Entrepreneurship and small business management chapter 21

21 Performance Objectives  Determine how you want to grow your business and eventually exit from it.. Growth Through Replication Replication strategies—ways to obtain money from your

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

 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

 Simplest, most commonly-used method

 Net Worth = Assets – Liabilities

 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)

 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)

company to another company

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

company and investors are bought out

or paid back

with company cash flow over time

for portions of debt over time to change lenders into owners

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.