Balderson and Mombourquette,

Canadian Entrepreneurship & Small Business Management,

10th Edition

Presentation prepared by:

Peter Mombourquette of
Mount Saint Vincent
University
 CHAPTER 5
BUYING A BUSINESS AND
FRANCHISING

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Learning Objectives
LO1 Describe the advantages and disadvantages of
purchasing an ongoing business compared with the other
methods of small business ownership.
LO2 Identify the sources of businesses that are for sale.
LO3 Explain how to evaluate a business that is for sale.
LO4 Describe the methods used in determining the price
to pay for a business.
LO5 Discuss the significance of franchising in the Canadian
economy.

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Learning Objectives
LO6 Explain the various types of franchises available for
small business.
LO7 List the relative strengths and weaknesses of
franchising as a method of starting a small business.
LO8 Explain how to evaluate a franchise opportunity.
LO9 Discuss how to organize a franchising system.

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Purchasing an Existing
Business
Advantages of Purchasing
oReduction of Risk
oReduction in Start-up Time
oFinancing
oLocation
oEstablished Market Structure
oCost

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Purchasing an Existing
Business
Advantages of Purchasing (cont.)
◦ Existing Employees
◦ More Opportunity to Be Creative
◦ Reduce the Number of Competitors

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Purchasing an Existing
Business
Disadvantages of Purchasing
◦ Marginal Success Record
◦ Physical Facilities
◦ Personnel
◦ Inventory
◦ Accounts Receivable
◦ Financial Condition

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Purchasing an Existing
Business
Disadvantages of Purchasing (cont.)
◦ Market and Key Customers
◦ Overvalued
◦ Paying Too Much for Goodwill

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Summary
Main Advantage of Buying an Existing
Business
• Knowledge of sales and operating history

Main Disadvantage of Busing an Existing

Business
• Marginal Success Record and Over Paying

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Sources of Businesses For
Sale
oInternet
oGovernment Departments
oTrade Journals
oReal Estate Brokers
oOther Professionals
oWord of Mouth

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Evaluating a Business For Sale
Industry Analysis
◦ Sales and Profit Trends in the Industry
◦ State of the Economy
◦ Legal Restrictions and Pending Legislation
◦ Social Concerns

The Previous Owner

Financial Condition of the Business
◦ Validity of the Financial Statements
◦ Evaluation of the Financial Statements

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Evaluating a Business For Sale
The Previous Owner
◦ Why are they selling?
◦ Impact owner has had on success.
◦ Will owner help finance the business
◦ Previous owner’s future plans

Financial Condition of the Business

◦ Validity of the Financial Statements
◦ Evaluation of the Financial Statements

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Evaluating a Business For Sale
Condition of the Assets
◦ Liquid Assets (Cash and Investments)
◦ Accounts Receivable
◦ Inventory
◦ Building and Equipment
◦ Real Estate
◦ Goodwill

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Evaluating a Business For Sale
Quality of Personnel
External Relationships of the Business
Conditions of the Records

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Determining the Price or Value of a
Business
Market Value
Asset value
◦ Book Value
◦ Replacement Value

Earnings Value
◦ Capitalization of Earnings Method
◦ Times Earnings Method

Combination Method
◦ Analytical Method
◦ Historical Method

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 The Purchase Transaction
Coverage
◦ Purchase price, including principal and interest amounts
◦ Payment dates - when and to whom
◦ Detailed list of assets included in the purchase
◦ Conditions of the purchase - nonfinancial requirements
◦ Provisions for noncompliance with conditions and penalties for
breaches
◦ Collateral or security pledged

Negotiating the Deal

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 Negotiating the Deal
Starts with an Offer
Back & Forth
Increasingly Common for Performance Guarantees

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History and Background of Franchising
Most rapid growth in North America since the 1950s.
1960s: Franchisee associations formed and legislation to
protect rights of franchisees and franchisors.
More than 40% of all retail sales resulted from franchising in
North America in the last decade.

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What Is Franchising?
Manufacturer-Directed Franchise
Wholesaler-Retailer-Directed Franchise
Franchising Company

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Advantages of Franchising
Proven Market for the Product or Service
oKnown Market & Brand Recognition

Services the Franchisor May Provide

1. Selection of Location
2. Purchase or Construction of Site, Buildings, and
Equipment
3. Provision of Financing

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Advantages of Franchising
Services the Franchisor May Provide (cont.)
4. Standardized Methods of Operating
5. Advertising
6. Purchasing Advantages
7. Training
8. Ongoing Support

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Potential Disadvantages of Franchising
Lack of Independence
oEntrepreneur lacks independence in the franchise model
Cost of the Franchise
oFranchises usually have fees and on-going royalties
Unfulfilled Promises
Restrictions of the Contract
◦ Product or Service Offered
◦ Line Forcing

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Potential Disadvantages of Franchising
Restrictions of the Contract Continued
◦ Termination
◦ Remodeling Clauses

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Potential Disadvantages of
Franchising (cont.)
Saturation of the Market
Lack of Security
Cost of Merchandise
Effectiveness of Promotion
Exaggeration of Financial Success

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Finding a Franchise
Internet
Networks
Salespeople
Franchise Directories & Websites

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 Evaluation of a Franchise Opportunity
1.Unproven versus Proven Franchise
o Proven Franchise is usually a safer investment but more expensive
o Unproven Franchises are normally less expensive but carry more risk

2.Financial Stability of Franchise

o How many Franchises
o How successful are the Franchisees
o Experience and history of the Franchisor

3.Potential Market for the New Franchise

4.Profit Potential for a New Franchise
o Develop Pro Forma Statements to Determine Profit Potential & Risks

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Evaluation of a Franchise Opportunity
5.Territorial Protection
o Does the Franchisor offer Territorial Protection? Terms?

6.Training and Operations Assistance

o Extent of training

7.Contract Length and Renewal and Termination Terms

o Duration & Terms
8.What current Owners are Saying About their Franchise
o Why did they choose the franchise?
o Are they happy? Any problems?
o Would they invest again?

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The Entrepreneur as Franchisor
What businesses can be franchised?
oA business should have a sound concept
oIt must be replicable
oTransferable to other geographical areas

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The Entrepreneur as Franchisor
How does one become a franchisor?
1. Establish a prototype.
2. Prepare the necessary information.
3. Investigate the legal requirements.
4. Develop a planned and standardized program of
operations.
5. Obtain adequate financing.

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Franchising in the Future
“Piggybacking”: Two or more franchise operating in one
outlet.
“Branchising”: Converting existing chain outlets to
franchises.
“Mini-franchises”: Small satellite versions of larger
franchises.
Growth of service-based and home-based franchises

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Concept Checks
1. What are the potential advantages and disadvantages of
owning a small business?
2. What are the common sources of determining which
businesses are for sale?
3. In addition to experience, what key areas should be
investigated in an industry analysis?

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 Concept Checks
4. Why is it important to investigate the background of the
previous owner?
5. What parts of the business should be analysed to
determine the financial condition of the business?
6. Under what conditions would it be advantageous to
purchase a business even though it isn’t financially sound?

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Concept Checks
7. What nonfinancial aspects of the business should be
evaluated ?
8. What methods are available in determining a price for a
business that is for sale?

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Concept Checks
9. What steps are involved in determining the selling price
using the combination method?
10. What areas should be included in the purchase
agreement?

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Concept Checks
11. Why is franchising enjoying such rapid growth in the
Canadian economy?

12. What are the three general categories of franchises?

13. What are the potential advantages of franchising?

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 Concept Checks
14. What are the potential disadvantages of franchising?
15. When investigating purchasing a franchise what sources of
information are available to assist in making the decision?
16. What steps are involved in becoming a successful
franchisor?

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