Franchising Buyouts and Family Business

ALTERNATIVE ROUTES
TO ENTREPRENEURSHIP
© 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.
FRANCHSING
MMS401 Entrepreneurship and SBM

2018
Put on your
If you hear the word franchise

what pops into your head???

2018
Looking Ahead
After lesson, you should be able to:
1. Define franchising and identify franchise
options.
2. Understand the pros and cons of franchising
and the structure of the industry.
3. Describe the process for evaluating a franchise
opportunity.
4. List four reasons for buying an existing
business and describe the process of
evaluating a business.
5. Dynamics of Family Business
2018
Franchising (terminology)
• Franchising
– A marketing system involving a legal agreement, whereby the franchisee
conducts business according to the terms specified by the franchisor.
• Franchise
– A contractual license to operate an individually owned business as part of a
larger chain. The parent company that develops a product or business
process and sells the rights to franchisees.
• Franchisor
– Party in franchise contract that specifies methods to be followed and terms to
be met by the other party.
• Franchisee
– An entrepreneur whose power is limited by a contractual agreement with a
franchisor. The small businessperson who purchases the franchise so as to
sell the product or service of the franchisor.
• Franchise Contract
– The legal agreement between franchisor and franchisee

2018
What is Franchising?
• A franchise is an agreement that binds a franchisor (a parent
company of the product, service, or method) with a franchisee
(a small business that pays fees and royalties for exclusive
rights to local distribution of the product or service).
• Through the franchise agreement, the franchisee gains the
benefit of the parent company’s expertise, experience,
management systems, marketing, and financial help.
• Franchisors benefit because they can expand their operations
by building a base of franchisees rather than by using their own
capital and resources.

2018
Franchising Systems
• There are three types of franchises:
1.Trade-name franchises
2.Product-distribution franchises
3.Business-format franchises
• These three forms are used by producers,
wholesalers, and retailers to distribute
goods and services to consumers and
other businesses. MMS401 Entrepreneurship and SBM
2018
Trade Name Franchise
• Trade name franchise involves a
brand name.
• Here, the franchisee purchases the
right to become identified with the
franchisers trade name without
distributing particular products
exclusively under the manufacturers
name. MMS401 Entrepreneurship and SBM
2018
Product-Distribution Franchising
• Product-distribution franchising allows the franchisee (or dealer) to buy products
from the franchisor (or supplier) or to license the use of its trade name.
• This approach typically connects a single manufacturer with many dealers. The idea
is to make products available to consumers in a specific geographic region through
exclusive dealers.
• Soft drink bottlers and gasoline stations, for example, use this type of franchising.
Auto manufacturers also use this system to make their cars, service, and parts
available.
• The local Toyota dealer, for instance, has full use of the Toyota trade name, brand
names and logos (like the bow tie symbol) to promote the dealership in your area.
• Product franchisors regulate their franchisees’ locations to avoid excessive
competition between them. As a consequence, Chevrolet would not allow a new
dealership that sells its products to set up across the street from your established
local dealer.

2018
Pure (or Comprehensive or Business
format) Franchise
• A pure or comprehensive or business-format franchising is more of a turnkey
approach to franchising.
• It provides the franchisee with a complete business format, including a license for a
trade name, the products or services to be sold, the physical plant, the methods of
operation, a marketing strategy plan, a quality control process, a two-way
communications system, and the necessary business services.
• In other words, the franchisee purchases not only the franchisor’s product to sell
but also the entire way of doing business, including operation procedures,
marketing packages, the physical building and equipment, and full business
services.
• Business-format franchising is commonly used in quick-service restaurants (56.3
percent) lodging (18.2 percent), retail food (14.2 percent), and table/full-service
restaurants (13.1 percent).

2018
Franchising Options
Product Distrib
& Trade Name Area Developers
Franchising
Pure or
Business Piggyback
Format Franchising
Franchising
Options
Multi-Brand
Master Licensee
Franchising
Multiple-Unit
Co-Branding
Ownership
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Franchising Options
Receives privilege Firm/Individual
Product & Trade
of using widely can open several
Name
recognised
Area Developers
outlets in a given
Franchising
product name area
Receives entire Retail franchise in

Business
marketing & Piggyback
the physical
Format
management facilities of a host
Franchising
Franchising
systems store
Firm/Individual Options Operating several

having a contract Multi-Brand
franchises in a
Master Licensee
to sell franchises single corporate
Franchising
for franchisor structure
Single franchisee 2 franchise

Multiple-Unit
owns more than 1
unit of the Co-Branding
brands together
Ownership under one roof
franchised business
2018
Top 5 franchises of 2011
Source: http://www.entrepreneur.com, accessed January 24, 2010.

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Advantages and Disadvantages of
Franchising

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e e
h i s w
n c v ie
r a of
F t
o i n
p
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Pros & Cons of Franchising
Advantages Limitations
• Probability of success • Financial issues
- Proven line of business - Misled about earnings opportunities
• Trade names & Trademarks - Initial franchise fee
- Names are well-known to prospective - Investment costs
& satisfied customers - Royalty payments
• Operations manual - Advertising cost
- All methods have been tried & tested

• Competitive issues
enable them to operate more - Some franchisors compete directly
efficiently with franchisees
• Management support • Management issues
- Provides training, reduces purchasing - Not really independent business owner
costs, help with marketing & obtaining – contract = limited sales territories,
capital site approval, limited goods/services,
limited advertising/ operating hours
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Benefits for the Franchisee
• A franchisee is able to claim ownership of a small business

relatively quickly, and because of its identification with an
established product and brand name, it often reaches the
break-even point faster than a traditional form of ownership
would.
• Franchisees also benefit from the franchisers business
experience. Many entrepreneurs go into business by
themselves and make many costly mistakes.

2018
1. Management Training and
Support.
• The most common cause of business failure is incompetent
management. Franchisers are well aware of this, and in an attempt to
reduce the number of franchise casualties, they offer managerial training
programs to franchisees before opening a new outlet.
• Many franchisers, especially the well established ones, also provide follow-
up training and counseling services.
• This service is vital, especially because most franchisers do not require a
franchisee to have experience in the business.
• Despite the positive features of training, there are dangers inherent in the
trainer-trainee relationship. Every would-be franchisee should be aware that
in some cases, assistance from the franchiser tends to drift into control over
the franchisee’s business.
• Also, some franchisers charge fees for their training services, so franchisees
should know exactly what they are agreeing to and what it costs.

2018
Type of Training Provided by the
Franchisor
• Training programs vary in their degree of formality and
comprehensiveness. Some franchisers rely almost exclusively on manuals and
booklets, with very little personal interaction or instruction. Other franchisers
provide extensive programs at a company location, using classroom training,
discussion groups, simulations, and other techniques to familiarize the
franchisee with the basic operation of the business.
• The range of topics covered in training programs is quite varied. Standard
subjects include store layout and design, equipment purchasing and operation,
insurance needs, inventory control, advertising techniques, accounting
methods, employee selection and training, and store management.
• To ensure a franchisees success, some franchisers supplement the start-up
training with continuous guidance and instruction. Some programs feature
refresher courses, manuals and audiovisual aids, and travelling
consultants. Franchisers offer these training programs because they realize that
their ultimate success depends on the franchisees success.

2018
2. Brand Name Appeal.
• A licensed franchisee purchases the right to use a nationally known and
advertised brand name for a product or service.
• Thus the franchisee has the advantage of identifying his business with a
widely recognized name, which usually provided a great deal of drawing
power.
• Customers recognize the identifying trademark, the standard symbols, the
store design, and the products of an established franchise.
• For example, nearly everyone is familiar with the golden arches of
McDonalds and the standard products and quality offered there.
• A customer can be confident that the quality and content of a meal at
McDonalds in Westgate , will be consistent with a meal at Sam Levy’s
McDonalds.

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3. Standardized Quality
Goods/Services.
• Because a franchisee purchases a license to sell the franchisers product or service and
the privilege of using the associated brand name, the quality of the goods or service
sold determines the franchisers reputation.
• Although building a sound reputation in business is achieved only gradually, destroying
a good reputation takes no time at all.
• If some franchisees were allowed to operate at substandard levels, the image of the
entire chain would suffer irreparable damage; therefore, franchisers normally demand
compliance with uniform standards of quality and service throughout the entire chain.
• In many cases, the franchiser conducts periodic inspections of local facilities, to assist in
maintaining acceptable levels of performance.
• Indeed, maintaining quality is so important that most franchisers retain the right to
terminate the franchise contract and to repurchase the outlet if the franchisee fails to
comply with established standards.
• In turn, the individual franchisees business is enhanced by the franchisers focus on
ensuring consistent, quality establishment.
• Franchisees also benefit from ongoing product research and development conducted by
the franchiser. MMS401 Entrepreneurship and SBM
2018
4. National Advertising Programs.
• An effective advertising program is essential to the success of virtually all franchise
operations.
• Marketing a brand name product or service over a wide geographic area requires a
far-reaching advertising program therefore benefits all franchisees.
• Normally, such an advertising campaign is organized and controlled by the franchiser,
and it is financed by each franchisees percentage of monthly sales contribution,
usually around 1 to 5 percent or a flat monthly fee.
• For example, Kentucky Fried Chicken franchisees must pay 1.5 percent of their gross
revenues to the KFC national advertising program.
• These funds are pooled and used for a cooperative advertising program, which offers
synergistic benefits to the entire franchise.
• Many franchisers also require franchisees to spend a minimum amount on local
advertising. Some franchisers help each franchisee design and produce its local ads.
• Many companies also help franchisees create promotional plans and provide press
releases and advertisements for grand opening.
• By requiring franchisees to contribute to national and local advertising campaigns,
franchisers ensure adequate public exposure of the product or service and the
associated brand name.
2018
5. Financial Assistance.
• Because they rely on their franchisees money to grow their businesses, franchisers
typically do not provide any extensive financial help for franchisees.
• Franchisers rarely make loans to enable franchisees to pay the initial franchise fee.
• However, once a franchiser locates a suitable prospective franchisee, he may offer
the qualified candidate direct financial assistance in specific areas, such as
purchasing equipment, inventory, or even the franchise fee.
• Because the start-up costs of some franchises are already at breathtaking levels
more and more franchisers are offering direct financial assistance.
• Because the nature of the franchiser-provided financial assistance varies, a would-
be franchisee should completely understand the help that he could receive.
• Although some franchisers offer no financial assistance, many will help franchisees
prepare a loan package to present to lending institutions; others will sell inventory
and equipment on credit, and still others may cosign notes or make direct loans to
qualified candidates.
• Generally, the larger and more established franchisers are less likely to offer direct
financial assistance to franchisees than are the smaller, upstart franchisers.

2018
6. Proven Products and Business
Formats.
• What a franchisee essentially is purchasing is the franchisers
experience, expertise, and products.
• That is, a franchise owner does not have to build the business
from scratch.
• Instead of being forced to rely solely on personal ability to
establish a business and attract a clientele, the franchisee can
depend on the methods and techniques of an established
business.
• These standardized procedures and operations greatly
enhance the franchisees chances of success and avoid the
most inefficient type of learning trial and error.

2018
7. Centralized Buying Power.
• A significant advantage that a franchisee has over the
independent small business owner is participation in the
franchisers centralized and large-volume buying power.
• In many cases, the franchisers passes on to the franchisee the
cost savings from quantity discounts.
• For example, it is unlikely that a small, independent fried
chicken seller could match the buying power of Inscor with its
50 or so Chicken Inn outlets.
• In many instances, economies of scale simply prelude the
independent owner from competing head to head with a
franchise operation.

2018
8. Territorial Protection.
• A proper location is critical to the success of any small business, and franchises are no
exception.
• In fact, franchise experts consider the three most important factors in franchising to be
location, location, and location.
• Becoming affiliated with a franchiser may be the best way to get into prime locations.
• Many franchisers make an extensive location analysis for each new outlet, including studies,
and population density. Spar, for example, is well known for its ability to obtain prime
locations in high traffic areas.
• Location is today probably the biggest obstacle facing the entire franchise industry.
• Most of the traditional, high volume locations have already been taken, a fact that will slow
the franchising growth rate in the future.
• Indeed, to obtain prime locations, some franchisees have bought and converted existing
franchise outlets.
• Franchisers also may offer a franchisee territorial protection, which gives the franchisee the
right to exclusive distribution of brand name goods or services within a particular geographic
area. The size of a franchisees territory varies from industry to industry.
• In Zimbabwe, the Coca Cola franchise is divided into two territories between Delta and
Mutare Bottling.
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9. Greater Chance for Success.
• Investing in a franchise is not risk free. In fact, the typical franchise does
not reach the break even point until six to eighteen months after its
inception, and so the owner must be prepared to withstand the losses
incurred during this time.
• Some franchises do not survive. But available statistics indicate that a
franchise is less risky than building a business from the group up.
• The risk of purchasing a franchise is two pronged; success or failure and
depends on both the entrepreneurs managerial skills and the franchisers
business experience and system.
• Many owners are convinced that franchising has been a crucial part of
their success.

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The Drawbacks of the Franchise
Model

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1. Franchise Fees and Profit
Sharing.
• Virtually all franchisers impose some type of fees and demand a share of the franchisees sales
revenues in return for the use of the franchises name, products or services, and business system.
• The fees and the initial capital requirements vary among the different franchisers. Total investments
for franchises range from $1,000 for business service up to $10 million for hotel and motel
franchises.
• Start-up costs for franchises often include numerous additional fees. Most franchises impose a
franchise fee up front for the right to use the company name. Spar for example needs $200000.
Nissan, for example, charges a $5,000 technical assistance fee for each distributors that a franchisee
opens.
• Other additional start-up costs may include site purchase and preparation, construction, signs,
fixtures, equipment, management assistance, and training.
• Before signing any contract, a prospective franchisee should determine the total cost of a franchise.
• Franchisers also impose continuing royalty fees as profit sharing devices. The royalty fee is a
percentage of gross sales with a required minimum, or a flat level fee levied on the franchise.
• Royalty fees typically range from 1 to 11 percent and can significantly increase the franchisees
overhead expenses. Variable royalty fees that rise as sales increase are popular among some
franchises.
2018
• Coca Cola and Kentucky Fried Chicken each receive a 4 percent royalty on
gross sales. Some franchisers impose other types of continuing fees, such
as those for advertising, rent, advisory services, and technical assistance. A
franchisee must find out what fees are required (some are merely
recommended) and then determine what services and benefits the fees
cover.
• One of the best ways to do this is to itemize what you are getting for your
money and then determine whether the cost corresponds to the benefits,
provided.
• Be sure to get the details on all expenses, amount, time of payment and
financing arrangements, and find out which items, if any, are included in
the initial franchisee fee and which ones are extra.

2018
2. Strict Adherence to
Standardised Operations
• Although, the franchisee owns the business, she does not have the
autonomy of an independent owner.
• To protect its public image, the franchiser requires that the franchisee
maintain certain operating standards.
• If a franchise constantly fails to meet the minimum standards established
for the business, its license may be terminated.
• Compliance with standards is usually determined by periodic inspections
which at times, can be a burden to the franchisee.
• The owner may believe that the written reports the franchiser demands
require an excessive amount of time.
• In other instances, the owner may be required to enforce specific rules
even though she believes they are inappropriate or unfair.

2018
3. Restrictions on Purchasing.
• In the interest of maintaining quality standards, the franchisee often is
required to purchase products or special equipment from the franchiser and
perhaps other items from an approved supplier.
• For example, Kentucky Fried Chicken requires that franchisees use only
seasonings blended by a particular company, because a poor image could
result from the use of inferior products in order to cut costs.
• Under some conditions, such purchase arrangements may be challenged in
court as a violation of antitrust laws, but generally the franchiser has a
legal right to see that its franchisees maintain acceptable quality
standards.
• A franchiser may set the prices paid for such product but may not establish
the retail prices to be charged on products sold by the franchisee.
• A franchiser can legally suggest retail prices but cannot force the
franchisee to abide by them.
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4. Limited Product Line.
• In most cases, the franchise agreement stipulates that the franchise can sell only
those products approved by the franchiser.
• Unless willing to risk cancellation of his license, a franchisee must avoid selling
any unapproved products through the franchise.
• A franchise may be required by the franchise agreement to carry an unpopular
product or be prevented from introducing a desirable one.
• In this way, the freedom to adapt a product line to local market conditions is
restricted.
• But some franchisers solicit product suggestions from their franchisees. In fact, it
was McDonalds franchisees that came up with the highly successful Big Mac and
Egg McMuffin.

2018
5. Unsatisfactory Training
Programs.
• Every would-be franchisee must be wary of the unscrupulous franchiser
who promises extensive services, advice, and assistance but delivers
nothing.
• For example, one owner relied on the franchiser to provide what had
been described as an extensive, rigorous training program after paying a
handsome technical assistance fee.
• The program was nothing but a set of pamphlets and do-it-yourself study
guides.
• Other examples include those impatient entrepreneurs who paid initial
franchise fees without investigating the business and never heard from
the franchiser again.
• Although disclosure rules have reduced the severity of the problem,
dishonest characters still thrive on unprepared prospective franchisees.

2018
6. Less Freedom.
• When a franchisee signs a contract, he agrees to sell the
franchisers product or service by following its prescribed
formula.
• When McDonalds introduces a new national product, for
instance, all franchisees must put it on their menus.
• Franchisers want to ensure success, and most closely monitor
their franchisees performances.
• Strict uniformity is the rule rather than the exception.
• Entrepreneurs who want to be their own bosses thus may be
disappointed with a franchise because it clips their creativity
wings.
2018
Evaluating Franchise Opportunities
• Selecting a Franchise
– Personal observation
– Advertisements
• Investigating the Potential Franchise

– Information sources
• Independent, third-party sources
– Federal Trade Commission
– Internet
– Franchise consultants
• Franchisors themselves
– Disclosure documents
• Existing and previous franchisees

2018
Top 5 franchises in Zim
• Spar
• Chicken Slice
• Total
• Holiday Inn
• Toyota
• Nissan

2018
Fr
an
vie chi
w p sor
o in ’ s
t
2018
The Benefits and Drawbacks of
Franchising
Franchising offers a relatively quick way to expand a distribution system with minimum
capital. The franchiser sells the rights to his/her goods or service and the accompanying business
system to prospective entrepreneurs, who provide the majority of the capital for expansion.
Another attraction for the franchiser is the ability to grow, without the cost and inconvenience of
locating and developing key managers. Of course, the franchiser must screen out those potential
entrepreneurs who are unqualified, but the task generally is much simpler than that involved in
internal expansion.
Franchisers also receive income from franchises through franchise fees and ongoing
royalties. For example, fast-food champion McDonalds collects a royalty fee of 11.5 percent
from its eleven thousand franchises, totaling a whopping $3.024 billion each year!
A franchiser can grab a share of a regional or national market relatively quickly without having
to invest huge amounts of her own money and to be paid while she does it. Growth is not always
explosive, however. The average franchise company sells only three franchises in its first year,
four in the third year. The growth rate accelerates after that, but it still averages less than ten
franchises a year for the first decade.
2018
Benefits & drawbacks for
Franchisor
Benefits Drawbacks
• Reduction of capital • Reduction in control

requirements
• Increase in management • Sharing of profits

motivation
• Speed of expansion • Increase in operational

supports cost

2018
Becoming a franchisor
The Business The Operations

Model Manual
Financial Government
Considerations Considerations Regulations
Required Adding Long-

Assistance term Value
2018
Becoming a franchisor
Spells out the
Easily adopt and
The Business The Operations
steps to make a
use success of the
Model Manual
successfully business
Bank loans, Differs from

Financial Government
royalties, Considerations country to
Considerations Regulations
country, FASA
franchise fees
Attorney,
Can you add lt
Required
consultants Adding Long-
value eg next 10
specialising
Assistancein term Value
-15 years
franchising MMS401 Entrepreneurship and SBM
2018
Legal issues in Franchising
• The Franchising Contract
– Signed with legal counsel present

– Contains a termination and transfer provision
– Contains statement of rights to renew contract

2018
Buying An
Existing Business

2018
2018
For sale

2018
Buying an existing business
Acquisition of
Reduction of
Ongoing
Uncertainties
Operations and
of Startup
Relationships
A Bargain
Price A Quick
Start

2018
Pros and Cons of Buying an
Existing Business
Pros Cons
– High chance of success – Existing problems

– Less planning – Poor quality of current
– Existing customers/ employees
suppliers – Poor business image
– Necessary equipment – Modernization required
– Bargain price – Purchase price based
– Experienced employees on inaccurate data
– Existing business – Poor business location
records
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Finding a business to buy
• Matchmakers
– Specialized brokers that bring
together buyers and sellers
• Relying on Professionals
– Accountants
– Attorneys
– Other experienced business owners

2018
`

2018
Finding out why a business is
for sale
• The seller’s real reasons for selling may or may not be the stated
ones. When a business is for sale, always question the owner’s
reasons for selling.
• There is a real possibility that the firm is not doing well or that
underlying problems exist that will affect its future performance
Owner’s Reasons for Selling
– Old age or illness
– Desire to relocate in a different section of the country
– Decision to accept a position with another company
– Unprofitability of the business
– Loss of an exclusive sales franchise
– Maturing of the industry and lack of growth potential
Examining the financial data
• Review financial statements and tax returns for the
past five years.
• Recognize that financial data can be misleading.

– Assets overvalued
– Expenses overstated/understated
– Income underreported
– Unrecorded debts
• Adjust asset valuations to reflect the true state of the

business.

2018
Valuing the Business
• Balance-Sheet/ Asset-Based Valuation
– Estimates the value of the firm based on the worth of its assets;
does not reflect the value of the firm as a going concern.
• Market-Comparable Valuation
– Considers the sale prices of comparable firms; difficulty is in
finding comparable firms.
• Cash-Flow-based Valuation/ Income-Statement Methods

of Valuation
– A method of determining the value of a business based on its
profit potential.
– Compares the expected and required rates of return on the
amount of capital to be invested in the business.

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Non quantitative Factors in
Valuing a Business
• Competition
• Market
• Future community
development
• Legal commitments
• Union contracts
• Buildings
• Product prices
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Negotiating & Closing the deal
• Terms of Purchase
– Assets purchase or total entity
– Indemnification clause
– Payment in full or partial payments over time
• Closing the sale

– Best handled by a third party
• Tax certifications
• Payment-to-seller agreements
and guarantees

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The Family
Business MMS401 Entrepreneurship and SBM
2018
2018
Put on your
Can you think of any family

businesses in Zimbabwe and the
world over?

2018
Looking Ahead
After studying this unit you should be able to
explain:
1. What is a family business?

2. Explain the forces that can keep a family business
moving forward.
3. Describe the complex roles and relationships involved in
a family business.
4. Identify management practices that enable a family
business to function effectively.
5. Describe the process of managerial succession in a
family business.

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Entering the Family
Business
• A Family is a group of people bound by a shared history and a commitment
to share a future together, while supporting the development and well-
being of individual members.
• This definition acknowledges the considerable differences in the
compositions of families. They can vary according to blood relationships,
generational representation, legal status, and more.
• Joining a family business is one route to entrepreneurship.
• It is an option for those people who have parents or grandparents who
have an operating business venture
• It is estimated that in Europe family businesses contribute between 45 and
65% of the GDP and they represent between 75% and 95% of registered
companies.
• In the US, 95% of all companies are family controlled
• A family business is not a normal business because of the involvement of
family issues that are, by nature,
MMS401 more emotional.
Entrepreneurship and SBM
2018
What is a Family
Business?
• We define a family business as one in which more than
one family member either owns or works in the
business and there is intent to keep the business in the
family.
• An organization in which either the individuals who
established or acquired the firm, or their descendants,
significantly influence the strategic decisions and life
course of the firm
• It is a business that is influenced by family ties in order
to achieve the vision of the family over, potentially
several generations
*Most definitions are based on aspects such as %
ownership, voting rights, power MMS401withEntrepreneurship
regard to strategic and SBM
direction
© 2010 andLearning.
South-Western/Cengage active management
All Rights bycopied
Reserved. May not be scanned, family2018 members
or duplicated, or posted to a publicly accessible Web site, in whole or in part.
Key Elements in Family Business
• From the above definition it can be noted
that;
1.The family (or part of) is actively involved
in that particular business
2.Family members have a definite input into
the strategic direction of the business
3.There is more than one family member
involved in the business
4.The intention is to continue the family
business over time
2018
Advantages
• A strong family culture can ensure that the business will survive over
generations
• Strength of family relationships during challenging periods of business
change
• Financial sacrifices that family members make for the good of the firm
• Operation as a family business distinguishes the firm from its
competitors
• A better sense of community will exist between the various members
which is necessary for growing the business.
• Capability to plan and prepare for the long haul
• Emphasis on quality and value

2018
Disadvantages
• Conflict among family members about:
– Risk (consequences of failure) to the family in
launching a business
– Nepotism and the differences in competencies and
merit of family members involved in the business
– Family traditions versus the business need to
innovate and seize opportunities
– Unity and cooperation of family versus business need
to foster diversity and competition
– Family loyalty versus the necessity to provide
opportunities for non-family employees
2018
Systems in Family Business
• Essentially there are two broad systems in a family business: the
family and the business
• The family system is a social system that focuses on caring for its
members and can therefore be regarded as more conservative
and concerned with protecting family name and reputation
rather than exploitation of ideas.
• On the other hand, the business system is task oriented
concerned with exploiting opportunities in a changing
environment.
• Change is therefore a way of living and relations are contractual.
• Success in the family business can only be ensured if the two
broad systems (family and business) are balanced. If one system
dominates the other, negative conflict can be expected, which
destroy the family business.
2018
Family and Business
Overlap
Family Concerns Business Concerns
– Care and nurturing of family – Production and distribution of

members goods and/or services
– Employment and – Need for professional

advancement in the firm management
– Loyalty to the family – Effective and efficient

operation of the firm

2018
Family Business Dynamics:
Systems in a family business
Family systems are fundamentally different to business systems.
Their contrary dynamics create tensions, on many levels, even in the “best” families.
FAMILY BUSINESS
SYSTEM SYSTEM
Potential
conflict
Inward focus Outward focus
Emotion based Task based
Unconditional acceptance Rewards performance
Lifetime membership Perform or leave
Averse to change Embraces change

2018
Family Business Dynamic Tensions
Business Systems Family Systems
Competitive - Protective
Objective - Emotional
Task-based - Obligation-based
Results-oriented - Relationship-oriented
Select best person for the job - Status by birthright

Performance - Loyalty
External focus - Internal focus
Survival of the fittest - Nurture and support weakest
Encourage/exploit change - Minimise change
Employment by competence - Employment by relationship
Employment is an opportunity - Employment is a right

2018
The 3 Circle Model
• The two broad family business systems can be further
divided into sub-systems.
• The family system can comprise the family, family by
marriage, parents, brothers and sisters, family inside
and family outside the business.
• Every member of the family must know exactly where
they fit into the total system and what their rights and
privileges are.
• The business system also consists of various subsystems
such as managers, owners, employees and external
networks.
• This reflects the complexity of the family business as
reflected in the 3 circle
MMS401 model.
2018
Systems in a family business
Three-circle model
Not family/
Family member &
not employee
owner, not employee
2.
Ownership
1. 4.
Family
Owner &
7&8 5. employee , not
Not owner/ not family member
employee 6.
3.
Family member &
Family member & Business
employee , not Not family/
employee &
owner not owner
MMS401owner
2018
Roles in the Family Business
System
• Family members often simultaneously wear three hats: ownership, family,
and business. It helps for the appropriate person to wear the appropriate
hat at the appropriate time and to clarify who makes what decisions
representing what interests.
• The different roles are:
1. Family members
2. Non-family investors
3. Non-family employees
4. Family shareholders
5. Non-family working owners
6. Working family members
7. Working family owners
8. Family owners and Business Leaders

2018
Conflict in Family Businesses
• If the systems of family and business are not in harmony, then
conflict might have a detrimental effect on the long term
survival and growth of the family business.
• These problems are clear from the following research findings:
1. Only 30% of family business are successful into the 2nd
generation
2. Only 10% of family businesses are successful into 3rd
generation
3. The average lifespan of family business is 24 years- the average
time that the founder –manager stays in the business
4. Family businesses become less entrepreneurial when family
system dominates
2018
Problems in Family Business
• Lank (2000:15) lists special problems of family businesses;
1. Failure to find capital for growth without diluting family equity
2. Inability to balance optimally family needs for liquidity and business need for
cash
3. Poor estate planning and the inability of next generation to pay inheritance
taxes
4. Lack of willingness of older generation to “let go” of ownership and
management power at an appropriate moment
5. Inability to attract and retain competent motivated family successors
6. Unchecked sibling rivalry with no consensus having been reached on the
chosen successor
7. Inability to attract competent senior non-family professional managers
8. Unmanaged conflict between cultures of family, board and the business.
9. Internal family conflicts like divorce and emigration which destroy family
business
10.Favoritism and nepotismMMS401
in promotion without
Entrepreneurship concern for expertise.
and SBM
2018
Success of Family Business
Family Business will only succeed
when all subsystems work in
harmony

2018
Family-in-Business Structures

2018
Family Business Momentum
• The Founder’s Imprint on the Culture
– The founder’s core values become a transmitted part of
the culture (for better or worse).
• Organizational Culture
– Patterns of behaviors and beliefs that characterize a
particular firm.
• Family Business Cultural Values
– Mutual respect
– Integrity
– Wise use of resources
– Personal responsibility
– “Fun”
2018
Commitment of Family Members (Why
are you joining?)
Desired-Based Obligation-Based
Commitment Commitment
(“Want to”) (“Ought to”)
Turnover
&
Performance
Cost-Based
Commitment Need-Based
(“Have to”) Commitment
(“Need to”)

2018
Emotional Attachment (Desire-
Based Commitment)
• When family members join a firm based on a deep-
seated, gut level attraction to the business, it is
usually because they believe in and accept the
purpose of the enterprise.
• Typically, their personal identity is closely tied to the
business and they believe they have the ability to
contribute something to it.
• In short, these individuals join the company
because they genuinely want to. Moore et al, 2010)

2018
Obligation-Based Commitment
• It is what drives individuals who feel that they
really ought to pursue a career in the family
business.
• Often, the goal is to do what the parent-
founder wants, even if that career path is not
what the family member had in mind. (C.W.
Moore et al, 2010: 127)

2018
Cost-Based Commitment (Have to)
• If a family member concludes that there is too much to lose by
turning away from a career opportunity within the family
business, then his or her decision to join is based on a
calculation, not a sense of obligation or emotional
identification.
• Often this “have to” response is motivated by the perception
that the opportunity for gain is too great to pass up or that the
value of the business will fall if somebody doesn’t step in to
take care of it. In other words, joining the business may be the
best way to benefit from what the family firm has to offer or to
protect the investment value of what is likely to be inherited in
the future. (C.W. Moore et al, 2010: 127)
2018
Need-Based Commitment
• When family members join the business because of self-doubt or
a concern that they might not be able to reach significant career
success on their own, their commitment to the family enterprise
is based on perceived necessity.
• That is, they need to join the business because they lack options
for career success outside of it.
• This reasoning is common among young heirs who leapfrog over
nonfamily employees into coveted positions, the demands of
which exceed their knowledge and experience.
• They often feel guilty for their privileged status and are left to
wonder if they have what it takes to succeed on their own.
(Moore et al, 2010)
2018
Family Roles & Relationships
• Mom or Dad (Founder)

– Plans to pass it on to children.
– Business & Children grown together.
• Co-Preneurs (Husband–Wife Teams)

– Opportunity to share more in each other’s lives
– Business differences interfere with family life
– Work doesn’t leave time for family life
– Sharing family responsibilities eases the load
2018
• Sons and Daughters
– Personal preferences different from the business
– Personal qualifications insufficient to assume role in
business
– Desire for personal freedom to choose another career
• Sibling Cooperation, Sibling Rivalry

– Best case: siblings work as a team, each contributing
services according to his or her abilities
– Worst case: siblings compete as rivals and disagree
about their business roles
2018
• In-laws In and Out of the Business

– Disagreements about how to treat and reward in-laws
and family members/children
• Assign to different branches or
to different business roles
• The Entrepreneur’s Spouse

– Communication between
entrepreneur and spouse is
critical for their performance as
an effective team for both the
business and the family.
2018
Need for Good Management in the
Family Firm
• Best Practices (Professional Management):

– Promote learning to stimulate thinking and fresh strategic insights.
– Solicit ample input from outsiders to keep things in perspective.
– Establish channels for constructive communication and use them.
– Build a culture that accepts continuous change.
– Promote family members only according to their skill levels.
– Attract and retain excellent nonfamily managers.
– Ensure fair compensation for all employees, including those outside
the family.
– Establish a solid leadership succession plan.
– Exploit the unique advantages of family ownership.

2018
Family Firm
• Nonfamily Employees in a Family Firm
– Hazards:
• Competition with family members for advancement
• Getting caught in the crossfire and politics of family
competition within the firm
– Solutions:
• Identify family-only reserved positions in advance.
• Treat both family and nonfamily employees fairly in matters
of reward and promotion.
2018
Family Firm
Family Retreats
– A gathering of family members, usually at a remote location, to discuss
family business matters.
– Use of an outside facilitator may be necessary.
• Guidelines
1. Set a time and place.
2. Distribute an agenda prior to the meeting.
3. Plan a schedule in advance.
4. Give everyone a chance to participate.
5. Keep it professional.

2018
Family Firm
Family Councils
– An organized group of family members who gather
periodically to discuss family-related business
issues.
• Represent the family to board of directors
• Useful in developing family harmony
• Increases understanding of family
traditions and interest

2018
Family Firm
• Family Business Constitution

– A statement of principles intended to guide a family firm
through times of crisis and change.
• Family Protocol
– An extension of the constitution incorporating additional
agreements that includes:
• Ownership agreements (inheritance and buy–sell compacts)
• Governance and personnel policies
• Use of business resources by family members
• Conflicts of interest and noncompetition agreements
• Codes of conduct

2018
Succession in Family Business
• One of the main aspects ensuring the
survival of family business is
succession
• Succession is the process through
which leadership is transferred from
the existing leader to a subsequent
family member or non-family
member (a professional manager)
• Succession is not always a natural
process in a family business . It
remains one that should be managed.
2018
Barriers to Good
Succession
1. The founder is autocratic and does
not want to transfer leadership
2. The existing leader acts like he will
never die
3. A child-stays-child scenario (“How can
my child tell me what to do?”)
4. The existing leader misinterprets
environmental trends and does not
want to implement changes on time
5. The leader does not want to make a
choice with regard to a possible
successor
6. The leader selects a successor who
can
2018be his or her ‘slave’
Leader Style and Succession
• The management style of the leader can influence succession.
• According to Lank (2000:199) the different styles are as
follows:
1. Monarchs- they do not leave office until they are decisively
forced out through death or internal “palace revolt”
2. Generals: They are forced out of the office but plot their
return and quickly come back out of retirement to ‘save’ the
business
3. Ambassadors- they leave the office gracefully and frequently
serve as post –retirement mentors
4. Governors- they rule for a limited term of office, retire and
switch to other vocational outlets
2018
Process of Leadership Succession
• Available Family Talent
– Competency
• Allowing only qualified competent
family members to assume leadership
roles in the firm increases the value of
the firm for all who have an ownership
interest in it.
– Mentoring
• Guiding and supporting the work
and development of a new or less-
experienced organization member.

2018
Process of Leadership Succession
Stages of succession
6
Transfer of ownership
5
Declaration of succession
4
Formal start in business
3
Proof of competence
2
Education & Personal Development
1 Pre – business stage
2018
The End

2018

Franchising Buyouts and Family Business

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Franchising Buyouts and Family Business

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ALTERNATIVE ROUTES

MMS401 Entrepreneurship and SBM

If you hear the word franchise

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

Receives entire Retail franchise in

Firm/Individual Options Operating several

Single franchisee 2 franchise

Source: http://www.entrepreneur.com, accessed January 24, 2010.

MMS401 Entrepreneurship and SBM

- All methods have been tried & tested

• A franchisee is able to claim ownership of a small business

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

• Investigating the Potential Franchise

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

• Reduction of capital • Reduction in control

• Increase in management • Sharing of profits

• Speed of expansion • Increase in operational

MMS401 Entrepreneurship and SBM

The Business The Operations

Required Adding Long-

Bank loans, Differs from

• The Franchising Contract

– Signed with legal counsel present

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

– High chance of success – Existing problems

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

• Recognize that financial data can be misleading.

• Adjust asset valuations to reflect the true state of the

MMS401 Entrepreneurship and SBM

• Cash-Flow-based Valuation/ Income-Statement Methods

MMS401 Entrepreneurship and SBM

• Closing the sale

MMS401 Entrepreneurship and SBM

Can you think of any family

MMS401 Entrepreneurship and SBM

1. What is a family business?

MMS401 Entrepreneurship and SBM

MMS401 Entrepreneurship and SBM

– Care and nurturing of family – Production and distribution of

– Employment and – Need for professional

– Loyalty to the family – Effective and efficient

MMS401 Entrepreneurship and SBM