CHAPTER 14:

ACCESSING RESOURCES FOR

GROWTH FROM EXTERNAL
SOURCES
JOINT VENTURES

• A separate entity that involves a partnership between

two or more active participants. Also called strategic
alliances, they can involve a wide variety of partners
that include universities, not-for-profit organizations,
businesses, and the public sector.
• They have been a good conduit by which an
entrepreneur can enter an international market.
• Concerns about the ethics and ethical behavior of the
potential partner may arise.
TYPES OF JOINT VENTURES

1. Cost-sharing arrangement between the different

entities of the partnership.
2. Entering new markets, entering foreign markets,
raising capital and expanding markets
3. Cooperative research and development
4. Industry–university agreements
5. International joint ventures- business objectives,
cultural differences, government policies
FACTORS IN JOINT VENTURE SUCCESS

1. Accurate assessment to manage the venture.

2. The degree of symmetry between the partners.
3. The expectations of the results of the joint
venture must be reasonable, consistent, and
realistic.
4. The timing must be right.
ACQUISITIONS

• The purchase of an entire company, or part of a company;

by definition, the company is completely absorbed and no
longer exists independently.
• Provide an excellent means of expanding a business by
entering new markets or new product areas.
• Can take many forms, depending on the goals and
position of the parties involved in the transaction, the
amount of money involved, and the type of company.
ADVANTAGES OF AN ACQUISITION

1. Established business
2. Location
3. Established marketing structure
4. Cost
5. Existing employees
6. More opportunity to be creative
DISADVANTAGES OF AN ACQUISITION

1. Marginal success record

2. Overconfidence in ability
3. Key employee loss
4. Overvaluation
SYNERGY- “the whole is greater than the sum of its
parts”; should occur in both the business concept, with the
acquisition functioning as a vehicle to move toward overall
goals, and the financial performance
STRUCTURING THE DEAL

• Involves the parties, the assets, the payment form, and the
timing of the payment.
1. DIRECT PURCHASE of the firm, the entrepreneur often
obtains funds from an outside lender or the seller of the
company being purchased.
2. BOOTSTRAP PURCHASE, acquiring a small amount of
the firm, such as 20 to 30 percent, for cash; purchases the
remainder of the company with a long-term note that is
paid off over time out of the acquired company’s earnings.
LOCATING ACQUISITION CANDIDATES

1. Brokers- People who sell companies

2. Accountants, attorneys, bankers, business associates, and
consultants
3. Classified sections of the newspaper or in a trade
magazine
Involves significant time and effort. The entrepreneur
should gather as much information as possible, read it
carefully, consult with advisors and experts, consider his or
her own situation, and then make a constructive decision.
MERGERS

A transaction involving two, or possibly more,

companies in which only one company survives.
• A key concern in any merger (or acquisition) is
the legality of the purchase.
• Merger objectives must be spelled out; evaluate
the other company’s management; determine the
value and appropriateness of the existing
resources; establish a climate of mutual trust
LEVERAGED BUYOUTS

Purchasing for cash an existing venture by any employee

group.
• The key to a successful LBO is not the relative debt-
equity ratio but rather the ability of the entrepreneur
taking over to cover the principal and interest
payments through increased sales and profits;
depends on the skills of the entrepreneur and the
strength and stability of the firm.
 EVALUATION PROCEDURE
1. Determine whether the present owner’s asking price is
reasonable.
• Subjective evaluations
• the competitiveness of the industry and the competitive
position of the firm in that industry
• the uniqueness of the offering of the firm and its stage in
the product life cycle
• the abilities of management and other key personnel
remaining with the firm.
• Quantitative techniques are used to evaluate the
fairness of the asking price. The price-earnings
ratio of the LBO prospect should be calculated and
compared with those of comparable companies, as
well as the present value of future earnings of the
prospect and its book value.
2. Assess the firm’s debt capacity- depends on the
prospect’s business risk and the stability of its future
cash flows
3. Develop the appropriate financial package.
• Must meet the needs and objectives of the
providers of the funds as well as the company’s
and the entrepreneur’s situation
• An LBO agreement with venture capitalists has
warrants that are convertible into common stock
at a later date.
• A sinking fund repayment of the long-term debt
is frequently required.
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.
• Franchisor- the person offering the franchise
• Franchisee- the person who purchases the
franchise
ADVANTAGES OF FRANCHISING—TO THE FRANCHISEE

1. Product Acceptance- name, product, service, credibility,

image
2. Management Expertise- training program in accounting,
personnel management, marketing, and production
3. Capital Requirements- fee for the franchise, construction
costs, and the purchase of equipment.
4. Knowledge of the Market- details the profile of the target
customer and the strategies that should be implemented
5. Operating and Structural Controls- maintaining
quality control of products and services and
establishing effective managerial controls.
• Administrative controls usually involve financial
decisions relating to costs, inventory, and cash
flow, and personnel issues such as criteria for
hiring and firing, scheduling, and training to
ensure consistent service to the customer
ADVANTAGES OF FRANCHISING—TO THE FRANCHISOR

1. Expansion Risk- allows the venture to expand quickly

using little capital.
2. Capital requirements-capital necessary for expansion is
much less; allows the franchisor to maintain low
payrolls and minimizes personnel issues and problems.
3. Cost Advantages- can purchase supplies in large
quantities; ability to commit larger sums of money to
advertising.
DISADVANTAGES OF FRANCHISING
1. Inability of the franchisor to provide services, advertising,
and location.
2. The problem of a franchisor’s failing or being bought out
by another company.
3. Difficulty to find quality franchisees.
4. Poor management
5. Ability to maintain tight controls becomes more difficult.
TYPES OF FRANCHISES

1. Dealership- manufacturers use franchises to

distribute product lines (automobile, oil industry)
2. Franchise that offers a name, image, and method
of doing business (restaurants, hotels)
3. Franchise that offers services- personnel agencies,
income tax preparation companies, and real estate
agencies.
TRENDS AFFECTING FRANCHISING OPPORTUNITIES

1. Good health
2. Time saving or convenience- home
delivery services
3. Health care
4. The need for a number of child-related
service
INVESTING IN A FRANCHISE

1. Unproven versus proven franchise- risk,

mistakes, financial investment
2. Financial stability of franchise
3. Potential market for the new franchise
4. Profit potential for a new franchise
OVERCOMING CONSTRAINTS BY NEGOTIATING
FOR MORE RESOURCES

1. DISTRIBUTION TASK- Negotiating how the

benefits of the relationship will be allocated
between the parties.
2. INTEGRATION TASK- Exploring possible
mutual benefits from the relationship through
collaboration
Assessment 1: What Will You Do If an
Agreement Is Not Reached?
• “Best alternative to a negotiated agreement.”
• Determine a reservation price which is the
price (the bundle of resources from the
agreement) at which the entrepreneur is
indifferent about whether to accept the
agreement or choose the alternative.
• Assessment 2: What Will the Other Party to the
Negotiation Do If an Agreement Is Not
Reached?
• Assessment 3: What Are the Underlying Issues
of This Negotiation? How Important Is Each
Issue to You?
• Assessment 4: What Are the Underlying Issues
of This Negotiation? How Important Is Each
Issue to the Other Party?
DECISIONS BASED ON STRATEGIES

Strategy 1: Build Trust and Share Information

Strategy 2: Ask Lots of Questions
Strategy 3: Make Multiple Offers
Simultaneously
Strategy 4: Use Differences to Create Trade-Offs
That Are a Source of Mutually Beneficial
Outcomes