Franchising as a Growth Strategy

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Questions and Answers

What is refranchising?

Marketing a business for sale

Selling company-owned stores to franchisees (correct)

Closing down unprofitable business locations

Buying an existing business

What is one of the advantages of buying an existing business?

Lower startup costs

Access to new markets

Guarantees a job (correct)

Complete control over business operations

What is a turnkey business?

A business that can be purchased without changing its model and products (correct)

A business that is being sold by its original owner

A business that requires significant renovations

A business that is heavily in debt

What is one of the methods for determining the value of a business?

Review of financial statements Signup and view all the answers

What is one of the advantages of buying an existing business?

Increase experience Signup and view all the answers

What is one of the steps involved in buying an existing business?

Negotiating the deal Signup and view all the answers

What is a key consideration when creating a successful franchise operation?

Developing a unique concept Signup and view all the answers

What is the primary purpose of a Partnership Agreement?

To outline the terms of ownership Signup and view all the answers

What is one of the benefits of buying an existing business?

Business continues to be successful Signup and view all the answers

What is one of the advantages of buying an existing business?

Easier access to financing Signup and view all the answers

What is a characteristic of a Limited Liability Partnership?

One or more general partners and one or more limited partners Signup and view all the answers

What is the main advantage of a franchise arrangement?

The franchisee benefits from the franchisor's brand recognition and support Signup and view all the answers

What is the purpose of the Uniform Partnership Act?

To arrange the law of dealing with partnerships in the US Signup and view all the answers

What is a key characteristic of a corporation?

It is a legal entity created by the state Signup and view all the answers

What is the primary purpose of an S Corporation?

To offer tax benefits Signup and view all the answers

What is a key feature of a master franchise arrangement?

It is a good option in international markets Signup and view all the answers

What is the main objective of the Discounted Future Earnings Approach (DFEA)?

To estimate the net income for several years Signup and view all the answers

Which of the following is a disadvantage of the Capitalized Earnings Approach?

It is difficult to find similar companies for comparison Signup and view all the answers

What is the purpose of the fifth step in the Discounted Future Earnings Approach (DFEA)?

To compute the total value of the business Signup and view all the answers

What is the main goal of the buyer in a business negotiation?

To buy at the lowest price Signup and view all the answers

Which of the following is NOT a step in the Discounted Future Earnings Approach (DFEA)?

Calculate the risk level of the company Signup and view all the answers

What is the main goal of the seller in a business negotiation?

To maximize cash from the deal Signup and view all the answers

Which of the following approaches estimates goodwill by calculating opportunity costs, extra earning power, and tangible net worth?

Excess Earnings Method Signup and view all the answers

What is the purpose of the present value factor in the Discounted Future Earnings Approach (DFEA)?

To discount the future earnings to find the present value Signup and view all the answers

What is the primary objective of preparing an advertising budget?

To determine what is affordable Signup and view all the answers

What type of advertising technique involves sharing the cost of advertising with the retailer?

Shared advertising Signup and view all the answers

What is the term for the area between the price ceiling and price floor?

Price range Signup and view all the answers

What is the term for advertising that is concentrated when customers are most likely to buy?

Pulsing Signup and view all the answers

What is the primary goal of selecting advertising media?

To target a specific demographic Signup and view all the answers

What is the term for a group of businesses that produce ads?

Advertising cooperative Signup and view all the answers

What is the term for innovative ads located in unexpected areas?

Stealth advertising Signup and view all the answers

What is the primary goal of raising prices incrementally?

To communicate with customers Signup and view all the answers

What is the primary purpose of a balance sheet?

To estimate a firm's worth on a specific date Signup and view all the answers

What is the relationship between assets, liabilities, and owner's equity?

Assets = Liabilities + Owner's Equity Signup and view all the answers

What type of asset is a patent?

Intangible asset Signup and view all the answers

What is the purpose of a cash budget?

To manage a firm's cash flow Signup and view all the answers

What is the term for the owner's claim on a business's assets?

Owner's equity Signup and view all the answers

What is the difference between current and long-term liabilities?

Current liabilities are short-term, while long-term liabilities are long-term Signup and view all the answers

What is the purpose of the 'Big Three' of cash management?

To manage a firm's cash flow Signup and view all the answers

What is bootstrapping in the context of cash management?

Avoiding debt to finance a business Signup and view all the answers

What is one of the techniques for identifying business opportunities?

Take a new twist on an existing idea Signup and view all the answers

What is one of the benefits of owning a small business?

Reap profits Signup and view all the answers

What is one of the drawbacks of becoming an entrepreneur?

Risk of losing whole capital Signup and view all the answers

What is one of the top reasons businesses fail?

Lack of planning Signup and view all the answers

What is one of the factors that led to the age of entrepreneurship?

Shift to service economy Signup and view all the answers

What is an important aspect of identifying business opportunities?

Noticing what is missing in the market Signup and view all the answers

What is a common characteristic of entrepreneurs?

Creativity Signup and view all the answers

What is a key aspect of entrepreneurship?

Taking calculated risks Signup and view all the answers

What is the primary consideration for an entrepreneur when choosing a form of ownership?

All of the above Signup and view all the answers

What is the main characteristic of a sole proprietorship?

The owner makes decisions alone Signup and view all the answers

What is the primary advantage of a sole proprietorship?

Low cost to establish Signup and view all the answers

What is the main disadvantage of a sole proprietorship?

Lack of business continuity Signup and view all the answers

What is the primary purpose of a partnership agreement?

To establish the partnership Signup and view all the answers

What is the main advantage of a partnership?

Larger capital Signup and view all the answers

What is the primary disadvantage of a partnership?

Authority conflicts Signup and view all the answers

What is the key difference between a sole proprietorship and a partnership?

Number of owners Signup and view all the answers

What is the primary goal of an Employee Stock Ownership Plan (ESOP)?

To allow employees to earn a part or the whole company Signup and view all the answers

What is the purpose of due diligence?

To investigate and review information about attractive business candidates Signup and view all the answers

What is the primary purpose of a balance sheet?

To provide a clear picture of a company's financial situation Signup and view all the answers

What is the main objective of the seller in a business negotiation?

To get the best possible price for the business Signup and view all the answers

What is the term for the process of adjusting a company's value?

Adjusted balance sheet Signup and view all the answers

What is the primary goal of communicating with employees during a business transition?

To ensure a smooth transition Signup and view all the answers

What is the purpose of listening to employees during a business transition?

To ensure a smooth transition Signup and view all the answers

What is the primary goal of talking about the vision with stakeholders during a business transition?

To communicate the new vision Signup and view all the answers

What is the primary purpose of the Franchise Disclosure Document (FDD)?

To disclose information about the franchise to potential buyers Signup and view all the answers

What is a key consideration when evaluating a franchise opportunity?

The level of support provided by the franchisor Signup and view all the answers

What is the primary advantage of buying an existing franchise?

Established customer base Signup and view all the answers

What is the typical provision in a franchise agreement regarding termination?

Franchisors can terminate the agreement with or without cause Signup and view all the answers

What is the purpose of the seventh step in the process of buying a franchise?

To make a final decision regarding the franchise opportunity Signup and view all the answers

What is the primary characteristic of area development in franchising?

It offers exclusive rights to a specific geographic area Signup and view all the answers

What is the main advantage of conversion franchising?

It provides instant name recognition Signup and view all the answers

What is the primary purpose of the rights and obligations outlined in a franchise agreement?

To govern the franchisor-franchisee relationship Signup and view all the answers

What is the primary purpose of asking core questions to all candidates during an interview?

To ensure consistency in the hiring process Signup and view all the answers

What is the main goal of building an organizational culture?

To allow employees to reach their full potential Signup and view all the answers

What is the primary reason for not relying on candidates' self-descriptions during the hiring process?

To avoid inconsistent and evidence-based selection process Signup and view all the answers

What is the main objective of motivating workers in an organization?

To increase employee productivity Signup and view all the answers

What is the primary purpose of sponsoring a 'job shadowing' program for students?

To provide students with real-world work experience Signup and view all the answers

What makes a test valid?

It measures what it is intended to measure Signup and view all the answers

What is the main goal of creating an environment of trust in an organization?

To communicate the company's values and vision Signup and view all the answers

What is the primary purpose of communicating the company's values and vision?

To create an environment of trust and motivation Signup and view all the answers

Study Notes

Master Franchising and Cobranding

Master franchising can be a good option in international markets
Cobranding involves teaming up with complementary products or services, serving dual-career couples and aging baby boomers

Strategies for a Successful Franchise Operation

A unique concept is needed to create a successful franchise operation
The concept must be replicable
Expansion plans are necessary
Legal guidance is required

Types of Business Ownership

Sole Proprietorship

The owner makes decisions alone
The owner has unlimited personal liability

Partnership

An association of multiple people who own a business together to make a profit
A partnership agreement states the terms of ownership to protect the rights of each owner
The Uniform Partnership Act arranges the law of dealing with partnerships in the US

Limited Partnerships

One or more general partners and one or more limited partners
Limited Liability Partnerships (LLPs) are a type of limited partnership where all partners are limited partners

Corporation

A legal entity created by the state that can sue or be sued in its name, enforce contracts, transfer property, and can be liable if it violates the law
An S-Corporation is a type of corporation made for tax purposes
A Limited Liability Corporation (LLC) is an S-Corporation but is not subject to the same restrictions

Franchising

Semi-independent owners pay fees to a company for the right to sell its products and services under the franchiser's trade name
Refranchising involves reducing the number of company-owned stores

Buying an Existing Business

Advantages include business continuity, guaranteed job, easier access to financing, increased experience, and the ability to purchase without changing the business model and products
Methods for determining the value of a business include:
- Variation 1: Excess Earnings Method, which estimates goodwill and calculates opportunity costs, extra earning power, and tangible net worth
- Variation 2: Capitalized Earnings Approach, which calculates risk level
- Variation 3: Discounted Future Earnings Approach (DFEA), which estimates net income for several years and discounts the future earnings using the present value factor

Negotiating the Deal

Tips for negotiating include:
- Developing a negotiating strategy
- Focusing on the issue, not the person
- Being a good listener
- Being patient and flexible
Seller goals include:
- Getting the highest price
- Minimizing tax burden
- Maximizing cash from the deal
- Avoiding unreasonable contract terms
Buyer goals include:
- Buying at the lowest price
- Negotiating a favorable price
- Avoiding the seller competing against them
- Minimizing payment upfront

Advertising on a Small Budget

Selecting advertising media options include:
- Email
- Social media
- TV
- Radio
- Newspaper/magazine
- Word-of-mouth
Preparing an advertising budget involves:
- Determining what is affordable
- Matching competitor's ad expenditures
- Using percentage of sales (past or future)
- Objective-and-task method
Advertising strategies include:
- Comparative advertising
- Shared advertising
- Stealth advertising
- Repeating successful ads
- Concentrating advertising when customers are most likely to buy

Pricing Strategies

The price range is the area between the price ceiling and price floor
Communicating with customers and raising prices incrementally are important pricing strategies

Identifying Business Opportunities

Techniques for identifying business opportunities include:
- Taking different approaches to a market
- Looking for creative ways to use existing resources
- Putting a new twist on an old idea
- Monitoring trends
- Realizing that all face the same problems
- Noticing what is missing in the market

Benefits of Owning a Small Business

Benefits of owning a small business include:
- Control over one's destiny
- Making a difference
- Contributing to society
- Reaching full potential
- Reaping profits
- Doing what one enjoys

Drawbacks of Entrepreneurship

Drawbacks of becoming an entrepreneur include:
- Uncertainty of income
- Risk of losing whole capital
- Long working hours
- Low quality of life at the beginning
- High levels of stress
- Complete responsibility
- Discouragement

Top 5 Reasons Businesses Fail

Top 5 reasons businesses fail include:
- Bad location
- Insufficient capital
- Lack of experience
- Poor inventory control
- Lack of planning

Factors Leading to Entrepreneurship

Factors that led to the age of entrepreneurship include:
- Shift to service economy

Choosing a Form of Ownership

Issues to consider when choosing the form of ownership include:
- Control
- Managerial ability
- Business goal
- Taxes consideration

Sole Proprietorship

Definition: ownership where the owner makes decisions alone
Advantages:
- Simple to create
- Low cost to establish
- Encourages profits
- Only one to make decisions
- No legal restrictions
- Easy to stop and terminate
Disadvantages:
- Limited access to capital
- Limited abilities and skills
- Feelings of isolation
- Lack of business continuity

Partnership and Corporation

Partnership definition: association of multiple people who own a business together to make profit
Advantages:
- Easy to establish
- Larger capital
- Strict operations
Disadvantages:
- Authority conflicts
- Partners are bound by the laws

Franchising and the Law

Franchise disclosure document (FDD) must be presented before any offer or sale
FDD must be written in English and contains information such as:
- Business experience
- Franchise fees and costs
- Lawsuits involving the franchisor

The Right Way to Buy a Franchise

7 steps to buying a franchise:
- Evaluate yourself
- Research market
- Consider options
- Get a copy of FDD and study it
- Talk to existing franchisees
- Ask franchisors questions
- Make your choice

Franchise Contracts

Govern the franchisor-franchisee relationship
Example: rights and obligations
Termination: franchisors can terminate “with or without cause” while franchisees can’t
Renewal: franchisors usually have the right to renew or refuse contract renewal
Transfer and buybacks: franchisees are usually not free to sell their business without approval

Trends in Franchising

Trends in franchising include:
- Smaller, nontraditional locations
- Conversion franchising: offers instant name recognition
- Refranchising: reducing the number of company-owned stores
- Area development: offers exclusive rights to an area
- Employee Stock Ownership Plan (ESOP): a plan in which employees earn a part or the whole company

Due Diligence

Definition: investigating, studying, reviewing, and verifying relevant information concerning the most attractive business candidates in greater detail
Process involves:
- Adjusted balance sheet technique: a realistic method to determine a company’s value
- Employee Stock Ownership Plan (ESOP): a plan in which employees earn a part or the whole company

New Business Planning Process

Conducting a feasibility analysis and crafting a winning business plan
Elements of a business plan:
- What lenders and investors look for in a business plan
The pitch: making the business plan presentation

The Entrepreneur’s Role as Leader

4 vital tasks:
- Hire the right employees and constantly improve their skills
- Build an organizational culture that allows one to reach potential
- Communicate the values and vision of the company and create an environment of trust
- Motivate workers

Hiring the Right Employees

Poor hiring practices:
- Trusting candidates' self-descriptions rather than testing them
- Inconsistent, evidence-based selection process
- Not explaining the jobs they're hiring for
- Send recruiters to college students
Creative recruiting techniques:
- Sponsoring a "job shadowing" program for students
- Invite college seniors to a company tailgate at a sports event
- Host job fairs

Valid and Reliable Tests

Definition: a test that measures what it is intended to measure
Reliable test: a test that measures consistently over time

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Description

This quiz covers franchising strategies, including master franchising, cobranding, and serving specific demographics, as well as the elements needed to create a successful franchise operation.