Chapter 14

Accessing Resources for Growth

from External Sources

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives
• To understand how joint ventures can help an
entrepreneur grow his or her business and
acknowledge the challenges of finding, and
maintaining, an effective joint venture
relationship
• To be aware of the pros and cons of using
acquisitions to grow a business and to know
what to look for in an acquisition candidate

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 Learning Objectives
• To understand the possibilities of achieving
growth through mergers and leveraged
buyouts and the challenges associated with
each
• To understand franchising from the
perspective of both the entrepreneur looking
to reduce the risk of new entry and the
entrepreneur looking for a way to grow his or
her business
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 Learning Objectives
• To understand the tasks of negotiation and
develop the skills to more effectively conduct
these tasks

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Using External Parties to Help Grow a
Business
• Mechanisms
• Joint ventures
• Acquisitions
• Mergers
• Franchising

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 Joint Ventures
• A separate entity that involves a partnership
between two or more active participants
• Types of joint ventures:
• Between private-sector companies
• Objectives - Entering new/ foreign markets, raising
capital, cooperative research
• Industry-university agreements
• Created for the purpose of doing research
• International joint ventures

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 Historic Joint Ventures

© 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document
may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Acquisitions
• Purchasing all or part of a company
• Advantages of an acquisition
• Established business
• Location
• Established marketing structure
• Cost
• Existing employees
• More opportunity to be creative

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 Acquisitions
• Disadvantages of an acquisition
• Marginal success record
• Overconfidence in ability
• Key employee loss
• Overvaluation
• Synergy
• “The whole is greater than the sum of its parts”
• Should occur in both the business concept and the
financial performance

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 Acquisitions
• Structuring the deal
• Involves the parties, the assets, the payment form,
and the timing of the payment
• Two most common means of acquisition
• Entrepreneur’s direct purchase of stock or assets
• Bootstrap purchase of assets

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 Acquisitions
• Locating acquisition candidates
• Brokers: People who sell companies
• Accountants, attorneys, bankers, business
associates, and consultants may know of
candidates
• Business opportunities in newspapers or trade
magazines

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© 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document
may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 
 Mergers
• Joining two or more companies
• Key concern - Legality of the purchase
• Process:
• Determine the merger objectives and resulting
gains for both companies
• Carefully evaluate the other company’s
management

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 Mergers
• Determine the value and appropriateness of the
existing resources
• Establishing a climate of mutual trust
• Determine the value of a merger candidate

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Figure 14.1 - Merger Motivations

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 Leveraged Buyout
• Purchasing an existing venture by any
employee group
• Acquired firm’s assets serve as collateral
• Long-term debt financing is provided by banks,
venture capitalists, and insurance companies
• Evaluation procedure:
• Determine whether asking price is reasonable
• Assess the firm’s debt capacity
• Develop the appropriate financial package

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 Franchising
• Franchisor gives exclusive rights of local
distribution to:
• A franchisee in return for payment of royalties and
conformance to standardized operating
procedures
• Franchisor: Person offering the franchise
• Franchisee: Person who purchases the
franchise

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 Franchising
• Advantages of franchising - To the franchisee
• Product acceptance
• Has an accepted name, product, or service
• Management expertise
• Managerial assistance provided by the franchisor
• Capital requirements
• Up-front support can save entrepreneur significant time
and capital

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 Franchising
• Advantages of franchising - To the franchisee
• Knowledge of the market
• Offers experience in business and market
• Operating and structural controls
• Helps in standardization and administrative controls

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 Franchising
• Advantages of franchising - To the franchisor
• Expansion risk
• Allows venture to expand quickly using little capital
• Business can be expanded nationally and
internationally
• Requires fewer employees than a non-franchised
business
• Cost advantages
• Supplies can be purchased in large quantities to achieve
economies of scale
• Commit larger sums of money to advertising
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 Franchising
• Disadvantages of franchising
• Inability of the franchisor to provide services,
advertising, and location
• Franchisor’s failing or being bought out by another
company
• Difficulty in finding quality franchisees

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 Franchising
• Poor management can cause individual franchise
failures
• The ability to maintain tight control over
franchises becomes difficult as their number
increases

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 Franchising
• Types of franchises
• Dealership - Acts as a retail store for the
manufacturer
• Franchise that offers a name, image, and method
of doing business
• Franchise that offers services

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 Investing in a Franchise
• Factors to be assessed before making the final
decision:
• Unproven versus proven franchise
• Financial stability of franchise
• Potential market for the new franchise
• Profit potential for a new franchise

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 Investing in a Franchise
• Franchisors are required to make a full presale
disclosure
• Franchise agreement contains the
requirements and obligations of the
franchisee

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Table 14.2 - Information Required in
Disclosure Statement

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Table 14.2 - Information Required in
Disclosure Statement

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