Entrepreneurship

Chapter 14
Franchising, Licensing, and Harvesting:
Cashing in Your Brand
 What Do You Want from
Your Business?
 Sell  Grow
 Sell to others  Internal growth
 Merge  Acquire other
 Maintain companies
 License your brand
 Close  Franchise
 Cease operations
 Bankrupt

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 2 All Rights Reserved.
 Growth through Replication
 Licensing = “renting” your brand or
other intellectual property to sell your
products
 Franchising = replicating the business
formula through others

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 3 All Rights Reserved.
 Focus Your Brand
 A name, term, sign, logo, design that identifies a
product/service
 Represents a promise to consistently meet customer
expectations
 Tightly focused brands  better performance
 Line Extension = using an established brand to
promote different kinds of products
 Can work if brand is very strong & new products relate well
 Potential damage if products don’t reinforce the brand

Diversification can unfocus the company & damage the brand.

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 4 All Rights Reserved.
 Licensing
 Licensor—sells license, which “rents” the right to
use the licensor’s company name.

 Licensee—pays fee for the license & may also pay

royalties (percentage of sales) to licensor.

 Licensing is effective when it does not tarnish image

of licensee’s own company or products.

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 5 All Rights Reserved.
 Franchising
Franchisor
 Pros
 Can expand without huge capital investment

 Earn royalties

 Cons
 Franchisee may fail to operate franchise correctly,

tarnishing reputation.
 Many federal, state regulations

 Franchisees who fail may try to sue.

 Costly to become a franchisor

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 6 All Rights Reserved.
 Franchise Research
 Do your research before you decide to
franchise your business
 Consult with a franchise attorney
 Visit the International Franchise Association &
the American Association of Franchisee &
Dealers websites
 Create a Franchise Agreement

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 7 All Rights Reserved.
 The Franchise Agreement
 Contract between franchisor & franchisee
 Defines
 Standards of quality & performance

 Royalty rates

 Duration of the contract

 Assigns territories to prevent franchisees

from competing with each other

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 8 All Rights Reserved.
 Harvesting & Exiting
 Harvesting = obtaining cash or stock by selling,
public offering, or merger of company you founded
 Usually takes at least 10 years to be ready

 Founder may remain with the business in the case

of a merger
 Exiting = leaving the business through closure,
liquidation or bankruptcy
 Loaded with debt

 No product or service of lasting value

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 9 All Rights Reserved.
 How to Value a Business
 Popular methods of valuation:
 Book value = Assets – Liabilities
 Most common method

 Future earnings = estimated future earnings stream

 Best for businesses that are growing quickly

 Market-based = P/E Ratio x Estimated Future Net Earnings

 P/E = company stock price/earnings per share
 Applies only to publicly traded stocks

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 10 All Rights Reserved.
 Harvesting Options
 Increase free cash flows
 Management buy-out (MBO)
 Employee stock ownership plan (ESOP)
 Merging or being acquired
 Initial public offering (IPO)

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 11 All Rights Reserved.
 Exit Strategies for Investors
 Acquisition = someone buys the
corporation & they are bought out or paid
back.
 Earn out = investors are bought out with
company cash flow over time.
 Debt-equity exchange = trade equity for
portions of debt over time to change
lenders into owners.
 Merger = value is created through
combining with another company.

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 12 All Rights Reserved.
 Investors & Exit Strategies
 Investors care about your exit strategy
because it will affect their investment & how
they will eventually get their ROI.

 Spell out your exit strategy in your business

plan. Simply claiming you will “go public” is
not adequate.

Entrepreneurship, 2nd Edition © 2010 Pearson Education, Upper Saddle River, NJ 07458.
Mariotti and Glackin with NFTE 13 All Rights Reserved.