Chapter 5

Entrepreneurial
Option:

Start Up, Buy Out or

Franchising
 For a new entrepreneur, the decision to own and operate a business is the
result of his serious exploration of ideas and sensible evaluation of
opportunities. A sensible entrepreneur would always consider serious issues
before going into business. Very often, the decision to engage is a particular
business would minimize the possible waste of time, energy and resources if it
is made after carefully addressing these issues.
STARTING A NEW BUSINESS
 This is a business from scratch as start up. Some entrepreneurs get a
feeling of fulfilment in their autonomy and freedom to run a business.

REASONS THAT MOVE AN ENTREPRENEUR TO PURCHASE A BUSINESS

 The entrepreneur has a newly invented or newly developed products or
service.
 Wants to take advantage of an ideal location, product or service,
equipment, employees, suppliers, and financial backers.
 Wants to avoid problems and undesirable commitments in policies,
contracts, and procedures involving other firms.
 Advantages and Disadvantages of Starting a new
business

ADVANTAGES
 Lower start-up cost
 Independence
 Site Location
 No baggage
 Opportunity to orient the business towards your own personal goals
 Complete flexibility in selecting your products, target market, service strategy, competitive
strategy, location and facilities
 Easier to innovate and make further improvements
 You can make your own policies and procedures that can train your employees in your own
way
 You can avoid “goodwill” expense of buying an existing business along the possibility of
unknown or contingent liabilities
 You will not risk inheriting any pre-existing will from previous customers, suppliers,
creditors, or employees
DISADVANTAGES
 A great uncertainty about the market demand for the new product or service
 Takes time and energy to create an image, build patronage, works out new system and
procedures, and reach a break even level of sales
 Added risks in an investment will not be recouped
 Unexpected competition may emerge and potential customers may be more difficult to
attract.
 High commitment
 Delayed profitability
 Limited financing
 You will need to look in to every small detail that goes into running your business and that
may mean long working hours and fewer chances of vacation
 Running a full-fledged business is not easy
 Owning a business means exposure to direct legal problems, which you would not face as an
employee in a company
 huge risk that the customers may leave you owing to different methods of business employed
them.
BUYING AN EXISTING BUSINESS

For some entrepreneurs, buying an existing business represents less of a

gamble than starting a new business from scratch.
Ideally any business you buy needs to fit your own skills, lifestyle and
aspirations. Before you start looking, think about what you can bring to a
business and what you'd like to get back.
Things to consider:
 Your abilities
 Your capital
 Expectations in terms of earning
 Your commitment
 Your strengths
 Business sector you’re interested in
 Location
 Advantages and Disadvantages of choosing an
existing business
ADVANTAGES
 Drastic reduction in start-up costs
 Facilities, technology already available
 Cash flow may be immediate because of existing inventory and receivables
 Existing goodwill and easier financing opportunities, assuming the business
has a good reputation
 They already have available personnel with know-how
 easier to obtain finance as the business will have a proven track record.
 A market for the product or service will have already been demonstrated.
 There may be established customers, a reliable income, a reputation to
capitalise and build on and a useful network of contacts.
 A business plan and marketing method should already be in place.
 Existing employees should have experience you can draw on.
 Many of the problems will have been discovered and solved already.
DISADVANTAGES
 Purchasing cost may be much higher than the cost of starting a new business
 Hidden problems associated with the business and receivables that are valued at
the time of purchase, but later turn out to be non-collectible
 Some of the groundwork to get the business up and running will have been done.
 It may be easier to obtain finance as the business will have a proven track
record.
 A market for the product or service will have already been demonstrated.
 There may be established customers, a reliable income, a reputation to
capitalise and build on and a useful network of contacts.
 A business plan and marketing method should already be in place.
 Existing employees should have experience you can draw on.
 Many of the problems will have been discovered and solved already.
 How to value a business
Valuing a business can be one of the most worrying parts of buying an
existing business.
There are several valuation methods you can use. For specific advice on
valuation methods see the guide on how to value and market your business.
To get a general idea of how healthy the business is, look at:
 the history of the business
 its current performance - sales, turnover, profit
 future projections or a business plan
 its financial situation – cash flow, debts, expenses, assets
 why the business is being sold
 any outstanding or major litigation the business is involved in
 any regulatory changes which might have an impact on the business
Intangible assets

The most difficult part is valuing the intangible assets. These are usually
difficult to measure and could include:

 the company's reputation

 the relationship with suppliers
 the value of goodwill
 the value of licenses
 patents or intellectual property
Other factors that will affect the value:
 stock
 location
 assets
 products
 debtors
 creditors
 suppliers
 employees
 premises
 competition
 benchmarking - what other businesses in the sector have sold for
 who else in the sector is for sale or on the market
 the economic climate - will any new government legislation have an impact
on the business
Step-by-step: how to buy a business

1. Get professional advice

2. Research
3. Initial viewing and valuation
4. Arrange finance
5. Make a formal offer
6. Negotiation
7.  Completion
 FRANCHISING
Concepts of Franchising
Franchise – an agreement whereby an independent person is given exclusive rights
to sell a specified good or service.
Franchising – a marketing system based on a legal agreement wherein one party
(franchisee or franchiser) is given the right to handle a business as an independent
owner but is required to abide by the terms and conditions specified by the other
party (franchisor).
Franchisor - The franchisor owns the overall rights and trademarks of the company
and allows its franchisees to use these rights and trademarks to do business.
Franchisee - A franchisee is an individual who purchases the rights to use a
company’s trademarked name and business model to do business.
Franchising Contract - The franchise agreement is a legally binding agreement
which outlines the franchisor's terms and conditions for the franchisee.
Types of Franchising
1. The Product Franchise- With this the manufacturer uses the franchise
agreement to determine how the product is distributed by the person buying the
franchise.
2. The Manufacturing Franchise- The franchisee is permitted to manufacture
the products under license and sell them using the originator's trademark and
name. They also get the benefit of the national advertising of the product they
manufacture.
3. The Business Franchise Venture- The franchisee purchases and distributes
the products for the franchise owner. A client base is provided by the product
owner for the franchisee to maintain.
4. A Business Format Franchise- Involves providing the franchisee a proven
business model using a recognized product and brand. Training is provided by the
franchise owner and assistance in setting up the business.
What Does Franchise Provide

Business name– The franchisee may have a different company name but it’s the
product should have the names that are patented by the franchisor. The name and the
way it is written designed or printed should be uniform with the other franchise
outlets.
Market Research – The marketing research of the franchisor should benefit the
franchisee. It will serve as guide to help the franchisor in evaluating the proper
location, promotions, personnel, distribution and market segment.
System Ideas and the Operating Manual – It describes how things should be
conducted in the operating of the system. The operating manual communicates the
complete operating procedures necessary to maintain the standards of the franchise
Propriety Marks – Include logo, slogans, and other printed signs that show distinction of
the franchise. The franchisee is allowed to use the patented marks of the franchisor.
Experience – This is an important service that the franchisor provides to the franchisee. It
will help reduce losses brought about by the miscalculation of risks.
Training- Franchisor provide training assistance to the franchisee. Not only the
knowledge but the conceptual framework of the business.
Location Assistance and Approval - Give ideas on where a franchise would likely to get
more sales.
Store Layout and Construction Supervision – Franchisor give the franchisee the
specification for the construction of the store. These specifications are based on careful
planning that would bring the efficient operations. (color, decor, walls, pertinent
materials)
Exclusive Area Coverage – Franchisors provide exclusive territories to franchise
holders. Exclusive territory means that no others franchise coming from the same
organization may overlap territorial limit.
Procurement Programs – Franchise organizations share the system of
procurement with the franchisee. It provides the list of authorized suppliers for the
different needs of the franchise outlet.
Hiring Assistance – The franchisor usually gives the franchisee the guidance
needed in hiring personnel that would fit the nature of the organization.
Grand Opening Assistance – The opening is the highlight event of the franchise
outlet. The franchise organization’s management and staff lend a helping hand to
make sure that everything goes smoothly starting at the day one.
Marketing Strategies – The franchisor is generally familiar with tested and proven
strategies to guide the franchisee to remain competitive. It includes the aspects of
advertising and different promotional tactics design to ensure continued profit.
Research and Development – the franchisee must see to it that the business does
not remain stagnant. The franchisor spends time to ensure that improvement in the
products, services, equipment, operation processes.
 Advantages and Disadvantages of
Franchising
ADVANTAGES

 The business you are franchising is already successful and is a proven idea.
 The brand name is already recognized and name-recall is already very easy
 You may have exclusive rights to market the franchised products in your
territory.
 A franchisee will enjoy the benefits of being supported by the franchisor.
 Systems are already in place.
 You will get to leverage on the good name and purchasing power of your
franchisor when it comes to sourcing your supplies from suppliers.
 Lower Failure Rate
 Buying Power
 Star Power
 Profits
DISADVANTAGES
 Their Way or The Highway
 Ongoing Costs
 Ongoing Support
 Cost
 Shark-Infested Waters