Small Business Management Module 3

Revenues generated by these businesses amounted to _____ amounting for what percent of nonfarm gross domestic product of the United States.

$868.1 billion 3.4 percent

Define Franchise Disclosure Document (F D D)

- A detailed statement providing information about the franchisor that satisfies the franchise disclosure requirements of the F T C.

Define business format franchising

- A franchise arrangement whereby the franchisee obtains an entire marketing, management, and supply system geared to entrepreneurs.

Nondisclosure agreement

- An agreement in which the buyer promises the seller that he or she will not reveal confidential information or violate the seller's trust

Define Area developers

- Individuals or firms that obtain the legal right to open several franchised outlets in a given area

Define Multiple-unit ownership

- Ownership by a single franchisee of more than one unit of the franchised company.

6 advantages of franchising

-Established, reputable franchisors offer business models with proven track records. -Attractive franchisors offer value because they have names and trademarks that are well known to prospective customers. -When a new franchisee comes on board, franchisors provide detailed operations manuals that explain the specific steps required to operate the enterprise profitably. -Franchisors support their franchisees by providing training, reducing purchasing costs, designing promotional campaigns, and assisting in obtaining capital. -Franchising can be a way for existing companies to diversify -A number of franchisors provide or facilitate financing for franchisees

What are 4 cons of franchising

-Financial issues. -Churning -Encroachment -Management issues

A potential franchisee should consider asking the following questions when assessing different franchise opportunities:

-Is the franchisor dedicated to a franchise system as its primary means of product and service distribution? -Does the franchisor produce and market quality goods and services for which there is an established consumer demand? - Does the franchisor enjoy a favorable reputation and broad acceptance in the industry? -Will the franchisor offer an established, well-designed marketing plan and provide substantial and complete training to franchisees? -Does the franchisor have good relationships with its franchisees? -Do franchisees have a strong franchisee organization that has negotiating leverage with the franchisor? -Does the franchisor have a history of attractive earnings by its franchisees?

The 6 most frequent means for carrying out growth strategies are through

-Master License -Multiple-unit ownership -Area developers -Piggyback franchising -Multibrand franchising -Co-branding

What are the two primary forms of franchising?

-Product and trade name franchising -Business format franchising

If you are thinking about becoming a franchisor, consider:

-The efficiency of your business model. -How you will finance growth. -What expert assistance you will need. -The content of your operations manual. -Government disclosure requirements. -Your ability to add long-term value for franchisees.

What are the 4 costs associated with being a franchise

-The initial franchise fee -Investment costs. -Royalty payments. -Advertising costs.

Nonquantitative factors in determining the value of a business for sale include:

-The market -Competition -Future community development -Legal commitments -Union contracts -Buildings -Product prices

FRANCHISE DISCLOSURE REQUIREMENTS

-The offer and sale of a franchise are regulated by both state and federal laws. -At the federal level, the minimum disclosure standards are specified by the Franchise Rule.

What are some independent third parties that can be valuable sources of franchise information for potential franchisees.

-state and federal government agencies, -the International Franchise Association, -business publications

Of a franchise, what percent of sales goes towards advertising costs

1 to 2

There are numerous techniques used for valuing a company, but they can be grouped into three basic methods:

1. Asset-based valuation. 2. Market-based valuation. 3. Cash flow-based valuation.

The reasons for buying an existing business can be condensed into the following four categories:

1. To reduce some of the uncertainties that must be faced when starting a business from the ground up. 2. To acquire a business with ongoing operations and established relationships with customers and suppliers. 3. To obtain an established business at a price below what it would cost to start a new business or to buy a franchise. 4. To get into business more quickly than by starting from scratch.

3 Documents completed during the closing include:

A bill of sale. • Tax and other government forms. • Agreements regarding future payments and related guarantees to the seller.

RELYING ON PROFESSIONALS

A buyer should seek the help of outside experts, especially accountants and lawyers.

Define product and trade name franchising

A franchise agreement granting the right to use a widely recognized product or trademark.

Define franchising

A process for expanding a business and distributing goods and services through a licensing relationship.

Define franchise rule

A rule that requires the franchisor to disclose certain information to prospective franchisees.

Define churning

Actions by franchisors to void the contracts of franchisees in order to sell the franchise to someone else and collect an additional fee.

Define Master licensee

An independent firm or individual acting as a middleman or sales agent with the responsibility of finding new franchisees within a specified territory.

What types of companies are examples of product and trade name franchising

Automobile dealers and convenience stores

Who do historians believe was actually the first U.S. franchisor

Benjamin Franklin They cite the arrangement he made with a printer in South Carolina to reproduce Poor Richard's Almanac columns.

Define Co-branding

Bringing two or more franchise brands together within a single enterprise.

EXISTING AND PREVIOUS FRANCHISEES AS SOURCES OF INFORMATION

Existing and previous franchisees are also good sources of information

What is one of the top pros to franchising

Perhaps the most fundamental argument in support of the franchise model is that it reduces the level of risk for business owners.

What services engage in business format franchising

Quick-service restaurants, hotels and motels, and business services typically engage in this type of franchising.

Business brokers

Specialized brokers that bring together buyers and sellers of businesses

What is credited with being the first franchisor in the U.S.

The Singer Sewing Machine company

the market

The ability of the market to support all competing business units, including the one to be purchased, should be determined. • This requires doing marketing research, studying census data, and personally observing each competitor's place of business.

THE FRANCHISE CONTRACT

The basic features of the relationship between the franchisor and the franchisee are embodied in the franchise contract.

EXAMINING THE FINANCIAL DATA

The company's financial statements and tax returns for the past three to five years (or longer) should always be examined.

Due diligence

The exercise of reasonable care in the evaluation of a business opportunity.

Define franchise contract

The legal agreement between franchisor and franchisee.

Define Piggyback franchising

The operation of a retail franchised outlet within the physical facilities of a host store.

Define Multibrand franchising

The operation of several franchised businesses within a single corporate structure.

Define franchisee

The party in a franchise contract that is granted a license to do business under a particular trademark and trade name by the franchisor.

Define franchisor

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

THE FRANCHISOR AS A SOURCE OF INFORMATION

The primary source of information about a franchise opportunity is the franchisor.

• Competition.

The prospective buyer should look into the extent, intensity, and location of competing businesses. • In particular, the buyer should check to see whether the business in question is gaining or losing in its race with rivals

Define franchise

The right to sell the licensing company's goods or services in a particular area.

The legal document must inform

potential franchisees of any restrictions, costs, and provisions for renewal or cancellation of the franchise.

In 2016, franchising was estimated to

provide direct employment in 801,153 franchise establishments, totally nearly 9 million jobs.

Before you sign the agreement, the franchisor must

provide you with a Franchise Disclosure Document.

One of the most important features of the franchise contract is the

provision relating to termination and transfer of the franchise

If the buyer instead purchases only the assets, then the seller is

responsible for settling any outstanding debts previously incurred.

Sources of leads about businesses available for purchase include

suppliers, distributors, trade associations, and even bankers.

A buyer should never go through a closing without

the aid of an experienced attorney who represents only the buyer.

Terms may become more attractive to the buyer and the seller as

the amount of the down payment is reduced and / or the length of the repayment period is extended.

When a business is purchased as a total entity, the buyer not only takes control of

the assets but also assumes any outstanding debt, including any hidden or unknown liabilities.

Once the initial investigation and evaluation have been completed, the buyer must arrive at a fair value for the firm and to do so

the buyer will want to review supporting materials that validate the accuracy of the financial statements, such as state sales tax statements, supplier invoices, customer receipts, and the company's bank statements.

The buyer needs to investigate why

the seller is offering the business for sale.

• An important part of the negotiation process is

the terms of purchase.

The contract spells out

your relationship and obligations to each other

Realtors

—particularly those who specialize in the sale of business firms and business properties—can also provide leads.

Some of the 6 steps in the due diligence process are:

• Identify legal obligations, such as outstanding judgments or tax liens. • Make sure all licensing, permits, and zoning requirements are met. • Review all existing contracts with suppliers and employees. • Verify that the company owns all the assets listed on the balance sheet. • Review accounting practices, revenue, inventory management, accounts receivable, and previous tax returns. • Determine the value of the business

The buyer should recognize that

financial statements can be misleading and may require normalization to yield a realistic picture of the business

Both the franchisee and the franchisor must

fully assess a decision to pursue a franchising opportunity

Both parties to a franchise agreement must

have knowledge of the legal issues involved.

Preferably, the closing will occur under the direction of an

independent third party

The F D D provides

information such as the franchisor's finances, experience, size, and involvement in litigation.

The prospective franchisee must identify a franchising company of interest and

investigate it completely

The decision to purchase an existing business involves a serious

investment of funds, so careful consideration must be given to the advantages and disadvantages of this option

The purchase price of a business is determined by

negotiation between buyer and seller

Once the initial investigation and evaluation have been completed, the buyer must arrive at a fair value for the firm by

arrive at a fair value for the firm.

In some cases, the buyer may have the option of purchasing the

assets only, rather than the business as a whole.

Define encroachment

To sell another franchise location within the market area of an existing franchisee.

A prospective franchisee should also use as many other sources of help, such as

a banker and a professional accounting firm, as would be practical.

the franchise contract should never

be signed by the franchisee without legal counsel

the rights of the franchisee to sell the business to a third party and the rights to renew the contract after the business has been

built up to a successful operating level should be clearly spelled out.

A potential franchisor who is interested in expanding his or her business must address

certain questions before offering the franchise option to possible franchisees.

A prospective buyer cannot be

certain that the seller-owner will be honest in presenting all the facts about the business, especially concerning financial matters.

As with the purchase of real estate, the purchase of a business is

closed at a specific time, and a title company or an attorney usually handles the closing

The franchise contract is typically a

complex document of many pages.

The prospective franchisee should be wary of

contract provisions that contain overly strict or vague cancellation policies.

In order to become a franchisee, you will need to

enter into a legal contract with the franchisor.

Franchisors establish organizational structures and designate employees or partners to

expand the number of franchised outlets and to monitor their performance.