Entrepreneurship and Small Business Management Chapter 21 Franchising, Licensing, and Harvesting: Cashing in Your Brand

Ch. 21 Performance Objectives Determine how you want to grow your business and eventually exit from it. Describe how businesses use licensing to profit from their brands. Explain how a business can be franchised. Learn methods of valuing a business. Discuss five ways to harvest a business.

What Do You Want From Your Business? Sell Sell to others Merge Maintain Close Cease Operations Bankrupt Grow Internal growth Acquire other companies License your brand Franchise the business

Growth Through Replication Replication strategies—ways to obtain money from your business by letting others copy it for a fee Licensing—”renting” your brand or other intellectual property to increase product sales Franchising—replicating the business formula through others

Focus Your Brand A brand is a name, term, sign, logo, or design that identifies a product/service. A brand represents a promise to consistently meet customer expectations. Tightly-focused brands have better performance. Line extension—using an established brand to promote different kinds of products Can work if brand is very strong & new products relate well Potential damage if products do not reinforce the brand

Licensing Review of terms: 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 the licensor A company can profitably license its brand when it has a core group of loyal customers. Licensing can be effective as long as it does not tarnish the licensor’s company or product image.

Pros & Cons to Being a Franchisor Benefits Drawbacks Growth with minimal capital investment Lower marketing and promotional costs Royalties Tarnished reputation if franchisee fails to operate business properly Can be difficult to find qualified franchisees Potentially, withheld payments or lawsuits if franchisee is unsuccessful Many federal and state regulations

Before You Franchise… Carry out extensive research Consult with a franchise attorney Visit resource Web sites for information: International Franchise Association American Association of Franchisees and Dealers Create a franchise agreement which establishes standards of uniformity

Harvesting Your Business Act of selling, taking public, or merging a company to yield proceeds for the owner(s) Usually takes at least 10 years to be ready Entrepreneur not usually involved after harvesting In mergers, founder(s) may work in the new organization for a specified time period Not possible if firm has heavy debt, or no product/service of lasting value; alternatives: Liquidation (selling all assets) Bankruptcy

Business Valuation Methods Book value Simplest, most commonly-used method Net Worth = Assets – Liabilities Future earnings Based on estimated future earnings stream Best for quickly growing companies Must take into account the time value of money, as well as the rate of return

Business Valuation Methods (continued) Market-based approach Business value is compiled from the price/earnings (P/E) ratio of comparable public companies. P/E ratio is determined by dividing a company’s stock price by its earnings per share. Value = P/E Ratio × Estimated Future Net Earnings

Five Ways to Harvest a Business Increase the free cash flow—reduce investment and take cash out Management buyout (MBO)—sell the firm to its managers Employee stock ownership plan (ESOP) Establish a plan that allows employees to buy company stock as part of their retirement. When you are ready to exit, the ESOP borrows money and uses the cash to buy your stock.

Five Ways to Harvest a Business (continued) Merging or being acquired—sell the company to another company Initial public offering (IPO)—sell shares of your company in the stock market: Choose an investment banker to develop the IPO. Make sales presentations to brokers and institutional investors.

Exit Strategy Options Acquisition—someone buys the company and investors are bought out or paid back Earn out—investors are bought out with company cash flow over time Debt/equity exchange—trade equity for portions of debt over time to change lenders into owners Merge—value is created by combining strengths with another company

Investors & Exit Strategies Investors care about your exit strategy because it lets them know up front how their investment should eventually be turned into cash or stock. Include your exit strategy in your business plan. Be specific about timing.