Franchising and family by Corny Poems Inc.

Franchising, Buying a New Business And Family Business ÂŠ 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Looking Ahead

After lesson, you should be able to:

1. Define franchising and identify franchise options. 2. Understand the pros and cons of franchising 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.

Put on your If you hear the word franchise what pops into your head??? ÂŠ 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Franchising (terminology) • Franchising – A marketing system involving a legal agreement, whereby the franchisee conducts business according to the terms specified by the franchisor.

• Franchisor

– Party in franchise contract that specifies methods to be followed and terms to be met by the other party.

• Franchisee

– An entrepreneur whose power is limited by a contractual agreement with a franchisor.

• Franchise Contract

– The legal agreement between franchisor and franchisee

Franchising Options Product & Trade Name Franchising

Area Developers

Business Format Franchising

Piggyback Franchising

Options

Master Licensee

Multi-Brand Franchising

Multiple-Unit Ownership

Co-Branding

Franchising Options Receives privilege Product & Trade of using widely Name recognised Franchising product name

Firm/Individual can open several Area Developers outlets in a given area

Receives entire Business marketing & Format management Franchising systems

Retail franchise in Piggyback the physical facilities of a host Franchising store

Firm/Individual having a contract Master Licensee to sell franchises for franchisor Single franchisee Multiple-Unit owns more than 1 unit of the Ownership franchised business

Options

Operating several Multi-Brand franchises in a single corporate Franchising structure 2 franchise brands together Co-Branding under one roof

I am thinking of buying a McDonalds franchise. Class is going to divide into two consulting groups. one is FOR buying a franchise, other group is AGAINST it. Indicate which factors I should consider. ÂŠ 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

s â&#x20AC;&#x2122; e e s i t h n c i n o a wp r F ie v ÂŠ 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Pros & Cons of Franchising Advantages

Limitations

•

Probability of success

• Financial issues

Proven line of business

•

Trade names & Trademarks

Names are well-known to prospective & satisfied customers

• -

Operations manual

Misled about earnings opportunities Initial franchise fee Investment costs Royalty payments Advertising cost

•

Competitive issues

Some franchisors compete directly with franchisees

•

Management support

•

Management issues

Provides training, reduces purchasing costs, help with marketing & obtaining capital

Not really independent business owner – contract = limited sales territories, site approval, limited goods/services, limited advertising/ operating hours

All methods have been tried & tested enable them to operate more efficiently

Evaluating Franchise Opportunities • Selecting a Franchise – Personal observation – Advertisements

• Investigating the Potential Franchise – Information sources

• Independent, third-party sources – Federal Trade Commission – Internet – Franchise consultants

• Franchisors themselves – Disclosure documents

• Existing and previous franchisees

Top 5 franchises of 2011

Source: http://www.entrepreneur.com, accessed January 24, 2010.

Fr an vie chi w p s or oin â&#x20AC;&#x2122;s t ÂŠ 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Becoming a franchisor The Business Model

The Operations Manual

Financial Considerations

Government Regulations

Required Assistance

Considerations

Adding Longterm Value

Becoming a franchisor Easily adopt and The Business use Model successfully

Spells out the The Operations steps to make a success of the Manual business

Bank loans, Financial royalties, Considerations franchise fees

Government country to Regulations country, FASA

Attorney, Required consultants specialising Assistancein franchising

Differs from

Considerations

Can you add lt

Adding Longvalue eg next 10 term Value -15 years

Benefits & drawbacks for Franchisor Benefits

Drawbacks

•

Reduction of capital requirements

• Reduction in control

•

Increase in management motivation

•

Sharing of profits

•

Speed of expansion

•

Increase in operational supports cost

Legal issues in Franchising • The Franchising Contract – Signed with legal counsel present – Contains a termination and transfer provision – Contains statement of rights to renew contract

For sale

Buying an existing business Reduction of Uncertainties of Startup

A Bargain Price

Acquisition of Ongoing Operations and Relationships

A Quick Start

Pros and Cons of Buying an Existing Business Pros

Cons

– High chance of success – Less planning – Existing customers/ suppliers – Necessary equipment – Bargain price – Experienced employees – Existing business records

– Existing problems – Poor quality of current employees – Poor business image – Modernization required – Purchase price based on inaccurate data – Poor business location

Finding a business to buy • Matchmakers – Specialized brokers that bring together buyers and sellers

• Relying on Professionals – Accountants – Attorneys – Other experienced business owners

Finding out why a business is for sale • Owner’s Reasons for Selling – Old age or illness – Desire to relocate in a different section of the country – Decision to accept a position with another company – Unprofitability of the business – Loss of an exclusive sales franchise – Maturing of the industry and lack of growth potential

Examining the financial data • Review financial statements and tax returns for the past five years. • Recognize that financial data can be misleading. – – – –

Assets overvalued Expenses overstated/understated Income underreported Unrecorded debts

• Adjust asset valuations to reflect the true state of the business. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Valuing the business • Asset-Based Valuation – Estimates the value of the firm’s assets; does not reflect the value of the firm as a going concern.

• Market-Comparable Valuation – Considers the sale prices of comparable firms; difficulty is in finding comparable firms.

• Cash-Flow-based Valuation – Compares the expected and required rates of return on the amount of capital to be invested in the business. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Non quantitative Factors in Valuing a Business • Competition • Market • Future community development • Legal commitments • Union contracts • Buildings • Product prices © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Negotiating & Closing the deal • Terms of Purchase – Assets purchase or total entity – Indemnification clause – Payment in full or partial payments over time

• Closing the sale – Best handled by a third party • Tax certifications • Payment-to-seller agreements and guarantees

How many of you have brothers or sisters?

How many of you recently went on holiday with your family?

How many of your children are living with you?

My Family How did THAT go?

What do you typically argue about? ÂŠ 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

If it is this hard to have a holiday with your family, can you imagine how hard it must be to run a business with them? Can you think of any family businesses around the world?

â&#x20AC;Ś and in Bloemfontein?

Looking Ahead

After studying this chapter, you should be able to:

1. What is a family business? 2. Explain the forces that can keep a family business moving forward. 3. Describe the complex roles and relationships involved in a family business. 4. Identify management practices that enable a family business to function effectively. 5. Describe the process of managerial succession in a family business.

Family Business (terminology) • Family

• A group of people bound by a shared history and a commitment to share a future together, while supporting the development and well-being of individual members.

• Family Business • An organization in which either the individuals who established or acquired the firm, or their descendants, significantly influence the strategic decisions and life course of the firm. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Systems in a family business Two broad systems BUSINESS

FAMILY Potential conflict

Inward focus Emotion based Unconditional acceptance Lifetime membership Averse to change

Outward focus Task based Rewards performance Perform or leave Embraces change

Family and Business Overlap Family Concerns

Business Concerns

– Care and nurturing of family members

– Production and distribution of goods and/or services

– Employment and advancement in the firm

– Need for professional management

– Loyalty to the family

– Effective and efficient operation of the firm

Systems in a family business Three-circle model Not family/ not employee

Family member & owner, not employee

1. Family Not owner/ not employee Family member & employee , not owner

2. Ownership

7&8

6. Family member & employee & owner

Owner & employee , not family member

3. Business Not family/ not owner

Advantages • Strength of family relationships during challenging periods of business change • Financial sacrifices that family members make for the good of the firm • Operation as a family business distinguishes the firm from its competitors • Higher levels of concern for its community and non-family employees • Capability to plan and prepare for the long haul • Emphasis on quality and value © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Disadvantages • Conflict among family members about: – Risk (consequences of failure) to the family in launching a business – Nepotism and the differences in competencies and merit of family members involved in the business – Family traditions versus the business need to innovate and seize opportunities – Unity and cooperation of family versus business need to foster diversity and competition – Family loyalty versus the necessity to provide opportunities for non-family employees © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Family Business Momentum • The Founder’s Imprint on the Culture – The founder’s core values become a transmitted part of the culture (for better or worse).

• Organizational Culture – Patterns of behaviors and beliefs that characterize a particular firm. • Family Business Cultural Values – Mutual respect – Integrity – Wise use of resources – Personal responsibility – “Fun” © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Commitment of Family Members (Why are you joining?)

Desired-Based Commitment (“Want to”)

Obligation-Based Commitment (“Ought to”)

Turnover & Performance Cost-Based Commitment (“Have to”)

Need-Based Commitment (“Need to”)

Family Roles & Relationships • Mom or Dad (Founder) – Plans to pass it on to children. – Business & Children grown together.

• Co-Preneurs (Husband–Wife Teams) – Opportunity to share more in each other’s lives – Business differences interfere with family life – Work doesn’t leave time for family life – Sharing family responsibilities eases the load © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Family Roles & Relationships • Sons and Daughters – Personal preferences different from the business – Personal qualifications insufficient to assume role in business – Desire for personal freedom to choose another career

• Sibling Cooperation, Sibling Rivalry – Best case: siblings work as a team, each contributing services according to his or her abilities – Worst case: siblings compete as rivals and disagree about their business roles © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Family Roles & Relationships • In-laws In and Out of the Business – Disagreements about how to treat and reward in-laws and family members/children • Assign to different branches or to different business roles

• The Entrepreneur’s Spouse – Communication between entrepreneur and spouse is critical for their performance as an effective team for both the business and the family. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Need for Good Management in the Family Firm

• Best Practices (Professional Management): – Promote learning to stimulate thinking and fresh strategic insights. – Solicit ample input from outsiders to keep things in perspective. – Establish channels for constructive communication and use them. – Build a culture that accepts continuous change. – Promote family members only according to their skill levels. – Attract and retain excellent nonfamily managers. – Ensure fair compensation for all employees, including those outside the family. – Establish a solid leadership succession plan. – Exploit the unique advantages of family ownership.

Need for Good Management in the Family Firm

• Nonfamily Employees in a Family Firm – Hazards: • Competition with family members for advancement • Getting caught in the crossfire and politics of family competition within the firm

– Solutions: • Identify family-only reserved positions in advance. • Treat both family and nonfamily employees fairly in matters of reward and promotion. © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Need for Good Management in the Family Firm

Family Retreats – A gathering of family members, usually at a remote location, to discuss family business matters. – Use of an outside facilitator may be necessary.

• Guidelines 1. 2. 3. 4. 5.

Set a time and place. Distribute an agenda prior to the meeting. Plan a schedule in advance. Give everyone a chance to participate. Keep it professional.

Need for Good Management in the Family Firm

• Family Councils – An organized group of family members who gather periodically to discuss family-related business issues. • Represent the family to board of directors • Useful in developing family harmony • Increases understanding of family traditions and interest © 2010 South-Western/Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Need for Good Management in the Family Firm • Family Business Constitution

– A statement of principles intended to guide a family firm through times of crisis and change.

• Family Protocol

– An extension of the constitution incorporating additional agreements that includes: • • • • •

Ownership agreements (inheritance and buy–sell compacts) Governance and personnel policies Use of business resources by family members Conflicts of interest and noncompetition agreements Codes of conduct

Process of Leadership Succession

• Available Family Talent – Competency • Allowing only qualified competent family members to assume leadership roles in the firm increases the value of the firm for all who have an ownership interest in it.

– Mentoring • Guiding and supporting the work and development of a new or lessexperienced organization member.

Process of Leadership Succession

Stages of succession

Transfer of ownership Declaration of succession Formal start in business Proof of competence

Education & Personal Development Pre â&#x20AC;&#x201C; business stage

The End