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

Entrepreneurship and Small Business

Management

Chapter 21Franchising, Licensing, and

Harvesting: Cashing in Your Brand

© 2012 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.2

Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin

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 Growth with

minimal capital investment

Lower marketing and promotional costs

Royalties

Drawbacks 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.

Documents

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