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Chapter 05 - How to Form a Business
5-31
B. THREE MAJOR TYPES OF CORPORATE MER-
GERS
1. VERTICAL MERGER is the joining of two com-
panies involved in different stages of related
businesses (example: merger of a soft drink
company and a company producing artificial
sweetener).
2. HORIZONTAL MERGER joins two firms in the
same industry.
a. It allows the firms to diversify or expand their
products.
b. Example: merger of a soft drink and a min-
eral water company.
3. CONGLOMERATE MERGER is the joining of
firms in completely unrelated industries thereby
diversifying business operations (example: mer-
ger of a soft drink company and a snack food
producer).
C. Rather than merge, some corporations decide to
MAINTAIN CONTROL of the firm internally, TAK-
ING IT PRIVATE.
1. A LEVERAGED BUYOUT is an attempt by em-
ployees, management, or a group of investors to
purchase an organization primarily through bor-
rowing.
a. Borrowed funds are used to buy out the
stockholders in the company.
b. Employees, managers, or a group of inves-
tors then become the owners of the firm.
Chapter 05 - How to Form a Business
5-32
PPT 5-37
Types of Mergers
TYPES of MERGERS
5-37
LO 4-4
• Vertical Merger -- The joining of two firms in
different stages of related businesses.
• Horizontal Merger -- The joining of two firms in the
same.
• Conglomerate Merger -- The joining of firms in
completely unrelated industries.
TEXT FIGURE 5.8
Types of Mergers
This text figure illustrates the differences among the three
types of mergers.
PPT 5-38
Leveraged Buyouts
LEVERAGED BUYOUTS
5-38
LO 4-4
• Leveraged Buyout (LBO) -- An attempt by
employees, management or a group of investors to
buy out the stockholders in a company.
• LBOs have ranged in size from $50 million to $34
billion and have involved everything from small
businesses to giant corporations.
• In 2012, foreign investors poured $166 billion into
U.S. companies.
Chapter 05 - How to Form a Business
5-33
2. Merger mania has also involved foreign compa-
nies purchasing U.S. companies.
3. Some international mergers are controversial
(such as the failed 2005 merger of a U.S. oil
company and a Chinese oil company).
learning objective 5
Outline the advantages and disadvantages of franchises, and discuss the opportu-
nities for diversity in franchising and the challenges of global franchising.
VI. FRANCHISES
A. A FRANCHISE AGREEMENT is an arrangement
whereby someone with a good idea for a business
sells the rights to use the business name and sell a
product or service to others in a given territory.
1. DEFINITIONS:
a. The FRANCHISOR is a company that devel-
ops a product concept and sells others the
rights to make and sell the product.
b. The FRANCHISE is the right to use a specific
business’s name and sell its products or ser-
vices in a given territory.
c. The FRANCHISEE is the person who buys a
franchise.
2. Franchising may be an alternative for people who
like to own their own businesses but want more
assurance of success.
3. More than 770,000 franchised businesses oper-
ate in the U.S.
4. The most popular businesses for franchising are
restaurants, gas stations, retail stores, hotels and
Chapter 05 - How to Form a Business
5-34
PPT 5-39
Franchising
FRANCHISING
5-39
LO 4-5
• Franchise Agreement -- An arrangement whereby
someone with a good idea for a business (franchisor)
sells the rights to use the business name and sell a
product or service (franchise) to others (franchisees)
in a given territory.
• More than 770,000 franchised businesses operate
in the U.S., employing approximately 8.5 million
people.
lecture enhancer 5-6
QUIZNOS COLLAPSES AS OTHER
CHAINS SUCCEED
Quiznos franchisees are getting upset as the company they
bought into has fallen in popularity. (See the complete lecture
enhancer on page 5.70 of this manual.)
bonus case 5-1
FRANCHISE OR INDEPENDENT?
WHAT FITS YOUR MOLD?
A husband and wife team opens a restaurant and discovers
how big a job it is. (See the complete case, discussion ques-
tions, and suggested answers beginning on page 5.77 of this
manual.)
Chapter 05 - How to Form a Business
5-35
motels, and automotive parts and service cen-
ters.
5. Senior care is a fast-growing sector.
B. ADVANTAGES OF FRANCHISES
1. MANAGEMENT AND MARKETING ASSIS-
TANCE, providing a greater chance of success
through:
a. An established product
b. Help in choosing a location
c. Assistance in all phases of operation
d. Intensive training
e. Local marketing efforts
2. PERSONAL OWNERSHIP: You are still your
own boss, although you must follow the rules,
regulations, and procedures of the franchise.
3. NATIONALLY RECOGNIZED NAME: You get
instant recognition and support.
4. FINANCIAL ADVICE AND ASSISTANCE
a. Franchisees get assistance arranging financ-
ing and learning to keep records.
b. Some franchisors will even provide financing
to potential franchisees.
5. LOWER FAILURE RATE
a. Historically, the failure rate for franchises
has been lower than that of other business
ventures.
b. However, because many weak franchises
Chapter 05 - How to Form a Business
5-36
PPT 5-40
Make Way for the Newbies
Source:Entrepreneur,www.entrepreneur.com,accessedNovember2014.
MAKE WAY for the NEWBIES
Top New Franchises
Rank Company Industry
1Mac Tools Automotive tools
2 Bricks 4 Kidz Toys
3 Orange Leaf Frozen Yogurt Frozen yogurt
4Sears Hometown Appliances
5 Fitness Revolution Personal and group fitness
6 The Grounds Guys LLC Landscape management
7Paul Davis Emergency Services Restoration
8 Doc Popcorn Food
9 Title Boxing Club Personal and group fitness
10 Fuzzy’s Taco Shop Food
5-40
LO 4-5
PPT 5-41
Advantages of Franchising
ADVANTAGES of FRANCHISING
5-41
LO 4-5
1. Management and
marketing assistance
2. Personal ownership
3. Nationally recognized
name
4. Financial advice and
assistance
5. Lower failure rate
Chapter 05 - How to Form a Business
5-37
have entered the field, care is needed.
C. DISADVANTAGES OF FRANCHISES
1. LARGE START-UP COSTS
a. Most franchises charge a fee for the rights to
the franchise.
b. Start-up costs can be as high as $1.5 million
(for a Dunkin’ Donuts franchise).
2. SHARED PROFIT: The franchisor often de-
mands a large share of the profits, or ROYAL-
TY, based on sales, not profit.
3. MANAGEMENT REGULATION
a. Some franchisees find the company’s rules
and regulations burdensome.
b. In recent years, franchisees have banded
together to resolve their grievances with
franchisors.
c. In 2010, the KFC National Council & Adver-
tising Cooperative sued KFC to gain control
of advertising strategies.
4. COATTAIL EFFECTS
a. The actions of other franchisees have an
impact on the franchise’s future growth and
level of profitability, a phenomenon known
as a COATTAIL EFFECT.
b. Franchisees must also watch for competition
from fellow franchisees.
5. RESTRICTIONS ON SELLING
a. Many franchisees face restrictions when re-
Chapter 05 - How to Form a Business
5-38
PPT 5-42
Disadvantages of Franchising
DISADVANTAGES of
FRANCHISING
5-42
LO 4-5
1. Large start-up costs
2. Shared profit
3. Management regulation
4. Coattail effects
5. Restrictions on selling
6. Fraudulent franchisors
SPOTLIGHT ON
small
business
PPT 5-43
The Building
Blocks of Fran-
chising
THE BUILDING BLOCKS of
FRANCHISING
5-43
• Bricks 4 Kidz was created as
a way to help kids
understand engineering and
construction.
• Since the business was low
cost and easily reproduced,
this led to over 200
franchises in the U.S. and 11
other countries.
Chapter 05 - How to Form a Business
5-39
selling their franchises.
b. Franchisors often insist on approving the
new owner, who must meet their stand-
ards.
6. FRAUDULENT FRANCHISORS
a. Most franchisors are not large systems;
many are small, obscure companies.
b. There has been an increase in complaints
to the FTC about franchisors that deliv-
ered little or nothing that they promised.
D. DIVERSITY IN FRANCHISING
1. WOMEN IN FRANCHISING
a. However, firms owned by women have
grown at twice the rate of all companies.
b. Women are becoming FRANCHISORS as
well.
c. The text uses the examples of the fran-
chises Auntie Anne’s, Decorating Den,
and Jazzercise.
2. MINORITY FRANCHISE OWNERSHIP is
growing at more than six times the national
average.
3. Nearly 20% of the franchises in the U.S. are
owned by African Americans, Latinos, Asians,
and Native Americans.
4. Franchisors are increasingly focusing on re-
cruiting minority franchisees.
E. HOME-BASED FRANCHISES
Chapter 05 - How to Form a Business
5-40
TEXT FIGURE 5.9
Buying a Franchise
This text figure provides some tips on evaluating a franchise.
PPT 5-44
Women in Franchising
• Women own about half of U.S. companies, yet
ownership of franchises is about 21%.
WOMEN in FRANCHISING
5-44
LO 4-5
• More women are
becoming
franchisors.
Auntie Anne’s and
Jazzercise and are
owned by women.
PPT 5-45
Minority-Owned Franchises
MINORITY-OWNED
FRANCHISES
5-45
PhotoCredit:TomMagliery
LO 4-5
• DiversityFran is an initiative to
build awareness of
franchising opportunities
within minority communities.
• Domino’s Pizza launched a
minority franchise recruitment
program called Delivering the
Dream.
• Over 20% of franchises are
minority-owned.
Chapter 05 - How to Form a Business
5-41
1. Home-based businesses offer advantages but
may leave owners with a feeling of isolation.
2. Home-based FRANCHISES feel less isolated.
F. E-COMMERCE IN FRANCHISING
1. Today, Internet users worldwide can obtain fran-
chises to open online retail stores.
2. Many franchisees with existing brick-and-mortar
stores are expanding online.
3. Some franchisors prohibit franchisee-sponsored
websites, however, which can lead to conflicts
between franchisors and franchisees.
4. Traditional brick-and-mortar franchises require
finding real estate. Online franchises require lit-
tle training and franchise fees.
G. USING TECHNOLOGY IN FRANCHISING
1. Franchisors are using technology, including so-
cial media, to meet the needs of customers and
franchisees.
2. Franchise websites streamline communication
with employees, customers, and vendors.
3. Using a website, every franchisee has immedi-
ate access to every subject that involves the
franchise operation.
H. FRANCHISING IN GLOBAL MARKETS
1. Canada is by far the most popular market be-
cause of proximity and language.
2. The costs of franchising are high in these mar-
kets, but these are counterbalanced by less
Chapter 05 - How to Form a Business
5-42
PPT 5-46
Home-Based Franchises
HOME-BASED FRANCHISES
5-46
LO 4-5
Advantages:
• Relief from
commuting stress
• Extra family time
• Low overhead
expenses
Main Disadvantages:
• Isolation
• Long hours
PPT 5-47
Home Sweet Home
Source:Entrepreneur,www.entrepreneur.com,accessedNovember2014.
HOME SWEET HOME
Top Home-Based Franchises
Rank Company Industry
1 Jan-Pro Disaster Restoration
2 Cruise Planners Travel
3 Vanguard Cleaning Systems Commercial Cleaning
4Snap-on Tools Professional Tools
5Matco Tools Professional Tools
6 Jazzercise Fitness
7 CleanNet USA Commercial Cleaning
8Budget Blinds Home Décor
9 Coverall Health-Based Cleaning Commercial Cleaning
10 Chem-Dry Carpet & Upholstery
Cleaning
Commercial and
Residential Cleaning
5-47
LO 4-5
PPT 5-48
E-Commerce in Franchising
E-COMMERCE
in FRANCHISHING
5-48
LO 4-5
• Most brick-and-mortar franchises have expanded
online.
• Many franchisors prohibit franchisee-sponsored
sites because conflicts can erupt.
• Sometimes “reverse royalties” are sent to
franchisees who believe their sales were hurt by
the franchisor’s site.
• Other franchises are solely based online.
ADAPTING TO
change
PPT 5-49
Giving Entre-
preneurs Op-
tions with Digital
Franchising
GIVING ENTREPRENEURS OPTIONS
with DIGITAL FRANCHISING
5-49
• Chris Jeffrey created OrderUp shortly after
graduating college.
• OrderUp links up restaurants with hungry patrons
and allows people to order online while OrderUp
takes a small commission.
• For a startup fee of
$42,000 franchisees
receive software and
training to launch OrderUp
in their area.
PPT 5-50
Global Franchising
GLOBAL FRANCHISING
5-50
LO 4-5
• Canada is the most popular target for U.S.-based
franchises.
• China, South Africa, the Philippines and the
Middle East are becoming popular despite high
cost.
• International franchising goes both ways – some
foreign franchises have come to the U.S.
Chapter 05 - How to Form a Business
5-43
competition and rapidly expanding consumer
base.
3. Newer, smaller franchises are also going inter-
national, such as Auntie Anne’s and Build-A-
Bear Workshop.
4. Convenience and a predictable level of service
and quality are what make international franchis-
ing successful.
5. Franchisors must be careful to adapt to the re-
gion.
6. Foreign franchises are also expanding to the
U.S.
learning objective 6
Explain the role of cooperatives.
VII. COOPERATIVES
A. A COOPERATIVE is a business owned and con-
trolled by the people who use it—producers, con-
sumers, or workers with similar needs who pool their
resources for mutual gain.
1. There are about one billion members of cooper-
atives worldwide.
2. Members democratically control these busi-
nesses by electing a board of directors that hires
professional management.
B. Some cooperatives are formed to give members
MORE ECONOMIC POWER than they would have
as individuals (e.g., farm cooperatives).
1. The FARM COOPERATIVE began with farmers
Chapter 05 - How to Form a Business
5-44
lecture enhancer 5-7
FRANCHISING AROUND THE
WORLD
It’s worth the time and risk to franchise internationally and
now small companies, like Wing Zone, are breaking into in-
ternational markets. (See the complete lecture enhancer on
page 5.71of this manual.)
PPT 5-51
What to Choose?
Source:RichardGibson,WallStreetJournal,www.wsj.co m,accessedNovember2014.
WHAT to CHOOSE?
Picking Franchises that May Survive a Recessi on
5-51
LO 4-5
• Focus on tried-and-true name brands.
• Stick to core goods and services.
• Be choosy about the site.
• Don’t pinch pennies.
• Have a fallback choice.
• Don’t assume the franchise will pay off.
PPT 5-52
High Flyers
Source:Entrepreneur,www.entrepreneur,com,accessedNovember2014.
HIGH FLYERS
Ten High-Performing Franchises
5-52
PhotoCredit:InnisfreeHotels
LO 4-5
1. Anytime Fitness
2. Hampton Hotels
3. Subway
4. Supercuts
5. Jimmy John’s
6. 7-Eleven
7. Servpro
8. Denny’s
9. Pizza Hut
10. Dunkin Donuts
PPT 5-53
Cooperatives
COOPERATIVES
5-53
LO 4-6
• Cooperatives -- Businesses owned and controlled
by the people who use them– producers, consumers,
or workers with similar needs who pool their
resources for mutual gain.
• Worldwide, co-ops serve one billion members!
• Members democratically control the business by
electing a board of directors that hires
professional management.
Chapter 05 - How to Form a Business
5-45
joining together to get better prices for their food
products.
2. Farm cooperatives now buy and sell other prod-
ucts needed on the farm.
3. Cooperatives are still a major force in agriculture
today.
VIII. WHICH FORM OF OWNERSHIP IS FOR YOU?
A. There are RISKS TO EVERY FORM of business
ownership.
B. The freedom and incentives of capitalism make risks
acceptable to many people.
IX. SUMMARY
