Chapter 14

Accessing Resources for

Growth from External
Sources
Copyright © 2013 by McGraw-Hill Education (India) Private Limited. All rights reserved.

Hisrich
Manimala
Peters
Shepherd
Using External Parties to Help Grow
a Business
 Some of the mechanisms entrepreneurs can
use are:
 Franchising.
 Joint ventures.
 Acquisitions.
 Mergers.

14-2
Franchising

 An arrangement whereby the manufacturer

or sole distributor of a trademarked product
or service gives exclusive rights of local
distribution to independent retailers in
return for their payment of royalties and
conformance to standardized operating
procedures.
 The person offering the franchise is known as
the franchisor.
 The franchisee is the person who purchases the
franchise.
14-3
Franchising (cont.)

 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.
 Knowledge of the market - Offers experience in
business and market.
 Operating and structural controls – Helps in
standardization and administrative controls.

14-4
Franchising (cont.)

 Advantages of Franchising—to the

Franchisor
 Expansion risk
 Allows venture to expand quickly using little capital.
 Business can be expanded nationally and even
internationally.
 Requires fewer employees than a non-franchised
business.
 Cost advantages
 Supplies can be purchased in large quantities to
achieve economies of scale.
 Ability to commit larger sums of money to advertising.

14-5
Franchising (cont.)

 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.
 Poor management can cause individual franchise
failures.
 The ability to maintain tight control over
franchises becomes difficult as their number
increases.
14-6
Franchising (cont.)

 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.
 Changes that helped evolve franchising
opportunities:
 Good health.
 Time saving or convenience.
 Health care.
 The second baby boom.
14-7
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.
 Franchisors are required to make a full presale
disclosure.
 The franchise agreement contains the
requirements and obligations of the
franchisee.
14-8
Table 14.2 - Information Required
in Disclosure Statement

14-9
Table 14.2 - Information Required
in Disclosure Statement (cont.)

14-10
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, etc.
 Industry–university agreements.
 Created for the purpose of doing research.
 International joint ventures.

14-11
Joint Ventures (cont.)

 Factors in Joint Venture Success:

 The accurate assessment of the parties
involved to best manage the new entity.
 The degree of symmetry between the partners.
 The expectations of the results of the joint
venture must be reasonable.
 The timing must be right.

14-12
Acquisitions

 The purchase of an entire company, or part

of a company; the company no longer
exists independently.
 Advantages of an Acquisition
 Established business.
 Location.
 Established marketing structure.
 Cost.
 Existing employees.
 More opportunity to be creative.
14-13
Acquisitions (cont.)

 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.”
 Synergy should occur in both the business
concept and the financial performance.

14-14
Acquisitions (cont.)

 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.

14-15
Acquisitions (cont.)

 Locating Acquisition Candidates

 Brokers, accountants, attorneys, bankers,
business associates, and consultants may know
of candidates.
 Business opportunities in newspapers or trade
magazines.

14-16
Mergers

 Key concern - Legality of the purchase.

 Process:
 Determine the merger objectives and resulting
gains for both companies.
 Carefully evaluate the other company’s
management.
 Determine the value and appropriateness of the
existing resources.
 Establishing a climate of mutual trust.
 Determine the value of a merger candidate.

14-17
Figure 14.1 - Merger Motivations

14-18
Leveraged Buyout

 An entrepreneur (or any employee group)

uses borrowed funds to purchase an
existing venture for cash.
 Long-term debt financing is provided by banks,
venture capitalists, and insurance companies.
 Acquired firm’s assets serve as collateral.
 Evaluation procedure:
 Determine whether asking price is reasonable.
 Assess the firm’s debt capacity.
 Develop the appropriate financial package.

14-19
Overcoming Constraints by
Negotiating for More Resources
 Distribution task - Negotiating how the
benefits of the relationship will be allocated
between the parties.
 Integration task - Exploring possible mutual
benefits from the relationship so that the
“size of the pie” can be increased.

14-20
Overcoming Constraints by Negotiating
for More Resources (cont.)
 Assessment 1: What will you do if an
agreement is not reached?
 Best alternative to a negotiated agreement.
 Determine a reservation price.

14-21
Overcoming Constraints by Negotiating
for More Resources (cont.)
 Assessment 2: What will the other party to
the negotiation do if an agreement is not
reached?
 Difficult to assess reservation price.
 Bargaining zone - Range of outcomes between
the entrepreneur’s reservation price and that of
the other party.

14-22
Overcoming Constraints by Negotiating
for More Resources (cont.)
 Assessment 3: What are the underlying
issues of this negotiation? How important is
each issue to you?
 Focus on achieving aspects most desirable by
trading off aspects of less importance.

14-23
Overcoming Constraints by Negotiating
for More Resources (cont.)
 Assessment 4: What are the underlying
issues of this negotiation? How important is
each issue to the other party?
 Provides the entrepreneur an opportunity to
sacrifice aspects of less importance to him/ her
but of high importance to the other party.

14-24
Overcoming Constraints by Negotiating
for More Resources (cont.)
 Negotiation strategies:
 Build trust and share information.
 Ask lots of questions.
 Make multiple offers simultaneously.
 Use differences to create trade-offs that are a
source of mutually beneficial outcomes.

14-25