Exam 14: Accessing Resources for Growth From External Sources

Which of the following is the most significant advantage of an acquisition according to the text?

If a franchise looks good as an investment,the entrepreneur may request a franchise package from the franchisor at no cost,which usually contains a draft franchise agreement or contract.

The debt to capital ratio for most _____ usually exceeds the equity by a factor of 5:1.

When an entrepreneur bootstraps the purchase of a company,the entrepreneur usually puts down 10-20% in cash and then financing the remainder of the price with long-term debt paid back through the company's earnings.

By understanding more about the other party,the entrepreneur has a greater opportunity to achieve integration in negotiation.

A key concern in any merger or acquisition is the legality of the purchase.

Identify and describe the three different types of franchises. A.Dealership - a form commonly found in the automobile industry.Here,manufacturers use franchises to distribute their product lines.These dealerships act as the retail stores for the manufacturer.In some instances,they are required to meet quotas established by the manufacturers,but as is the case for any franchise,they benefit from the advertising and management support provided by the franchisor. B."Retail" - The most common type of franchise is the type that offers a name,image,and method of doing business,such as McDonald's,Subway,KFC,Midas,Dunkin'Donuts,and Holiday Inn.Note: students may identify as retail,no specific name is given for this type. C.Service - These include personnel agencies,income tax preparation companies,and real estate agencies.These franchises have established names and reputations and methods of doing business.In some instances,such as real estate,the franchisee has actually been operating a business and then applies to become a member of the franchise.

A common procedure for determining a merger's value is to estimate the present value of discounted cash flows and the expected after-tax earnings attributable to the merger.

The integration task phase of negotiation explores mutual benefits for the parties.

One method of expanding a business is the purchase of an entire company or part of it so that the entity is completely absorbed and no longer exists as a separate company.This is called:

A ________ occurs when an entrepreneur or an employee group uses borrowed funds to purchase an existing venture for cash.

Negotiating how the benefits of the relationship will be allocated between the parties is known as the distribution task.

A _________ is a separate entity that involves a partnership between two or more active participants.

Lack of synergy is one of the most frequent causes of an acquisition's failure to meet its objectives.

The disclosure document provided by the franchisor:

An acquisition is the purchase of a company,or part of a company,in which the acquired company ceases to exist independently.

In negotiations the _________ task involves how the benefits of the relationship will be allocated between the parties.

The reservation price is the price at which the entrepreneur is ready to accept the agreement.

In evaluating an LBO's asking price an entrepreneur can use qualitative measures such as evaluating the abilities of key personnel.

Discuss the main disadvantages of an acquisition. A.Marginal success record.Most ventures that are for sale have an erratic,marginally successful,or even unprofitable track record.It is important to review the records and meet with important constituents to assess that record in terms of the business's future potential. B.Overconfidence in ability.Sometimes an entrepreneur may assume that he or she can succeed where others have failed.This is why a self-evaluation is so important before entering into any purchase agreement.Even though the entrepreneur brings new ideas and management qualities,the venture may never be successful for reasons that are not possible to correct.Often managers are overconfident in their ability to overcome cultural differences between their current business and the one being acquired. C.Key employee loss.Often,when a business changes hands,key employees also leave.Key employee loss can be devastating to an entrepreneur who is acquiring a business since the value of the business is often a reflection of the efforts of the employees. This is particularly evident in a service business,where it is difficult to separate the actual service from the person who performs it.In the acquisition negotiations,it is helpful for the entrepreneur to speak to all employees individually to obtain some assurance of their intentions as well as to inform them of how important they will be to the future of the business.Incentives can sometimes be used to ensure that key employees will remain with the business. D.Overvaluation.It is possible that the actual purchase price is inflated due to the established image,customer base,channel members,or suppliers.If the entrepreneur has to pay too much for a business,it is possible that the return on investment will be unacceptable.It is important to look at the investment required in purchasing a business and at the potential profit and establish a reasonable payback to justify the investment.