SMALL BUSINESS MANAGEMENT – CHAPTER 4 – FRANCHISING & BUYOUTS – Flashcards

The potential value of any franchising arrangement is determine by the rights contained in the franchise contract. Product and trade name franchising & business-format franchising are the two types of franchising.

Piggyback franchising, mater franchisors, multiple-unit ownership, & area developers are special approaches to franchising. Different franchising systems offer various relationships between franchisor and franchisee.

To set up or cause to function in conjunction with something larger, more important, or already in existence or operation. To function or be carried on or as if on the back of another.

A franchise may be favoured over other alternatives because it offers training, financial assistance, & operating benefits. The major limitations of franchising are its costs, restrictions on business operations, & loss of independence.

The substantial investment required by most franchises justifies careful investigation by a potential franchisee. The most logical source of the greatest amount of information about a franchise is the franchisor.

Existing and former franchisees are good sources of information for evaluating a franchise. Independent third parties, such as the Government and the Canadian Franchise Association, can be valuable sources of franchise information.

The major benefits of becoming a franchisor are reduced capital requirements, increased management motivation, & rapid expansion. The major drawbacks to franchising are reduced control, shared profits, & increased operating support costs.

The basic features of the relationship between the franchisor and the franchisee are embodied in the franchise contract. A franchise contract is a complex document and should be referred to a lawyer for evaluation.

An important feature of the franchise contract is the provision relating to termination and transfer. Five provinces: Alberta, Ontario, PEI, New Brunswick, & Manitoba, have enacted franchise legislation whereby the franchisor must provide prospective franchisees with a Franchise Disclosure Document.

Buying an existing company can reduce uncertainties. In acquiring an existing firm, the entrepreneur can take advantage of the company's ongoing operations & established relationships. It may be cheaper than starting a new business.

Another reason for buying an existing business is that an entrepreneur may be in a hurry to start an enterprise. Investigating a business requires due diligence. A buyer should seek the help of outside experts, the two most valuable sources of outside assistance being lawyers & accountants.

The buyer needs to investigate why the seller is offering the business for sale. The financial data related to the business should always be examined.

Buying assets is more flexible, since the buyer can buy only those assets deemed valuable to the ongoing business. Buying assets means the liabilities & any potential liabilities stay with the seller.

Non quantitative information about the business for sale should also be used in determining its value. The difference between the purchase price and the amount of financing, including goodwill, is often financed by a "vendor take-back" loan.