Buying Existing and

Turnaround Businesses
Opening Franchises.

Patterns of Entrepreneurship
Chapter 12
Choosing the Right Business

• Buying an Existing Business

• Risks and reasons the business is for sale

  The Business is not Adequately Capitalized
 The Pressures of Business and Personal
Finances
 The Owners Lose Interest or the Death of a
owner
–
Primary Advantages to Consider when Buying
an Existing Business.:
 Established Business
 Lower Costs
 Fewer Personnel Changes
 More Established Policies
 Primary Disadvantages to Consider
when Buying an Existing Business.

 Negative Motivation on the Part

of the Seller
 Key Employee Losses.
 Overvaluation
 BUYING A TURNAROUND
BUSINESS
• There are three categories of a business that should be
evaluated in the turnaround plan.
• The business assets that can be evaluated in terms of
book or market value.
• The business operations to examine sale trends, credit
policies, pricing, promotional activities, and distribution
systems. Also, the buyer will want to understand human-
resources issues, including how the owner’s personal
skills and abilities influence operations and whether
capable employees will stay after acquisition.
• The evaluation of the business environment.
 Guidelines for Purchasing
Turnarounds
• Market and Product Offering. The concept for what
product or service the company will offer must become
clear before the business can succeed
• Determining the Margin or Profit for the Business.
Profit margins vary with the industry, but the product
must sell to the end user for at least four to five times
the direct costs and labor and materials needed to
produce it.
• Achieving Sales. Obtaining a few sales or one big sale
are not enough for a sustainable business
 Guidelines for Purchasing
Turnarounds

 Financial Controls. The projected financial

statement is an important tool for managing
the business successfully
 Analyzing Gross Profit Statements. The
gross profit analysis will describe, by
product line, where the gross profit is
generated.
 Guidelines for Purchasing
Turnarounds
 Analyzing Income Statements. The income
statement shows where the business is going by
summarizing how much the entrepreneur is
selling, spending, and earning from the
operations

 Analyzing Cash Flow Statements. No matter how

profitable the business is, it is critical to manage
the cash effectively.
Introduction to Franchising

 What is franchising?
 A franchise is “an arrangement by the
manufacturer or sole distributor of a trademarked
product or service that provides exclusive rights
of local distribution to independent retailers in
return for their payment of royalties.
Introduction to Datamark

Evaluating a Potential Franchiser

  What is the franchiser’s reputation?

  Is the franchiser now involved in any litigation?
  Is training and start-up assistance available?
  What is the management structure of the organization?
  Is the location and territory protected?
  What are the operating practices of the franchise?
  What are the franchise’s start-up costs?
  How can the purchase be financed?
  What are the terms of renewal and termination of the contract or
agreement?
Evaluation of a Franchise

Buying a franchise

 A franchise can be a very attractive way to operate

one’s own business because of the following
advantages
 Proven Product
 Established Business Plan
 Financing Assistance
 Knowledge of Market and Capital Assistance
 Attained success stories
Disadvantages of Franchising

  Restrictions in Decision-Making. Unlike starting one’s own

venture, the entrepreneur will not be “his or her own boss.”
  High Start-Up Expenses. The initial franchise fee is
frequently non-refundable and is often a sizable amount..
  Selection and Price Restrictions. The franchisee may
be restricted in establishing selling prices, introducing new
products and services, and adjusting the supply cycles to
meet current demands..
Analyzing the Franchise Fee Structure

 Initial franchise fees: the initial fee is a single payment by

the buyer to acquire the franchise rights
 Royalties: The heart of a franchise program is the ongoing
income derived from sales. There are several ways to
structure royalties, but the most common is a percentage
of gross sales.
 Service to franchisees: Franchise agreements can specify
fees for which franchisees pay a retainer or periodic fee.
 Analyzing the Franchise Fee Structure

 Promotional fees:National promotion and advertising

fees are specified in the franchise agreement. This can
be a small percentage of sales, seldom any more than
1 percent, or a flat monthly fee.
 Periodically, additional fees are collected for joint
promotional campaigns.
 Real estate income: New franchise outlets that require
unique physical facilities are usually built by
franchisers and leased to franchisees.
 Examples include stand-alone 7-Eleven markets, Jiffy
Lube garages, and McDonald’s restaurants.