Assignment 226

Chapter Five

Create, Buy or Franchise a Small Business

Copyright © 2018 by McGraw-Hill Education. All rights reserved

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Learning Objectives

Explain how to go into business for yourself.

Describe the steps involved in the procedure recommended for going into business.

Describe how to search for and identify a product needed by the public—that is, how to find your niche.

Decide whether to start a new business, buy an existing one, or buy a franchise.

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Learning Objectives (cont.)

Describe the growing opportunities in franchising.

Explain how to tell if a franchise is right for you.

Explain the future of franchising.

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How a Business Is
Formed and Operates

Figure 5.1

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Steps in Starting a Business

Search for and identify a needed product.

Study the market for the product, using as many sources as feasible.

Decide whether to start a new business, buy an existing one, or buy a franchise.

Make strategic plans, including setting your mission, strategic objectives, and strategies.

Make operational plans including setting policies, budgets, standards, procedures, and methods, and planning the many aspects of producing and marketing the product.

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Steps in Starting a Business

Make financial plans, including estimating income

estimating initial investment, and locating sources of

funding.

7. Develop these plans into a detailed business plan.

Implement the plan.

Steps 1 through 3 are covered in this Chapter 5. Steps 4 through 8 are covered in Chapter 6. Implementing the business plan is covered throughout the text.

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Finding Your Niche by Identifying
a Needed Product

Niche marketing

The process of finding a small—but profitable— demand for something and producing a custom-made product for that market.

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Choosing the Business to Enter

SCORE (Service Corps of Retired Executives)

Group of retired—but active—managers from all walks of life who help people develop their business ideas.

It takes observation, study, vision, and luck, to recognize the appropriate product for your business.

Do you have a dream? Investigate, prepare, and Go For It!

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Questions to Ask to Help Eliminate
Possible Businesses That Are Wrong for You

Figure 5.2

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Choosing the Business to Enter

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Business Selection Survey Checklist

Figure 5.3

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Methods of Obtaining Information about the Market

Market research

The systematic gathering, recording, and analyzing of data related to the marketing of goods and services.

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Methods Used to Study the Market

First - Determine the size of the industry and market segment you want to enter.

Second - Estimate your competition and determine how you stack up against it.

Third - Estimate your own share of the market.

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Estimating the Size of the Market

How large is the industry?

Where is the market for the company, and how large is it?

Are sales to be made to a selected age group, and, if so, how large is that group?

What are the size and distribution of income within the population?

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Estimating the Size of the Market

Is the sales volume for this kind of business growing, remaining stable, or declining?

What are the number and size of competitors?

What is the success rate for competing businesses?

What are the technical aspects (state of the art) of the industry?

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Which Road to Take?

Figure 5.4

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Reasons FOR Starting a New Business

Reasons for starting a new business lie in the owner’s freedom to:

Define the nature of the business.

Create the preferred type of physical facilities.

Obtain fresh inventory.

Have a free hand in selecting and developing personnel.

Take advantage of the latest technology, equipment, materials, and tools.

Select a competitive environment.

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Reasons for NOT Starting a
New Business

Problems in finding the right business.

Problems associated with assembling the resources,

Lack of an established product line.

Production problems associated with starting a new business.

Lack of an established market and channels of distribution.

Problems in establishing basic management systems and controls.

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Reasons FOR Buying an
Existing Business

Personnel are already working.

The facilities are already available.

A product is already being produced for an existing market.

The location may be desirable.

Relationships have been established with banks and trade creditors.

Revenues and profits are being generated, and goodwill exists.

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Reasons for NOT Buying
an Existing Business

The physical facilities may be old or obsolete.

The employees may have a poor production record or attitude.

The accounts receivable may be past due or uncollectible.

The location may be bad.

The financial condition and relations with financial institutions may be poor.

The inventory may be obsolete or of poor quality.

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Questions to Ask before Buying an Existing Business

Table 5.1

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Questions to Ask before Buying an Existing Business

Table 5.1

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Reasons FOR Buying a Franchise

The franchiser brings proven and successful methods of operation and business images to aid the franchisee.

Franchise has many of the requirements for success.

Franchiser can provide supplemental help through its experience and concentrated study of the field.

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Reasons for Not Buying a Franchise.

Not having enough money to cover all needs (including personal funds).

Unsuccessful marketing.

Issues affecting the franchisee understanding their role in the
responsibilities of
operating the franchise.

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What Is Franchising?

Franchising

A marketing system whereby an individual owner conducts business according to the terms and conditions set by the franchiser.

Franchise

An agreement whereby an independent business person is given exclusive rights to sell a specified good or service.

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What Is Franchising?

Franchiser

Owns the franchise’s name and distinctive elements and licenses others to sell its products.

Franchisee

An independent businessperson who agrees to sell the product according to the franchiser’s requirements.

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Types of Franchising Systems

Product and trademark franchising

Grants the franchisee the right to sell a widely recognized product or brand.

Business format franchising

Grants a franchisee the right to market the product and trademark and to use a complete operating system.

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Types of Franchising Systems

Figure 5.5

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How to Tell Whether a Franchise
Is Right for You

Due diligence

The research and analysis of the company that is done before a business transaction.

You should thoroughly research and analyze to see which franchise could be appropriate for your business circumstances.

Learn which ones are growing fastest.

Figure 5.6 in the text covers How to Check Out a Franchise.

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See What the Franchise
Can Do for You

Franchise fee

One-time fee paid by the franchisee to the franchiser for the business concept, rights to use of trademarks, management assistance, and other related services from the franchiser.

Ask yourself if you are willing to ay these fees, accept the franchiser’s regulations, and give up a certain amount of independence.

www.franchiseking.com

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See What the Franchise
Can Do for You

Royalty fee

Is a continuous fee paid by the franchisee to the franchiser usually based on a percentage of the franchisee’s gross revenue.

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Investigate the Franchise

Prospectus or disclosure statement,(UFOC)

Sometimes called an offering circular, is a document that provides information on 20 items required by the Federal Trade Commission.

The FTC requires that a franchiser gives prospective franchisees a formal agreement and

A Uniform Franchise Offering Circular (UFOC), at least 10 days before any money is paid.

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Obtain Professional Advice

The potential franchisee especially should obtain professional assistance in reviewing and evaluating any franchise under consideration.

A lawyer can advise you about your legal rights and obligations in relation to the franchise agreement and may be able to suggest important changes in it that will protect your interest better.

Know your legal rights.

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Possible Problem Areas for Franchisees

The high price of supplies that must be bought from the franchiser.

Inadequate servicing.

Slashing technical support and services.

Fraud.

Encroachment.

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Expected Areas of Growth

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Other Areas of Expected Development

Synergy

The concept that two or more people, working together in a coordinated way can accomplish more than the sum of their independent efforts.

Another way to think about synergy, is the whole becomes greater than the sum of its parts

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Other Areas of Expected Development

Combination franchising

Big-name franchise operations offer both companies’ products under the same roof.

Also called multi-format franchising, dual branding, complementary branding.

Global franchising

Another opportunity for growth, especially of you choose a fast-food franchise.

For example, Subway was the biggest Global Franchiser in 2016, with 27, 000 restaurants in the U.S. and 42, 920 in other countries.

Table5.3 in the SBMA 8th edition text, shows ten 2016 global franchises, with fees, start-up costs, and royalties.