ENTREPRENEURIAL

OPTIONS: START-UP,
BUYOUT OR
FRANCHISING
ENTREPRENEURIAL OPTIONS: START-UP, BUYOUT OR FRANCHISING

 For a new entrepreneur, the decision to own and operate a business is

the result of his serious exploration of ideas and sensible evaluation
of opportunities. Accordingly, this is a well thought-out process which
also entails identifying the product he will sell according to his vision
and objectives, analyzing the possible market for his product and
developing as well as operationalizing the plans needed to realize his
vision and objectives.
GUIDE QUESTIONS IN CHOOSING THE BUSINESS TO ENTER

1. Do I have the needed capital to enter into and compete successfully in

the business?
2. How soon can I get back my investment?
3. Will I live long to continue running the business?
4. What is the level of risk involved? Am I willing to take the risk?
5. Am I psychologically prepared to lose the business?
GUIDE QUESTIONS IN CHOOSING THE BUSINESS TO ENTER

6. How much time and effort is required of me in running it?

7. What is the potential for this business to succeed?
8. Do I have the ability, traits and resources needed to make the
business succeed?
9. Is this business something that I would enjoy?
10.Would I prefer a franchise, buyout or create a new one on my own?
CREATING A NEW BUSINESS

 The reasons for the popularity of a start up among

entrepreneurs are varied. Some entrepreneurs want
others to recognize that the new idea or product and
the success that goes with it is all theirs.
ADVANTAGES – START-UP

 Opportunity to orient business toward your own personal goals

 You can design the business around the policies and procedures
 You avoid the ‘goodwill’ expense
 Will not risk inheriting any preexisting ‘ill will’ from previous
customers, suppliers, creditors or employees.
DISADVANTAGES – START-UP

 Uncertainty about the market demand for your new product or service
 It takes time and energy to create an image, build patronage, work the bugs
out of new systems and procedures, and reach out a break-even level of
sales
 Staff must be hired, contacts developed with suppliers
 Risks that investment will not be recouped, unexpected competition may
emerge and potential customers may be more difficult to attract than you
had anticipated
BUYING AN EXISTING BUSINESS, WHY?

1. There are already available personnel with know-how

2. Facilities and technology are already available
3. There is an existing product with an existing market
4. The location of the business is favorable
5. The business has an established relationship with banks and trade creditors
6. The business is generating profit
7. The business has an existing goodwill.
COMMON REASONS FOR SELLING A BUSINESS

1. Demand for the product is declining. Growth potential is poor

2. Owner is ill or getting old
3. Business is unprofitable
4. Owner wants to relocate to another area
5. Existing franchise is discontinued or terminated
6. Owner decided to seek employment in another company.
ADVANTAGES – BUYING AN EXISTING BUSINESS

1. Increase the likelihood of successful operation

2. It has a proven location
3. Profits can be earned sooner
4. The time, cost and effort needed to do a thorough planning is
eliminated
5. Presence of an established clientele
ADVANTAGES – BUYING AN EXISTING BUSINESS

6 . Stock inventory is already available

7. Suppliers are already established
8. Equipment and technology are already available
9. The resources and capabilities are known in advance
10. Financing is restricted to a single purchase transaction
DISADVANTAGES – BUYING AN EXISTING BUSINESS

1. The new owner inherits the bad reputation of the seller

2. Existing inventory and lines of product may not conform to buyer’s
best judgment
3. Some of the personnel inherited may not be useful to the business
4. The inherited clientele may not be most desirable for the business
DISADVANTAGES – BUYING AN EXISTING BUSINESS

5. Some precedents set by former owner may be difficult to change

6. The existing facilities and layout may not conform to modern
standards and may be expensive to modernize
7. If the location is rented, the landlord’s attitude and practices may not
be conducive to a pleasant and profitable relationship
EVALUATING AN OPPORTUNITY TO BUY

1. What has been the trend on profits for the firm?

2. Is the business growing, declining or relatively stable?
3. Are profits consistent with the sales volume?
4. Why does the present owner wish to sell?
5. Does the balance sheet for the firm reflect a sound current financial
condition?
EVALUATING AN OPPORTUNITY TO BUY

6. Are the fixed assets property valued considering their cost and
depreciation charges?
7. Are the expenses in line with average statistics for this type of firm?
8. If the location is rented, what is the nature of the lease?
9. What is the competition in the area?
10. What are the present owner’s plans when he sells?
EVALUATING AN OPPORTUNITY TO BUY

11. Will I need any of the present employees? Are they satisfactory?
12. What are the prospects for increasing profits
13. What is the customer and neighborhood attitude toward the firm?
14. What is the reputation of the firms among businessmen of the area?
15. Are there any nationality, religious or political factors in the area
which would discourage purchase?
EVALUATING AN OPPORTUNITY TO BUY

16. Do suppliers regard the seller favorably?

17. Is the community to be served growing?
18.Are all liabilities correctly stated on the balance sheet?
19.Would the investment make as high a return as could be made by
starting a new firm?
HOW MUCH SHOULD BE THE ACQUISITION COST OF THE BUSINESS?

 When a startup entrepreneur buys an existing business, the price

which he pays should be based on its potential to earn a profit. As the
first step, it is advisable for the buyer to analyze the past financial
statements and income tax records. Some analysis must be done.
Have sales and profits been increasing or decreasing? What has been
the rate of return on the owner’s investment?
TWO BASIC METHODS USED TO DETERMINE THE VALUE OF A
BUSINESS

1.Capitalized Value
2.Appraised Value
CAPITALIZED VALUE (DIVIDING THE ANNUAL PROFIT BY THE
SPECIFIED INTEREST RATE)

For example, supposed you have projected that a business is capable of

earning P25,000 per year over the next 5 years after paying all of its
expenses including your own salary. If the investment in this business is
as safe as, let’s say, a bank time deposit rate of 10%, you could adopt
this rate to capitalize the profits and arrive at the following capitalized
value for the business:
Capitalized value = P25,000/10% = P250,000
CAPITALIZED VALUE (DIVIDING THE ANNUAL PROFIT BY THE
SPECIFIED INTEREST RATE)

 However, no investment at present is as safe as time deposit in a

stable bank. There are other investment which give a higher yield but
they are risky and not common. The effect of securing higher rate of
interest on investment would be a lower capitalized value. Thus, if we
assume that we can earn an interest of 25 percent on an investment,
the resulting capitalized value be as follows:
 Capitalized value = P25,000/25% = P100,000
TWO IMPORTANT FACTORS IN DETERMINING CAPITALIZED VALUE

1. The capitalized value is very sensitive to changes in the

capitalization rate.
2. Valuing long-term profits.
APPRAISED VALUE

The majority of the business purchases are based on

the net value of the assets to be transferred. It consists
basically of establishing exactly what assets are going to
be transferred and appraising their current market
value.
NEGOTIATION

 The product of negotiation process is a formal contract

covering the details of the purchase. The central issue in
negotiation is usually the price.
FRANCHISING

A start-up entrepreneur may decide to go into business by

simply buying a license to locally operate let’s say Jollibee. This
practice is known as franchising. As backgrounder, the term
franchise came from the Old French franchir, which means
freedom, privilege or immunity from burden.
FRANCHISING CONCEPTS

 Franchise – it is an agreement whereby an independent person is given exclusive

rights to sell a specified goods or service.
 Franchising – it is a marketing system based on a legal agreement wherein one
party (franchisee or franchisor) is given the right to handle business as an
independent owner but is required to abide by the terms and conditions specified
by the other party (franchisor). For franchisor, therefore, franchising means
selling the franchise, while for the franchisee or franchiser, franchising is
understood to mean buying a franchise
FRANCHISING CONCEPTS

 Franchisor – refers to an entity that owns the franchise name and

distinctive elements ( such as patent, trademarks, signs and symbols)
which grant others the rights to sell its products.
 Franchisee or the franchise buyer – it is the entity that buys to operate
the business using the name, product, trademark, service mark,
product and business format of the franchisor un der the terms and
conditions of the franchise agreement.
FRANCHISING CONCEPTS

 Franchising contract - it refers to the legal document involving

two parties (franchisor and franchisee) specifying the
obligations, primarily of the franchisee and the conditions
under which the latter will conduct business.
BENEFITS OF FRANCHISING

 Both franchiser and the franchisee can benefit from

franchising.
 For franchiser (guarantees faster expansion and greater
market penetration)
 For franchisee (better brand recognition, less-costly share in
local and national promotion of the product)
WHAT ARE THE TYPES OF FRANCHISING?

 Product and Trademark Franchising

 Business format Franchising
PRODUCT AND TRADEMARK FRANCHISING

 Product and Trademark Franchising involves an arrangement wherein the

franchisee is given the right to manufacture and/or distribute a widely
recognize brand or product.
 3 Types:
1. Manufacturer-Retailer Franchise
2. Manufacturer- Wholesaler Franchise
3. Wholesaler-Retailer Franchise
ADVANTAGES - FRANCHISING

1. Possibility of failure is lessened

2. Increase in new market location through urbanization of local areas
3. Customers tend to patronized a specific franchised service or product
4. Customer loyalty and preference for a successful brand name
5. Better management through training provided by the franchisor
ADVANTAGES - FRANCHISING

6. Technical and other assistance is easily accessed from the franchisor

7. It is easier and faster to build a good reputation and gain recognition
8. A better assurance that the business will be profitable
9. Obtain grater purchasing power
10.High performance standards
11.Advertising cost is less
DISADVANTAGES - FRANCHISING

1. High cost of franchise

2. Operation is controlled by the franchisor
3. Presence of fierce competition
4. Pressure to continuously make the product acceptable to the
market
5. Problems associated with expiration of the franchise
 FACTORS TO LOOK INTO, IN THE PROCESS OF NEGOTIATING AND
FINALIZING THE FRANCHISE UNDERTAKING

1. Business Name

2. Market research 7. Training

3. System ideals and operating manual 8. Location assistance and approval
4. Proprietary marks 9. Store layout and construction supervision
5. Experience 10. Exclusive area coverage
6. Good judgment of the franchisor
FACTORS TO LOOK INTO, IN THE PROCESS OF NEGOTIATING AND
FINALIZING THE FRANCHISE UNDERTAKING

11. Procurement program

12. Hiring assistance
13. Grand opening assistance
14. Marketing strategies
Effective Field service
16. Research and development
WHY AN ENTREPRENEUR MAY BUY A FRANCHISE?

7. Eliminates the difficulties in starting-up

1. Earning depends on the effort
8. Ease in operationalizing the business plan
2. Opportunities for unlimited income
9. Benefits of having an established system
3. Personal satisfaction
10. Benefits from quality research and
4. Tax Benefits
development
5. Freedom to pursue the job you want
11. Quicker start-up
6. Assurance of continuous employment
12. Probability of Success is high
CONSIDERATIONS IN SELECTING FRANCHISES

1. Cost of investment
2. Franchisee’s preference and interest
3. Location of the franchise
4. Reputation of the franchise organization
5. Franchise support and assistance
6. Possibility of obtaining a master franchise
FACTORS NECESSARY TO A SUCCESSFUL FRANCHISE

1. An effective organization
5. Territorial protection by the franchisor
2. A clear regulation on products and services
6. Geographical limits and restrictions to the
to carry
franchisee
3. Policy control on operating assets, goods
7. Exclusivity and focus in business
and services for quality and uniformity
relationship
4. Regulation on the use of the franchisee’s
8. Restrictions on transfer of the franchise
business premises
FACTORS NECESSARY TO A SUCCESSFUL FRANCHISE

12. Continuous improvement and

implementation of effective systems to
9. Protection to clause to the franchisee after
guarantee superior operations
expiration of contract
13. The franchise is recognized as something
10. A vision, philosophy and culture
that provides value-added benefits to the
harmonious to both franchisor and franchisee
franchisee
11. Reasonable provision for expansion
14. Franchise disagreements are easily
resolved between the parties.
CONDITIONS MAKING A PRODUCT ELIGIBLE FOR FRANCHISE

1. Business must be in operation for at least a
year
2. The business systems can be easily
migrated and operationalized
3. The business has proven record of
profitability
4. There is a need for the kind of business in
other places
5. The products or services is needed for a
long time
6. The prospective franchisor can cope up
with expanding administrative job
MISTAKES TO AVOID IN BUYING A FRANCHISE

1. Buying a franchise with minimal capital left for operations

2. Being the first in the franchise system
3. Not following entirely the business plan of the franchisor
4. Complacency on the part of the franchiser
FRAUDULENT FRANCHISORS TO AVOID

1. The ‘too-good-to-be-true’ impression 6. Works on any location

2. The make-it-fast deal 7. Secret!
3. We only accept cash 8. Exempted from registration
4. Come on, brag 9. Franchisor lacking in capital
5. Living like a dream
REFERENCES

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DISCLAIMER

 No copyright infringement intended for this presentation, solely for educational purposes only.