Franchising, Licensing, and Harvesting: Cashing in Your Brand Entrepreneurship Chapter 13 Franchising, Licensing, and Harvesting: Cashing in Your Brand Mariotti: Entrepreneurship

The Franchise Agreement Contract between franchisor and franchisee Sets standards of quality and performance Sets royalty rates Assigns territories to prevent franchisees from competing with each other Marriotti: Entrepreneurship

Focus Your Brand A brand is a name, term, sign, logo, design that identifies a product/service. A brand represents a company’s promise to consistently meet customer expectations. Tightly focused brands perform better because customers know what to expect. Marriotti: Entrepreneurship

Line Extension Using an established brand to promote different kinds of products is called line extension. Can work if brand is very strong and if new products relate well to the brand. Can damage the brand if applied to products customers don’t like or that don’t reinforce the brand’s competitive advantage. Diversification, or spreading the brand out among many products, can unfocus the company and damage the brand. Marriotti: Entrepreneurship

Licensing Licensor—sells license, which “rents” the right to use the licensor’s company name. Licensee—pays fee for the license and may also pay royalties (percentage of sales) to licensor. Licensing is effective when it does not tarnish image of licensee’s own company or products. Marriotti: Entrepreneurship

Franchising Franchise—a business that markets a product or service in the exact manner prescribed by the company that developed the business. Franchisor—company selling franchises Franchisee—person buying a franchise Franchisees pay a fee and royalties on sales Examples: McDonalds, Burger King, GNC, Meineke Marriotti: Entrepreneurship

Profits Follow Quality In 1950s, economist W. Edwards Deming argued that companies should focus on quality, not short-term profits. His theory was proven after World War II when it helped Japan rebuild its economy. The high quality of Japanese cars and stereos won customers worldwide. If you can develop a business model that can deliver consistent quality, you may be able to franchise. Marriotti: Entrepreneurship

Franchising Pros and Cons Franchisor Pros Can expand without huge capital investment Earn royalties Cons Franchisee may fail to operate franchise correctly, tarnishing reputation Many federal, state regulations Franchisees who fail may try to sue Marriotti: Entrepreneurship

Franchising Pros and Cons (cont.) Franchisee Pros Less risk than starting a business alone Proven concept, help with management, training Advertising Cons Giving up control, must follow franchisor operations Franchisor may fail to deliver promised training, support Franchisor may do something to tarnish image of franchise Marriotti: Entrepreneurship

Replication and Harvesting Replication strategies involve obtaining money from a business you created by letting others copy (replicate) it. Franchising Licensing Harvesting involves obtaining money from a business you created by selling it, taking it public, or merging with larger company. Entrepreneur leaves the business with chunk of cash or stock. Investors want to know your harvesting strategy. Not every business can be harvested. Some have too much debt or have not created a product/service of lasting value. Marriotti: Entrepreneurship

5 Ways to Harvest a Business Increase free cash flows Management buy-out (MBO) Employee stock ownership plan (ESOP) Merging or being acquired Initial public offering (IPO) Marriotti: Entrepreneurship

How to Value a Business Sale price of a business is its net present value. 3 primary methods of valuation: Book value: assets—liabilities; most common method. Future earnings: estimated future earnings, best for businesses that are growing quickly. Market-based value: P/E Ratio X Estimated future net earnings. P/E is company stock price divided by earnings per share. Marriotti: Entrepreneurship

Exit Strategy Options Investors care about your exit strategy because it will affect their investment and how they will eventually get their ROI. Spell out your exit strategy in your business plan. Simply claiming you will “go public” (sell stock) one day is not adequate. Marriotti: Entrepreneurship

Exit Strategies Exit strategies: Acquisition: will someone want to buy your business one day? Earn out: can you generate strong cash flow and offer to buy out your investors over time? Debt-equity exchange: if you borrow from investors, can you plan to trade equity for portions of the loan over time, making them owners? Merger: can you create a business that another business may want to join with someday? Marriotti: Entrepreneurship