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9E

Robert D. Hisrich
Mathew J. Manimala
Michael P. Peters
Dean A. Shepherd

2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

ENTREPRENEURSHIP

14

ACCESSING RESOURCES FOR


GROWTH FROM EXTERNAL
SOURCES

LEARNING OBJECTIVES
To understand how joint ventures can
help an entrepreneur grow his or her
business and acknowledge the
challenges of finding, and
maintaining, an effective joint
venture relationship
To be aware of the pros and cons of
using acquisitions to grow a business
and to know what to look for in an
acquisition candidate
14-3

Contd

LEARNING OBJECTIVES
To understand the possibilities of
achieving growth through mergers
and leveraged buyouts and the
challenges associated with each
To understand franchising from the
perspective of both the entrepreneur
looking to reduce the risk of new
entry and the entrepreneur looking
for a way to grow his or her business
14-4

Contd

LEARNING OBJECTIVES
To understand the tasks of
negotiation and develop the skills to
more effectively conduct these tasks

14-5

USING EXTERNAL PARTIES


TO HELP GROW A BUSINESS
Mechanisms

Joint ventures
Acquisitions
Mergers
Franchising

14-6

JOINT VENTURES
A separate entity that involves a
partnership between two or more
active participants
Types of joint ventures:
Between private-sector companies
Objectives - Entering new/ foreign markets,
raising capital, cooperative research

Industry-university agreements
Created for the purpose of doing research

International joint ventures


14-7

Contd

JOINT VENTURES
Factors in joint venture success
Accurate assessment of the parties
involved to best manage the new entity
Degree of symmetry between the
partners
Expectations of the results of the joint
venture must be reasonable
Timing

14-8

ACQUISITIONS
Purchasing all or part of a company
Advantages of an acquisition

Established business
Location
Established marketing structure
Cost
Existing employees
More opportunity to be creative

14-9

Contd

ACQUISITIONS
Disadvantages of an acquisition

Marginal success record


Overconfidence in ability
Key employee loss
Overvaluation

Synergy
The whole is greater than the sum of its
parts
Should occur in both the business
concept and the financial performance
14-10

Contd

ACQUISITIONS
Structuring the deal
Involves the parties, the assets, the
payment form, and the timing of the
payment
Two most common means of acquisition
Entrepreneurs direct purchase of stock or
assets
Bootstrap purchase of assets

14-11

Contd

ACQUISITIONS
Locating acquisition candidates
Brokers: People who sell companies
Accountants, attorneys, bankers,
business associates, and consultants
may know of candidates
Business opportunities in newspapers or
trade magazines (e.g. motels in US
advertising in India Abroad)

14-12

MERGERS
Joining two or more companies
Key concern - Legality of the
purchase
Process:
Determine the merger objectives and
resulting gains for both companies
Carefully evaluate the other companys
management

14-13

Contd

MERGERS
Determine the value and
appropriateness of the existing
resources
Establishing a climate of mutual trust

Determine the value of a merger


candidate

14-14

MERGER MOTIVATIONS
FIGURE 14.1

14-15

LEVERAGED BUYOUT
Purchasing an existing venture by
any employee group
Acquired firms assets serve as collateral
Long-term debt financing is provided by
banks, venture capitalists, and
insurance companies

Evaluation procedure:
Determine whether asking price is
reasonable
Assess the firms debt capacity
14-16

FRANCHISING
Franchisor gives exclusive rights of
local distribution to:
A franchisee in return for payment of
royalties and conformance to
standardized operating procedures

Franchisor: Person offering the


franchise
Franchisee: Person who purchases
the franchise
14-17

Contd

FRANCHISING
Advantages of franchising - To the
franchisee
Product acceptance
Has an accepted name, product, or service

Management expertise
Managerial assistance provided by the
franchisor

Capital requirements
Up-front support can save entrepreneur
significant time and capital
14-18

Contd

FRANCHISING
Advantages of franchising - To the
franchisee
Knowledge of the market
Offers experience in business and market

Operating and structural controls


Helps in standardization and administrative
controls

14-19

Contd

FRANCHISING
Advantages of franchising - To the
franchisor
Expansion risk
Allows venture to expand quickly using little
capital
Business can be expanded nationally and
internationally
Requires fewer employees than a nonfranchised business

Cost advantages
Supplies can be purchased in large
quantities to achieve economies of scale

14-20

Contd

FRANCHISING
Disadvantages of franchising
Inability of the franchisor to provide
services, advertising, and location
Franchisors failing or being bought out
by another company
Difficulty in finding quality franchisees

14-21

Contd

FRANCHISING
Poor management can cause individual
franchise failures
The ability to maintain tight control over
franchises becomes difficult as their
number increases

14-22

Contd

FRANCHISING
Types of franchises
Dealership - Acts as a retail store for the
manufacturer
Franchise that offers a name, image,
and method of doing business
(McDonalds)
Franchise that offers services (e.g. preschools EuroKids)

14-23

Contd

FRANCHISING
Changes that helped evolve franchising
opportunities:
Good health
Time saving or convenience
Health care
The second baby boom

14-24

INVESTING IN A
FRANCHISE
Factors to be assessed before making
the final decision:

Unproven versus proven franchise


Financial stability of franchise
Potential market for the new franchise
Profit potential for a new franchise

14-25

INVESTING IN A
FRANCHISE

Contd

Franchisors are required to make a


full presale disclosure
Franchise agreement contains the
requirements and obligations of the
franchisee

14-26

INFORMATION REQUIRED IN
DISCLOSURE STATEMENT
TABLE 14.2

14-27

Contd

INFORMATION REQUIRED IN
DISCLOSURE STATEMENT
TABLE 14.2

14-28

OVERCOMING CONSTRAINTS
BY NEGOTIATING FOR MORE
RESOURCES
Distribution task: Negotiating how
the benefits of the relationship will
be allocated between the parties
Integration task: Exploring possible
mutual benefits from the relationship
so that the size of the pie can be
increased
14-29

OVERCOMING CONSTRAINTS
BY NEGOTIATING FOR MORE
RESOURCES

Contd

Assessment 1: What will you do if an


agreement is not reached?
Best alternative to a negotiated
agreement
Helps to determine a reservation price
Reservation price: Price at which the
entrepreneur is indifferent about whether to:
Accept the agreement or choose the alternative

14-30

OVERCOMING CONSTRAINTS
BY NEGOTIATING FOR MORE
RESOURCES

Contd

Assessment 2: What will the other


party to the negotiation do if an
agreement is not reached?
Difficult to assess reservation price
Bargaining zone: Range of outcomes
between the entrepreneurs reservation
price and that of the other party

14-31

OVERCOMING CONSTRAINTS
BY NEGOTIATING FOR MORE
RESOURCES

Contd

Assessment 3: What are the


underlying issues of this negotiation?
How important is each issue to you?
Focus on achieving aspects most
desirable by trading off aspects of less
importance

14-32

OVERCOMING CONSTRAINTS
BY NEGOTIATING FOR MORE
RESOURCES

Contd

Assessment 4: What are the


underlying issues of this negotiation?
How important is each issue to the
other party?
Provides the entrepreneur an
opportunity to sacrifice aspects of less
importance to him/ her but of high
importance to the other party (e.g. icing
and cake, orange peel and orange role
play)
14-33

OVERCOMING CONSTRAINTS
BY NEGOTIATING FOR MORE
RESOURCES

Contd

Negotiation strategies

Build trust and share information


Ask lots of questions
Make multiple offers simultaneously
Use differences to create trade-offs that
are a source of mutually beneficial
outcomes

14-34