Chapter 4: Franchises and Buyouts Flashcards
What is a franchise?
A business model that involves one business owner licensing trademarks and methods to an independent entrepreneur
The owner of a trademark, service mark, trade name, or advertising symbol is called
Franchisor
The party in a franchise contract that specifies the methods to be followed and the terms to be met by the other party is the
Franchisor
An individual or group wishing to use the franchisor’s identification in a business is the
Franchisee
An entrepreneur whose power is limited by a contractual relationship with a franchissing organization is the
Franchisee
A franchise arrangement whereby the franchisee obtains an entire marketing and management system geared to entrepreneurs
Business Format Franchising
The franchisor provides a full range of services including site selection, training, product supply, marketing plans, and assistance in obtaining financing in this format
Business Format Franchising
The legal agreement between franchisor and franchisee is the
Franchise Contract
An independent firm or individual acting as a middleman or sales agent with the responsibility of finding new franchisees within a specified territory
Master License
Ownership by a single franchisee of more than one franchise from the same company
Multiple-Unit Ownership
Individuals or firms that obtain the legal right to open several franchised outlets in a given area
Area Developers
Operation of a retail franchise within the physical facilities of another business
Piggyback Franchising
Operating several franchise organizations within a single corporate structure
Multibrand Franchising
Bringing two franchise brands together under one owner
Co-Branding
The purpose of this is to protect, enhance, and promote franchising
The International Franchise Association
An entrepreneur who enters into a franchising agreement acquires the right to use the franchisor’s
Trademark or brand name
This protects words, names, symbols, sounds, or colors that distinguish goods and services from those manufactured or sold by others and to indicate the source of the goods
Trademark
A trademark protects what?
The words, names, symbols, sounds, or colors that distinguish goods and services
How long can trademarks be renewed?
Forever as long as they are being used in commerce
What are the pros of franchising?
Trade names and trademarks A proven business system Training Support Supply and Purchasing power Financial Support
What are the Cons of franchising?
Financial Issues
Franchisor Competition
Management Issues
Actions by franchisors to void the contracts of franchisees in order to sell the franchise to someone else and collect an additional fee
Churning
The franchisor’s selling of another franchise location within the market area of an existing franchise
Encroachment
What are the most common restrictions with management of a franchise?
Limiting sales territories
Requiring site approval for the retail outlet
Imposing requirements regarding outlet appearance
Limiting goods and services offered for sale
Limiting advertising and hours of operations
What are the costs of being a franchisee?
Initial franchise fee
Investment costs
Royalty Payments
Advertising Costs
Who investigates who when researching for a potential franchise opportunity?
The franchisor investigates the potential franchisee, and the franchisee investigates the franchisor
A detailed statement of such information such as the franchisor’s finances, experience, size, and involvement in litigation is the
Franchise Disclosure Document
The Franchise Disclosure Document must inform potential franchisees of these
Any restrictions, costs, and provisions for renewal or cancellation of the franchise
Steps for finding a business to buy
Identify your interests
Consider your talents
List conditions for your business
Quantify your investment
Specialized brokers who bring buyers and sellers of businesses together
Business Brokers
The exercise of reasonable care in the evaluation of a business opportunity
Due Dilligence
What are the most common reasons why owners sell their businesses?
Retirement Illness Partnership or family disputes Unprofitability Burnout Lack of Capital for growth potential
How far back should you ask for financial data
The past 5 years, or as many as available
The buyer promises the seller that he or she will not reveal confidential information or violate the trust that the seller has offered in providing the information
Nondisclosure Agreement
The price at which the property would change hands between a willing buyer and willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts
Fair Market Value
3 Basic Approaches used for valuing a company
Asset-Based Valuation
Market-Comparable Valuation
Cash-Flow Based Valuation
How is the purchase price of a business determined?
Negotiation
If the buyer buys the total entity of the business, the buyer then takes control of the business, as well as
Assuming any outstanding dept and hidden or unknown liabilities
