This Document Contains Chapters 13 to 15 Chapter 13: Buying a Business I. Business Plan Building Block (SLIDE 13-2) Chapter 13 will help students investigate the advantages and pitfalls of buying a business. II. CHAPTER LEARNING OUTCOMES (SLIDE 13-3) After completing this chapter, students should be able to: • Evaluate objectively businesses that are for sale. • Understand the pros and cons of purchasing an ongoing business. • Assess the market value of an ongoing business. • Recognize when you need professional help. • Decide whether it is better for you to buy an ongoing business or to begin from scratch. III. LECTURE OUTLINE 1. Why Purchase an Ongoing Business? (SLIDE 13-4 and SLIDE 13-5) Explain to your students that the dominant reason for buying an ongoing business is money, primarily the income stream. Other reasons include (SLIDE 13-4 and page 346): 1. If you find a “hungry seller,” you should be able to negotiate good terms. 2. Fixtures and equipment will be negotiable. 3. Training and support may be available through the seller and can sometimes be negotiated. 4. An established customer base should be in place. You will need to determine how loyal the customers are and whether there is goodwill or ill will. 5. Relationships with suppliers and distributors are in place. 6. The location may be excellent and not easily duplicated. 7. Employees may possess specialized knowledge that can benefit your business immensely. 8. Existing licenses and permits may be difficult to replicate. 9. You will be able to see actual financial data and tax-reporting forms. Investigate! 10. An inside look into the business operation will determine if using advanced technology could increase operational effectiveness and thus profits. Remind students that the uncertainties of a start-up business are reduced but not eliminated. Some tips on getting your students started include (SLIDE 13-5 and page 340): • Determine which type of entrepreneur you are. • Fall in love with the business not the deal. • Stay true to your business values and vision. • Make sure you purchase a business you know how to run. • Look for a retiring entrepreneur who will stay on to help you. • Above all, obtain legal and financial advice before you sign any contract. 2. How to Buy and How Not to Buy (SLIDE 13-6) Suggest that your students analyze everything about a business, using every tool and business guru they can. Do not buy for emotional reasons. The best deals are seldom advertised. The worst business opportunities are advertised widely, usually in the classified section of the newspapers. Suggest to students that they should consider running their own advertisement. 3. Getting the Word Out (SLIDE 13-7) The following tips can help your students learn about what’s for sale (page 347): • Spread the word that you are a potential buyer. • Contact everyone you can in your chosen industry. • Ask people in your network to help you in your search. • Advertise your needs in trade journals. • Check out the Internet. • Send letters of inquiry to potential sellers. • Knock on doors. • Check with business-opportunities brokers. • Talk with firms that deal in mergers and acquisitions. • Don’t rush. Encourage your students to complete Action Step 57, page 348, which will help them get started on getting the word out. 4. Investigate the Business from the Outside (SLIDE 13-8) Learn from others’ mistakes. Suggest students learn from the experience of others like Ben and Sally Raymundo in the opening caption, page 348: • Don’t take sellers at face value. • Talk with suppliers. • Count your time as a cost of doing business. • Look at each deal from the viewpoint of what it would cost to hire a competent manager and staff at market rates. Know when you need outside help. Suggest students learn from the experience of Georgia and her husband Fred, page 349. They may need the perspective of someone who is more objective than your student’s team members. Explain that the first step is to gather as much information as they can from the exterior. Explain that studying the business from the outside will tell them whether they should go inside and probe more deeply (Action Step 58, page 349). 1. Make sure the business fits into the framework of your industry overview. 2. Diagram the area. 3. Take some photographs of the exterior. 4. Ask around. Interview the neighbours and the customers. 5. Check out future competition. 6. Check with the local authorities. 7. Know when you need outside help 5. Investigate the Business from the Inside (SLIDE 13-9) Explain to students that there are two ways to get inside the business: they can either contact the owner themselves, or they can get assistance from a business-opportunity broker. Explain that if they are serious about buying a business, use the services of a business broker. Brokers have the expertise and knowledge you’ll need. Encourage your students to complete Action Step 59, page 350, which helps them to investigate a business from the inside out. Dealing with Brokers. A business broker is a real-estate broker who specializes in representing people who want to sell businesses. A broker can be very helpful in playing a third-party role in negotiations. Explain that, however, a broker normally has a responsibility to represent the seller and is not paid unless he or she sells something. Your students should network their business contacts to locate a competent broker. Encourage them to ask brokers for referrals from their former clients and quiz their business knowledge. How to Look at the Inside of a Business. Explain that once they have their foot in the door and have established themselves as a potential buyer, investigate the inner workings of the business. Suggest they do the following: 1. Study the financial history. • You need to know where the money comes from and where it goes. • Try to get financial information from five years back. • Take your time studying the financial papers. • If you don’t understand the records, hire someone who does. • Look at the history of cash flow, profit and loss, and accounts receivable. • Review every receipt you can find. • Evaluate closely any personal expenses that are being charged to the business. • Evaluate cancelled cheques, income tax returns, and the amount of salary the owner has paid himself or herself. 2. Compare what your money could do elsewhere. • Calculate how much money you would be putting into the business. • Calculate how long it would take you to earn it back. • Make sure to figure in your time. 3. Evaluate the tangible assets. • Real estate: Get an outside appraisal of the building and land. • Equipment and fixtures: Get an idea of current market values by speaking to equipment dealers and reading the want ads. Don’t tie up too much capital in equipment that is outmoded or about to come apart. • Inventory: Count the inventory yourself. Make sure the boxes are packed with what you think they should be. Contact suppliers to check current prices and negotiate on inventory that is damaged, out-of-date, etc. 4. Talk to insiders. • Bankers: It is a must to discuss the business with you banker and, ideally, with the current owner’s banker. • Suppliers: Will they supply you? Will you inherit any difficulties? • Employees: Identify key employees. You don’t want them to walk out the day you take over. • Competitors. Identify major competitors and interview them to learn what goes on from their perspective. 5. Get a non-competition covenant. This is an agreement, in writing, that the seller will not set up in competition with you, or work for a competitor, for the next five years. 6. Analyze the seller’s motives. Some reasons favour the buyer, while other reasons favour the seller, page 354. 7. Examine the asking price. Consider the following: • The owner may be emotionally attached to the business and, therefore, overvalue its worth. • Use this formula: return on your investment minus the value of your management time. • Consult the newspaper financial pages to learn the price/earnings ratios of publicly traded stock. • You will pay more for a firm with above-average growth potential. • Don’t buy a declining business unless you can get it at a great price and turn it around or dispose of its assets at a profit. 8. Negotiate the value of goodwill. Goodwill is an invisible commodity used by sellers to increase the asking price for a business. It is the dollar value obtained when you subtract the total value of the tangible assets from the purchase price. Before you negotiate: • Find out how much goodwill there is and where it is. • Compare the goodwill you are being asked to buy with that of similar businesses. • Figure out how long it will take you to pay the goodwill. • Figure out how much you could make if you invested the money spent on goodwill in secure investments. • Find out how long it would take to reach the same level of profitability, starting from scratch. 9. Learn whether bulk sales escrow is needed. Bulk sales escrow is an examination process intended to protect buyers from unknown liabilities. Find out if any inventory you are buying is tied up by creditors. 10. Buying a business on an earnout basis is an option. An earnout is a contractual arrangement in which the purchase price is stated in terms of a minimum and the buyer of the business agrees to make future payments to the seller based on the achievement of predefined financial goals after closing. Buying on an earnout basis is an option only if the seller has great confidence in the buyer’s skills and knowledge of the business—as learned from the Sam Wilson case study, page 357. 6. The Decision to Buy (SLIDE 13-10, SLIDE 13-11, SLIDE 13-12 and SLIDE 13-13) Suggest that even if they think they’re ready to make their decision, don’t do it—not yet. Suggest to your students that they look for the “red flags” provided in Box 13.4, page 357. When it comes time to buy, they should use a checklist (SLIDE 13-10) like the one in Box 13.5, page 357. Prepare for the negotiations (SLIDE 13-11). When it is time to talk meaningful numbers, the most important subject is terms, not asking price. Favourable terms will give you the needed cash flow. When the seller brings up the subject of goodwill, be ready for it. Flip the coin over and be ready to discuss ill will. Get some practice. Complete Action Step 60, page 359. Protect yourself (SLIDE 13-11). Your purchasing goal is the lowest possible price with the best possible terms. Start low; you can negotiate up if necessary. If you are asked to put down a deposit, put it in an escrow account. Be sure to add a stipulation in your offer that says the offer is subject to your inspection and approval of all financial records and all other aspects of the business. 7. Negotiating the Price (SLIDE 13-12) Explain that the seller and the buyer may have very different views as to what constitutes a fair price. Nonetheless, the price of a business is related to the ability of that business to generate revenue. This is determined, to some degree, by the assets of the business. Explain the three useful methods of valuing a small business. Suggest that this will get them started on the process. But caution your students, these are only three of the many approaches and methods available. Should they find themselves wanting to buy a business, professional help in setting a fair price is strongly advised. The three methods are: 1. Asset-based valuation. In an asset-based valuation, the purchase price of a business is determined, in large part, by the assets of the business. The most common method of asset valuation is the adjusted book value. The book value is the owner’s equity or total assets – total liabilities. The adjusted book value is the book value amended to reflect market values. 2.. Ability to pay valuation. The value of the business is determined by its ability to pay off the loan over a specified period, and provide a reasonable return on the owner’s investment. Most new business owners cannot afford to buy a business without taking out a loan or getting some sort of earnout. So, before buying a business, they want to make sure that the business can pay off the loan or earnout and at the same time have enough cash to pay all the other expenses—which includes, of course, a salary to the new owner. Five steps to calculate this valuation are contained on pages 355–357. 3. Earnings-assets valuation. This method takes into consideration both earning potential and asset value. This valuation approach requires copies of the financial statements for the business. It is only from these figures that a valid analysis can be made. There are various methods for calculating an earning-assets evaluation. One method—the earnings-assets pricing formula—is shown on page 363. Encourage your students to work through this approach in our end-of-chapter case study (question 4b, page 370). 8. The Contract (SLIDE 13-13) Explain that the sale of a business involves a combination of final price, other terms, and overall risk. Explain that once they have arrived at the terms of sale, the details should be spelled out in a contract that itemizes all aspects of the sale. A summary of some standard items that are usually found in such a contract are provided on page 366. 9. Expect Some Pleasant Surprises Explain that there are bargains to be found for hunter-buyers with vision and persistence, as exemplified by the Woolett’s Hardware case, page 367. 10. Think Points for Success Review the following think points with your students: √ Stick to what you know. Don’t buy a business you know nothing about. √ Compare what your money could do elsewhere √ Don’t let a seller or a broker rush you. A business is not a used car. √ If your seller looks absolutely honest, check him or her out anyway. √ Worry less about price; work harder on terms. √ Most good businesses are sold behind the scenes, before they reach the open market. √ Make sure you’re there when the physical inventory takes place. Look in those boxes yourself. √ Get everything in writing. Be specific. √ Always go through bulk sales escrow. √ Buying a corporation is tricky. Have an experienced lawyer and accountant help you. 11. Checklist Questions and Actions to Develop Your Business Plan (SLIDE 13-15) Review the following Checklist Questions and Actions to Develop Your Business: √ Why would you buy a business rather than start from scratch? √ What are the potential “icebergs” (unknowns or major risks) in buying a business? √ Establish the value of goodwill. Is the business worth this amount? √ What would be the cost involved in starting from scratch versus buying a business? IV. SUGGESTIONS FOR GUEST SPEAKERS Some guest speakers to consider include: 1. A business-opportunity broker. Have the broker discuss why entrepreneurs should buy businesses. 2. An owner with a business for sale. Have the owner talk about how long he or she has been in business, why the business is being sold, how much he or she values goodwill, and how long he or she trained in this particular business. 3. An accountant. Invite an accountant with experience in valuating businesses to talk about how a business, including goodwill, is valued. V. CLASS PROJECTS Class Project 1: Field Trip Take students to a shopping centre where there are several businesses for sale. Ask students to apply the techniques from Action Step 58, page 350, for viewing a business from the outside. When you reconvene in the classroom, have students write their observations on the board and then draw conclusions about these businesses. Class Project 2: Interviews Assign different teams to: • Interview a business broker. • Interview the owner of a business for sale. Have the teams report back to class. Class Project 3: Gather Data Send teams of students to gather data on cases of businesses for sale in your community. List these criteria on the board: 1. The most expensive business for sale. • employees, number, and training • major product or service • how long in business and how long on market • legal form • annual income • location, square footage, and rent • major means of advertising the sale • asking price • value placed on goodwill • real value 2. The least expensive business for sale. (Use the same criteria as above.) Class Project 4: “Maria’s Experience” Have students read “Maria’s Experience” below. It is a good example of how to go about buying a business. Have each student think about and choose a business he or she would like to buy. Advise them to keep in mind Maria’s experience while answering the following: • How would you go about looking for this type of business? • What are the minimum conditions under which you would buy the business? • Who would you put on your buying team to give you advice? Maria’s Experience Several years ago, Maria decided she had had it with the computer industry, the cold weather of Calgary, and the rushed life of the city. She laid out her two-week vacation through several smaller towns in Southern British Columbia. She had always liked travelling and thought it would be fun to own a travel agency. Two weeks before her vacation, Maria began purchasing the major newspapers from the towns she planned to visit, and searched the “want ads” for travel agencies for sale. As she found them, she made a list of prospects. A few days before her vacation, she phoned everyone on her list, told them she was interested, and made appointments for when she would be in the area. Maria also outlined the type of arrangement she was looking for, as follows: • small agency—two to four employees • some commercial accounts • a good percentage of the business (30 to 60 percent) from tours and/or cruises • training from owner who would stay on at least a year • low down payment—balance paid out of profits She visited 11 of the 20 agencies on her list and found three that met most of her requirements. She had prepared a résumé of her accomplishments, experience, and education to show the owners of the agencies she liked most. Although she lacked a travel background, she could show that she was a doer and a winner. As a result, two of the three agencies she was interested in offered to sell at very attractive terms. She accepted an offer with the following terms: • She would work as an employee for one year on a salary plus a percentage of profits. The owner would work full-time for the year and pay for her travel agency training. • A percentage of the year’s profit plus $5,000 cash would be the down payment. • The owner would work part-time, as required by the new owner, for the second year. • The seller would take, after the minimum salary for a new owner, 30 percent of the profits for the first three years and then 15 percent of profits until the loan was paid off. Maria has now been in British Columbia for three years. She is travelling free or at high discounts and is really enjoying herself. Sales and profits have been up every year, and the former owner stops in at least once a month to see if help is needed. VI. INTERNET EXERCISES 1. Buying a Business (Box 13.1 page 348) Have your students link on to Canadian Business Exchange, “Find a Business to Buy”: www.canadianbusinessexchange.com or “Business Sell Canada”: www.businesssellcanada.com/sale/buymain.htm. Get them to find a business for sale. Have them bring in a description of the business and terms for class discussion. 2. How Much is a Business Worth? (Box 13.2, page 352) Get students to link on to the CCH, Valuation of Small Business Link: http://www.toolkit.cch.com/text/P11_2200.asp Have them answer the following questions: • Key factors. What factors are most important to buyers? What are secondary? • Adding value. How can you boost these important factors before the sale? • Recasting financial statements. How might your accountant adjust your financial statements, before showing them to potential buyers? • Valuation methods. What are some of the methods and formulas that are commonly used to put a price tag on a business? • Partial interests. If you're only selling part of the business, how does that affect the price? VII. SUGGESTED LESSON PLAN VIII. SUGGESTED ACTIVITIES ACTIVITY 1: Review and Overview 1. Review Chapter 12 and answer any questions. (Show SLIDE 12-2, SLIDE 12- 3 and SLIDE 12-4 and SLIDE 12-21 of Chapter 12 if necessary.) 2. Ask students to recall the experience of Ben and Sally Raymundo in the opening caption, page 345. What were the reasons for their unfortunate experience? 3. Show and explain SLIDE 13-2 and SLIDE 13-3. Activity 2: Getting Started—Why Purchase a Business? Show and briefly explain SLIDE 13-4, SLIDE 13-5, and SLIDE 13-6. Optional class discussion and mind mapping exercises (30–40 minutes) 1. Learning from Others’ Successes and Mistakes 1. The main purpose of this exercise is to help students learn, from the experience of other entrepreneurs, primary research techniques for evaluating a business from the outside. 2. Divide the class into groups. • Have one-third of the class mind-map what they learned about evaluating a business from the Ben and Sally Raymundo case in the opening caption, page 345. • Have one-third of the class mind-map what they learned about evaluating a business from the Georgia and Fred case, page 348. • Have one-third of the class mind-map what they learned about evaluating a business from the Sam Wilson case “An Earn-Out Success Story,” page 356. 3. When the groups have completed their mind maps, ask a member from each group to share the group results with the class. Mind-map these group ideas on the blackboard and summarize results. 4. Show and briefly explain SLIDE 13-4, SLIDE 13-5, and SLIDE 13-6. 2. Maria’s Experience (20–30 minutes) 1. You may also want to have students mind-map what they learned from “Maria’s Experience” in Class Projects, Section V, class project #4, above. 2. Show and briefly explain SLIDE 13-4, SLIDE 13-5, and SLIDE 13-6. Activity 3: Getting the Word Out Show and briefly explain SLIDE 13-7. Activity 4: Study a Business from the Outside Show and briefly explain SLIDE 13-8. You may also want to refer to the suggested Instructor notes that accompany this slide. Optional class discussion exercise (15–20 minutes) 1. Ask if any of the students have already investigated a business. Have these students share their results with the class. 2. Show and briefly explain SLIDE 13-8. Activity 5: Networking Break Encourage students to network and learn more about each other during the break. Activity 6: Study a Business from the Inside In the last activity, students were encouraged to investigate a business from the outside. This is the first step in evaluating a business for sale. Explain that the next step is to go “inside” and probe more deeply. Show and briefly explain SLIDE 13-9. You may also want to refer to the suggested notes that accompany this slide. Action Step 59, page 350, helps you to investigate a business from the inside out. Learning from a Business Broker—Optional guest speaker exercise (40–50 minutes) 1. A business broker can often play an important role in matching buyers and sellers. This exercise will give students the opportunity to meet a broker and learn how to deal with brokers to find a business opportunity. (Note: Contact a business broker who deals in the buying and selling of small businesses. A local real estate firm would be a good place to start. You could also check the Internet or the Yellow Pages.) You may wish to assign the task of inviting a guest to a group of students. 2. Arrange to meet with your guest at least one week before he/she is scheduled to speak. 3. Find out what resources your guest requires and make appropriate arrangements. 4. Brief your guest on the purpose and background of the course. Be sure to get the appropriate personal and business information to introduce and then thank your guest. You could assign this task to a student. 5. Indicate that the main objective of this activity is to help students learn about the role of a broker, how a broker can help entrepreneurs find a business, and finding a good broker. Students will also want to know how a broker evaluates a business. The broker may even want to suggest some good businesses for sale and why he/she thinks they are “hot deals.” 6. If possible, get the broker to become familiar with the chapter, especially the section “Dealing with Brokers,” page 351. 7. Encourage your guest to try to stimulate discussion and leave time to answer questions. 8. Encourage your guest to bring handouts, information, and business cards to give to students. 9. Show and briefly explain SLIDE 13-9. You may also want to refer to the suggested notes that accompany this slide. Activity 7: Before You Buy See NETA Lesson Plan #1 Activity 8: Negotiating the Price See NETA Lesson Plan #2 Show and briefly explain SLIDE 13-12. You may want to refer to the Instructor notes that accompany this slide. Optional class discussion exercise—business valuation (25–35 minutes) 1. Inform students that there are various ways to establish a price—many of which are quite complicated. The methodology provided in the textbook, pages 360–366, is relatively straightforward and can help them get started. Show and briefly explain SLIDE 13-12. 2. Have them get into groups of 4–7 students and answer case study question #4, page 370. 3. Have a spokesperson from each group present the group results to the class. 4. Answers to this case study are provided below in Section IX. Activity 9: The Contract Show and briefly explain SLIDE 13-13. Activity 10: Summary, Q&A, and Preparing for Chapter 14 1. Recap the key points for each objective (using SLIDE 13-2 and SLIDE 13-3 and SLIDE 13 if necessary). 2. Show SLIDE 13-15 and encourage students to complete the Checklist Questions and Actions to Develop Your Business Plan, page 369. You may also want to briefly review the Think Points for Success, page 368. 3. Show SLIDE 13-16 and encourage students to complete the case study questions. Answers to the case study questions are contained below in Section IX. 4. Respond to any questions that students may have. 5. Encourage students to go to the Nelson Small Business site: www.knowlescastillo6e.nelson.com. Click on to the Test Yourself link and complete the true or false/multiple choice, short answer and matching exercise for Chapter 13. 6. Have students read Chapter 14 in preparation for the next lesson. Some instructors may want to encourage students to also prepare a mind map of key points contained in Chapter 14. 7. In preparation for Activity 3, Chapter 14, optional exercise, encourage students to go out and interview a franchisee using the questions provided in Action Step 62, page 379. X. CASE STUDY Case Study Questions and Answers 1. Reasons for buying a business a. List five reasons why an entrepreneur would buy a business rather than start his/her own. Answer: The most important reason is the income stream. According to the text, page 346, other possible reasons could include: • Hungry seller. If you find a “hungry seller,” you should be able to negotiate good terms or seller financing. You should request that the owner continue to work in the business for a short time to help you adjust and to serve as a bridge with the customers. • Fixtures and equipment. You might be able to negotiate a good price on fixtures and equipment. Be sure to see service records, learn what equipment is being leased, and check for any liens on the equipment. • Training and support. This may be available through the seller and can sometimes be negotiated. • Customer base. You may get access to a loyal customer base. • Suppliers and distributors. You may benefit from an established relationship with suppliers and distributors. • Location. Buying a business may help you access an excellent location. • Expertise. Employees (especially in the high tech industries) may possess specialized knowledge that can benefit your business immensely. • Licences and permits. Existing licences and permits may be difficult to replicate. b. If Mitch and Carolyn had reviewed this list, would they have bought the business? Answer: If Mitch and Carolyn had reviewed this list, it is very likely that they would not have bought the business. • They would have checked out the fixtures and equipment and learned of the leasing problem. • A thorough investigation of the income stream and corresponding income statements would have revealed why payments were not being made. • They may also have learned about the state of the business from suppliers, distributors, customers, and employees. 2. Investigating the business As Uncle Jack advised, Mitch and Carolyn should have investigated the business from both the outside and the inside. Suppose you were Uncle Jack. a. Prepare a checklist of possible research questions for Mitch and Carolyn related to the outside of the business. Answer: 1. Market Demand: What is the current demand for the product or service in the target market? 2. Competition: Who are the main competitors, and what are their strengths and weaknesses? 3. Customer Preferences: What are the key preferences and needs of potential customers? 4. Industry Trends: What are the current trends and future forecasts for the industry? Note: • To help draw up this list, you might want to encourage students to review Box 13.5, page 357. • You may want to use this question as an in-class activity. Get students into groups and ask them to brainstorm a list of possible “outside” research questions. When completed, have a class discussion. Get a student to write down all the possible reasons. A possible outside checklist of questions might include: • What is the lifecycle stage of the community? • Who are the major competitors? • Do you want to be close to competitors, or do you want to be kilometres away? • Could a competitor move in next door the day after you move in? • Have you checked out possible future competition? • Have you thought about any possible “invisible” competitors? • Have you interviewed the sellers customers? • Have your asked customers about possible competitors (touchpoint analysis)? Where else do they go for similar products or services? • What do customers like about the store? Is the service good? • How far will your target customer (TC) have to walk? • What changes would they recommend? • What services or products would they like to see added? • Have you made checks on the currency of the customer lists? • Who are your top 20 customers? Your top 50? • Is the seller locked into one to three major customers who control the business? • What do the neighbours or surrounding businesses know about the business? • Will the neighbours (surrounding businesses) help draw TCs to your business? • What do the suppliers say about the business? • Have you checked out the location? • How does the area fit into the municipal/regional planning for the future • Where is the traffic flow? • Is there good pedestrian access? • Is parking adequate? • Is the parking lot a drop-off point for car poolers? • Have you interviewed your prospective landlord? • Has your lawyer checked for any potential problems in the transferal of licences and permits? • Is the building in good repair? b. Prepare a checklist of possible research questions for Mitch and Carolyn related to the inside of the business. Answer: 1. Financial Health: What are the current financial statements, including income, balance sheet, and cash flow? 2. Operational Efficiency: What are the key operational processes, and how efficient are they? 3. Staff and Management: What is the experience and capability of the current staff and management team? 4. Legal and Compliance: Are there any legal issues or compliance requirements affecting the business? Note: • As with question 2 (a), to help draw up this list, you might want to encourage students to review Box 13.5, page 357. • Again, you may want to use this question as an in-class activity. Get students into groups of 4–7 students and ask them to brainstorm a list of possible “inside” research questions. When completed, have a class discussion. Get a student to help you write down all the reasons. A possible checklist of inside questions might include: • How long do you plan to own this business? • How old is this business? Can you sketch its history? • Is this business in the embryonic stage, the growth stage, the mature stage, or the decline stage? • What reasons does the owner give for selling? • Has your accountant reviewed the books and made a sales projection for you? • How long will it take for this business to show a complete recovery on your investment? • Will the owner let you see bank deposit records? (If not, why not?) • Have you calculated utility costs for the first three to five years? • What does a review of tax records tell you? • How complete is the insurance coverage? What insurance will you have to get? • How old are the receivables? (Remember, age decreases their value.) • Are there any payables? To whom does your seller owe money? • What is the seller paying himself or herself? Is it low or high? And what do you want to pay yourself? • How well is the business using technology, computerized systems, and business management? • Inventory? • Are you buying inventory? • What is the seller asking? • Are you sure the inventory is really on hand? • How old is the inventory? • Equipment? Who owns the equipment? • Have you checked the value of the equipment against the price of used equipment from another source? • Has your lawyer checked for liens on the seller’s equipment? • Do you have maintenance contracts on the equipment you’re buying? • Has your lawyer or escrow company gone through bulk sales escrow? • Have you talked to the staff. Will they stay with you once the business is sold? • Have you made certain that: • you’re getting all brand names, logos, trademarks, and so on that you need? • the seller has signed a non-competition covenant? • the key lines of supply will stay intact when you take over? 3. Red flags a. Carolyn and Mitch should have listened carefully to Frank who gave them a number of “red flags” (see, for example, Box 13.4, page 357) to try and sell his business quickly. What red flags were raised by Frank? Answer: Frank gave Mitch and Carolyn at least four red flags (based on Box 13.4, page 357). • I have a couple of other offers. If you want the deal, you’ll have to get back to me in the next couple of days. • If you move quickly, I’ll even throw in the inventory. • We hardly need a costly lawyer or accountant. • You’re really risking only $10,000. It’s just not that much money. • With all the goodwill you’re buying, you can make your small investment back in no time. b. Go back to Box 13.4. For each red flag listed, state one reason why a perspective buyer should be careful, when they hear each statement. Answer: 1. “I’ve got two sets of books.” Red flag: The seller is implying he/she is not honest. 2. “I usually take a few dollars out every week. Save on the GST and sales taxes. So the real cash flow is much better than it looks.” Red flag: The seller is telling you he/she is not honest with the government. Why then would the seller be honest to you? In addition, the seller may be stealing from the government because the business is not profitable. 3. “I have a couple of buyers interested. So the first one in gets the deal.” Red flag: Never be in a rush. If someone is rushing you—run. They have a reason and it will not be in your best interest. Take your time and investigate the business from the inside and outside. And get professional help. 4. “Think about all the goodwill you’re buying.” Red flag: Goodwill has very little value unless it shows up on the income stream. When valuing a business, goodwill is almost always disregarded. 5. “If I had more time, I could do a lot better.” Red flag: If the seller does not have any time, what makes you think you will have the time. Usually this is because the business is not earning enough money to pay the owner. 6. “My staff has been robbing me blind. So the numbers are much lower than they really are. With good management, a lot more money can be made.” Red flag: You must be able to prove that good management will lead to higher profits. Why did the seller not do anything about this? Maybe the seller was robbing the business. Maybe no one was stealing. Possible theft is no reason for buying the business. What will it cost you to hire and train new staff? 7. “We don’t need lawyers and accountants here. It’s not that much money.” Red flag: You will always need legal and accounting advice. Anyone who advises otherwise is trying to hide something. 8. “Slip me a few dollars ‘under the table’ and I can drop the price.” Red flag: The seller has proven his/her dishonesty. Run. 9. “I want all cash for the business.” Red flag: Always hold money back as part of the sale. Unforeseen problems are very common. All sellers know this. A seller, who is up-front should never need a cash deal. A cash deal usually means a hidden problem. You may never see the buyer again. Many times it means the seller does not plan to pay taxes or record the sale. Get your accountant’s advice. 10. “It’s not a lot to pay for this business. The downside is you’re not risking much money but the payoff can be massive.” Red flag: Usually the seller is trying to speed up the deal with this type of statement. They also might be implying that lawyers and accountants fees are not necessary. Don’t be rushed and you will usually find out why a quick sale was being proposed. 4. Businesses valuation Introductory note to instructor: It is important for students to realize that the price of a business can vary greatly depending of the valuation method used. For this reason alone, it is highly recommended that perspective buyers get professional help before buying a business. Suppose that Carolyn and Mitch had done their financial due diligence and had calculated the following financial information: Total assets (market value): $50,000 Goodwill: $10,000 Total liabilities: $35,000 Average annual net profit before taxes: $25,000 Salary to owner: $22,000 Suppose, as well, that Carolyn and Mitch had also estimated that they would need a combined salary of $32,000, to pay their personal expenses. This means that the net profit given to them by Frank would be $25,000 - $10,000 = $15,000. Assume that they had worked out the earning power of Frank’s assets to be 10 percent. As Frank had been in business only 18 months, they would decide to apply a developmental (or times earning) factor of 1. a. One method of valuing a business is the adjusted book value. According to this method, what is the value of Frank’s business? Answer: Adjusted book value = Total assets (minus the value of goodwill) – Total liabilities ($50,000 - $10,000) - ($35,000) = $5,000. b. Using the earnings-assets valuation method, page 357, how much is the business worth? Compete the following steps: Answer: 1. Tangible net worth = $5,000 ($50,000 - $10,000) - ($35,000) 2. Earning power (10%) = $500 (.10 × $5,000) 3. Reasonable salary for owner(s) = $32,000 4. Earning capacity = $32,500 ($500 + $32,000) 5. Average annual net profit = $57,000 ($25,000 + $32,000) 6. Extra earning power = $24,500 7. Value of intangibles (developmental factor of 1) $24,500 8. Final earnings-assets valuation price $5,000 + 24,500 = $29,500 c. Compare your results in (a) and (b) above. Which valuation estimate is lower? Why? Answer: Adjusted book value = $5,000 Earnings-assets value = $29,500 The adjusted book value is lower. As we state in the text, normally, an adjusted book value usually reflects a minimum valuation of a business. Unlike the earnings-assets valuation, the adjusted book value does not take into consideration the earning potential of the business. Chapter 14: Buying a Franchise or Franchising Your Business I. Business Plan Building Block (SLIDE 14-2) Chapter 14 will introduce you to the world of franchising and help you decide if buying a franchise or becoming a franchisor is right for you. II. CHAPTER LEARNING OUTCOMES (SLIDE 14-3) After completing this chapter, students should be able to: • Appreciate the vast world of franchising. • Understand key franchising terms and conditions in an agreement. • Understand the relationship between franchisor and franchisee. • Learn the benefits and liabilities of owning and operating a franchise. • Learn how to become a master franchisee. • Learn the process involved in purchasing a franchise. • Understand what it takes to become a franchisor. • Decide whether buying a franchise or becoming a franchisor is the right step for you. III. LECTURE OUTLINE 1. What is a Franchise? (SLIDE 14-4 and SLIDE 14-5) Explain that a franchise is a special kind of partnership or distribution system in which one company (the franchisor) grants the right to sell its products or services to another company or individual (the franchisee). The franchisor is the firm that sells the rights to do business under its name and continues to control the business. A franchisee is the individual operator who is licensed to operate under the franchisor’s rules and directives (SLIDE 14-4). The franchising industry is enormous (SLIDE 14-5): • Franchised businesses account for 40% of all retail sales. • 78,000 franchises across Canada • Canadian Franchise Association membership grows 10% yr • Franchising directly employs 1,000,000 people • Every year, thousands of Canadians are improving their lives by becoming franchisees • Franchising accounts for $90 billion/yr in nation sales & 10% of Canada’s Gross Domestic Product (GDP) • Franchising accounts for 1 out of 5 consumer dollars spent in Canada on goods & services 2. Franchise Systems (SLIDE 14-6) Business format franchise. The business format franchise is a type of franchise in which the product, method of distribution, sales and management procedures are highly controlled. This is the most popular type of franchise system. PropertyGuys.com, in the opening caption, page 373, and 1-800-GOT- JUNK? (Chapter 6, page 127) are good examples. Dealership relationship franchise. A second type of popular franchise system is a dealership relationship franchise (also called a licensing or associate relationship). This is a type of franchise in which the franchisee buys the right to distribute a franchisor's product or service. PropertyGuys.com (opening caption), Home Hardware and Century 21 are good examples of this type of franchise. This chapter focuses mostly on the business format franchise, although much of the discussion also pertains to the dealership or licensing format. 3. Franchise Networks (SLIDE 14-7) A franchisor has two basic types of franchise networks available to distribute its products or services. 1. Direct franchising. If a franchisee deals directly with the franchisor on a one-to-one basis, then this type of network is referred to as direct franchising. For example, in the opening case study, Anna Babin bought the franchise rights from PropertyGuys.com to operate her franchise for several counties in Nova Scotia. PropertyGuys.com, the franchisor will be dealing directly with her. If she has questions or problems she deals directly with a representative of the franchisor. 2. Master franchising. If a franchisor wants to grow quickly and still provide hands on service it may turn to the master franchise format. Master franchising is a business arrangement or network in which a franchisor sells the rights of an area or territory to a franchisee who is normally required to sell (or establish) and service a specified number of franchises (often called sub-franchisees) in a specified time period within its area. For example, PropertyGuys.com (page 373) signed a Master Franchise Agreement (MFA). Don Swanston and Matt Eldridge purchased 18 franchise units in British Columbia's Greater Vancouver area. 4. Why Buy a Franchise? (SLIDE 14-8, SLIDE 14-9, and SLIDE 14-10) In theory, a successful franchise system can benefit the consumer, the franchisee, and the franchisor—a win-win situation. What the customer receives (SLIDE 14-8). The customer expects to receive: • A consistent standard of service and product. • A sense of security and familiarity. • A perception that the owner is close by and ready to help. What the franchisee receives (SLIDE 14-9). The franchisee expects to receive: • brand-name recognition • support from the corporation (franchisor) • training • financial support • a business template—a proven plan and business strategy • purchasing power • corporate monitoring and assistance • less risk of failure • national/regional promotion • additional units—an opportunity to grow What the franchisor receives (SLIDE 14-10). Franchisors earn money and benefit in several ways: • Franchise fee. They collect a fee for rights to use their name and system. This is usually a one-time fee paid on the day the franchise agreement is signed. • Royalty fee. They get an ongoing (usually weekly or monthly) royalty fee, which normally ranges from 2 to 15 percent of gross sales. • Profit. Some franchisors make a profit from supplying the franchisee. • Advertising and promotion fees. Most franchisees are required to pay advertising and promotions fees—generally ranging between 2 to 5 percent of sales. • Growth and market penetration. Franchisors can expand their business quickly with limited capital. 5. Investigating Franchise Opportunities (SLIDE 14-11 and SLIDE 14-12) Explain that true entrepreneurs may not be comfortable operating by a franchisor’s strict rules and regulations. Explain that students should still, however, keep their eyes open. Explain that they can learn a lot by examining how good franchises work. To learn more about franchising, suggest to students that they get in touch with the Canadian Franchise Association (Box 14.1, page 375). See if they are holding an event near where the students live. Encourage them to complete Action Step 61, page 378; Action Step 62, page 379; and the E-exercises provided in Box 14.2, page 379 will also help. The franchise agreement and system (SLIDE 14-11). When you purchase a franchise, you will be required to sign a franchise agreement. This contract is often complex and, therefore, we strongly advise you to get legal advice. Typical clauses in the contract are provided on page 381. The process involved in purchasing a franchise (SLIDE 14-12). If you have explored and investigated franchising and believe it is the right fit for you, and if you have worked through the Action Steps, the process truly begins. Explain that students must contact the franchise development office or the Web site of the franchise they are exploring. If the franchisor believes there might be a fit, a franchise packet will be sent to them. An example of the Second Cup Application is provided in Figure 14.1, page 381. Explain that if the franchise is large, a local sales manager or master franchisee will contact them after reviewing their application. Should there be a fit, they will meet and discuss capital requirements (see, for example, M & M Investment Requirements, Box 14.3, page 382) and possible locations in more detail. Explain to students that at this point they should be exploring the franchisor and their franchisees, current and past, in depth. Before going any further, ask if they can work in one of the franchises for 2 to 4 weeks to get a feel for daily operations and responsibilities. Explain that the more contact they have with franchisees, the better equipped they will be to make a final purchase decision. Explain that with the advice of an accountant, lawyer, past and current franchisees, and banker, they are now ready to negotiate with the franchisor to complete the sale. Deposits may be required. Do not deposit or sign any agreement until they have had a chance to review the information with their lawyer. Explain that once they have negotiated their contract, and signed the franchise agreement, they may be basically on their own or they may have a strong franchise organization behind them helping them. 6. Buyer Beware: Some Pitfalls of Franchising (SLIDE 14-13) Explain that some notable pitfalls and issues that plague the franchising industry include (pages 383-384): • Encroachment. This is a situation in which franchisors compete with their own franchisees by putting an outlet nearby or setting up alternative competitive distribution channels, such as mail order or the Internet. Some franchise experts tell us that this is the number one issue in the franchise industry. • Ground-floor opportunities. Beware of the so-called "grow with us" or "ground-floor" franchise opportunities. Your franchisor should have a demonstrated successful track record. • Renewal period. Franchise agreements should stipulate the conditions for a renewal period after which the contract agreement has expired. Beware of the contracts that do not provide for conditions of renewal, which are negotiable. Upon renewal you do not want to pay a second franchise fee and again this can be negotiated. • Verbal agreements. Most well written agreements come with a “small-print” paragraph that says something to the effect that the franchisor or it representatives are not legally responsible for any promises made prior to the signing of the agreement. Get everything in writing. • Minimum franchise legislation. Most franchise disputes must be settled in the courts. There is no federal legislation to protect franchisees from unscrupulous franchisors. As of 2006, Alberta and Ontario are the only two provinces that have substantial franchise legislation. Outside of Alberta and Ontario, franchisors are not legally required to provide the following types of information: a) A balance sheet and income statement b) Number of franchises c) Bankruptcy history d) Background of the owners/key officers e) Revenues and expenses of the franchisor f) Turnover rate of franchisees • Signing personally. If you are going to sign a franchise agreement, get legal and professional advice. Sign the agreement in a company name if possible. • Few facts. Most evidence on the success and failure of franchises is anecdotal and relies on information from franchise associations. • Saturated markets. Competition has become intense and some market areas are becoming saturated with similar product lines and services. • Poor training. Some training programs are poor or non-existent. • Supplies stipulation. Some franchisees are overcharged on products supplied by the franchisor. • Insiders first. Typically, the current franchisees are offered prime locations. Invariably, new franchisees are offered locations that have already been passed over. • Non-refundable deposits. Some franchisors ask for a refundable deposit. Be careful, there have been cases where refundable deposits were never returned. 7. Evaluating a Franchise (SLIDE 14-14) Explain that evaluating a franchise opportunity is much like evaluating any other business that's up for sale. A checklist for specifically evaluating a franchise is provided in Box 14.4, pages 386–389. Choose your product or service with care. As a potential franchisee, you should try to learn everything you can about the product or service the franchise system delivers. You should also evaluate the franchisor in terms of the whole process of getting a product to the customer, especially how the product is marketed. Reasons for not buying a franchise. Some reasons for not buying a franchise are (page 386): • You know the business as well as the franchisor does. • The franchise name is not all that important. • Why pay a franchise fee? • Why pay a royalty fee and advertising fee? • Your individuality will be stifled. • You don’t want others to tell you how to run your business. • You don’t want a ground-floor opportunity in which you will be the guinea pig. • There are restrictions on selling out. • If you don’t do as you are told, you will lose the franchise. • The specified hours of business do not suit your location. • The franchisor’s promotions and products do not fit your customers’ needs or tastes. • They offer no territory protection. 8. Can You Franchise Your Idea and Become The Franchisor? (SLIDE 14-15) Explain that successful entrepreneurs are dreamers and they dream big. Aileen Reid franchised her A.P. Reid Insurance Stores Ltd. Business, page 390. Ken LeBlanc made a success out of franchising PropertyGuys.com, page 391. Explain that they too may be able to franchise their business. But their business must: • Have a proven and profitable business track record. • Have a competitive advantage. • Be credible, teachable, and transferable. • Not be dependent on your personality Lastly, explain that they must have the time, money, and expertise to develop and grow the franchise system. To learn more about franchising your business, click on the sites in Box 14.5, page 391. 9. A Final Word About Franchises Explain to students that they should look at franchising as an option. They may even be able to start their own franchise, which is a good reason for learning as much as they can. However, if they are not ready to be on their own, franchising may be the way to go. Remind them that a franchise is a partnership and they need to make sure they can work under the controls of the system. If they do decide to buy a franchise, tell them to make sure they read and understand every paragraph of the franchise agreement and be sure to consult a lawyer with franchise experience. 10. Member-Owned Buying Group: An Alternative Entrepreneurs that want the benefit of purchasing power that franchises enjoy but don’t want the legal implications of owning a franchise, Member-Owned Buying Groups (for example, sourceforsports.com) page 391, provides an alternatives to franchising. 11. Think Points for Success Review the following think points with your students: √ Avoid ground-floor opportunities. “Grow with us” might really signal “Caveat emptor” (“Let the buyer beware”). √ Talk to other franchisees. √ Consider becoming a master franchisee. √ If you are going to buy a franchise, get professional help before you sign anything. √ The franchisor gets a percentage of gross sales for advertising and royalty fees whether the franchisee enjoys a profit or not. √ Read the proposed agreements carefully. √ Do you really need the security blanket of a franchise? √ Think about franchising your business 12. Checklist Questions and Actions to Develop Your Business Plan (SLIDE 14-17) Review the following Checklist Questions and Actions to Develop Your Business: √ Why have you selected a franchise as your method of start-up? √ What were your lawyer's comments on the franchise agreement? √ Do your personal vision, goals, and personality match a franchise form of ownership? IV. SUGGESTIONS FOR GUEST SPEAKERS Some guest speakers to consider include: 1. A franchisee, preferably from an industry selected by the students. Have the franchisee discuss benefits he or she receives for the franchise investment and the kind of research the franchisee did before buying the franchise. Ask the franchisee what he or she would do differently if he or she had to do it again. 2. A franchisor, preferably from the same industry as the franchisee. Invite the franchisor to talk about the benefits the franchisor provides to the franchisees; what is expected of franchisees in return for the benefits; how the company screens prospective franchisees; and the kind of information (sales forecasts, marketing surveys, etc.) the franchisor provides to prospects. V. CLASS PROJECTS Class Project 1: Interview Assign different teams to: 1. Interview a franchisor. Have students find out what services the franchisor provides and what the franchisee receives. 2. Interview a franchisee. Have students find out what services the franchisee receives and what payments are made to the franchisor. 3. Have the teams report their findings to the class. Class Project 2: Internal Networks Some franchisees have developed internal networks. Have students explore some of these, attend meetings, and report findings to the class. Class Project 3: Franchise Information Have students write to franchisors to receive information pertaining to that franchise. Have them report their findings to the class. Class Project 4: Survey Have students survey local shopping centres to report on the number and types of businesses that are franchised. VI. INTERNET EXERCISES 1. Disclosure Document Guide Have students go to the disclosure document guide of the Canadian Franchise Association: http://www.cfa.ca/Page.aspx?URL=CFADisclosureRules.html&menu=6 In accordance with the mandatory disclosure policy of the Canadian Franchise Association, members are required to complete a disclosure document. Have students briefly summarize the terms of this disclosure agreement. Note: You may wish to emphasize that according to the Canadian Franchise Association, this disclosure information should be made available to prospective franchisees. Stress that people should not enter into a franchise agreement without this franchisor information. Note that despite this disclosure information, a dispute with the franchisor will most likely have to be settled in courts. 2. Which Products or Services are Hot for Franchising? Students always want to know what business opportunities or areas of the economy are “hot.” Have them visit the Platinum Franchise Opportunity link of CanadianFranchise.com: www.canadianfranchise.com/index.asp. Students can list three franchise ideas that would be of interest to them and reasons why. 3. Is It Smart to Buy a Franchise Right Out of College? (Box 14.2, page 379) What does Jeff Elgin have to say about buying a franchise: Entrepreneur.com: http://www.entrepreneur.com/franchises/buyingafranchise/franchisecolumnistjeffelgin/article75034.html 4. Is Franchising for You? (Box 14.2, page 379) Students will need to consider several personal issues when deciding whether franchising is the best option for them. Get them to click on to the sites below. The self-test and checklists will help them determine how well they might fit into a franchise operation. • Take the online quiz: www.franchisehelp.com/execfb/public.quiz • Determine if you are compatible with franchise ownership: www.franinfo.com/selftst1/default.html • Franchisee Checklists—Evaluating Yourself (Franchise Direct): www.franchisedirect.com/icentre/evaluate.htm#intro • Checklists for Franchisees (Canada Business Service Centres): www.cbsc.org/servlet/ContentServer?pagename=CBSC_FE/display& c=GuideFactSheet&cid=1081945275607&lang=en VII. SUGGESTED LESSON PLAN VIII. SUGGESTED ACTIVITIES ACTIVITY 1: Review and Overview 1. Review Chapter 13 and answer any questions. (Show SLIDE 13-2, SLIDE 13-3 and SLIDE 13-14 of Chapter 13 if necessary.) 2. Ask students to recall the experience of Anna Babin (PropertyGuys.com) and Doug Tham (Second Cup) case studies in the opening captions, page 375. Explain that franchising can be an option. 3. Show and explain SLIDE 14-2 and SLIDE 14-3. Activity 2: What is a Franchise? 1. Begin by asking students to think of some franchises, and to list them on the blackboard in terms of either a business format franchise or a dealership relationship franchise. Most of the franchises that they list should be of the business format nature. This exercise will impress upon students the importance of franchising in our economy. 2. Show and explain SLIDE 14-4. You may wish to emphasize that the franchisor and the franchisee have an interdependent relationship. Both of them must accept responsibility and accountability for the success of the system. 3. The franchising industry is enormous. Show and briefly explain SLIDE 14-5. 4. Show and explain SLIDE 14-6. You should note that business format franchising has been responsible for most of the growth in franchising over the past 20 years. 5. Show and explain SLIDE 14-7. You may also want to refer to the Instructor notes that accompany this slide. Optional class exercise—learning from a franchisee (40–60 minutes) 1. Invite a franchisee as a guest speaker. We suggest that you may wish to assign this responsibility to a student or group of students. 2. You may wish to note that the purpose of this exercise is to help students learn about the realities of a franchise system through primary research and interviewing. 3. There are many franchisees who would be willing to come in to talk and share their experiences with a small business class. However, if you have trouble finding a franchisee, you could get in touch with the Canadian Franchise Association: • Toll Free Tel: 1-800-665-4232 • E-mail: [email protected] • Internet: http://www.cfa.ca 4. Arrange to meet with your guest at least one week before he or she is scheduled to speak. Find out what resources your guest requires, and make appropriate arrangements. 5. Brief the franchisee on the purpose and background of the course. Be sure to get the appropriate personal and business information to introduce and later thank your guest. 6. Indicate that your main objectives for this activity are to help students understand the opportunities available from franchising, and the real world relationship that exists between a franchisor and franchisee. You could ask your guest to address some of the following questions: a) Describe why you bought this franchise. b) What were you promised by the franchisor? c) Did the franchisor deliver on the promises? d) What did you actually get from the franchisor? e) What do you pay the franchisor? f) Would you buy another franchise and why? g) Do you have any entrepreneurial freedom? 7. When the guest is finished, show and explain SLIDE 14-4, SLIDE 14-5, SLIDE 14-6, and SLIDE 14-7. Activity 3: The Benefits of Franchising See NETA Lesson Plan #1 Activity 4: Networking Break Encourage students to network and learn more about each other during the break. Activity 5: The Franchise Agreement 1. Show and explain SLIDE 14-11 2. You may wish to note all franchisors will require franchisees to sign a franchise agreement. Typical clauses are shown in the textbook on page 374. 3. If any students are planning to buy a franchise, emphasize that they must have a business plan. If the franchisor provides this plan, they should check it thoroughly. Secondly, they should never sign a franchise agreement without having it reviewed by a lawyer. (The Canadian Franchise Association will provide a list of franchise lawyers.) You may want to remind students that, as of 2006, only Alberta and Ontario have franchise legislation in place. This means that almost anyone can establish a franchise regardless of his or her business history or credit record — so buyer beware. Activity 6: Purchasing a Franchise See NETA Lesson Plan #2 Activity 7: Evaluating a Franchise 1. When considering a franchise, encourage students to investigate before they buy. Of late, there have been many franchise horror stories. 2. Show and briefly explain SLIDE 14-14. Activity 8: Become the Franchisor Show and briefly explain SLIDE 14-15. You may want to refer to the explanatory notes and suggestions that accompany this slide. Activity 9: Summary, Q&A, and Preparing for Chapter 15 1. Recap the key points for each objective (using SLIDE 14-2 and SLIDE 14-3 if necessary). 2. Show SLIDE 14-17 and encourage students to complete the Checklist Questions and Actions to Develop Your Business Plan, page 392. You may also want to briefly review the Think Points for Success, page 392. 3. Show SLIDE 14-18 and encourage students to complete the case study questions. Answers to the case study questions are contained in Section IX below. 4. Respond to any questions that students may have. 5. Encourage students to go to the Nelson Small Business site: www.knowlescastillo6e.nelson.com. Click on to the Test Yourself link and complete the true or false/multiple choice, short answer and matching exercise for Chapter 14. 6. Have students read Chapter 15 in preparation for the next lesson. Some instructors may want to encourage students to also prepare a mind map of key points contained in Chapter 15. IX. CASE STUDY Background Case Study PROPERTYGUYS.COM Background In the opening vignette, we captioned Anna Babin, who bought a PropertyGuys.com franchise and returned to her roots in Atlantic Canada. The idea for PropertyGuys.com began in 1998. Ken LeBlanc and three other young Moncton, New Brunswick, entrepreneurs had a business concept. They had done their research and found a solid market niche—consumers resented paying real estate agents’ high commissions. House sellers were looking for an alternative. LeBlanc and his partners wanted to launch a commission-free real estate company. They approached the Canadian Youth Business Foundation (CYBF) and received help with their business plan, professional advice and support, and a small amount of financial assistance. In September 2000, they opened their business as a part-time venture with four employees. The market responded, and almost overnight, the business was a success. The partners knew they had a great concept and would have to grow the business quickly if they wanted to be successful in the longer term. They chose the franchise route, and by early 2002, they had launched their franchise division. Franchising proved to be the right growth strategy. Today PropertyGuys.com is Canada’s leading private sale real estate marketing company, with more than 50 licensed franchise units across the country. It’s a member of the Canadian Franchise Association (CFA) and a recipient of the 2005 CYBF New Brunswick Best Business award, and has been recognized as one of the Top 25 most successful Canadian franchise systems by Canadian Franchise magazine. Case Study Resources Additional information on this successful, high growth, Canadian franchise business can be found by linking on to the following online sources: • PropertyGuys.com home page: http://propertyguys.com • PropertyGuys.com, press releases, “Reversing the Brain Drain”: http://propertyguys.com/corporate/press_release/2005-08-16_NS-Yarmouth.html • PropertyGuys.com Home Page, press releases: “PropertyGuys.com Expands into Master Franchise Agreements”: http://propertyguys.com/corporate/press_release/2005-05-27_HO-Master.html • Direct Marketing News: “Case study—PropertyGuys.com, Private Sale Real Estate Marketing Company”: http://www.dmn.ca/Click/articles/vol32/click32f.htm • CNW GROUP, Signs of Changing Times: ww.newswire.ca/en/releases/archive/April2005/22/c8733.html • Checklists for Franchisees (Canada Business Service Centres) www.cbsc.org/servlet/ContentServer?pagename=CBSC_FE/display&c=GuideFactSheet&cid=1081945275607&lang=en • Entrepreneur.com, Mark Siebert’s article “How To Be a Successful Franchisor” http://www.entrepreneur.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article83230.html • Entrepreneur.com, Mark Siebert’s article “Are You Ready to Franchise?” http://www.entrepreneur.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article82112.html Case Study Questions and Answers 1. The driving forces In Chapter 5, we talked about the need for a driving force, or distinctive competency. We explained that successful businesses have at least one dominant driving force. a. What was PropertGuys.com major driving force or competitive strategy? Answer: In Chapter 5, page 113, we provided three broad competitive strategies. 1. Niche or focus strategy. A company carves out a specific or narrow segment of a market. A firm is pursuing a focus strategy if it targets one or more narrow market segments, or "niches," which are segments within segments. 2. Differentiation strategy. A differentiation strategy helps a firm to compete by successfully developing and maintaining a unique perception of its product or service that is valued by the customer. This "uniqueness" may be physical, technological, or psychological. 3. Cost leadership strategy. A company successfully competes on price by being a low-cost producer or service provider. The major driving force of PropertyGuys.com was cost leadership. Ken LeBlanc and three other young Moncton, New Brunswick entrepreneurs at PropertyGuys.com had done their research and found a solid market need—consumers resented paying realtors’ high commissions. House sellers were looking for an alternative. LeBlanc and his partners, launched a “commission-free” real estate company—totally undercutting the high costs of traditional real estate fees. According to Ken LeBlanc, “We’re living in an age of smart, do-it-yourself consumers. We provide people with the tools they need to sell their own homes, and they save thousands of dollars in the process. (Reversing the Brain Drain: http://propertyguys.com/corporate/press_release/2005-08-16_NS-Yarmouth.html) b. A compelling vision has been a common linchpin for all of the successful small businesses we have highlighted in this text. And franchising is no different! According to experts in the franchise field like Mark Siebert, “Virtually every successful franchisor starts with a vision of the future and the role their company will play.” (http://www.entrepreneur.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article83230.html). What was Ken LeBlanc’s and the other founding partners’ vision of the future and the role their company would play? Answer: Ken LeBlanc and his partners visualized a long-term trend of a “consumer-led alternative to real estate commissions.” They believed that consumers would latch on to the “serve yourself” market trend and begin selling and buying their own homes without the assistance or high commissions of traditional real estate firms (http://www.dmn.ca/Click/articles/vol32/click32f.htm ). The role of their company would be to “offer home sellers a no commission, low cost alternative to expensive real estate commissions while allowing consumers to stay in control of the process.” (See http://www.newswire.ca/en/releases/archive/April2005/22/c8733.html) c. What role has the Internet played in the success of PropertyGuys.com? Answer: According to LeBlanc: "The Internet has created a culture of smart, independent people who want to take charge of their own affairs and keep more money in their pockets." Success of Internet companies like eBay, have demonstrated that many consumers like to buy and sell on their own terms—provided they have a readily available medium in which to do so. PropertyGuys.com and the Internet provided a value-added method for people to economically buy and sell their homes. (See http://www.newswire.ca/en/releases/archive/April2005/22/c8733.html) 2. Types of franchise systems a. What is a franchise? Answer: A franchise is a distribution system. It’s a special kind of partnership in which one company (the franchisor) grants the right to sell its products or services to another company or individual (the franchisee). b. In this chapter, we discussed two basic types of franchise systems: business format franchise and dealership relationship franchise. Briefly describe the characteristics of these two systems. Answer: 1. Business format franchise. This is a type of franchise in which the product, method of distribution, and sales and management procedures—the business format—are highly controlled and standardized. The main job of the franchisee is to staff and run the operation. 2. Dealership relationship franchise (also termed a licensing or associate relationship). A second type of popular franchise system is the dealership relationship franchise (also termed a licensing or associate relationship). Here the dealer or associate (franchisee) buys the right to distribute a franchisor’s product or service. These types of licensing arrangements are less restrictive than the business format arrangement, where the key is standardization. c. Which franchise system did PropertyGuys.com use? Answer: Dealership or licensing franchise system. As with most traditional real estate franchises, PropertyGuys.com established a dealership or licensing franchise system. Franchisees, like Anna Babin in the opening caption, are given a great deal of flexibility in how they conduct their business. For example, PropertyGuys.com does not control aspects of the Anna’s business such as the car she drives and the accounting system she uses. d. Return to the Chapter 6, 1-800-GOT-JUNK? opening case study, page 123. Which franchise system did 1-800-GOT-JUNK? use? Answer: Business format franchise. In contrast to PropertyGuys.com, the 1-800-GOT JUNK? franchisees are subject to a number of operational and head office controls. As we noted in the Got-JUNK opening caption (Chapter 6, 124), for example, “…all franchisees must wear clean apparel and trucks are to be washed every day.” One franchisee in Calgary even lost his franchise rights when he drove a muddy truck with a peeling 1-800-GOT-JUNK? label. Follow-up calls are made to ensure total customer satisfaction. The main job of a franchisee is to staff and run the operation—with an emphasis on promoting their services. 3. Franchise networks To distribute its products or services, a franchisor has the options to use a direct franchise or master franchise network—or a combination of both. a. Distinguish between a direct and master franchise network. Answer: Direct franchising. If a franchisee deals directly with the franchisor on a one-to-one basis, then this type of network is referred to as direct franchising. Master franchising. This is a business arrangement in which a franchisor sells the rights of an area or territory to a franchisee who is normally required to sell (or establish) and service a specified number of franchises in a specified time period within its area. b. In the opening caption of this chapter, Anna Babin bought the franchise rights from PropertyGuys.com to operate her franchise. What type of franchise network agreement did she sign? Briefly explain why. Answer: Anna Babin signed a direct franchise agreement. In this case, PropertyGuys.com—the franchisor—would be dealing directly with her. If she had any questions or problems she would deal directly with a head office representative of the franchisor. c. In 2005, Don Swanston and Matt Eldridge signed a PropertyGuys.com franchise agreement for the Vancouver area. (http://propertyguys.com/corporate/press_release/2005-05-27_HO- Master.html) What type of franchise network agreement was this? Briefly explain the reason for your answer. Answer: Don Swanston and Matt Eldridge signed a master franchise agreement (textbook, page 376). Don Swanston and Matt Eldridge purchased 18 franchise units in British Columbia's Greater Vancouver area. As master franchisees, they will service this area on behalf of the PropertyGuys.com. They have the option to resell the franchises, or operate them themselves. 4. Franchise checklist Suppose you were Anna Babin’s franchise consultant. Prepare a franchise checklist composed of what you think to be 10 of the most important franchise evaluation criteria. Based on these criteria, would you have advised Anna to buy the franchise? (Hint: you may want to start by checking out Box 14.1, page 375 and Box 14.4, page 386.) Answer: 1. Franchise Reputation: What is the franchise's reputation and brand recognition? 2. Financial Performance: What are the franchise’s financial performance and profitability metrics? 3. Initial Investment: What is the total cost of investment, including franchise fees and startup costs? 4. Training and Support: What training and ongoing support does the franchisor provide? 5. Franchisee Satisfaction: How satisfied are current franchisees with their experience? 6. Market Demand: Is there strong market demand for the franchise’s products or services? 7. Franchise Agreement: What are the terms and conditions of the franchise agreement? 8. Competitive Advantage: What unique advantages does the franchise offer over competitors? 9. Operational Systems: What operational systems and processes are in place? 10. Legal Considerations: Are there any legal issues or disputes involving the franchise? Notes to instructor: This is a good topic for class discussion. Divide the class into groups of 4–7 students. Have them brainstorm and mind-map their 10 most important franchise evaluation criteria. Have each group present, to the class, its answer to the question “Based on these criteria, would you have advised Anna to buy the franchise? Student answers will differ. Whether students recommend buying or not buying this franchise will depend on a number of personal and business factors. The main point here is that it gets them thinking about the amount of “due diligence” required before buying a franchise. Box, 14.4, page 380, provides an extensive checklist for students to work with. In addition, you might want to encourage students to link on to Business Start-up Assistant, “Franchising”: Checklists for Franchisees (Canada Business Service Centres) www.cbsc.org/servlet/ContentServer?pagename=CBSC_FE/display&c=GuideFactSheet&cid=1081945275607&lang=en 5. You, too, can be your own franchisor! PropertyGuys.com latched onto the franchising trend as a distribution method to quickly expand at minimum cost. We have also highlighted other bold entrepreneurs who have also chosen the franchisor rout—like Aileen Reid of A.P. Reid Insurance Stores Ltd., and 1-800-GOT-JUNK? Link on to Entrepreneur.com, Mark Siebert’s article “Are You Ready to Franchise?” http://www.entrepreneur.com/franchises/franchisingyourbusinesscolumnistmarksiebert/article82112.html According to Siebert, what are the top 10 questions to ask yourself if you're thinking of franchising your business? If you are not thinking of franchising, these same questions will also help you decide if you want to start your own business. Answer: According to Siebert, you should ask the 10 following questions: • Is my business ready to franchise? • Do I need to franchise to achieve my personal goals? • What's happening in my marketplace? • Am I ready to start a new business? • Do I have adequate resources? • Do I have the "intestinal fortitude" to spend? • Am I a Cowboy? • Am I a Dictator? • Are my eyes bigger than my stomach? • Do I have the fire in the belly? Chapter 15: Pulling the Plan Together I. Business Plan Building Block (SLIDE 15-2) Chapter 15 will help you in the final assembly of your business plan. It will guide you in writing a plan that has maximum clarity and impact, inserting an executive summary, a table of contents, and appendixes, and finally, compiling and presenting the completed plan. II. CHAPTER LEARNING OUTCOMES (SLIDE 15-3) After reading this chapter, students should be able to: • Gather all the information you have together into one coherent unit, which becomes a working showcase for your business. • Study a sample business plan to see how one group of entrepreneurs defined and presented their business. • Match or surpass the sample business plan in value-added information, research, and effectiveness. • Complete a PERT chart to organize the work ahead. • Put your finished business plan to work with passion. III. LECTURE OUTLINE 1. How to Start Writing Your Business Plan (SLIDE 15-4) Explain to students that their Business Plan could be one of the most important documents they have ever pulled together. Explain that there is also a comprehensive online resource base with much more help. In the www.knowlescastillo6e.nelson.com site accompanying this text, we have provided you with another completed business plan example: “Business Plan Proposal for Specialty Chocolates and Candy Concession” whose primary emphasis is on store operations. We also provide students with a detailed business plan template. In Box 15.1, page 399, we provide them with an extensive list of business plan sites. Also explain that if they need to start a business immediately, consider using the Fast-Start Business Plan. This may be the alternative for them, particularly if their business is less complex and has very low capital needs. Lots of examples and templates of Fast-Start business plans are also contained on the www.knowlescastillo6e.nelson.com site. Explain to them that before they begin their plan, we want them to think about the needs of their target audience. Some investors will only give you 5 or 10 minutes of their time. Here, they might even want to think about their elevator pitch (Chapter 2, page 50). Encourage your students to share their plan with others; they may have ideas, insights, or recommendations. In Chapter 6, page 146, we introduced to them networking, In Chapter 12, page 326, we encouraged them to get a mentor and draw on the resources of an advisory team. Now is the time to get their help before they start their business. Have them read and evaluate plan. Explain to students that now is the time for their passion to come to the forefront and spill out into every section of their Business Plan. If their plan doesn’t shout passion and confidence, they cannot expect their Business Plan readers to read further than the executive summary. Suggest to students that before they begin, they should gather in one place all completed Action Steps and backup data. Planning is an ongoing process. Tell them that an outline in their plan, fill in the information from your Action Steps, refine the plan, and ask at least one knowledgeable person to review their plan. Explain to them that we don’t expect them to write each part sequentially. The best way to begin writing a Business Plan is to start with the material with which they feel most comfortable. Explain that in Chapter 15, the Action Steps will serve as a checklist for keeping track of which parts of the plan they have written. Explain that for example, in practice they would probably write the cover letter last, but that is the first Action Step we present. 2. Three-Part Structure: Words, Numbers, and Appendixes (SLIDE 15-5, SLIDE 15-6, SLIDE 15-7, and SLIDE 15-8) Explain to students that for ease of handling, tell them to divide their plan into two major sections, and provide the needed documentation in appendixes at the end. Recall that in Section I (SLIDE 15-5), we suggest that they use words to briefly introduce their strategies for marketing, production, and management. They should “Hook” their readers through a clear and exciting description about: • creating a business • assessing the competition • designing a marketing plan • targeting customers • finding the right location • building a team Section II (SLIDE 15-6) is primarily aimed at bankers, credit managers, venture capitalists, vendors, small business and commercial credit lenders. It includes financial material, such as: • income statements • cash-flow projections • projected balance sheets • ratio analysis Support sections I and II with Appendixes (SLIDE 15-7), which would include such information as: • résumés • maps • diagrams • photographs • tables • reprints from industry journals • letters from customers and vendors • credit reports • personal financial statements • contractors’ bids Outside Assistance in Writing a Business Plan (SLIDE 15-8). You should not let someone else write your business plan. If you do not want to put the time and effort into writing your own Business Plan, it is doubtful that you will have the energy and drive to develop a business. Hiring a business consultant to refine your plan is acceptable. We suggest that on finishing your initial plan you look for several business owners, possible investors, and outside specialists to review it. Reminders (SLIDE 15-8). Completing a Business Plan helps reduce the risk of failure. No plan can guarantee success. The plan should be easy to read, with each number and figure well documented. Use bullets, graphs, and appendixes to support the plan’s strongest points. Be sure there are no typographical errors and that the plan is well written. The plan should consist of about 20 to 40 pages with additional pages for appendixes. Make the plan easy for your reader to write notes on and include how the reader can reach you—fax, e-mail, address, telephone, pager, and so on. Suggest to students to read through this chapter once and then reread, completing the Action Steps. Explain that although the Action Steps appear in the order they would be included in their Business Plan, they should complete Action Steps 65 to 75 first, then Action Step 64 (which focuses on the Executive Summary), and finally Action Step 63, the cover letter. Explain to your students that this chapter illustrates the steps involved in completing a Business Plan along with providing them with samples of each step as completed by a hypothetical business, the Software School Inc. 3. The Cover Letter (SLIDE 15-9) Explain that the purpose of the cover letter is to aim their plan so that it will achieve the most good. Suggest that each time they send the plan to someone, write a special cover letter addressed to that person. Explain that Action Step 63, page 401, helps them to write a cover letter, a sample of which is provided in Box 15.2, page 402. Consider the following points when drafting their cover letter: • Introduce the excitement of your plan. • Tell why you are sending the plan. • The reader will pass judgment on your plan on the basis of the letter. • Your letter needs to give a good impression. • A good cover letter will make its reader want to become involved in your venture. 4. Preliminaries (SLIDE 15-10 & SLIDE 15-11) The Table of Contents (SLIDE 15-10). The table of contents gives a quick overview of your finished business plan. In practice, it is usually prepared last. An example is provided in Box 15.3, page 403. The Executive Summary (SLIDE 15-11). The executive summary serves as an introduction to the business plan. It acquaints the reader with the subject of the material that follows. Lenders prefer “hard” numerical data and facts; they rarely take speculations about things seriously. Normally, this summary appears right after the table of contents. In most cases, it is written after the plan is completed. Action Step 64, page 403, helps you write an executive summary, an example of which is provided in Box 15.4, page 404. 5. Section 1: Description of the Business (SLIDE 15-12 & SLIDE 15-13) Explain that regardless of whether their business already exists or is just starting, the goals of Section I are the same: to demonstrate that they know their business and that they’re a winner. For this section, follow the example of The Software School, an ongoing business that is seeking financing to acquire more equipment. Part A: Business Description. When you describe your product or service: • Let the facts speak for themselves. • Explain your product or service fully. • Support all claims with numbers. • Avoid hard-sell tactics. • Don’t puff the product or service. • Project a positive future. • Describe what industry you’re in. • Explain what makes your business unique. Explain that Action Step 65, page 405, helps them describe their product or service. An example is provided in Box 15.5, page 405. Part B: The Market and the Target Customer. If your research is sound, it will show up in your writing. Let your reader visualize your target customer. Use data from primary and secondary sources to give credibility to the picture you are painting. Explain that Action Step 66, page 406, gives them a chance to show what they know about their market and target customer. An example is provided in Box 15.6, page 407. Part C: The Competition. Briefly profile the businesses that compete with you directly. Address such issues as: • What are their strengths and/or weaknesses? • What can you learn from them? • How are you going to be better than them? • What is your distinctive competency? Explain to your students that now they should be ready to complete Action Step 67, page 406. An example of a competitor assessment appears in Box 15.7, page 408. Part D: Marketing Strategy. Here, you have to describe the marketing and promotional policies that will keep your business competitive. You must describe the promotional mix. Because pricing is such an important consideration, you should start with what your target customer sees as a good value and then develop your marketing mix. Explain that Action Step 68, page 406, helps them to refine their marketing strategy. An example is provided in Box 15.8, page 409. Note that they must continue to focus on the target customer. Part E: Location. In this section, try painting an attractive picture of your business site. Keep your reader interested by inspiring confidence in your choice. Try to persuade potential lenders to visit your site. You may even want to use photos, diagrams, and illustrations to add a sense of reality. Explain that Action Step 69, page 409, helps them showcase their location in their plan. An example is provided in Box 15.9, page 410. Part F: Management. Management will make or break your small business. The business plan should inspire confidence in your team. Focus on their track records and accomplishments. The key to a great team is balance. Use this section to highlight the best qualities of your management team. These qualities should include: • experience • education • training • flexibility • imagination • tenacity Suggest to students that they be sure to include résumés and background information in the appendix. They should also include a description of their advisory team, which consists of their: • banker • lawyer • accountant Explain that Action Step 70, page 409, will help them describe their management team. An example is provided in Box 15.10, page 410. Part G: Human Resources. Describe the kinds of people you will need as employees and how they will fit into your business. Include such areas as: • The skills they have and will need. • Training plans. • How much you will pay them. • Incentives, fringe benefits, and overtime. • Job functions, descriptions, and responsibilities. Explain that Action Step 71, page 411, helps them describe the kinds of people they will need and how they will help them become more productive. A brief example of a human resource situation is provided in Box 15.11, page 411. 6. Section 2: Financial Section (SLIDE 15-14) Good Numbers. This is the heart of your business plan. Your objective here is to make the numbers do the talking. Now you are ready to organize your numbers into four standard areas: 1. Opening and projected balance sheets 2. Cash flow projection 3. Projected income statements 4. Supporting financial information and analysis, such as ratio analysis and break-even analysis. Explain to students that they need to show that they are efficient, conservative, in control, and have strong cash flow. It is also important for them to indicate when they will make a profit. Good Notes. Most lenders study first the notes that accompany income and cash flow projections. Explain to students that the use financial notes to tell potential lenders how they generated their numbers and to explain specific entries. Notes should be easy to read. Part H: Projected Cash Flow. Explain that their projected cash flow gives a month-by-month picture of how much cash their business has. Explain that profits don’t pay the bills and payroll, cash flow does. Explain that many potential lenders look at cash flow first, so Action Step 72, page 412, can make or break you. An example of a cash flow is provided in Table 15.1, page 416 and 417. The notes for these numbers are shown in Box 15.12, page 413. Part I: Projected Income Statement. Explain that they also have to calculate a projected income statement (sometimes called a profit and loss statement). The basic steps are: 1. Calculate your sales (revenues). 2. Calculate the cost of goods sold. 3. Subtract the cost of goods sold from sales to get the gross profit. 4. Add up all your expenses. 5. Subtract expenses from the gross profit to get the net profit before taxes. 6. Subtract taxes to get your net profit—the bottom line. Explain that Action Step 73, page 415, helps them project their monthly profit and loss statement. An example of a projected income statement is provided in Table 15.2, page 418 and 419. It is important to include explanatory notes, an example of which is shown in Box 15.13, page 414. Part J: Projected Balance Sheet. Explain that their projected balance sheet allows for an analysis of the state of their finances at a given point in time. It is a financial indicator of their ability to manage their business. Lenders will be looking for such things as: • Liquidity—how easily your assets can be converted into cash. • Capital structure—what your sources of funds are, how much you have borrowed, and so on. Encourage your students to complete Action Step 74, page 415, which helps them project a balance sheet for their business. Table 15.3, page 420, shows examples of two balance sheets for different ending periods. Other Important Financial Information. Explain that Ratios tell them a lot about the relative health of their business. Explain that an important ratio is their return on owner investment, which shows them how much they earned on the total dollars invested in the business. As discussed in Chapter 10, page 271, return on owner investment is calculated by dividing net profit by owner’s investment. Suggest that it is helpful to include a comparison of their ratios with industry averages. Remind students as well to include their break-even analysis. 7. Epilogue: Act on What You Know (SLIDE 15-15 and SLIDE 15-16) Explain to students that now that all the research is done and written up in their business plan, they should be aware of one more tool every entrepreneur should have. It is called PERT, an acronym for Program Evaluation and Review Technique. Suggest that if they feel overwhelmed by the tasks of starting up and they don’t know where to begin, PERT can be used to help them focus their energy on the right job at the right time. In its simplest form, a PERT chart lists the tasks that are to be completed and when they are to be done. Encourage students to look at a sample PERT chart provided in Table 15.4, page 421. Encourage your students to complete Action Step 75, page 421 and to construct their own PERT chart. 8. Think Points for Success Review the following think points with your students: √ Section 1 should generate excitement for your business. √ Section 2 should substantiate the excitement with numbers. √ Be sure to use sufficient footnotes to explain the numbers in your financial statements—Parts H, I, and J. √ The executive summary should read like ad copy. Hone it till it’s tight and convincing. √ Who is your target audience? √ Who can provide you with advice and guidance on writing your plan? √ Now that you have Plan A, have you thought about Plan B? √ Have you considered the risks and the ways to minimize them? 9. Checklist Questions and Actions to Develop Your Business Plan (SLIDE 15-18 and SLIDE 15-19) Review the following Checklist Questions and Actions to Develop Your Business: √ How will your business idea contribute to society in general? √ In what way does your product or service differ from that of your competitors? √ What are the critical success factors for your business? √ How would your customers define your quality and level of customer service? √ In completing your business plan, ask yourself: Have I been consistent in my thinking that the quality of sales staff fits the image I wish to convey, and that money is set aside for appropriate training? √ What social responsibility practices do you intend to follow? √ What business-related ethical issue might surface about your business venture? √ If your business is successful, what is your long-term growth plan? √ Are you going to achieve your personal vision? IV. SUGGESTIONS FOR GUEST SPEAKERS 1. When you begin investigating the world of small business, you’ll find a high percentage of owners who started business without writing down their thoughts and research in business plan form. They cite the same reasons for not doing this: “Who needs it?”; “No time”; or “I do everything in my head.” You could consider inviting two different kinds of speakers: 1. Owners with plans. 2. Owners without plans. The main point is that a business plan is an essential tool not only for starting a business, but for providing guidance and direction in the operation of a business. You will also be trying to inspire students with the excitement and energy of these business owners. Small business owners almost always convey a passion. 2. You may want to consider inviting a banker or financial advisor to discuss the importance and components of a business plan. V. CASE PROJECTS Class Project 1: Troubleshooting By now, most students should have pulled together much of what they need to construct a plan. You can spend class time troubleshooting and helping them with organization and flow. Class Project 2: Reviewing Finished Plans For class discussion, you could make copies of completed sections from students’ business plans. Class Project 3: A Step into the Marketplace You need to encourage your students to act on what they know in any way they can. Keep asking: “What now? What is the next step?” Some of them—the real entrepreneurs—will already be lunging into business. Others still need to be encouraged to work in the industry they discovered back in the first few chapters. Class Project 4: Presentation Assign teams to present a finished business plan to the following groups: • bankers • prospective founders or team members • venture capital groups • potential lenders • vendors/suppliers You could invite actual professionals, or assign students to role-play these people. Class Project 5: Aiming Presentation means writing a different cover letter for each target reader. Assign each team to compose one cover letter to a representative of one of the groups listed in Class Project 4. (For venture capitalists, the students may wish to change the letter to an executive summary.) Class Project 6: Importance of a Good Showcase Here’s a true story which you might want to share with your students: Several years ago, Tom, a student in an entrepreneurship class and new to the area, had just sold his old business and wanted to start a similar business in the area. Students in the class were asked to design a business plan by the end of the semester, but Tom was in a hurry. One-third of the way through the class, he submitted what he thought was a good business plan, which was really just a little more than an average outline for a business plan. The instructor tried to tell Tom what was needed to complete the plan, but Tom felt it was good enough, since he was in a hurry. He took his plan to the local bank to obtain a start-up loan, but was turned down. He went to a second bank and then a third, with the same results. He then went back to class, took the instructor’s suggestions, and wrote an outstanding business plan. Armed with a new plan and added confidence, Tom went to meet with the first banker who had turned him down. He came out of the meeting with more money than he had expected, but not more than he had requested. He had figured that the bank would knock off a few dollars from the loan request, so he had tacked on a few dollars more. Tom became successful with his new business. He is now a leader in the community and president-elect of the local chamber of commerce. Moral: A good business plan helps build your confidence and your ability to sell your ideas. VI. INTERNET EXERCISES 1. Sample Business Plans All too often, students want to know what a model business plan looks like. We have provided one template in this chapter. Other templates and sample business plans are provided on the two Web sites below. Have students select one sample plan. Get them to prepare a one-page summary on the features and characteristics of this plan. • Bplans.com http://www.bplans.com/sp/ • Morebusiness.com: • http://www.morebusiness.com/templates_worksheets/bplans/ 2. What are Venture Capitalists Looking For? Have students link to The Entrepreneur’s Mind site at: http://www.benlore.com/files/emexpert1_5.html. Ask them to summarize what venture capitalists are looking for when asked to finance a business. They should discover that a business plan is a necessary, but not a sufficient condition. 3. Mistakes to Avoid Get students to link on to Virtual Business Plan (BizPlanIt): http://www.bizplanit.com/vplan.html Here they will find a discussion on each section of the business plan. Ask students to click on to at least three sections (executive summary, mission and vision, and company description, for example). Get them to report on the “mistakes to avoid” for each of these sections. 4. Business Plan Workshop Have students visit the American Express, Small Business Exchange site at: http://www133.americanexpress.com/osbn/Tool/biz_plan/try/index.asp This workshop teaches students how to create a compelling business plan through a series of exercises that test their ability to create some of the plan's most important elements. By doing these exercises, students hone their business plan writing skills and learn about the areas in which they need improvement. Students will work on a business plan for a company called Bella’s Biscotti, a start up founded by Bella Lettini. It sells wholesale biscotti to gourmet shops in Metro City and its suburbs. Its five-year plan is to extend its distribution. In each step of this exercise, students are presented with three choices for how an element of the business plan should read. They have to pick the one that sounds best to them. The answer is then given. After students have finished with Bella’s plan, they will be ready to create one of their own. The following topics are covered: • Business Description • Customers • Development Status • Sales and Marketing Strategy • Management Description • Risks Note: This site also contains very useful information on writing a business plan, which you may want to have students review. VII. SUGGESTED LESSON PLAN VIII. SUGGESTED ACTIVITIES ACTIVITY 1: Review and Overview 1. Review Chapter 14 and answer any questions. (Show SLIDE 14-2, SLIDE 14-3 and SLIDE 14-16 of Chapter 14 if necessary.) 2. Some instructors like to use this lesson to get students to showcase sections of their business plans. Other instructors prefer to use the Software School Inc. business plan in the text. We encourage you to use the student work whenever this is possible. 3. Explain that the purpose of this lesson is to go over the sections of a typical business plan as provided in the chapter. Note that there are other kinds of business templates or outlines, and various business plan frameworks. You may, therefore, wish to refer students to some of the Internet sites listed in Box 15.1, page 399, or the sites provided in Section VI above. 4. Introduce Chapter 15, show and explain SLIDE 15-2 and SLIDE 15-3. You may want to begin by sharing the business plan success story in Section V, Class Project 6, above. Activity 2: Getting Started Show and briefly explain SLIDE 15-4. You may also want to refer to the Instructor notes that accompany this slide. Activity 3: The Basic Outline 1. Explain that most business plans can be divided into three broad sections—words, numbers, and appendixes. 2. Show SLIDE 15-5. In Section 1 of the business plan, entrepreneurs must try to excite and hook the reader with their concept. They use mostly words and few numbers to describe the strategies for marketing, production, and management. 3. Show SLIDE 15-6. Briefly explain that Section 2 of the plan relies on the financials or numbers to describe the business. These numbers must speak for themselves and justify the description of Section 1. 4. Show SLIDE 15-7. Note that the two major sections are usually supported with appendixes. Most of this back-up or support information comes from secondary and primary research. 5. Some general guidelines and reminders are contained in SLIDE 15-8. 6. You may want to refer to the detailed Instructor notes that accompany these slides. Activity 4: The Cover Letter See NETA Lesson Plan #1 Activity 5: Preliminaries 1. Generally a business plan begins with a table of contents. Note that in practice, however, the table of contents is usually prepared last. 2. Show and briefly explain SLIDE 15-10. 3. Note that the table of contents is normally followed by an executive summary. Show and explain SLIDE 15-11. 4. You may also want to refer to the Instructor notes that accompany these slides. Optional class exercises—class presentation and group discussion (25–30 minutes) 1. You may want to ask a student to share and discuss his or her executive summary with the class. 2. As an alternative, you can refer students to the Software School executive summary in the textbook (Box 15.4, page 404). Ask what makes this an effective executive summary. 3. Encourage students to complete Action Step 64, page 403. Activity 6: Networking Break Encourage students to network and learn more about each other during the break. Activity 7: Section 1: Description of the Business 1. Show and explain SLIDE 15-12 and SLIDE 15-13. Some instructors like to draw on the summarized discussion contained in Section III, subsection 5 above. You may also want to refer to the Instructor notes that accompany these slides. 2. Encourage students to complete Action Steps 65 to 71. Optional class exercises—class presentation and group discussion (25–30 minutes) 1. You may want to ask a student to share and discuss his or her Description of the Business with the class. 2. As an alternative, you can refer students to the Software School Description in the textbook (Box 15.5, page 405). Ask what makes this an effective description. 3. Encourage students to complete Action Steps 65 to 71. Activity 8: Section 2: Financial Description See NETA Lesson Plan #2 Activity 9: Act on What You Know We have found that students consider PERT a useful technique for helping them focus their energies. Show SLIDE 15-15 and SLIDE 15-16 and encourage them to “PERT” their tasks over the next year. What you are asking students to do is to set new objectives. Activity 10: Summary and Final Wrap-up 1. Recap the key points for each objective (using SLIDE 15-2 and SLIDE 15-3 if necessary). 2. Show SLIDE 15-18 and SLIDE 19 and encourage students to complete the Checklist Questions and Actions to Develop Your Business Plan, page 422. You may also want to briefly review the Think Points for Success, page 422. 3. Respond to any questions that students may have. 4. Encourage students to go to the Nelson Small Business site: www.knowlescastillo6e.nelson.com. Click on to the Test Yourself link and complete the true or false/multiple choice, short answer, and matching exercise for Chapter 15. 5. You may wish to share what you have learned from the class and recall a few special moments. 6. And lastly: Thank students for their participation and wish them future success in small business. Solution Manual for Small Business: An Entrepreneurs Plan Ron Knowles, Chris Castillo 9780176501808, 9780176252403
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