For A-Plus Writer Only

References

Hisrich, R.D., Peters, M.P., & Shepherd, D.A. (2013). Entrepreneurship (Laureate Custom

Education). New York: McGraw-Hill Irwin.

Custom Create Edition LAUREATE EDUCATION INC

424 I Eotrepreo<"" h;p . .-...------·+---------

ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES

1

To understand franchising from the perspective of both the entrepreneur looking to reduce the risk of new entry and the entrepreneur looking

for a way to grow his or her business.

2 To understand how joint ventures can help an entrepreneur grow his or her business

and acknowledge the challenges of finding, and maintaining, an effective joint venture relationship.

3 To be aware of the pros and cons of using acquisitions to grow a business

and to know what to look for in an acquisition candidate.

4 To understand the possibilities of achieving growth through mergers and

leveraged buyouts and the challenges associated with each.

5 To understand the tasks of negotiation and develop the skills

to more effectively conduct these tasks.

I Entrepreneurship, Eighth Edition I 425

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OPENING PROFILE

BILL GROSS

How does a start-up company take advantage of the seemingly endless opportunities

of the Internet by using the creative talents of one person and then letting other se-

lected entrepreneurs take over the responsibility of running these businesses? It

sounds like a repeat of history when Thomas Edison made invention a business. But the

new kid on the block is Bill Gross, whose vision is to grow

his ldealab by nurturing and monitoring other Internet

businesses that have resulted because of his ingenuity. He

refers to Idea lab as Internet start-ups in a box. Basically the

concept is simple. Bill comes up with an idea for an Internet start-up . He locates some-

one, either a former executive or even an engineering student, who he thinks is right

for the job. That person is then given the reins to start this venture all under the roof

of an incubator-like operation, where Bill provides the structure and services necessary

to make these start-ups rapidly grow into successful enterprises.

Bill describes ldealab as a combination of incubator, venture capitalist, and creative

think tank. Like an incubator, it provides shared space and administrative services, it of-

fers seed financing for a minority equity position (up to 49 percent), and it uses every-

one to brainstorm on the most opportune technology applications. Started in 1996 in

Pasadena, California, to date the company has created 30 Internet ventures, all at var-

ious stages of development. Each idea came from Gross or one of his ldealab staff man-

agers. For each firm a CEO was found and hired using Bill's networking skills in the

Internet industry and at Caltech, his alma mater. Then the core expert staff becomes

involved to get these ventures up and running as quickly as possible . This involves de-

veloping the technology, conducting marketing research, preparing a business plan,

hiring management, launching the venture, and finally either going public or sell ing

the business. The seed financing that ldealab provides to these start-ups does not ex-

ceed $250,000. Bill believes that Internet start-ups do not need large amounts of capi-

tal to get started but, more importantly, do need knowledge, intelligence, and speed.

Knowledge and intelligence are provided by Bill and the ldealab's staff experts, and

speed focuses on the ability to quickly grow a start-up, but with few mistakes. Accord-

ing to Bill, these two elements are much more important in the successful launch and

growth of an Internet company than money.

411

' j

-~26_+- ~ntrep~neursh ip

412 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

Bill Gross personifies the real meaning of an entrepreneur. He probably holds

the unique distinction in the field of entrepreneurship of not only starting ma

businesses but also turning all of them into successful enterprises. As an enterpris i_ - o;

12-year-old he noticed that the corner drugstore was selling candy at 9 cents, and a-

the Sav-On nearby it was selling for 7 cents. He quickly figured out that with no over-

head he could make an easy profit on the price spread. Bill then moved on to his nex!

successful enterprise by placing ads in Popular Mechanics, where he sold $25,000 wo

of solar devices and plans. The proceeds from this effort were used to finance his fres h-

man year's tuition at Caltech. While at Caltech he proceeded to launch GNP Inc., a

stereo equipment maker. This enterprise not only was very successful but was reco g-

nized as one of Inc. magazine's top 500 growth ventures in 1982 and 1985. His next en-

terprise was created when Bill and his brother found a way to make Lotus 1-2-3 obe

simple commands. Mitch Kapor, the founder of Lotus, was impressed with their soft-

ware and purchased their business for $10 million .

The success streak continued with the launch of Knowledge Adventure in 1991. This

venture developed and marketed educational software and was conside red to be his

most successful venture to date. He sold the business in 1997 for $100 million. ldea lab

actually was created in 1996 when Bill was stepping down from Knowledge Adventu re

and negotiating the sale.

A sample of some of the companies launched by Idea lab includes CitySearch, whi ch

competes with Microsoft and provides online services for urban communities; Entertai n-

Net, an Internet broadcaster that provides news and related information; an d

Answer.com, a Web site that will answer any question you might have and which has al-

ready been acquired by another company. Last year Bill expanded his operations into

Silicon Valley. He wanted to be close to the action and take advantage of ldealab's abil-

ity to quickly transform some of these Internet opportunities into successful ventures.

Growing these start-ups is a challenge to Bill Gross, and although there is hig h

risk in the Internet industry, Bill feels that ldealab will continue to stay focused on

its mission. 1

USING EXTERNAL PARTIES TO HELP GROW A BUSINESS In Chapter 3, we introduced franchising as a means of new entry that can reduce the ri sk of downside loss for the franchisee. Franchising is also an alternative means by which an entrepreneur may expand his or her business by having others pay for the use of the name, process, product, service, and so on. Using franchising as a growth mechanism is the primary focus of this chapter. Given the importance of franchising for both new en- try and growth, the first section explores franchising from the perspective of the entrepre- neur looking to use franchising to reduce the risks of new entry and from the perspective of the entrepreneur looking to use franchising as a way to grow his or her business . The second section explores other external mechanisms for growing a business, namely, joint

franchising An arrangement whereby a

franchisor gives exclusive

rights of local distribution

to a franchisee in return

for payment of royalties

and conformance to

standardized operating

procedures

franchisor The person

offering the franchise

Franchisee The person

who purchases the

franchise

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CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 413

ventures, acquisitions, and mergers. Finally, this chapter provides some useful advice for those entrepreneurs who need to negotiate to obtain the human and financial resources necessary to fuel business growth.

FRANCHISING Franchising is "an arrangement whereby the manufacturer or sole distributor of a trade- marked product or service gives exclusive rights of local distribution to independent retailers in return for their payment of royalties and conformance to standardized operating proce- dures."2 The person offering the franchise is known as the franchisor. The franchisee is the person who purchases the franchise and is given the opportunity to enter a new business with a better chance to succeed than if he or she were to start a new business from scratch.

Advantages of Franchising-to the Franchisee One of the most important advantages of buying a franchise is that the entrepreneur does not have to incur all the risks associated with creating a new business. Table 14.1 summa- rizes the important advantages of a franchise . Typically, the areas that entrepreneurs have problems with in starting a new venture are product acceptance, management expertise, meeting capital requirements, knowledge of the market, and operating and structural con- trols. In franchising, the risks associated with each are minimized through the franchise re- lationship, as discussed in the following.

Product Acceptance The franchisee usually enters into a business that has an accepted name, product, or service. In the case of Subway, any person buying a franchise will be us- ing the Subway name, which is well known and established throughout the United States. The franchisee does not have to spend resources trying to establish the credibility of the business. That credibility already exists based on the years the franchise has existed. Sub- way has also spent millions of dollars in advertising, thus building a favorable image of the products and services offered. An entrepreneur who tries to start a sandwich shop would be unknown to the potential customers and would require significant effort and resources to build credibility and a reputation in the market.

Management Expertise Another important advantage to the franchisee is the manage- rial assistance provided by the franchisor. Each new franchisee is often required to take a training program on all aspects of operating the franchise. This training could include classes in accounting, personnel management, marketing, and production. McDonald's, for

TABLE 14.1 What You May Buy in a Franchise

1. A product or service with an established market and favorable image.

2. A patented formula or design.

3. Trade names or trademarks.

4. A financial management system for controlling the financial revenue.

5. Managerial advice from experts in the field.

6. Economies of scale for advertising and purchasing.

7. Head office services.

8. A tested business concept.

428 I Entrepreneurship

414 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

example, requires all its franchisees to spend time at its school, where everyone classes in these areas. In addition, some franchisors require their new franchis~­ actually work with an existing franchise owner or at a company-owned store or f: to get on-the-job training. Once the franchise has been started, most franchi sors offer managerial assistance on the basis of need. Toll-free numbers are also availab~= that the franchisee can ask questions anytime. Local offices for the larger fr an continually visit the local franchisees to offer advice and keep owners informed of- developments.

The training and education offered is actually an important criterion that the en neur should consider in evaluating any franchise opportunity. If the assistance in start -=- not good, the entrepreneur should probably look elsewhere for opportunities unless she already has extensive experience in the field.

Capital Requirements As we've seen in previous chapters, starting a new ven can be costly in terms of both time and money. The franchise offers an opportuni . start a new venture with up-front support that could save the entrepreneur sig nifi,-- time and possibly capital. Some franchisors conduct location analysis and marker •=- search of the area that might include an assessment of traffic, demographics, busin~ conditions, and competition . In some cases, the franchisor will also finance the ini investment to start the franchise operation. The initial capital required to purchase franchise generally reflects a fee for the franchise, construction costs, and the purch: of equipment.

The layout of the facility, control of stock and inventory, and the potential buying po of the entire franchise operation can save the entrepreneur significant funds. The size of r'-.: parent company can be advantageous in the purchase of health care and business insuran• since the entrepreneur would be considered a participant in the entire franchise organiL:!: tion. Savings in start-up are also reflected in the pooling of monies by individual ~­ chisees for advertising and sales promotion. The contribution by each franchisee is usual:. a function of the volume and the number of franchises owned. This allows advertising both a local and a national scale to enhance the image and credibility of the business, some- thing that would be impossible for a single operation.

Knowledge of the Market Any established franchise business offers the entreprenec years of experience in the business and knowledge of the market. This knowledge is ust!- ally reflected in a plan offered to the franchisee that details the profile of the target cus- tomer and the strategies that should be implemented once the operation has begun. This · particularly important because of regional and local differences in markets. Competition media effectiveness, and tastes can vary widely from one market to another. Given their experience, franchisors can provide advice and assistance in accommodating any of these differences.

Most franchisors will be constantly evaluating market conditions and determining the most effective strategies to be communicated to the franchisees. Newsletters and other pub- lications that reflect new ideas and developments in the overall market are continually sen;- to franchisees.

Operating and Structural Controls 1\vo problems that many entrepreneurs have iL starting a new venture are maintaining quality control of products and services and estatr lishing effective managerial controls. The franchisor, particularly in the food business, will identify suppliers that meet the quality standards established. In some instances, the sup- plies are actually provided by the franchisor. Standardization in the supplies, products, ana

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CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 415

services provided helps ensure that the entrepreneur will maintain quality standards that are so important. Standardization also supports a consistent image on which the franchise busi- ness depends for expansion.

Administrative controls usually involve financial decisions relating to costs, inventory, and cash flow, and personnel issues such as criteria for hiring and firing, scheduling, and training to ensure consistent service to the customer. These controls will usually be outlined in a manual supplied to the franchisee upon completion of the franchise deal.

Although all the preceding are advantages to the franchisee, they also represent impor- tant strategic considerations for an entrepreneur who is considering growing the business by selling franchises. Since there are so many franchise options for an entrepreneur, the franchisor will need to offer all the preceding services to succeed in the sale of franchises. One of the reasons for the success of such franchises as McDonald's, Burger King, KFC, Boston Market, Subway, Midas, Jiffy Lube, Holiday Inn, Mail Boxes Etc., and Merry Maids is that all these firms have established an excellent franchise system that effectively provides the necessary services to the franchisee.

Advantages of Franchising-to the Franchisor The advantages a franchisor gains through franchising are related to expansion risk, capi- tal requirements, and cost advantages that result from extensive buying power. Consider the success of the Subway chain. Clearly, Fred DeLuca would not have been able to achieve the size and scope of his business without franchising it. To use franchising as an expansion method, the franchisor must have established value and credibility that someone else is willing to buy.

Expansion Risk The most obvious advantage of franchising for an entrepreneur is that it allows the venture to expand quickly using little capital. This advantage is signif- icant when we reflect on the problems and issues that an entrepreneur faces in trying to manage and grow a new venture (see Chapter 13). A franchisor can expand a business nationally and even internationally by authorizing and selling franchises in selected lo- cations. The capital necessary for this expansion is much less than it would be without franchising. Just think of the capital that DeLuca would require to build 8,300 Subway sandwich shops.

The value of the franchise depends on the to-date track record of the franchisor and on the services offered to the entrepreneur or franchisee. Subway's low franchise fee has enhanced expansion opportunities, as more people can afford it.

Operating a franchised business requires fewer employees than a nonfranchised busi- ness. Headquarters and regional offices can be lightly staffed, primarily to support the needs of the franchisees. This allows the franchisor to maintain low payrolls and minimizes personnel issues and problems.

Cost Advantages The mere size of a franchised company offers many advantages to the franchisees. The franchisor can purchase supplies in large quantities, thus achieving economies of scale that would not have been possible otherwise. Many franchise busi- nesses produce parts, accessories, packaging, and raw materials in large quantities, and then in turn sell these to the franchisees. Franchisees are usually required to purchase these items as part of the franchise agreement, and they usually benefit from lower prices .

One of the biggest cost advantages of franchising a business is the ability to commit larger sums of money to advertising. Each franchisee contributes a percentage of sales

430 I '""'"""'""h;p -:.;... _______ ~-~~--~-------- - -- -- ---------- ---- -- ·---- ----· -- ---------- ------------------- ---------

AS SEEN IN BUSINESSWEEK

VENTURE CAPITAL' S FAVORITE STARTUPS

Over the past four quarters-even as the depths of the na- tion's economic problems became evident-venture capital- ists invested more than $7 billion in seed and early-stage companies in more than 1,400 deals, according to the MoneyTree Report from the National Venture Capital Assn. That's more money raised by young companies than in any calendar year since the dot-com bubble burst in 2001.

In the largest deals of the past year, venture capital firms poured money into companies tackling the global problems of climate change and disease. The challenges are great-and investors bet that the payoffs will be, too-for the startups that successfully commercialize ideas like solar power, low- emission cars, and new medications.

Who are these hot startups? To find out. we followed the money, looking at deals that took place in the four most re- cent quarters ava ilable, from October 2007 to September 2008, based on the MoneyTree report, which uses data from Thomson Reuters. We then reached out to a selection of the seed and early-stage companies that raised the most money and profiled them in a slide show.

At the top of the list are some veteran entrepreneurs who have already proven themselves to investors by found- ing companies that led to acquisitions. The team behind Relypsa, a Santa Clara (Calif.) drug development company working on a treatment for life-threatening hyperkalemia in heart and kidney patients, sold their last company to Amgen (AMGN) for $420 million in 2007. Relypsa, founded months after the acquisition, raised $33 million in late 2007.

But even for well-capitalized startups with proven track records, the uncertain funding outlook means they have to make every dollar count. Gerrit Klaerner, Relypsa's chief op- erating officer, says startups that are only now thinking of ways to trim may be in trouble . "Operating a small company, I think you have to be lean and mean. If you start thinking about capital efficiency today, it's too late," he says.

For other businesses, the downturn carries the scent of opportunity. Ron Gonen, co-founder and chief executive offi- cer of RecycleBank, says the sudden need for cities and house- holds to conserve cash puts his company in a position to grow. The 85-employee New York firm runs recycling systems for cities that let residents earn points, based on the amount they recycle, that they can redeem at retailers . "Now that cities really need to save money and people are really looking for a way to get disposable income, we' re at a unique time in our growth curve," Gonen says. He says families can earn up to $400 a yea r in RecycleBank points. RecycleBank, which raised $30 million last year on top of $15 million in an earlier round, takes a cut of the savings that the cities get from re- ducing how much trash they send to landfills.

Venture capitalists see other companies that focus on conservation, renewable power, and reducing the emissions that cause global warming as strong bets even in bad times.

"No matter how much worse the economy could get over the next six to 12 months, there are many who believe

416

that clean tech kind of rides above the econo mic - tainty," says Mark Heesen, president of the National Capital Assn. Demand for clean power from gove around the globe, along with renewed attention t o emissions from the incoming Obama Admin istrat i convinced investors to bet on solar and w ind powe r, as _ as hybrid cars.

Likewise, Heesen says, biotechnology and medica l -- companies will continue to draw investors beca use :-~ promise of their products to extend lives is so impo..--: "We all are living longer, and we want to live long er, productive lives, and biotech is at the cusp of that , n he The startups Heesen predicts will suffer most from the turn are IT firms that ultimately sell their produ cts sumers or businesses, because both are cutting spe ndin -

Still, developing drugs or clean technology takes a money, with long time frames for exits potentially longer by an IPO drought and a tough market f or aCG- tions. One drug development company, IRX Thera peu · New York, has raised more than $60 million since its f ing more than a decade ago, mostly from high-net individuals and some VCs, to develop treatments t o r immune function in head and neck cancer patients . "\';_: -"' obviously a company without revenue in a bus iness ::-2' eats capital," says Chief Financial Officer Jeffrey Hwa says the firm has had to cut staff by a third and delay di:"~ trials it planned for 2009, because he's not sure whethe:-:.-~ funding will be the re to complete them . "We're not g to start anything we can't finish, " he says .

Heesen says many startups may face the same pro next year. He expects fewer companies to get funde d. entrepreneurs that do will have to prove the value of ideas and their ability to execute them even in a down

ADVICE TO AN ENTREPRENEUR An individual who is looking to start and grow a bus i approaches you and asks you the following questions:

1. If I don't have the track record of starting and ru nni a successful business, then what else can I do to en han my likelihood of raising funds to start up and grow a new business?

2. Why are "green opportunities" so attractive during a:- economic downturn? Will they "disappear" whe n the economy "heats up"?

3. Biotech requires scientific knowledge and considera ble money. Given the trends that make biotech attra ctive, what other businesses are also likely to be high gro

*Source: R eprinted from December 19, 2008 issue of Business Week by spec:n.. permission, copyright © 2008 by The McGraw-Hill Companies, Inc., ''Yen= Capital's F avorite Startups," by John Tozzi, http://www.businessweek.comf smallbiz/content/dec2008/sb2008121 8_856857.htm.

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CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 417

(1 to 2 percent) to an advertising pooL This pooling of resources allows the franchisor to conduct advertising in major media across a wide geographic area. If the business were not franchised, the company would have to provide funds for the entire advertising budget.

Disadvantages of Franchising Franchising is not always the best option for an entrepreneur. Anyone investing in a fran- chise should investigate the opportunity thoroughly. Problems between the franchisor and the franchisee are common and have recently begun to receive more attention from the government and trade associations.

The disadvantages to the franchisee usually center on the inability of the franchisor to provide services, advertising, and location. When promises made in the fra nchise agreement are not kept, the franchisee may be left without any support in important ar- eas. For example, Curtis Bean bought a dozen franchises in Checkers of America Inc., a flrm that provides auto inspection services. After losing $200,000, Bean and other franchisees flied a lawsuit claiming that the franchisor had misrepresented advertising costs and had made false claims-including that no experience was necessary to own a franchise. 3

The franchisee may also face the problem of a franchisor's failing or being bought out by another company. No one knows this better than Vincent Niagra, an owner of three Win- dow Works franchises. Niagra had invested about $1 million in these franchises when the franchise was sold to Apogee Enterprises and then resold four years later to a group of in- vestors. This caused many franchises to faiL The failure of these franchises has made it dif- ficult for Niagra to continue because customers are apprehensive about doing business with him for fear that he will also go out of business. None of the support services that had been promised were available. 4

The franchisor also incurs certain risks and disadvantages in choosing this expansion alternative. In some cases, the franchisor may flnd it very difficult to flnd quality fran- chisees. Poor management, in spite of all the training and controls, can still cause individ- ual franchise failures and, therefore, can reflect negatively on the entire franchise system. As the number of franchises increases, the ability to maintain tight controls becomes more difficult.

Types of Franchises There are three available types of franchises. 5 The fust type is the dealership, a form com- monly found in the automobile industry. Here, manufacturers use franchises to distribute their product lines. These dealerships act as the retail stores for the manufacturer. In some instances, they are required to meet quotas established by the manufacturers, but as is the case for any franchise, they beneflt from the advertising and management support provided by the franchisor.

The most common type of franchise is the type that offers a name, image, and method of doing business, such as McDonald's, Subway, KFC, Midas, Dunkin' Donuts, and Holiday Inn. There are many of these types of franchises, and their listings, with pertinent information, can be found in various sources.6

A third type of franchise offers services. These include personnel agencies, income tax preparation companies, and real estate agencies. These franchises have established names and reputations and methods of doing business. In some instances, such as real estate, the franchisee has actually been operating a business and then applies to become a member of the franchise.

i 1

__ 432 l Entrepreneurship

418 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

Franchising opportunities have often evolved from changes in the environment as ··• as important social trends. Several of these are discussed in the following.7

• Good health. Today people are eating healthier food and spending more time kee~s fit. Many franchises have developed in response to this trend. For example, Bassett's Original Turkey was created in response to consumer interest in eating foods lower :::.. cholesterol, and Booster Juice was created to provide fresh juice and smoothies as a healthy alternative to other snacks and drinks. Peter Taunton founded Snap Fitness b: in 2003 to offer patrons a convenient and affordable place to work out, and Gary Heavin created Curves for Women -a women-only fitness center.

• Time saving or convenience. More and more consumers prefer to have things delivere- to them as opposed to going out of their way to buy them. In fact, many food stores now offer home delivery services. In 1990, Auto Critic of America Inc. was started as a mobile car inspection service. About the same time, Ronald Tosh started Tubs To Gc a company that delivers Jacuzzis to almost any location for an average of $100 to $ per night.

• Health care. There is an increasing number of opportunities in health care for aging people. For example, Senior Helpers was founded in 2001 and started franchising in 2005 to offer care for seniors so that they can live independently in the comfort of the!: own home. HealthSource Chiropractic and Progressive Rehab started franchising in 2006 and offers chiropractic care with "Progressive Rehabilitation" where chiropractors work side by side with therapists, massage therapists, and athletic trainers.

• The second baby boom. Today's baby boomers have had babies themselves, which has resulted in the need for a number of child-related service franchises . Child care franchises such as KinderCare and Living and Learning are thriving. In 1989, two attorneys, David Pickus and Lee Sandoloski, opened Jungle Jim's Playland. This is an indoor amusement park with small-scale rides in a 20,000- to 27,000-square-foot facility. One franchise, Computertots, teaches classes on computers to preschoolers . This franchise has spread to 25 locations in 15 states.

INVESTING IN A FRANCHISE Franchising involves many risks to an entrepreneur. Although we read about the success of McDonald's or Burger King, for every one of these successes there are many failures . Fran- chising, like any other venture, is not for the passive person. It requires effort and long hours, as any business does, since duties such as hiring, scheduling, buying, and account- ing are still the franchisee's responsibility.

Not every franchise is right for every entrepreneur. He or she must evaluate the franchise alternatives to decide which one is most appropriate. A number of factors should be as- sessed before making the final decision.

1. Unproven versus proven franchise. There are some trade-offs in investing in a proven or unproven franchise business. Whereas an unproven franchise will be a less expen- sive investment, the lower investment is offset by more risk. In an unproven franchise, the franchisor is likely to make mistakes as the business grows. These mistakes could inevitably lead to failure. Constant reorganization of a new franchise can result in con- fusion and mismanagement. Yet, a new and unproven franchise can offer more excite- ment and challenge and can lead to significant opportunities for large profits should the business grow rapidly. A proven franchise offers lower risk but requires more financial investment.

Entrepreneurship, Eighth Edition 433 ---------------------------------------------------------------------------------------,---

~ ETHICS FAIR ENO UGH

lo "&e a "&etter"'NegotJator, "Learn to Tell th e Difference between a Lie and a Lie No one really likes to think about how much lying goes on at the bargaining table. Of course not-it's t roubling. On the one hand, we aspire t o principled negotiation, win-win solutions, and civility with our opponents. On the other, our whole notion of nego- ti ation is built on ethical quicksand: To succeed, you must deceive.

I'm not talking about the obvious cases, such as the bald lie. Those we all condemn, and in fact, our courts provide remedies for them-albeit slow, aggravating, inconsistent, and expensive ones. To me, it's the little lies, the omissions and evasions, that are more cu rious.

In negotiation, exaggerating benefits, ignoring fl aws, or saying "I don't know" when in reality you do is not considered lying. Rather, it's sales ability. De- cl aring your bottom line to be non-negotiable {even w hen you're posturing) is not lying. It's a show of strength. Pretending to bend over backward to make meaningless concessions is not lying. It's applied psy- chology. Savvy businesspeople accept these rituals w ithout undue introspection. Of course, the patho- logically honest among us find them disturbing. But w e have a place for those people ... in the back room, ar away from any bargaining table.

Still, some evasiveness and deception we consider out of bounds. Following are some tips for staying in bounds without getting clobbered.

'On tre<rense, vrgl rcrrtr5Ke-ptrcrsm' rsa""rremenhousCfs- set. Reflect on everything you hear. Reflect on every- thing you don't. If you're suspicious, ask questions, especially ones that require more than just a simple yes or no answer. Keep probing until you're satisfied. J. P. Morgan used to say, "A man always has two rea- sons for the things he does-a good one and the real one." So after you get the good ones, ask for the real ones by saying, "And why else?" Also, get important promises in writing, and scrutinize their wording with and without your lawyer. To discourage dishon- esty, tell your opponent you will independently verify the important stuff. If you can, do it. By the way, ex- perts say it's easier to detect lying on the phone than in person. The voice all by itself {without distracting vis ual cues) is more of a giveaway.

To the terminally honest, I say: Negotiation is not group therapy. Generally, if you bare your soul, you will be fleeced. Respect the rules-or have someone else do your bargaining for you. If you're a liar {and you know who you are), I hope you get nailed big time. And if you're morally stu rdy and find yourself unsure of what to say or omit, just keep Richard Nixon's comments about Watergate in mind: "I was not lying. I sa id things that later on seemed to be untrue."

Source: Reprinted with permission of Entrepreneur Media, Inc., "To Be a Better Negotiator, Learn to Tell the Difference between a Lie and a Lie," by Marc Diener, January 2002, Entrepreneur magazine: www.entrepreneur.com.

2. Financial stability of franchise. The purchase of a franchise should entail an assess- ment of the financial stability of the franchisor. A potential franchisee should seek answers to the following questions: • How many franchises are in the organization? • How successful is each of the members of the franchise organization? • Are most of the profits of the franchise a function of fees from the sale of franchises

or from royalties based on profits of franchisees? • Does the franchisor have management expertise in production, finance, and

marketing?

Some of the preceding information can be obtained from the profit-and-loss statements of the franchise organization. Face-to-face contact with the franchisor can also indicate the success of the organization. It is also worthwhile to contact some of the franchisees directly to determine their success and to identify any problems that have occurred. If financial information about the franchisor is unavailable, the entrepreneur may purchase a

419

434 l Entrepreneu rship t

420 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

financial rating from a source such as Dun & Bradstreet. Generally, the following c::-= good external sources of information: • Franchise association • Other franchisees • Government • Accountants and lawyers • Libraries • Franchise directories and journals • Business exhibitions

3. Potential market for the new franchise. It is important for the entrepreneur to evaluate the market that the franchise will attract. A starting point is evaluating the traffic flow and demographics of the residents from a map of the area. Traffic fl ow information may be observed by visiting the area. Direction of traffic flow, ease o ~ entry to the business, and the amount of traffic (pedestrian and automobile) can be estimated by observation. The demographics of the area can be determined fro m census data, which can be obtained from local libraries or the town hall. It can also be advantageous to locate competitors on the map to determine their potential effec:: on the franchise business. Marketing research in the market area is helpful. Attitu -'-- about and interest in the new business can be assessed in the market research. In some instances, the franchisor will conduct a market study as a selling point to the franchisee.

4. Profit potential for a new franchise. As in any start-up business, it is important to develop pro forma income and cash flow statements. The franchisor should provide projections to calculate the needed information.

In general, most of the preceding information should be provided in the disclosure stare- mentor the prospectus. The Federal Trade Commission's Franchise Rule requires frafi.- chisors to make full presale disclosure in a document that provides information about separate aspects of a franchise offering. 8 The information required in this disclosure is sum- marized in Table 14.2. Some of the information will be comprehensive and some will be sketchy. There are always weaknesses that must be evaluated before making a commitmcrr The disclosure statement represents a good resource, but it is also important to evaluate the other services mentioned earlier in this chapter.

Front-end procedure fees, royalty payments, expenses, and other information should be compared with those of franchises in the same field, as well as in different business areas.. If a franchise looks good as an investment, the entrepreneur may request a franchise package from the franchisor, which usually contains a draft franchise agreement or contract. Generally. this package will require a deposit of $400 to $600, which should be fully refundable.

The contract or franchise agreement is the final step in establishing a franchise arrange- ment. Here a lawyer experienced in franchising should be used. The franchise agreemen: contains all the specific requirements and obligations of the franchisee. Things such as the exclusivity of territory coverage will protect against the franchisor's granting another fran- chise within a certain radius of the business. The renewable terms will indicate the length of the contract and the requirements. Financial requirements will stipulate the initial price for the franchise, the schedule of payments, and the royalties to be paid. Termination of franchise requirements should indicate what will happen if the franchisee becomes disabled or dies and what provisions are made for the family. Terminating a franchise generally results in more lawsuits than any other issue in franchising. These terms should also allow the franchisee to obtain fair market value should the franchise be sold. Even though the agreement may be standard, the franchisee should try to negotiate important items to reduce the investment risk.

t renture Two or =me companies forming _::Iew company

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CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 421

TABLE 14.2 Information Required in Disclosure Statement

1. Identification of the franchisor and its affiliates and their business experience.

2. The business experience of each of the franchisor's officers, directors, and management personnel responsible for franchise services, training, and other aspects of the franch ise programs.

3. The lawsuits in which the franchisor and its officers, directors, and management personnel have been involved.

4. Any previous bankruptcies in which the franchisor and its officers, directors, and management personnel have been involved .

5. The initial franchise fee and other initial payments that are required to obtain the franchise.

6. The continuing payments that franchisees are required to make after the franchise opens.

7. Any restrictions on the quality of goods and services used in the franchise and where they may be purchased, including restrictions requiring purchases from the franchisor or its affiliates.

8. Any assistance available from the franchisor or its affiliates in financing the purchase of the franchise.

9. Restrictions on the goods or services franchises are permitted to sell.

10. Any restrictions on the customers with whom franchises may deal.

11. Any territorial protection that will be granted to the franchisee.

12. The conditions under which the franchise may be repurchased or refused renewal by the franchisor, transferred to a third party by the franchisee, and terminated or modified by either party.

13. The training programs provided to franchisees.

14. The involvement of any celebrities or public figures in the franchise.

15. Any assistance in selecting a site for the franchise that will be provided by the franchisor.

16. Statistical information about the present number of franchises; the number of franchises projected for the future; and the number of franchises terminated, the number the franchisor has decided not to renew, and the number repurchased in the past.

17. The financial statements of the franchisor.

18. The extent to which the franchisees must personally participate in the operation of the franchise.

19. A complete statement of the basis of any earnings claims made to the franchisee, including the percentage of existing franchises that have actually achieved the results that are claimed.

20. A list of the names and addresses of other franchises.

JOINT VENTURES

I

With the increase in business risks, hypercompetition, and failures, joint ventures have oc- curred with increased regularity and often involve a wide variety of players.9 Joint ventures are not a new concept, but rather have been used as a means of expansion by entrepreneur- ial firms for a long time.

What is a joint venture? A joint venture is a separate entity that involves a partnership be- tween two or more active participants. Sometimes called strategic alliances, joint ventures can involve a wide variety of partners that include universities, not-for-profit organizations,

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422 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

businesses, and the public sector. 10 Joint ventures have occurred between such riw .. :~ General Motors and Toyota as well as General Electric and Westinghouse. They haYe curred between the United States and foreign concerns to penetrate an international and they have been a good conduit by which an entrepreneur can enter an international

Whenever close relationships between two companies are being developed, con about the ethics and ethical behavior of the potential partner may arise.

Types of Joint Ventures Although there are many different types of joint venture arrangements, the most corm:r:-.u is still between two or more private-sector companies. For example, Boeing, Mitsub· · Fuji, and Kawasaki entered into a joint venture for the production of small aircraft to slu!::_ technology and cut costs . Microsoft and NBC Universal formed a partnership to crear.e cable news channel (MSNBC). There is an elaborate cost-sharing arrangement between~. different entities of the partnership.

Other private-sector joint ventures have had different objectives, such as entering new m::::- kets (Coming and Ciba-Geigy as well as Kodak and Cetus), entering foreign markets (AI.- - and Olivetti), and raising capital and expanding markets (U.S. Steel and Phong Iron and St:eei

Some joint ventures are formed to do cooperative research. Probably the best knovrll - ~ these is the Microelectronics and Computer Technology Corporation (MCC). Supported-. 13 major U.S. companies, this for-profit venture does long-range research with scien · who are loaned to MCC for up to four years before returning to their competing companie~ to apply the results of their research activities. MCC retains title to all the resulting knor.- edge and patents, making them available for license to the companies participating in -:.. program. Another type of joint venture for research development is the Semicondu Research Corporation, located in Triangle Park, North Carolina. A not-for-profit res organization, it began with the participation of 11 U.S. chip manufacturers and comp companies. The goal of the corporation is to sponsor basic research and train professio scientists and engineers to be future industry leaders. Members of SRC programs have · vested $1.1 billion in cutting-edge semiconductor research supporting over 7,000 stud! and 1,598 faculty members at 237 universities worldwide. 11

Industry-university agreements created for the purpose of doing research are ano type of joint venture that has seen increasing usage. However, two major problems ha'.~= kept these types of joint ventures from proliferating even faster. A profit corporation has.;...= objective of obtaining tangible results, such as a patent, from its research investment wants all proprietary rights. Universities want to share in the possible financial returns frm:::;. the patent, but the university researchers want to make the knowledge available through re- search papers. In spite of these problems , numerous industry-university teams have bee:; established. In one joint venture agreement in robotics, for example, Westinghouse re~ patent rights while Carnegie-Mellon receives a percentage of any license royalties. The versity also has the right to publish the research results as long as it withholds from pubii- cation any critical information that might adversely affect the patent.

The joint venture agreement between Celanese Corporation and Yale University, createe for researching the composition and synthesis of enzymes, took a somewhat differe~ form--cost sharing. Although Celanese assumes the expense of any needed supplies anc equipment for the research, as well as the salaries of the postdoctoral researchers, Yale pa, the salaries of the professors involved. The research results can be published only after ::. 45-day waiting period.

International joint ventures, discussed in Chapter 5, are rapidly increasing in number due to their relative advantages. Not only can both companies share in the earnings anrl growth, but the joint venture can have a low cash requirement if the knowledge or patents are

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CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 423

capitalized as a contribution to the venture. Also, the joint venture provides ready access to new international markets that otherwise may not be easily attained. Finally, since talent and financing come from all parties involved, an international joint venture causes less drain on a company's managerial and financial resources than a wholly owned subsidiary.

There are several drawbacks to establishing an international joint venture. First, the business objectives of the joint venture partners can be quite different, which can result in problems in the direction and growth of the new entity. In addition, cultural differences in each company can create managerial difficulties in the new joint venture. Finally, govern- ment policies can sometimes have a negative impact on the direction and operation of the international joint venture.

In spite of these problems, the benefits usually outweigh the drawbacks, as evidenced by the frequency rate of establishing international joint ventures. For example, an international joint venture was established between Dow Chemical (United States) and Asaki Chemicals (Japan) to develop and market chemicals on an international basis. While Asaki provided the raw materials and was a sole distributor, Dow provided the technology and obtained distri- bution in the Japanese market. The arrangement eventually dissolved because of the con- cerns of the Japanese government and the fundamental difference in motives between the two partners: Dow was primarily concerned with the profits of the joint venture, whereas Asaki was primarily concerned with having a purchaser for its basic petrochemicals.

Factors in Joint Venture Success Clearly, not all joint ventures succeed. An entrepreneur needs to assess this method of growth carefully and understand the factors that help ensure success as well as the prob- lems involved before using it. The most critical factors for success are:

1. The accurate assessment of the parties involved to best manage the new entity in light of the ensuing relationships . The joint venture will be more effective if the managers can work well together. Without this chemistry, the joint venture has a low likelihood of success and may even fail .

2. The degree of symmetry between the partners. This symmetry goes beyond chemistry to objectives and resource capabilities. When one partner feels that he or she is bring- ing more to the table, or when one partner wants profits and the other desires product outlet (as in the case of the Asaki-Dow international joint venture), problems arise. For a joint venture to be successful, the managers in each parent company, as well as those in the new entity, must concur on the objectives of the joint venture and the level of re- sources that will be provided. Good relationships must be nurtured between the man- agers in the joint venture and those in each parent company.

3. The expectations of the results of the joint venture must be reasonable. Far too often, at least one of the partners feels that a joint venture will be the cure-all for other corpo- rate problems. Expectations of a joint venture must be realistic.

4. The timing must be right. With environments constantly changing, industrial condi- tions being modified, and markets evolving, a particular joint venture could be a suc- cess one year and a failure the next. Intense competition leads to a hostile environment and increases the risks of establishing a joint venture. Some environments are just not conducive to success. An entrepreneur must determine whether the joint venture will offer opportunities for growth or will penalize the company, for example, by prevent- ing it from entering certain markets.

A joint venture is not a panacea for expanding the entrepreneurial venture. Rather, it should be considered one of many options for supplementing the resources of the firm and responding more quickly to competitive challenges and market opportunities. The effective

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424 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

acquisition Purchasing

all or part of a company

use of joint ventures as a strategy for expansion requires the entrepreneur to carefully aJ the situation and the potential partner(s). Other strategic alternatives to the joint venttm:- such as acquisitions, mergers, and leveraged buyouts-should also be considered.

ACQUISITIONS Another way the entrepreneur can expand the venture is by acquiring an existing busin~. Acquisitions provide an excellent means of expanding a business by entering new m~ or new product areas. One entrepreneur acquired a chemical manufacturing company ~ becoming familiar with its problems and operations as a supplier of the entrepreneu: .. :; company. An acquisition is the purchase of an entire company, or part of a company; . definition, the company is completely absorbed and no longer exists independently. An & - quisition can take many forms, depending on the goals and position of the parties invoh·oc in the transaction, the amount of money involved, and the type of company.

Although one of the key issues in buying a business is agreeing on a price, successfu: acquisition of a business actually involves much, much more. In fact, often the structure o: the deal can be more important to the resultant success of the transaction than the actua:. price. One radio station was successful after being acquired by a company primarily be- cause the previous owner loaned the money and took no principal payment (only interesl on the loan until the third year of operation.

From a strategic viewpoint, a prime concern of the entrepreneurial firm is maintaining the focus of the new venture as a whole. Whether the acquisition will become the core of the new business or rather represents a needed capability-such as a distribution outlet sales force, or production facility-the entrepreneur must ensure that it fits into the overall direction and structure of the strategic plan of the present venture.

Advantages of an Acquisition

For an entrepreneur, there are many advantages to acquiring an existing business:

1. Established business. The most significant advantage is that the acquired firm has an established image and track record. If the firm has been profitable, the entrepreneur need only continue its current strategy to be successful with the existing customer base.

2. Location. New customers are already familiar with the location.

3. Established marketing structure. An acquired firm has its existing channel and sales structure. Known suppliers, wholesalers, retailers, and manufacturers' reps are impor- tant assets to an entrepreneur. With this structure already in place, the entrepreneur can concentrate on improving or expanding the acquired business.

4. Cost. The actual cost of acquiring a business can be lower than other methods of expansion.

5. Existing employees. The employees of an existing business can be an important asset to the acquisition process. They know how to run the business and can help ensure that the business will continue in its successful mode. They already have established rela- tionships with customers, suppliers, and channel members and can reassure these groups when a new owner takes over the business.

6. More opportunity to be creative. Since the entrepreneur does not have to be concerned with finding suppliers, channel members, hiring new employees, or creating customer awareness, more time can be spent assessing opportunities to expand or strengthen the existing business and tapping into potential synergies between the businesses.

Entrepreneurship, Eighth Edition 439

CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 425

Disadvantages of an Acquisition Although we can see that there are many advantages to acquiring an existing business, there are also disadvantages . The importance of each of the advantages and disadvantages should be weighed carefully with other expansion options.

1. Marginal success record. Most ventures that are for sale have an erratic, marginally successful, or even unprofitable track record. It is important to review the records and meet with important constituents to assess that record in terms of the business's future potential. For example, if the store layout is poor, this factor can be rectified; but if the location is poor, the entrepreneur might do better using some other expan- sion method.

2. Overconfidence in ability. Sometimes an entrepreneur may assume that he or she can succeed where others have failed. This is why a self-evaluation is so important before entering into any purchase agreement. Even though the entrepreneur brings new ideas and management qualities, the venture may never be successful for reasons that are not possible to correct. Often managers are overconfident in their ability to overcome cultural differences between their current business and the one being acquired.

3. Key employee loss. Often, when a business changes hands, key employees also leave. Key employee loss can be devastating to an entrepreneur who is acquiring a business since the value of the business is often a reflection of the efforts of the employees. This is particularly evident in a service business, where it is difficult to separate the actual service from the person who performs it. In the acquisition negotiations, it is helpful for the entrepreneur to speak to all employees individually to obtain some assurance of their intentions as well as to inform them of how important they will be to the future of the business. Incentives can sometimes be used to ensure that key employees will remain with the business.

4. Overvaluation. It is possible that the actual purchase price is inflated due to the established image, customer base, channel members, or suppliers. If the entrepre- neur has to pay too much for a business, it is possible that the return on investment will be unacceptable. It is important to look at the investment required in purchasing a business and at the potential profit and establish a reasonable payback to justify the investment.

After balancing the pros and cons of the acquisition, the entrepreneur needs to determine a fair price for the business.

Synergy The concept that "the whole is greater than the sum of its parts" applies to the integration of an acquisition into the entrepreneur's venture. The synergy should occur in both the busi- ness concept, with the acquisition functioning as a vehicle to move toward overall goals, and the financial performance. The acquisition should positively impact the bottom line, af- fecting both long-term gains and future growth. Lack of synergy is one of the most frequent causes of an acquisition's failure to meet its objectives.

Structuring the Deal Once the entrepreneur has identified a good candidate for acquisition, an appropriate deal must be structured. Many techniques are available for acquiring a firm, each having a dis- tinct set of advantages to both the buyer and seller. The deal structure involves the parties,

440 j Entrepreneurship

AS SEEN IN ENTREPRENEUR MAGAZINE PROVIDE ADVICE TO AN ENTREPRENEUR ABOUT ENTERING INTO AGREEMENTS

Entrepreneurs: James Tiscione, 49, and Anthony Tiscione, 79, founders of ACM Enterprises in Tucson, Arizona.

Product Description: The Auto Card Manager (ACM), a thin metal case that holds a driver's license and up to five credit cards. When users push one of the six buttons on the case, the selected credit card is dispensed.

Start-Up: $50,000 in 2000 and 2001, to pay for the first production run of 25,000 units.

Sales: $1.8 million in 2002. The Challenge: Bringing a new product to market

with a limited marketing budget.

James Tiscione didn't have a lot of money when he launched his business, but that didn't stop him from finding a way to bring his unusual product to market. Here are the steps he followed:

1. Obtain a patent Tiscione started by visiting www.uspto.gov, the official Web site of the U.S. Patent and Trademark Office, to look for similar patents. "I looked at over 1,000 patents and found only two that we re even remotely similar to mine," he says. "Only after completing the search did I qo to a patent attorney." Doing some -- -· - ·. -.- . _, - -- - I - ~ -

research on his own did more than just save Tiscione money: "I was trying to hedge my bets before investing dollars in attorney fees, engi- neering design, and prototypes. I also wanted to see what other ideas were out there. I was sur- prised no one else ever had the idea." Before long, Tiscione applied for a provisional patent,

which doesn't give inventors patent protect ior but does allow them to show their ideas t o pe. pie. "It is an inexpensive way of protectio n allows inventors one year for research and d opment," Tiscione says. In 2001, he applie d f ...... - utility patent.

2. Decide what help you need. Because Tiscio ne r.a- never developed a product before, he felt he lacked the experience he needed to launch the idea . He asked his father, Anthony, an inve nto r. for help in finalizing his product design. Tiscior.E also approached Steve Pagac, a marketing whiz who owned a real estate and investment firm . Says Tiscione, "Steve invested sweat equity in venture, and he is responsible for lining up a ll custome rs."

3. Make a prototype. Tiscione knew people wo uld ... understand the ACM without trying it, so he made a prototype. Tiscione ended up choosin g a prototype supplier in California. Once he began using the prototype, people started asking where they cou ld buy one. The positi ve feedback played a major role in moving the business ahead.

4. Locate a production source. Tiscione's first sto p was the Hong Kong Chamber of Commerce, w hi has an office in San Francisco. "They sent me a r of companies I e-mailed," he says. He narrowed it down to one-but only signed the final ag ree- ment after visiting the company several times a viewing a few trial production pieces.

the assets, the payment form, and the timing of the payment. For example, all or part of the assets of one firm can be acquired by another for some combination of cash, notes, stock. and/or employment contract. This payment can be made at the time of acquisition, through- out the frrst year, or extended over several years.

426

The two most common means of acquisition are the entrepreneur's direct purchase of the firm's entire stock or assets or the bootstrap purchase of these assets. In the direct pur- chase of the firm, the entrepreneur often obtains funds from an outside lender or the seller of the company being purchased. The money is repaid over time from the cash flow gener- ated from the operations. Although this is a relatively simple and clear transaction, it usu- ally results in a long-term capital gain to the seller and double taxation on the funds used to repay the money borrowed to acquire the company.

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5. Explore all possibilities to find distribution out- lets. Tiscione and Pagac weren't sure which retail- ers would want to buy their product, so they started by approaching catalogs and stores such as Brookstone, The Sharper Image, and Things Remembered. "While the stores didn't bite, one promotional company did-AMG of Plymouth, Wisconsin," Tiscione says. "AMG signed an exclu- sive agreement with us for the promotional prod- ucts market in 2001." Tiscione and Pagac also approached SkyMall, a specialty retaile r that pro- duces a cost-sharing catalog targeting in-flight airline passengers. "After two quarters ending in September," says Tiscione, "SkyMall reported that the ACM was the No. 1-selling product in [the catalog], and they agreed to carry the product through March." Tiscione and Pagac also con- tacted MJ Med ia, a TV marketer in Phoenix that signed a nonexclusive agreement to sell the ACM through TV ads. "We revamped our original agreement with MJ Media to include a broader base of distribution," Tiscione says. "Originally, the contract was for TV advertising only. Since then, MJ Media has expanded into Internet sales and master distribution to small distributors." Now, Tiscione has a broad range of customers selling his products. As a bonus, Taylor Gifts, a major consumer catalog, picked up the ACM for t he 2002 Christmas season.

- Sign deals that maximize marketing exposure but limit financial risk. Advertising and market- ing expenses can kill a product-but Tiscione avoided these expenses by signing contracts w ith limited risk. Both AMG and MJ Media signed agreements to purchase the product

from ACM and promote it themselves . A lso, Tiscione's deal with SkyMall was cooperative. Tiscione paid nothing to be listed in SkyMall, but all the sales went to SkyMall up to a certain sales level. Once that level was reached, sales were split equal ly between SkyMall and ACM . At press time, ACM switched to a standard contract, which requires them to pay for the ad but allows them to retain all sales.

ADVICE TO AN ENTREPRENEUR An inventor has read the preceding article and comes to you for advice. "This is exactly what I want to do," he says, "I don't have the expertise or the money to manufacture the product myself or to market and sell it. What I need is for someone else to do that for me. Here are my questions:

1. Is it really that simple to find and then establish a relationsh ip with someone to produce my prod- uct? Should the producer have a manufacturing license or shou ld I enter into a joint venture?

2. Same sorts of issues on the marketing end, but I also want to know how much control! can main- tain over how the product is marketed and sold. Or should I not worry about that and let the experts do their thing?

3. One dilemma for me is how much money I should invest in the prototypes . The more money I invest, the better the prototype looks, but I don't want to waste money either.

Source: Reprinted with permission of Entrepreneur Media, Inc., "Play Your Cards Right. Presenting a Case Study in Striking the Best Deals to Launch Your Own Great Product on a Limited Budget," by Don Debelak, March 2003, Entrepreneur magazine: www.entrepreneur.com.

To avoid these problems, the entrepreneur can make a bootstrap purchase, acquiring a small amount of the flrm, such as 20 to 30 percent, for cash. He or she then purchases the remainder of the company with a long-term note that is paid off over time out of the acquired company's earnings. This type of deal often results in more favorable tax advan- tages to both the buyer and the seller.

Locating Acquisition Candidates If an entrepreneur is seriously planning to buy a business, there are some sources of assis-

People who sell tance. There are professional business brokers who operate in a fashion similar to a real es- tate broker. They represent the seller and will sometimes aggressively fmd buyers through either referrals, advertising, or direct sales. Since these brokers are paid a commission on the sale, they often expend more effort on their best deals.

427

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428 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

merger Joining two or

more companies

Accountants, attorneys, bankers, business associates, and consultants may also know o: good acquisition candidates. Many of these professionals have a good working knowledge of the business, which can be helpful in the negotiations.

It is also possible to find business opportunities in the classified sections of the newspa- per or in a trade magazine. Since these listings are usually completely unknown, they may involve more risk but can be purchased at a lower price.

Determining the best option for an entrepreneur involves significant time and effort. The entrepreneur should gather as much information as possible, read it carefully, consult with advisors and experts, consider his or her own situation, and then make a construc- tive decision.

MERGERS A merger--or a transaction involving two, or possibly more, companies in which only one company survives-is another method of expanding a venture. Acquisitions are so similar to mergers that at times the two terms are used interchangeably. A key concern in any merger (or acquisition) is the legality of the purchase. The Department of Justice frequen tly issues guidelines for horizontal, vertical, and conglomerate mergers which further define the interpretation that will be made in enforcing the Sherman Act and Clayton Act. Since the guidelines are extensive and technical, the entrepreneur should secure adequate leg<L advice when any issues arise.

Why should an entrepreneur merge? There are both defensive and offensive strategies for a merger, as indicated in Figure 14.1. Merger motivations range from survival to protec- tion to diversification to growth. When some technical obsolescence, market or raw mate- rial loss, or deterioration of the capital structure has occurred in the entrepreneur's venture. a merger may be the only means for survival. The merger can also protect against mark& encroachment, product innovation, or an unwarranted takeover. A merger can provide a great deal of diversification as well as growth in market, technology, and financial and managerial strength.

How does a merger take place? It requires sound planning by the entrepreneur. The merger objectives, particularly those dealing with earnings, must be spelled out with the

I FIGURE 14.1 Merger Motivations

DEFENSIVE OFFENSIVE (Passive) (Active)

Survival Protection Diversification Gains in ... requirement against... Countercyclical Market Capital Market Counterseasonal position structure infringement International Technological deterioration Lower cost operations edge Technological position of a Multiple Financial obsolescence competitor strategic plans strength Loss of raw Product Managerial materials innovations by talent Market loss to others

superior An unwanted products takeover

Source: F. T. Haner, Business Policy, Planning, and Strategy (Cambridge, MA: Winthrop, 1976), p. 399.

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CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 429

resulting gains for the owners of both companies delineated. Also, the entrepreneur must carefully evaluate the other company's management to ensure that, if retained, it would be competent in developing the growth and future of the combined entity. The value and ap- propriateness of the existing resources should also be determined. In essence, this involves a careful analysis of both companies to ensure that the weaknesses of one do not compound those of the other. Finally, the entrepreneur should work toward establishing a climate of mutual trust to help minimize any possible management threat or turbulence.

The same methods for valuing an acquisition candidate can be used to determine the value of a merger candidate. The process involves the entrepreneur looking at the syner- gistic product/market position, the new domestic or international market position, any un- dervalued financial strength, whether or not the company is skilled in a related industry, and any underexploited company asset. A common procedure for determining value is to estimate the present value of discounted cash flows and the expected after-tax earnings attributable to the merger. This should be done on optimistic, pessimistic, and probable scenarios of cash flows and earnings using various acceptable rates of return.

LEVERAGED BUYOUTS leveragedbuyout(LBO) A leveraged buyout (LBO) occurs when an entrepreneur (or any employee group) uses Purchasing an existing borrowed funds to purchase an existing venture for cash. Most LBOs occur because the venture by any employee entrepreneur purchasing the venture believes that he or she could run the company more group efficiently than the current owners. The current owner is frequently an entrepreneur or other

owner who wants to retire. The owner may also be a large corporation desiring to divest itself of a subsidiary that is too small or that does not fit its long-term strategic plans.

The purchaser needs a great amount of external funding since the personal financial re- sources needed to acquire the firm directly are frequently limited. Since the issuance of additional equity as a means of funding is usually not possible, capital is acquired in the form of long-term debt financing (five years or more), and the assets of the firm being ac- quired serve as collateral. Who usually provides this long-term debt financing? Banks, venture capitalists, and insurance companies have been the most active providers of the debt needed in LBOs.

The actual financial package used in an LBO reflects the lender's risk-reward profile. Whereas banks tend to use senior-debt issues, venture capitalists usually use subordinated debt issues with warrants or options. Regardless of the instrument used, the repayment plan established must be in line with the pro forma cash flows that the company expects to be generated. The interest rates are usually variable and are consistent with the current yields of comparable risk investment.

In most LBOs, the debt capital usually exceeds the equity by a ratio of 5 to 1, with some ratios as high as 10 to 1. This is significantly more debt relative to equity than in a typical firm's capital structure. Although this makes the financial risk great, the key to a success- ful LBO is not the relative debt-equity ratio but rather the ability of the entrepreneur taking over to cover the principal and interest payments through increased sales and profits. The ability depends on the skills of the entrepreneur and the strength and stability of the firm.

How does the entrepreneur determine whether a specific company is a good candidate for an LBO? This determination can be made through the following evaluation procedure:

1. The entrepreneur must determine whether the present owner's asking price is reason- able. Many subjective and quantitative techniques can be used in this determination. Subjective evaluations need to be made of the following: the competitiveness of the industry and the competitive position of the firm in that industry, the uniqueness of the

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430 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

distribution task

Negotiating how the

benefits of the relationship

will be allocated between

the parties

integration task

Exploring possible

mutual benefits from the

relationship so that the

"size of the pie" can be

increased

offering of the firm and its stage in the product life cycle, and the abilities of managem and other key personnel remaining with the firm. Quantitative techniques are used to evaluate the fairness of the asking price. The price-earnings ratio of the LBO prospect should be calculated and compared with those of comparable companies, as well as the present value of future earnings of the prospect and its book value.

2. The entrepreneur must assess the firm's debt capacity. This is particularly critical sin the entrepreneur wants to raise as much of the capital needed as possible in the form o~ long-term debt. The amount of long-term debt a prospective LBO can carry depends on the prospect's business risk and the stability of its future cash flows. The cash flow must cover the long-term debt required to finance the LBO. Any financial amount thar cannot be secured by long-term debt, due to the inadequacy of the cash flow, will neerl to be in the form of equity from the entrepreneur or other investors.

3. The entrepreneur must develop the appropriate financial package. The financial pack- age must meet the needs and objectives of the providers of the funds as well as the company's and the entrepreneur's situation. Although each LBO financial package is tailored to the specific situation, there are usually some restrictions, such as no pay- ment of dividends . Frequently, an LBO agreement with venture capitalists has war- rants that are convertible into common stock at a later date. A sinking fund repayment of the long-term debt is frequently required.

There are many instances of both successful and unsuccessful LBOs. One of the most pub- licized involved R. H. Macy and Co., a well-known department store chain. Macy's was n in bad condition in terms of the traditional measures of sales per square foot, profitability, and return on assets. However, it had experienced a significant drop in profits and was losing tal- ented middle executives. The LBO was accomplished by some 345 executives participating and sharing a 20 percent ownership in the $4.7 billion retailer. Ultimately, the LBO provided the following benefits: a new entrepreneurial spirit in management that fostered more loyalty in the employees; increased motivation among employees, with middle managers actually selling and earning sales floor bonuses during slack time; and a long-term planning direction for the board of directors that meets five times a year instead of once a month.

OVERCOMING CONSTRAINTS BY NEGOTIATING FOR MORE RESOURCES There are two primary tasks for an entrepreneur negotiating with another party for access to an external growth mechanism. The distribution task is the first-how the benefits of the relationship are distributed between the parties. That is, given a certain sized pie, the par- ties work out who gets what proportion of that pie. Second is the integration task, in which mutual benefits from the relationship are explored. This requires a collaborative mind-se so that the "size of the pie" can be increased.

Often people focus on the first task and ignore the second. However, making the pie big- ger before distribution provides the opportunity to generate greater benefits for both parties and increases the likelihood of an agreement being reached. Besides, the collaborative and creative aspects of working together to find ways to increase the size of the pie are more enjoyable and more beneficial than a conflict resolution approach, which involves simply allocating outcomes under a purely distributive approach.

To negotiate in a way that maximizes benefits requires the entrepreneur to use informa- tion about one's own preferences and those of the other party to create an outcome that is mutually beneficial. This requires an initial assessment of oneself and the other party and the use of strategies to elicit more information during the negotiation interactions to better

reservation price The

price (the bundle of

resources from the

agreement) at which the

entrepreneur is indifferent

about whether to accept

the agreement or choose

the alternative

bargaining zone The

range of outcomes

between the

entrepreneur's reservation

price and the reservation

price of the other party

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CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 431

inform those initial assessments. Based on the work of Max Bazerman and Margaret Neale, two leading experts on negotiation, there are a number of assessments that an entrepreneur should make when negotiating with a growth partner. 12

Assessment 1: What Will You Do If an Agreement Is Not Reached? The answer to such a question provides an important basis for any negotiation strategy. The answer represents the entrepreneur's "best alternative to a negotiated agreement." This best alter- native helps to determine a reservation price for the negotiation. The reservation price is the price (the bundle of resources from the agreement) at which the entrepreneur is indif- ferent about whether to accept the agreement or choose the alternative. For example, the best alternative to a negotiated agreement with a joint venture partner would be the ben- efits from pursuing growth at a slower rate using existing resources (knowledge, money, network, etc.). Recognizing that there is an alternative to this joint venture relationship, albeit a slower route, provides a minimum acceptable level of benefits that the negotiated outcome must reach.

Assessment 2: What Will the Other Party to the Negotiation Do If an Agreement Is Not Reached? It can be difficult for the entrepreneur to assess his or her own reservation prices, and it is even more difficult to assess those of the negotiation partner. If these prices can be determined, the entrepreneur has a good idea of the bargaining zone, or the range of outcomes between the entrepreneur's reservation price and the reservation price of the other party. Consideration of the bargaining zone encourages the entrepreneur not to focus prematurely on a settlement price but rather to consider the range of possible outcomes within the bargaining zone. If the bargaining zone can be determined by the entrepreneur while keeping his or her reservation price hidden from the other party, then the entrepre- neur is in a position to negotiate an outcome that is largely beneficial to the entrepreneur and only marginally beneficial to the other party (i.e., just above the other party's reserva- tion price). Of course, such an approach focuses on the distribution stage and not the inte- grative stage.

Assessment 3: What Are the Underlying Issues of This Negotiation? How Important Is Each Issue to You? Answers to these questions focus the negotiation toward achieving aspects of the relationship that are most desirable for the entrepreneur by trading off aspects of less importance for those of greater importance. For example, an entrepreneur might be more concerned about having control over a joint venture than about his or her share of the profits generated by the joint venture. Recognizing the relative importance of these aspects of the relationship allows the entrepreneur to "sacrifice" equity (maybe through nonvoting shares) but obtain control (e.g., to have 51 percent of the stock and/or one more seat on the board of directors and the position of chairman of the board) .

Assessment 4: What Are the Underlying Issues of This Negotiation? How Important Is Each Issue to the Other Party? By understanding more about the other party, the entrepreneur has a greater opportunity to achieve integration (i.e., make the size of the pie bigger). This information provides the opportunity for the entrepreneur to sacrifice aspects that are of less importance to him or her but of high importance to the other party. Similarly, the entrepreneur can obtain from the other party aspects of high importance to him or her but of low importance to the other party. If this information is known to both parties, then it is likely that the outcome will be mutually beneficial (because the size of the pie has been increased) .

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432 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

Being aware of the assessments that need to be made is an important step toward a success- ful negotiation but requires strategies for eliciting information from the other party that can benefit the distributive and/or integrative elements of a negotiation. Again based on the work of Bazerman and Neale (1992), 13 we offer a number of these strategies. These strategies should be thought of as tools. No one tool is perfect for every job. Some jobs require that a number of different tools be used simultaneously, while other jobs require that the tools be used sequen- tially. The entrepreneur needs to make his or her own decision as to which strategies should be used and when. This may not be known in advance, and the entrepreneur might experiment with different strategies to get an idea of which ones will work best for the current negotiation.

Strategy 1: Build Trust and Share Information As has been discussed, the best nego- tiated outcome likely arises from integration, where the parties find mutually beneficial trade-offs . To find them requires both parties to have information about each other's under- lying issues and the relative importance of those issues. Although providing information is beneficial to integration, it can be detrimental to the entrepreneur in distributing benefits if the other party has kept hidden his or her own preferences (e.g., the other party is aware of the entrepreneur's reservation price but the entrepreneur is unaware of the other party's reservation price) . Therefore, releasing information requires trust-a belief that the other party will not act opportunistically to the detriment of the entrepreneur.

Building trust is an important aspect of negotiation and is important for the ongoing re- lationship if an agreement is reached. One way to start this process is to share some infor- mation with the other party, such as the relative importance of a particular issue (not one's reservation price). The other party may reciprocate by also sharing information, as part of an incremental process of building trust. If possible, the entrepreneur should assess the other party's trustworthiness (maybe by investigating the other party's previous rela- tionships). If the other party appears to be untrustworthy, then the worst outcome for the entrepreneur would be that an agreement is reached, because a relationship with an untrust- worthy partner can be detrimental to the long-run performance of the firm .

Strategy 2: Ask Lots of Questions Asking questions provides an opportunity to learn more about the preferences of the other party, because this information is the foundation for finding the trade-offs necessary for integrative agreements. Even if the other party does not answer certain questions, the nonanswer itself might provide some information. For exam- ple, an entrepreneur negotiating an exclusive license agreement could ask the potential licensee, "How much would it cost you to get out of your current contract with firm YY to free yourself up to license our technology?"

Strategy 3: Make Multiple Offers Simultaneously Relationships are rarely defined by one dimension, and therefore there can be numerous possible offers based on combinations of different levels on different dimensions. Recognizing this, the entrepreneur can simulta- neously make multiple offers. By determining which offer is the closest to being accept- able, the entrepreneur can infer which issues are of greatest importance to the other party. This information is valuable in reaching an integrative agreement. It also sends a signal to the other party that the entrepreneur is flexible.

Strategy 4: Use Differences to Create Trade-Offs That Are a Source of Mutually Beneficial Outcomes Differences between the entrepreneur and the other party in ex- pectations, risk preferences, and time preferences all provide opportunities to reach an in- tegrative agreement. We can investigate these differences in the context of an entrepreneur negotiating a license agreement. One difference could be in expectation- the entrepreneur

IN REVIEW

SUMMARY

447

CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 433

expects the introduction of the licensed technology into the other party's product to in- crease sales more substantially than the other party expects. This difference in expectation could be the basis for an integrative agreement. For example, both parties would prefer to have a lower "up-front" fee for the technology and a greater royalty percentage. Both parties perceive that they do better based on their expectations of sales.

A similar license agreement would be mutually beneficial when the entrepreneur has less risk aversion than the other party-that is, when the entrepreneur is more willing to give up a certain gain from the up-front fee for a greater, but uncertain, stream of revenue from an increased royalty payment. Alternatively, differences in time preference could lead to the preceding negotiated license agreement. The entrepreneur prefers to accept less now for more later, whereas the licensee is prepared to pay more later, when the income from the license is generated.

In this chapter we explored alternate means by which an entrepreneur can grow his or her business. Franchising was discussed as a means of new entry that can reduce the risk of downside loss for the franchisee and also as a way that an entrepreneur can ex- pand his or her business by having others pay for the use of the business formula. For the franchisee, the advantages of franchising are that he or she enters into a business with an accepted name, product, or service; has access to managerial assistance pro- vided by the franchisor; receives up-front support that could save the entrepreneur sig- nificant time and possibly capital; has access to extensive information about the market; and has other operating and structural controls to assist in the effective management of the business. However, there are a number of potential disadvantages, which usually center on the inability of the franchisor to provide the services, advertising, and location that were promised.

For the franchisor, the primary advantage of franchising is that he or she can ex- pand the business quickly, using little personal capital. But the franchisor also incurs certain risks in choosing this expansion alternative. In some cases, the franchisor may find it very difficult to locate quality franchisees. Poor management, in spite of all the training and controls, can still cause individual franchise failures, and these can reflect negatively on the entire franchise system. As the number of franchises increases, the ability to maintain tight controls becomes more difficult.

Entrepreneurs can also achieve growth through joint ventures. The effective use of joint ventures as a strategy for expansion requires the entrepreneur to carefully appraise the situation and the potential partner(s). First, the entrepreneur needs an accurate assessment of the other party to best manage the new entity in light of the ensuing re- lationship. Second, there needs to be symmetry between the two (or more) firms in terms of "chemistry" and the combination of their resources. Third, expectations of the results of the joint venture must be reasonable. Far too often, at least one of the partners feels that a joint venture will be the cure-all for other corporate problems. Expectations of a joint venture must be realistic. Finally, the timing must be right.

Another way t he entrepreneur can expand the venture is by acquiring an existing business. For an entrepreneur, there are many advantages to acquiring an existing business, such as gaining access to an established image and track record, familiar location, established distribution and resource channels, and knowledgeable and

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434 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

skilled employees. Besides, the cost of an acquisition can be cheaper than other I""E anisms for growth. However, history suggests that acquisitions have only a mar~-~ success record. Entrepreneurs seem to be overly confident about their abil" achieve envisioned synergies, integrate organizational cultures, and retain key em~_ ees. After balancing the pros and cons of the acquisition, the entrepreneur nee determine a fair price for the business.

Mergers and leveraged buyouts are other ways that entrepreneurs can grow-- businesses. An essential skill for all these alternatives is the ability of the entrepre. to negotiate. Good negotiation involves two tasks. The first task involves determi:7 - _ how the benefits of the relationship are going to be distributed between the pa The second task is exploring the mutual benefits that can be gained from the re l<m::-- ship. To negotiate in a way that maximizes benefits requires the entrepreneu r to information about one's own preferences and those of the other party to create : outcome that is mutually beneficial. This requires an initial assessment of oneself a-:. the other party and the use of strategies to elicit more information during the neg ation interactions to better inform those initial assessments. To these ends, this chap .= offered four important assessments an entrepreneur should make and four strates - that can be used to achieve a successful negotiation.

RESEARCH TASKS

c 1. Find information about three joint ventures that were failures, and be prepared~= discuss the underlying reasons for the failure in each case. 2. Search on the Internet for franchises for sale. Choose three. What commonalities ar:e there across the businesses and the informat ion provided? What differences are there? For one of these businesses, obtain all franchise information. For this busin ess what are the benefits of being a franchisee rather than setting up an independen business? What are all the associated costs of being a franchisee for this business?

3. Interview three franchisees to better understand their relationship with the franchisor.

4. Find three types of business license agreements (only one of these should be a software license agreement). In what ways are these license agreements the sa me and in what ways are they different? Why have these companies decided to license their product or technology rather than simply sell it?

5. Find three reports of acquisitions that were unsuccessful. Why were these acquisitions deemed unsuccessful?

CLASS DISCUSSION

-- 1. Being a franchisor seems to be a mechanism for growth, but what are the growth

prospects for entrepreneurs who are franchisees? Isn't the entrepreneur limited in his or her ability to pursue all the different types of growth strategies? Is bei ng a franchisee simply substituting one type of employment for another type of employment? How can a franchisee grow his or her business(es)?

2. Recently the Chinese government has been encouraging foreign firms to enter into joint venture relationships with local (Chinese) firms. What are the benefits to the Chinese economy from these joint venture relationships? What are the benefits to the local Chinese firm? What are the benefits to the foreign firm? What is the impact of the joint venture on the foreign firm's domestic economy?

'"'"'""'"""'' e;gh<h Ed;doo I 449 ---------- --·---·--· --·- -·--·~·----·--·- ·-----·-------- --------- ------------------ --------·-------~---

CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 435

3. Identify a local franchise in your area, and determine where the competitors are located and where other franchises from the same organization are located. Evaluate the existing potential for the franchise.

4. Why are there so many different techniques for determining the worth of a firm? In any given situation, is there one "right answer" for a company's value? What effects do your answers to these questions have on the entrepreneur making an acquisition?

SELECTED READINGS

Bazerman, Max H.; and Jared R. Curhan. (2000). Negotiation. Annual Review of Psychology, vol. 51, no. 1, pp. 279-315.

This article focuses on the psychological study of negotiation, including the history of the negotiation game; the development of mental models on negotiation; the definition of negotiation rules based on concerns of ethics, fairness, and values; the impact of the selection of communication medium on the negotiation game; and the impact of cross-cultural issues on perception and of behavior on negotiation.

Chang, Sea Jin. (2004). Venture Capital Financing, Strategic Alliances, and the Initial Pub- lic Offerings of Internet Startups. Journal of Business Venturing, vol. 19, no. 5, pp. 721-41.

In this study the author examines how Internet start-ups' venture-capital financing and strategic alliances affect these start-ups' ability to acquire the resources neces- sary for growth. Using the initial public offering (I PO) event as an early-stage measure for an Internet start-ups' performance and controlling for the /PO market environ- ment, this study found that three factors positively influence a start-up's time to /PO: (1) the reputations of participating venture-capital firms and strategic alliance partners, (2) the amount of money the start-up raised, and (3) the size of the start- up's network of strategic alliances.

Dietmeyer, Brian J.; and Max H. Bazerman. (2001). Value Negotiation. Executive Excel- lence, vol. 18, no. 4, p. 7.

This article advises executives on value negotiation, including developing wise trades in value creation, building trust and sharing information in an open and truthful manner, asking questions, making multiple offers simultaneously, and searching for postsettlement settlements.

George, Gerard; Shaker A. Zahra; and D. Robley Wood, Jr. (2002). The Effects of Business-University Alliances on Innovative Output and Financial Performance: A Study of Publicly Traded 8 iotechnology Companies. Journal of Business Venturing, vol. 17, no. 6, pp. 557-90.

Analysis of 2,457 alliances undertaken by 147 biotechnology firms shows that com- panies with university linkages have lower R&D expenses and higher levels of inno- vative output. However, the results do not support the proposition that companies with university linkages achieve higher financial performance than similar firms without such linkages.

Gulati, Ranjay; and Monica C. Higgins. (2003). Which Ties Matter When? The Contin- gent Effects of lnterorganizational Partnerships on IPO Success. Strategic Management Journal, vol. 24, no. 2, pp. 127-45.

This paper investigates the contingent value of interorganizationa/ relationships at the time of a young firm's initial public offering (/PO). Results show that ties to prominent venture-capital firms are particularly beneficial to /PO success during cold markets, while ties to prominent investment banks are particularly beneficial to /PO success during hot markets; a firm's strategic alliances with major pharmaceu- tical and health-care firms did not have such contingent effects.

450 I '"'"'""'""';' ----~-+-- -- ---

436 PART 5 FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE

Holmberg, Stevan R.; and Kathryn Boe Morgan. (2003). Franchise Turnover and Fa i~·.:... ::: New Research and Perspectives. Journal of Business Venturing, vol. 18, no. 3, pp. 403-';

This paper's new franchise failure concept reconciles many prior, seemingly inco tent study results based largely on franchisors' surveys. Overall franchisee turn rates are significant and appear to have increased over time.

Katila, Riitta; Jeff Rosenberger; and Kathleen Eisenhardt. (2008). Swimming Sharks: Technology Ventures, Defense Mechanisms and Corporate Relationships.~­ ministrative Science Quarterly, vol. 53, no. 2, pp. 295-332.

This paper focuses on the tension that firms face between the need for reso urc=:. from partners and the potentially damaging misappropriation of their own ~= sources by corporate "sharks." The findings show that entrepreneurs take a ~ when they need resources that established firms uniquely provide (i.e., financia l a.""= manufacturing) and when they have effective defense mechanisms to protect th own resources (i.e ., secrecy and timing). [Abstract from authors.]

Kenis, Patrick; and David Knoke. (2002) . How Organizational Field Networks Shao= lnterorgan izational Tie-Formation Rates. Academy of Management Review, vo l. r no. 2, pp. 275-94.

The authors investigate the impact of communication in field-level networks on rat£5 of formation of interorganiza tional collaborative ties, such as strategic alliances ar·= joint ventures.

Marino, Louis; Karen Strandholm; Kevin H. Steensma; and Mark K. Weaver. (2002). Moderating Effect of National Culture on the Relationship between Entrepreneuria Orientation and Strategic Alliance Portfolio Extensiveness. Entrepreneurship: Theo ry - Practice, vol. 26, no. 4, pp. 145-61.

This article examines the moderating effect of national culture on the relatio nsh1;:. between entrepreneurial orientation and strategic alliance portfolio extensiveness..

Michael, Steven C. (2003) . First Mover Advantage through Franchising. Journal of Busi- ness Venturing, vol. 18, no. 1, pp. 61-81.

Franchising has been argued to be a technique used by entrepreneurs in service i dustries to assemble resources to rapidly create large chains and gain first-move r aa-- vantage. Whether and how such first-mover advantage is created is the subject o~ this paper. A structural equations model is specified, and empirical results from the restaurant industry support the model's predictions that the first-mover advantage initially takes the form of a lead in the number of retail outlets, followed by a mar- ket share lead and, finally, superior profitability.

Michael, Steven C. (2000). Investment to Create Bargaining Power: The Case of Fra chising. Strategic Management Journal, vol. 21, no. 4, pp. 497-517 .

In this article the author argues that the franchisor can make investments in activities to increase its bargaining power and decrease conflict and litigation in a franch ise system. Includes tapered integration, ownership of some units with franchisemen~ of others, selection of inexperienced franchisees, and employment of a long training program.

Park, Seung H.; Roger R. Chen; and Scott Gallagher. (2002). Firm Resources as Modera- tors of the Relationship between Market Growth and Strategic Alliances in Semicon- ductor Start-Ups. Academy of Management Journal, vol. 45, no. 3, pp. 527-46.

The results of this study indicate that, in volatile markets, resource-rich firms access external resources through alliances whereas resource-poor firms are less likely to do so. However, in relatively stable markets, this relationship reverses, and resourc~ poor firms become more active in alliance formation.

Pearce II, John A.; and Louise Hatfield. (2002). Performance Effects of Alternative Joi nt Venture Resource Responsibility Structures. Journal of Business Venturing, vol. 17, no. 4, pp. 343-65.

END NOTES

CHAPTER 14 ACCESSING RESOURCES FOR GROWTH FROM EXTERNAL SOURCES 437

The authors examine the relationship between the acquirers of a joint venture's (JV's) resources and the JV's performance in achieving its partners' goals in the United States. Topics covered include the impact of alternative resource responsibil- ity structures on JV performance, variation in resources received by JVs, and implica- tions for business theory development and practicing managers.

Sarkar, M. B.; R. A. J. Echambadi; and JeffreyS. Harrison. (2001). Alliance Entrepreneurship and Firm Market Performance. Strategic Management Journal, vol. 22, no. 6/7, pp. 701-12.

This article extends entrepreneurship into the domain of alliances and examines the effect of alliance proactiveness on market-based firm performance, including the higher performance of firms that are proactive in forming alliances, and the mod- erating influences of firm size and environmental uncertainty on the relationship between alliance proactiveness and performance.

Wiklund, Johan; and Dean A. Shepherd. (2009). The Effectiveness of Alliances and Ac- quisitions: The Role of Resource Combination Activities. Entrepreneurship: Theory & Practice, vol. 33, no. 1, pp. 193-212.

Resource complementarity increases the potential value of alliances and acquisitions, but the extent to which the value potential of an alliance or an acquisition becomes re- alized depends on the ability of the firm to discover and conduct productive resource combinations. Using a sample of 319 small firms, the authors separate domestic from international alliances and acquisitions and show that alliances and acquisitions bring limited benefits to firms unless a deliberate effort is devoted to resource combination.

1. See J. Useem, "The Start-up Factory," Inc. (February 9, 1997), pp. 40-52; E. Matson, "He Turns Ideas into Companies-at Net Speed," Fast Company (December 1996), p. 34; and ldealab Web site, www.idealab.com.

2. D. D. Seltz, The Complete Handbook of Franchising (Reading, MA: Addison- Wesley Publishing, 1982), p. 1.

3. L. Bongiorno, "Franchise Fracas," BusinessWeek (March 22, 1993), pp. 68-71. 4. F. Huffman, "Under New Ownership," Entrepreneur (January 1993), pp. 101-5. 5. W. Siegel, Franchising (New York: John Wiley & Sons, 1983), p. 9. 6. Directory of Franchising Organizations (Babylon, NY: Pilot Industries, 1985). 7. K. Rosenburg, "Franchising, American Style," Entrepreneur (January 1991),

pp. 86-93. 8. D. J. Kaufmann and D. E. Robbins, "Now Read This," Entrepreneur (January

1991), pp. 100-105. 9. For some different perspectives on joint ventures, seeR. D. Hisrich, "Joint

Ventures: Research Base and Use in International Methods," in Donald L. Sexton and John D. Kasarda (eds.), The State of the Art of Entrepreneurship (Boston: PWS-Kent Publishing, 1992), pp. 520-79; and J. McConnell and T. J. Nantell, "Corporate Combinations and Common Stock Returns: The Case of Joint Ventures," Journal of Finance 40 (June 1985), pp. 519-36.

10. For a discussion of some different types of joint ventures, seeR. M. Cyert, "Establishing University-Industry Joint Ventures," Research Management 28 (January-February 1985), pp. 27-28; F. K. Berlew, "The Joint Venturer-A Way into Foreign Markets," Harvard Business Review (July-August 1984), pp. 48-49 and 54; and Kathryn Rudie Harrigan, Strategies for Joint Ventures (Lexington, MA: Lexington Books, 1985).

11. Semiconductor Research Corporation, www.src.org/member/about/src.asp. 12. Max H. Bazerman and Margaret A. Neale, Negotiating Rationally (New York:

Free Press, 1992). 13. Ibid.