Chapter 16 : Old

business, New business

or Franchise

Prepared by: Flaubert John Fronda

The prospective small business operator has
three options if he wants to operate a small
business;
Start a new business
Buying an existing small business
Operate a franchise
Starting a New Business
• Advantages • Disadvantages
- can choose the area with the - the business has no
greatest economic and market success history
potential.
- building could be created to
- no idea how the
meet the needs of a small competitors will respond
business - greater equipment costs
- the building's type and size - no name recognition
might be created using current
designs.
- No negative reputation
Buying an Existing Business
• Advantages
- Successful existing business
may be made to continue
- The business is already
operating and have positive
qualities like best location
- Investors are in place and
trade credit has been
established
- Buying the business at
bargain
• Disadvantages
- Ill-will generated by the
business may be inherited
- Incompetents in the workforce
may be also inherited
- Inventory may be obsolescent
- The purchase price may be
too high and may place a
burden a future profits
 Evaluating an Opportunity to buy an existing
Business
• After buying an existing business the next step is to evaluate the
opportunity available
• The following are the critical areas must be analyzed;
- Why does the owner wish to sell?
- What is the physical condition of the business?
- What is the potential for then company product?
- What legal aspects should be considered?
- Is the business financially sound?
 Possible Reasons Why Owner is Selling the Business

• The owner has reached the stage of boredom and

burnout
• The owner is immigrating to another country
• Intense competition
• Cash flow problems
• Lease agreement is about to expire
• The owner wants to invest in other types of assets
• Costumer base is declining
The physical condition of the business
Evaluating the assets will
provide some basis for
avoiding the difficulties brought
by the incorrect ascertainment
of the real value of the assets.
• Are they transferable?
• Are they reasonably priced?
• Are they obsolete?
• Are they working efficiently?
• Do they need replacement?
• To established value for
the assets of business
concern the following
steps are recommended;
- Determine the book value
of assets
- Add or subtract an
adjusting factor
 Adjusting factors The potential of company’s
products or services
• Account Receivable
The prospective
• Raw materials inventory business must have
• Work in process enough sales potential to
inventory make the operation
worthwhile
• Finished good inventory • An analysis of existing
• Supplies and potential costumers
• Capital assets and • An analysis of competition
facilities these two are necessary
in preparation of sales
forecast
 Legal aspects to be considered
Bulk sales Law state laws which - Both the parties must
require, among other things, a buyer prepare a list of property
to give notice to the seller's creditors
if it is acquiring a significant portion included in the sale
of the seller's business or assets. - The buyer must keep the
To be protected by the Bulk sales list of creditors and the list
Law the buyer must make sure that of property up to the period
the ff are undertaken:
prescribed by law
- seller must give the buyer a sworn
list of existing creditors - The buyer must give notice
- Both the parties must prepare a list of the sale to each creditor
of property included in the sale before he takes possession
of the goods or pays for them
The following are the The financial Health of Business
contracts that need to be The prospective buyer must secure
the financial statements of the firm
evaluated by the buyer and to determine the financial health
- copyrights, patents and of the business
trademarks The value of the business
There are 3 practical methods in
- Exclusive agents and determining the value of the
distributors contracts business
- Real estate leases - The market method
- The income method
- Financing and loan
- The negotiation method
agreements
- Union contracts
The franchise as a business opportunity
• Franchising is the third alternative which may be
considered by the prospective small business operator
• A franchised business according to the IFA has 94%
success factor than 33% success factor of business
opened outside of franchise system
• Franchising is an arrangement whereby the
manufacturer of the trademark product gives exclusive
rights local distribution to independent retailers in return
for their payment royalties.
Three basic types of franchising
1. Trade name franchising – buys
the right to use the trade name
of the franchise without the
requirement of distributing
particular product exclusively
under the manufacturer’s name
2. Product distribution
franchising – also called as
dealership it involves licensing
the franchise to sell specific
products under the
manufacturer’s brand name and
trademark through limited
distribution network.
3. Pure or business
format franchising with a
complete business format
including name, image,
method of doing business,
the product or services to
be sold. This type of
franchising is commonly
used in fast food
restaurants lodging
establishments car rentals
schools and etc.
 Advantages of franchising
1. Management training and
counseling is provided by the
franchisor
2. Brand name appeal of the
products is offered for sale
3. Quality of goods is standardized
4. The benefit of national
advertising program
undertaken by the franchisor
5. Lower capital requirements and
financial assistance are given by
the franchisor
6. Products and business formats
are proven
7. Lower cost of procuring
equipment and materials is
enjoyed because of the
franchisor’s centralized buying
power
8. Exclusive rights to specific
territory are granted
9. Greater chance of success is
assured
 Disadvantages of franchising
1. Franchising fees have to be paid and profit is shared
with the franchisor
2. Restrictions regarding operations are imposed
3. Product line is limited
4. There is possibility of unsatisfactory training programs
provided by the franchisor
5. Less freedom for the franchisee to make decisions
Evaluating a Franchising Opportunity
• Not all franchise business are right so an
evaluation must be made before entering to the
business agreement .
1. The risk of dealing with unproven franchisor
2. The financial stability of the industry
3. The potential market for the new franchise
4. The profit potential for new franchise
 The Franchise Agreement
• The franchise agreement is the 3. The terms of renewal of the
contract drawn between the contract
franchisor and the franchisee. 4. The financial requirements
The rights and obligation of including initial rights, schedule
each party are contained in the
of payments etc.
contract. The following are the
specific contents of the 5. The provisions incase of
agreement include the disability or death of the
following: franchisee
1. The exclusive territorial rights 6. Provisions incase of selling
granted to the franchisee the franchise to another party
2. The number of years the or the buyback arrangement
control will be force with franchisor.