Chapter Objectives

1. To describe the major pathways and structures for

entrepreneurial ventures.
2. To present the factors involved in creating a new
venture
3. To identify and discuss the elements involved in
acquiring an established venture
4. To outline ten key questions to ask when buying an
ongoing venture
5. To examine the underlying issues involved in the
acquisition process
6. To define a franchise and outline its structure
7–2
Chapter Objectives (cont’d)
7. To examine the benefits and drawbacks of
franchising
8. To present the franchise disclosure document
(FDD) as a key item in franchises

7–3
The Pathways to New Ventures
for Entrepreneurs

Creating the Acquiring an

New Venture Existing Venture

Pathways to New
Ventures

Obtaining a
Franchise

7–4
Creating New Ventures

Approaches to
New-New New-Old
Approach Creating a New Approach
Venture

7–5
 New Approach
 New products or services frequently enter the market.
 Examples are smartphones, MP3 players, plasma
televisions, and global positioning systems (GPS).

New-Old Approach
 Start on someone else’s idea by either improving a
product or offering a service in an area in which it is not
currently available.
 Examples are setting up restaurants, clothing stores, or
similar outlets in sprawling suburban areas do not have
an abundance of these stores.

7–6
Table
7.1 Trends Creating Business Opportunities

Emerging Opportunities
Green Products Health Care Niche Consumables Home Automation and
Organic foods Healthy food Wine Media Storage
Organic fibers/textiles School and govt.- Chocolate Lighting control
Alternative Energy sponsored programs Burgers Security systems
Solar Exercise Coffee houses Energy management
Biofuel Yoga Exotic salads Comfort management
Fuel cells Niche gyms Entertainment systems
Energy conservation Children Networked kitchen
Nonmedical appliances
Pre-assisted living
Assisted living transition
services

Emerging Internet Opportunities Emerging Technology Opportunities

Mobile Advertising Virtual Economies Nanotechnology
Cell phones Online auctions Wireless Technology
PDAs Educational Tutoring
Concierge Services Human Resources Services
Niche Social Networks Matchmaking
Seniors Virtual HR
Music fans Online Staffing
Groups of local users
Pet owners
Dating groups
Source: Steve Cooper, Amanda C. Kooser, Kristin Ohlson, Karen E. Spaeder, Nichole L.
Torres, and Sara Wilson, “2007 Hot List,” Entrepreneur (December 2006): 80–93.

7–7
Figure
7.1 Sources of New Business Ideas Among Men and Women

Source: William J. Dennis, A Small Business Primer (Washington, DC: National

Federation of Independent Business, 1993) 27. Reprinted with permission.

7–8
Examining the Financial Picture
When Creating New Ventures
• Upside gain and downside loss expectations
 The profits the business can make and the losses it
can suffer.
• How much money will the enterprise take in if all goes well?
• How much will it gross if operations run as expected?
• How much will it lose if operations do not work out well?

• Risk vs. reward analysis

 Points out the importance of getting an adequate
return on the amount of money risked.

7–9
Table
7.2 Checklist for Estimating Start-Up Expenses

Source: U.S. Small Business Administration, “Management Aids” MA. 2.025 (Washington, DC: U.S. Government Printing Office.)

7–10
Table
7.2 Checklist for Estimating Start-Up Expenses (cont’d)

Source: U.S. Small Business Administration, “Management Aids” MA. 2.025 (Washington, DC: U.S. Government Printing Office.)

7–11
Acquisition of an Established Business Venture

1. Personal
Preferences

Steps in Acquiring an
2. Examination Established 3. Evaluation of
of Opportunities Entrepreneurial the Venture
Venture

4. Asking Key
Questions

7–12
1. Personal Preferences
 Entrepreneurs need to recognize certain personal
factors and to limit their choices of ventures
accordingly. An entrepreneur's background, skills,
interests, and experience are all important factors in
selecting the type of business to buy.

2. Examination of Opportunities
 Various sources of available opportunities:
1. Business brokers
2. Newspaper ads
3. Trade sources
4. Professional sources

7–13
Advantages of Acquiring an Ongoing Venture

Less fear about

Reduced time Purchasing at
successful future
and effort a good price
operation

Buying an
Ongoing Venture

7–14
3. Evaluation of the Selected Venture

Factors Affecting Sale

of the Venture

The business Assets of the

environment venture
Profits, sales, and
operating ratios

7–15
4. Key Questions to Ask
• Why is this business being sold?
• What is the current physical condition of the business?
• What is the condition of the inventory?
• What is the state of the other assets of the business?
• How many employees will remain with the business?
• What type of competition does the business face?
• What does financial picture of the business look like?

7–16
Negotiating the Deal

Information

Time
Factors Affecting Pressure
Negotiations

Alternatives

7–17
Considerations When Buying a Business
• Request that the seller retain a minority interest
in the business or make the final purchase price
dependent on the performance of the business
over a three-to-five-year span.
• Be wary of any promises made without written
corroboration.
• Spend time reconstructing financial statements to
determine how much cash is actually available.
• Interview the owner, vendors, competitors,
customers, and employees.

7–18
Franchising: The Hybrid
• Franchising
 Any arrangement in which the owner of a trademark,
trade name, or copyright has licensed others to use it
in selling goods or services.
• Franchisee
 A purchaser of a franchise
• Franchisor
 The seller of the franchise

7–19
How Franchising Works
• Franchisee Obligations:
1. Make a financial investment in the operation.
2. Obtain and maintain a standardized inventory
and/or equipment package usually purchased
from the franchisor.
3. Maintain a specified quality of performance.
4. Follow a franchise fee as well as a percentage
of the gross revenues.
5. Engage in a continuing business relationship.

7–20
How Franchising Works (cont’d)
• Franchisor Provides:
1. The company name that provides drawing power.
2. Identifying symbols, logos, designs, and facilities.
3. Professional management training for each
independent unit’s staff.
4. Sale of merchandise necessary for the unit’s
operation, equipment to run the operation, and the
food or materials needed for the final product.
5. Financial assistance, if needed.
6. Continuing aid and guidance to ensure that
everything is done in accordance with the contract.

7–21
Franchising
• Advantages • Disadvantages
 Training and guidance  Franchise fees
 Brand-name appeal  Franchisor control
 A proven track record  Unfulfilled promises
 Financial assistance of franchisor

7–22
Table
7.3 The Cost of Franchising

1. The basic franchising fee

2. Insurance
3. Opening product inventory
4. Remodeling and leasehold improvements.
5. Utility charges
6. Payroll
7. Debt service
8. Bookkeeping and accounting fees
9. Legal and professional fees
10. State and local licenses, permits, and certificates

7–23
Franchise Law
• Franchise Disclosure Document (FDD)
 Is divided into 24 items that provide different
segments of information for prospective franchisees.
 Was developed to provide guidance in complying
with the Franchise Disclosure Rule that requires
franchisors to make full presale
disclosure about their franchises.

7–24
Figure
7.2 The Decision to Purchase a Franchise: Process Model

Source: Patrick J. Kaufmann, “Franchising and the Choice of Self

Employment,” Journal of Business Venturing, 14(4): 1999: 348.
7–25
Table
7.4 World Wide Web Franchise Sites

Sites for franchising

http://www.betheboss.com
http://franchise1.com
http://www.franchiseworks.com/
http://franchise.org/

7–26
Table
7.4 World Wide Web Franchise Sites (cont’d)
American Bar Association Forum on Franchising www.abanet.org
U.S. Small Business Administration www.sba.gov
Statistics – USA www.stat-usa.gov
Entrepreneur Magazine www.entrepreneur.com/franchises/bestofthebest/index.html
Minority Business Entrepreneur Magazine www.mbemag.com
Franchise Times www.franchisetimes.com
Franchise Update www.franchise-update.com
Restaurant Business Magazine www.restaurantbiz.com
Source Book Publications www.worldfranchising.com
Federal Trade Commission http://www.ftc.gov/bcp/franchise/netfran.shtm
Franchise.com http://www.franchise.com/
World Franchising http://www.worldfranchising.com/
Franchise Solution http://www.franchisesolutions.com/
Franchise Opportunities http://www.franchiseopportunities.com/
Franchise Trade http://www.franchisetrade.com/
The Franchise Magazine http://www.thefranchisemagazine.net/
Franchise Info Mall http://www.franchiseinfomall.com/
Franchise Advantage http://www.franchiseadvantage.com
US Franchise News http://www.usfranchisenews.com/

7–27
Evaluating Franchising Opportunities

The Franchise
Opportunity Decision

Finding Reliable Investigating the Seeking

Information Franchisor Professional Help

7–28
Key Terms and Concepts

• business broker • new-old approach

• franchise • non-compete clause
• franchisee • profit trend
• franchise fee • risk vs. reward
• franchisor • Uniform Franchise
• franchisor control Offering Circular (UFOC)
• goodwill • unscrupulous practices
• legal restraint of trade • upside gain and downside
• new-new approach
loss

7–29