1. CHAPTER Section 22.1 Franchising & Licensing Section 22.2 Exit Strategies Franchising & Exit Strategies

2. SECTION OBJECTIVES Investigate franchising a business Learn about franchising documents Examine the advantages and disadvantages of being a franchisor Explore brand licensing Franchising & Licensing 2 Section 22.1: Franchising & Licensing

3. Franchising a Business Franchisee payments typically include: Franchise Fee. The franchise fee is an upfront charge that allows the franchisee to join the franchisor’s system. Franchise Royalty. The franchisee pays the franchisor regular, ongoing payments. This is typically a percentage of the sales the franchisee earns. Franchise Advertising Fee. Many franchisors operate an advertising fund on behalf of their franchisees to pay for the creation and distribution of marketing, advertising, and promotional materials that benefit all franchisees. 3 Section 22.1: Franchising & Licensing

4. Franchising Documents A franchise disclosure document is a legal document that provides detailed information to potential franchisees about the franchisor. A franchise agreement is a legally binding contract between a franchisor and franchisee that lists the rights and responsibilities of each party. A franchise operations manual provides detailed instructions to a franchisee about how to operate, staff, and manage a franchise unit. 4 Section 22.1: Franchising & Licensing

5. Advantages and Disadvantages for Franchisors Advantages Increased Revenue Franchisee Takes Responsibility Franchisee Investment No Liability Builds Brand Awareness 5 Section 22.1: Franchising & Licensing Disadvantages Regulatory and Legal Requirements Extensive Preparation Substantial Upfront Investment Time-Consuming Requires Certain Types of Businesses

6. Licensing a Brand Brand equity is the perceived monetary value of a brand. Brand licensing is granting permission to a person or company to use your brand. The company or person who owns the brand is the brand licensor. The company or person who is granted permission to use the brand is the brand licensee. Brand licensing is accomplished through a written licensing agreement between a licensor and a licensee. 6 Section 22.1: Franchising & Licensing

7. SECTION OBJECTIVES Examine when the timing is right to leave a business Study methods for valuing a business Investigate exit strategies for business owners Understand how to build wealth Exit Strategies 7 Section 22.2: Exit Strategies

8. When to Leave a Business The owner must consider three factors when deciding to sell a business: Personal considerations. The entrepreneur may wish to retire or pursue other business opportunities. Condition of the business. The business will be worth more if it’s growing and thriving when it goes up for sale. Condition of the economy. A business will probably sell more quickly and for more money when the national and local economies are doing well. 8 Section 22.2: Exit Strategies

9. How to Value a Business A business that is not doing well may be valued purely on its tangible assets that can be sold, or liquidated. Book value figures the total assets minus the total liabilities according to a company’s balance sheet. The multiple of earnings method is a valuation in which the amount of business earnings over a specific time period is multiplied by a number, typically 3 to 5, to determine a reasonable sales price for the business. Goodwill is a term that encompasses the intangible positive aspects of a business. 9 Section 22.2: Exit Strategies

10. Exit Strategies Several methods exist for harvesting value from a successful and growing business. A management buyout is an exit strategy in which a business owner sells his or her ownership shares to the business’s managers. An employee stock ownership plan (ESOP) is a fund established when a business owner sells his or her ownership shares to a retirement fund for the employees. An initial public offering (IPO) is the first sale of shares of stock to the general public by a privately held company. 10 Section 22.2: Exit Strategies

11. Building Wealth All investments involve some risk. The greater the potential reward of an investment, the more risky it is likely to be. Invested money grows by compounding, which means that you earn interest on your interest. The Rule of 72 is a quick way to figure how long it will take to double your money at a given rate of return. The future value of money is the amount to which a given sum will increase over time through investment. 11 Section 22.2: Exit Strategies