PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Part 2 Starting From Scratch or Joining an Existing Business Franchises and Buyouts

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 4–2 Looking Ahead After studying this chapter, you should be able to: 1. Identify the major pros and cons of franchising. 2. Explain franchising options and the structure of the industry. 3. Describe the process for evaluating a franchise opportunity. 4. List four reasons for buying an existing business and describe the process of evaluating a business.

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 4–3 Pros and Cons of Franchising Franchising is a formalized arrangement that describes a certain way of operating a small business. The overall advantage of franchising is its high rate of success. A franchise may be favored over other alternatives because it offers training, financial assistance, and operating benefits. The major limitations of franchising are its costs, restrictions on business operations, loss of entrepreneurial independence, and potential lack of franchisor support.

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 4–4 Franchising Options and the Industry The main parties in the franchising system are the franchisor and the franchisee. The potential value of any franchising arrangement is determined by the rights contained in the franchise contract. In product and trade name franchising, the main benefit the franchisee receives is the privilege of using a widely recognized product name. In business format franchising, entrepreneurs receive an entire marketing and management system.

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 4–5 The Structure of the Industry A master licensee is a firm or individual having a continuing contractual relationship with a franchisor to sell its franchises. Multiple-unit ownership, in which a single franchisee owns more than one unit of a franchised business, is becoming widely used. –Some of these single franchisees are area developers, individuals, or firms that obtain the legal right to open several outlets in a given area. Piggyback franchising is the operation of a retail franchise within the physical facilities of a host store. Facilitating groups include industry associations, government agencies, and private businesses.

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 4–6 Sources of Franchising Information The substantial investment required by most franchisors justifies careful investigation by a potential franchisee. –Independent third parties, such as state and federal government agencies, the International Franchise Association, and business publications, can be valuable sources of franchise information. The most logical source of the greatest amount of information about a franchise is the franchisor. Existing and previous franchisees are good sources of information for evaluating a franchise. Sources of international franchising information include government publications and Web sites hosted by individual foreign countries.

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 4–7 Franchising Contracts A franchise contract is a complex document and should be evaluated by a franchise attorney. An important feature of the franchise contract is the provision relating to termination and transfer of the franchise. Franchise disclosure requirements are specified by FTC Rule 436. The Uniform Franchise Offering Circular (UFOC) provides the accepted format for satisfying the franchise disclosure requirements of the FTC.

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 4–8 Reasons for Buying a Business Buying an existing firm can reduce uncertainties. In acquiring an existing firm, the entrepreneur can take advantage of the firm’s ongoing operations and established relationships. An existing business may be available at a bargain price. The entrepreneur may be in a hurry to get the business going.

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 4–9 Evaluating a Business Investigating a business requires due diligence. A buyer should seek the help of outside experts, the two most valuable sources of outside assistance being accountants and lawyers. The buyer needs to investigate why the seller is offering the business for sale. The financial data related to the business should always be examined. Nonquantitative information about the business for sale should also be used in determining its value.

Copyright © 2006 Thomson Business & Professional Publishing. All rights reserved. Student 4–10 Key Terms franchising franchisee franchisor franchise contract franchise product and trade name franchising business format franchising master licensee multiple-unit ownership area developers piggyback franchising disclosure document Uniform Franchise Offering Circular (UFOC) matchmakers due diligence