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Accessing resources for growth from external sources By:Riddhi ShroffSoham Sathe Harsh HedaPrabudh Bansal Saumya Mishra1Flow of the presentation Franchising
Joint Ventures
Acquisitions
Mergers
Leveraged Buyouts
Overcoming Constraints by Negotiating for more Resources
FRANCHISING
Right to use a firms business model and brand for a prescribedperiod of time.A Franchisee gets exclusive rights for local distributionto independent retailersA Franchisor gets their payment of royalties andconformance to standard operating procedures
FranchiseeFranchisorProduct AcceptanceExpansion RiskManagement ExpertiseCost AdvantagesCapital RequirementsOperating and Structural ControlsDisadvantages
Other franchisees could give the brand abad reputation
Allprofits(a percentage of sales) are usually shared with the franchisor.
Theinflexiblenature of a franchise may restrict your ability to introduce changes to the business to respond to the market or make the business grow.Types of FranchisesDealership or Product Franchises: Common in cases of automobile manufacturers.Method of doing business or business format franchises: Includes large fast food chains like Mcdonalds, KFC, etc.Services Franchises: When a company is already operating a same business and then becomes a part of a large franchiseBusiness format includes name and image.Source: Boundless. Types of Franchises.Boundless Business. Boundless, 21 Jul. 2015. Retrieved 03 Nov. 2015 fromhttps://www.boundless.com/business/textbooks/boundless-business-textbook/types-of-business-ownership-6/franchising-52/types-of-franchises-257-1725/
7Franchising Opportunities due to environmental changeGood HealthTime Saving or ConvenienceEnvironmental consciousnessThe second baby boomInvesting in a FranchiseFactors involved in making a decision:Unproven vs Proven FranchiseFinancial Stability of the franchisePotential Market for new franchiseProfit potential for a new franchise
Federal Trade Commissions Franchise Rule1. The Franchisor and any Parents, Predecessors, and Affiliates2. Business Experience3. Litigation4. Bankruptcy5. Initial Fees6. Other Fees7. Estimated Initial Investment8. Restrictions on Sources of Products and Services9. Franchisee's Obligations10. Financing11. Franchisor's Assistance, Advertising, Computer Systems, and TrainingFederal Trade Commissions Franchise Rule12. Territory13. Trademarks14. Patents, Copyrights, and Proprietary Information15. Obligation to Participate in the Actual Operation of the Franchise Business16. Restrictions on What the Franchisee May Sell17. Renewal, Termination, Transfer, and Dispute Resolution18. Public Figures19. Financial Performance Representations20. Outlets and Franchisee Information21. Financial Statements22. Contracts23. Receipts
JOINT VENTUREA Separate Entity in which two or more parties pool their resources to perform a specific task.A partnership between two or more parties.Generally, for a finite time.Partners involved Businesses, public sector, universities.
TYPES OF JOINT VENTUREBetween Two or more private sector companies:-
Technology & Asset SharingNew Market AccessCost Cutting(Financial burden)InnovationStrategic Move Against CompetitorsDiversification
Industry-University Agreement :-
Research basedIndustry aims at obtaining the patents and the proprietary rights from its research investmentsInstitutions share the patents for the financial returnsWhereas, researchers want to make the knowledge available through publishing the research paperInternational Joint Ventures:-Access to new international marketResource SavingsTechnology SharingInnovation
Drawbacks:Different Objectives of JV partnersCultural DifferencesGovernment Policies
Eg. Maruti-Suzuki, Hero Honda
Factors In Joint VentureChemistry Between the managers
Degree of Symmetry between the partners on the objectives and the level of resources being provided
Realistic Expectations from the JV
Proper Timing for JV is must. ACQUISITIONSA strategy through which one firm buys a controlling, or 100% interest in another firm with the intent of making the acquired firm a subsidiary business within its portfolio
Reasons:Increased Market PowerOvercoming Entry BarriersLower risks compared to developing new productsInnovationDiversificationType Of AcquisitionsHorizontal AcquisitionFlipkart acquired Myntra
Vertical AcquisitionLuxottica acquired RayBan, Sunglass Hut.
Conglomerate AcquisitionHUL with different product lines and different customer base for each product.Disadvantage of AcquisitionMarginal success record
Overconfidence in ability
Key employee often lose
OvervaluedStructuring the DealCommon means of acquisition
Direct purchase of firms entire stockBootstrap purchase
Locating acquisition candidate
AccountantsBankersBusiness AssociateBrokers
MergersFig: Merger MotivationsPros and Cons ProsEconomies of scaleR&DAvoid duplicationSpeed to marketConsHigh cost involvedIntegration issuesUnrelated diversification
Leveraged Buyouts (LBO)Borrowed fund to purchase an existing venture for cash
Great amount of external funding required
Long term debt financing
High financial riskCharacteristics of a Good LBO Candidate
Strong, predictable operating cash flows with which the leveraged company can service and pay down acquisition debtWell-established business and products and leading industry positionModerate CapEx and product development (R&D) requirements so that cash flows are not diverted from the principle goal of debt repaymentLimited working capital requirementsStrong tangible asset coverageSeller is motivated to cash out of his/her investment or divest non-core subsidiaries, perhaps under pressure to maximize shareholder valueStrong management teamViable exit strategy
Pros and ConsInterest payments on debt are tax deductible, while dividend payments on equity are not. Thus, tax shields are created and they have significant value.Large principal and interest payments can force management to improve performance and operating efficiency. Increase in fixed costs from higher interest payments can reduce a leveraged firms ability to weather downturns in the business cycle.Large principal and interest payments can force management to improve performance and operating efficiency. Debt discipline may force management to take strict measures for cost cutting, downsizing which leads to overall shareholder return.Interest payments on debt are tax deductible, while dividend payments on equity are not. Thus, tax shields are created and they have significant value.The most obvious risk associated with LBO is that of financial distress. Recession, drastic change in environmental variables, change in regulatory environment can lead to difficulties in interest payments which may lead to debt default resulting in equity holders losing their entire investment.Increase in fixed costs from higher interest payments can reduce a leveraged firms ability to weather downturns in the business cycle.
26Overcoming Constraints by Negotiating for More ResourcesNegotiation with Other PartyTwo primary tasks Assessments made by an EntrepreneurAssessment 1: What will you do if an agreement is not reached
Best alternative to negotiated agreementHelps in determining reservation price
Reservation price is the price (bundle of resources from the agreement) at which entrepreneur is indifferent about whether to accept the agreement or choose the alternative 29Assessment 2: What will the other party to the negotiation do if an agreement is not reached?
Difficult to assess the reservation price
Provides good idea of bargaining zone
Focuses on distributive stage but not integrative stage
Consideration of the bargaining zone encourages the entrepreneur not to focus prematurely on settlement price but rather to consider the range of possible outcomes within bargaining zone, if bargaining zone can be determined by the entrepreneur while keeping his or her reservation price hidden from other party then the entrepreneur is in position to negotiate an outcome that is highly beneficial to other party
30Assessment 3: What are underlying issues of this negotiation? How important is each issues to you?
Achieving relationship that is most desirable for the entrepreneur by trading off aspects of less importance for those of greater importance.
Example: Benefits of Joint Venture
Assessment 4: What are the underlying issues of this negotiation? How important is each issue to other party?
Greater opportunity to achieve integration- make size of pie bigger
Information is known to both parties, then it is likely that the outcome will be mutually beneficial
Strategies for NegotiationBuild Trust and Share information
Requires both parties to have information about each other underlying issues
Building trust is an important aspect as it may impact the long tem performance of the firm
Ask Lots of Questions
Opportunity to learn and find trade offs necessary for integrative agreements.
No answer itself provide answer to lots of questionsMake multiple offers simultaneously
Numerous possible offers based on different levels on different dimensions.
Send signal to other party that the entrepreneur is flexible.
Use differences to create trade offs that are source of mutually beneficial outcomes
Differences in terms of expectations, risk preferences and time preferences.
Example: Difference in expectations
The entrepreneur expects the introduction of the licensed technology into the other party product to increase sales more substantially than other party expects. This difference in expectation could be the basis for the integrative agreement.For eg both parties would prefer to have lower upfront fee for technology and greater royalty percentage, both parties percieve that they doo better basd on their expectations of sales37Referenceshttps://www.youtube.com/watch?v=kmYqlFgrgF8http://www.i-soldit.com/how-it-works/http://www.newlifeauctions.com/dropoff.htmlhttp://www.cfo-connect.comhttps://en.wikipedia.org