER 6 Case 6.1 Pathways to Entrepreneurial Ventures ‘Now coun the number of checks you have made nest to the fist responses and multiply this ‘number by 3. Count the checks next to the second responses and multiply by 2. Count the num bet of times you checked the thied answer. Toval these theee numbets. OF a possible 30 total points, a potentially successful enteepreneur should have at least 5 points If not, the prospective ‘entrepreneur should consider bringing in a parcner or abandoning the idea of going into business alone. The potential entrepreneur should always keep in mind these personal factoes while for. ‘mulating the action plan. Case 6.2 AN IDEA FOR THE DOGS! Chris Wassecberg isa salesperson for a Fortwie 100 firm. He has a bachelor’s degree in marketing and is one of the firm's best salespeople. Iti likely that Cris will one day become a sales manager if he stays with the firm. This is doubtful, however, because he hopes o start his own business. Since he was hired seven years ago, Chris has managed to build a nest egg of $160,000, He now is looking for a business that would require no more than $60,000-$70,000 to get stated ‘The rest would be used for operating capital and to keep him going until the company turns profitable, Inthe past, Chris has gathered ideas by reading magazines such as Entrepreneur and Inc. which repore new types of businesses, Last week, Chris read a story that intrigued him. A man on the West Coast has heen building custom doghouses out of expensive materials and selling then for $5,000 to $15,000 eaeh. Chris realizes that few people can afford to pay this much for a doghouse. Yet most doghouse are not distinctive, and owners simply pay $50 co $150 for basic doghowses. Chris believes a macket may exist for doghouses between these two extremes, in the cage of $250 to $500. Chris has done the research and believes it would not be coo difficult to differentiate his product from the standard doghouse. In particulay, he is considering building a house that is slightly larger than the typical cone, well insulated, and floored with washable vinyl; he would pus the dog’s name ahove the door and shingle the roof. Additionally, he believes that it would be more appealing ifthe house has the same basic design as the owners. The two biggest obstacles will be marketing and production that is, getting people co order houses for their dogs and then building che houses. Chris believes that, with his background, he can handle the marketing, and ic should not be too diffcul eo find someone to handle the construction. Moreover, until the business takes off, he believes he can continue with his sales jo. Questions 1. Is anything unique about Chris's idea? Explain 2. Whar is the first thing Chris should do to follow up om his idea? Explain, 3. When this is done, what else should Chris do? Oucline a general course of action for him, CHECKING IT OUT ‘When Arlene Ryan inherited $150,000 from her grandfather, she decided to use the money t0 start her own business. Arlene has been a legal secrecay for 14 years and feels she knows quite a fot about business, “Every day I take depositions and type legal memocanda,” she noted t0 a fiend. “And I've seen lots of businesses fail because they didn’t have adequate eapital or proper ‘management, Believe me, when you work for a law fim, you see—and learn—plenty.” Almost six months passed before Arlene decided om a business to pursue. A franchise ad in a business magazine caught her attention; Arlene called and found out that the fcanchisor was sell.Notes Notes ing fastfood franchises in her area, “We are in the process of moving into your section of the country.” the spokesperson told her “We have 111 franchisees throughout the nation and want to sell 26 in your star.” Arlene went to a meeting that the franchisor held at a local hor! and, along with large number of other potential investors listened co the sales pitch, It all sounded very good. The cost ofthe franchise was $75,000 plus 4 percent of gross revenues. The franchisor promised assistance with sie location and personnel training and encouraged the prospective feanchisees to ask questions and investigate the organization. “If you don’t fel this is a good deal for you, i's not a good deal for us ether; good business is 2 eworway street” the spokesperson pointed out. “We are going to be looking very carefully at all franchise applications, and you ‘ought tobe giving us the same degree of scrutiny.” ‘Arlene liked what she heard but felt it would be prudent to do some checking on her own. liefore Isavang the meeting, she asked the spokesperson for the names and addresses of some cur- rent fraachisees. “I don't have alist with me,” he said, “but I can write down some that { know of, and you ean get cheir sumbers from the operator” He then seribbled four names and locations fon a piece of paper and handed it co her ‘Arlege called information and was able to ger telephone numbers for only ewo of the fran- chises. The other addresses apparently were wrong. She then placed calls to the two franchi- sees. The first person said she had owned her franchise for one year and felt it was coo early to judge the suecess of the operation. When she found out Arlene was thinking about buying a franchise, she asked if Arlene would consider buying hers. The price the woman quoted was 185,000 less than what che company currently was quoting. The second person told Arlene he simply di not give out information over the phone. He seemed somewhat edgy about talking to her and continually sidestepped Arlene's requests for specific financial information. Finally, he told her, “Look. if vou really want this information, I think you should talk to my attorney. If he says its okay to tell you, I will” He then gave Arlene the attorney's number. Before she ‘could call che lawyer, Arlene left for lunch. When she returned, one of the partners of ker firm ‘was standing beside her desk. “Hey, Aclene, what are you doing calling this guy?” he asked, holding up che telephone number of the franchisee’ attorney. “Are you planning to sue some- cone? That's his specialty, you know.” Arlene smiled. “As a matter of fact, Lam. I'm thinking of suing you guys for back wages.” The attorney laughed along with her and then walked back into his office ‘auEstions 1, What is your appraisal of the situation? Does it look good or bad? 2. Would you recommend that Arlene buy the franchise from the woman who has offered £0 sell Why of why noe? 3. What would you recommend Arlene do now? Be complete in your answer. 4. Steve Rosenbush, ‘BusinessPVeck Online, March 28, 2006, htp'f] ‘wwrw.businessweek com/technology/content) mar2006/ie20060327-215976.htm (accessed book's on the Block, 4. Fred Stengold and Emily Dostow, The Compe Guide 1 Buying @ Business (Berkeley CA: Nolo Press, 2005). Jay B. Abrams, How fo Value Your Business and October 3, 2005), Tncreae fs Potential (New York: McGraw-Hill, 2005). 2, Saul Hansel, "Yahoo Noos a Social Networking 6. Fora good discussion of buying or selling a small Site New York Times Onlin, September 22, 2006, business, se Rene V. Richatds, How fo Buy and/or tpl rw: nytimes cm) 2006/09)2)/techology! 2afacebook htal?ex=1216577600en-09Cd5e70ax0 {o77aei=sosstipartne rssnytéenc Sell a Smal Business for Maximum Profit. (Charleston, SC: Atlantic, 2006) (accessed ‘October 3, 2006) 7. See Roy J. Lewickl, David M. Saunders, and 3. Donald F, Kuratko and Jflzey 8, tlornsby, ‘New Venture Management (Upper Sadale River, NJ: Pearson/Prentice Hall, 2008), 33-38, John W. Minton, Negotiation, 3rd ed. (Neve York: ‘MeGraw Hlfivin, 2002). This paperback gives practical examples and advice about negotiating, ‘Also see Michael Watkins, Negotiation: Harvend 178 |176 CHAPTER 6 10. nL. 2 Business Essentials Boston: Harvard Business School Pres, 2003) For an excellent overview of franchises, see Rupert Barkoft, Fundamentals of Business Franchising, 2nd ed. (Chicago: American Bar Association, 2005}; and Gaylord A. Jentz, Roger LeRoy Miller, and Frank B. Cross, West's Business Law, 10th ed. (Mason, OF! South-Westem/Cengage Learning, 2007) Patrick J. Kaufinann, “Franchising and the Choice of Self-Employment Journal of Business Venturing (uly 1999} 245-0, Robert T. Justis and Richard J. Judd, Franchising, Srl ed (Mason, OH: South-Western/Cengage Learning, 2004); and Joe Mathews, Don Debol, and Deb Pescval, Sree Smart Franchising (vin, CA: Entrepreneur Press, 2006). Darrell L. Williams, “Why Do Entrepreneurs Become Franchisees? An Empirical Analysis of Organizational Choice,” Journal of Business Venturing (January 1995): 103-24 Jentz, Miller, and Cross, West's Business Law, 10th ed. ‘See Steven C. Michael, “To Franchise or Not to Eranchise: An Analysis of Decision Rights and Organizational Form Shares," Journal af Business Venturing January 1996): 59-71; also see Nerlee ‘ing, “Franchisee Satisfaction: Contributors and Pathways to Entrepreneurial Ventures Consequences." Journal of Small Business ‘Management (April 1995]: 12-25; Marko Grunhagen ‘and Robert A. Mittelstacd, “Entrepreneurs or Investors: Do Multi-unit Franchistes Have Different Philosophical Orientations?” Journal of Small Business Management, 43, no. (uly 2008): 207-25, ‘Toani Jambulingam and John R. Nevin, “Influence of Franchise Seletion Criteria af Outcomes Desired by the Franchisor. Journal of Business Venturing (ly 1999}: 363-86; see also Gary J. Castrogiovannl, James G. Combs, and Robert T. Justis, “Shifting Imperatives: An Integrative View of Resource Scarcity and Agency Reasons for Franchising,” Entrepreneurship Theory & Practice, 30, no. 1 (Ganuary 2006}: 23-40; and Roland E. Kidwell, Arne ‘Nygard, and Rognhild Silkose, "Antecedents and Effects of Free Riding inthe Franchisor-Franchisee Relationship,” Journal of Business Venturing 22, no. 4 (July 2007]: 522-44, David A. Baucus, Melissa S. Baucas, and Sherrie Human, “Choosing a Franchise: How Base Fees and Royalties Relate tothe Value ofthe Franchise,” “iourmal of Small Business Management [Apri 1993): 531-104; see also Andrew J. Sherman, Franchising & Licensing: Two Powerful Ways to Grow Your Business in Any Economy, 3d ed. (New York: AMACOM Books, 2004).Legal Challenges for Entrepreneurial Ventures Entrepreneurial Thought ‘A mojor difficulty for the inexperienced entrepreneur is the host of strange terms and phrases which are scattered throughout most legal dacuments. The noviee in this kind oF reading should have some understanding not only of what is contained in such dacu- iments, but also why these provisions have been included. Ifan entrepreneur cannot find the time or take the interest to read and understand the major contracts into which his company will enter, he should be very cautious obout being an entrepreneur at ath — PRYRIEK R. LES Havers une Shoo! Chapter Objectives 1 To introduce the importance of le issues to entrepreneurs 2 To examine patent protection, including definitions and preparation 3. To review zopyrights and their relevance to entrepreneurs 4 To study trademarks and their impact fn new ventures 8 To examine the legal forms of organization~sole proprietorship, partnership, and corporation 6 Toillustrate the advantages and lsadvanteges of each ofthese three legal forms SEES TA 10 To explain the nature of the limite partnership and timited fabiity partnerships (LLPS) To examine how an S corporation works Ta define the adltional classifications of corporations, including finite Habiity companies (LLCS) Tw present the majo segments of the bankruptey law that apply to entrepreneurs1768 CHAPTER 6 2. 1. Susiness Essentials (Boston: Harvard Gusiness Schoo! Press, 2003) For an excellent overview of franchises, see Rupert Barkolf, Fundamentals of Business Franchising, 2nd ed. (Chicago: American Bar Association, 2005); and Gaylord A. Jentz, Roger LeRoy Mille, and Frank B. Cross, West's Business Law, 10th ed (ason, OH: South-Western/Cengage Learning, 2007), Patrick J. Kaufmann, “Franchising and the Choice of Self-Employment" Journal of Business Venturing Guly 1999) 345-62, Robert T. Justis and Richard J. Judd, Franchising, 3rd ed. (Mason, OH: South-Western/Cengage Learning, 2004); and Joe Mathews, Don Delolt, and Deb Percival, Steet Smart Franchising (levine, CA: Entrepreneut Press, 2008), Dacrel L. Williams, “Why Do Entrepreneurs Become Franchisees? An Empirical Analysis of Organizational Choice,” Journal of Business Venturing Canuary 1999): 103-24 ents, Miler, and Cross, West's Business Low, 10th ed See Steven C. Michael, "To Franchise or Not to Franchise: An Analysis of Decision Rights and Organizational Form Shares," Journal of Business Venturing January 1996): 59-71; also see Nerilee Hing, “Franchisee Satisfaction: Contabutars and Pathways to Entrepreneurial Ventures 15, Consequences." Journal of Small Business ‘Management (Apt 1895}: 12-25; Marko Grunhagen and Robert A. Mitelstaed, “Entrepreneurs or Investors: Do Multi-unit Franchisees Have Different Philosophical Orientations? Journal of Small Business Management, 43, 20.9 (uly 2005} 207-25, ‘Thani Jambulingem and John R. Nevin, “Influence of Franchisee Section ritetia of Outcomes Desire by the Franchisor. Journal of Business Venturing sly 1999): 262-96; see also Gary J. Casrogiovann, James G. Combs, and Rober T. Justis, "Shifting Imperatives: An Integrative View of Resource Scarcity and Agency Reasons for Franchising,” Entrepreneurship Theory & Practice, 10,0. | Ganuary 2006): 23-40; and Roland E. Kidwell, Ame [Nytuard, and Rageild Sikoset, “Antecedents and Effects of Free Riding in the Franchisor-Franchisee Relationship,” Journal of Business Venturing 22, no. 4 (Duly 2007) 522-44 David A. Baucus, Melissa S, Baucos and Sheri ‘Human, “Choosing a Franchise: How Base Fees and Royalties Relate tothe Value ofthe Frachise, Journal of Small Business Mosragement (Ap! 1993 ‘31-104; see also Andrew J. Shertian, Franchising & Licensing: Two Powerfl Ways to Grow Your Business in Any Economy, 3 el. feo York ‘AMACOM Books, 2008).