Professional Documents
Culture Documents
H
FROM EXTERNAL SOURCES
OPEIVNG PROFILE
BILL GROSS
.
.'" ,
How does a start-up company take advantage of the seemingly endless opportunties
of the Internet by using the creative talents of one person and then letting other selected entrepreneurs tke over the responsibility of running these businesses? lt
sounds like a repeat of history when Thomas Edison rnade invention a business. But the
businesses
concept is simple. Bill comes up with an idea for an Internet start-up. He locates some-
- one. either a former executive or even an engineering student, who he thinks is right
i.. .' for the job. That person is then given the reins to start
this venture all under the roof
..
' ': , of an incubator-like operation, where Bill provides the structure and services necessary
to make these start-ups rapidly grow into successful enterprises.
.
I
.
:'
.
.
'
. . : . .. .
: i '
veloping the technology, conducting marketing
.
"
,:--..,...,;., hiring managernent, launching the venture, and finally either going public or setling
the business. The seed financing that ldealab provides to these start-ups does not ex- , ceed $250,000. Bill believes that Internet start-ups do not need large amounts
of capi,:, tal to get started but, more importantly, do need knowledge, intelligence, and speed.
'
:-,:
Knowledge and intelligence are provided by Bill and the ldealab's staff experts, and
speed focuses on the ability to quickly grow a start-up, but with few mistakes. According to Bill, these two elements are much more important in the successful launch and
412
PART
FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING TI{E NEW VENTURE
the Sav-On nearby it was selling for 7 cents. He quickly figured out that with no overhead he could make an easy profit on the price spread. Bill then moved on to his next
successful enterprise by placing adsin Popular Mechanics, where he sold $25,000 worth
of solar devices and plans. The proceeds from this effort were used to finance his freshman year's tuition at Caltech. While at Caltech he proceeded to launch GNP Inc., a
stereo equipment maker. This enterprise not only was very successful but was recognized as one of /nc. magazine's top 500 growth ventures in 1982 and 1985. Hs next enterprise was created when Bill and his brother found a way to make Lotus l-2-3 obey
simple commands. Mitch Kapor, the founder of Lotus, was impressed with their software and purchased their business for $ 1 0 million.
The success streak continued with the launch of Knowledge Adventure in 1991. This
venture developed and marketed educational software and was considered to be his
most successful venture to date. He sold the business in 1997 for $100 million. ldealab
actually was created in 1996 when Bill was stepping down from Knowledge Adventure
and negotiating the sale.
A sample of sorne of the companies launched by ldealab includes CitySearch, which
competes with Microsoft and provides online services for urban communities; Entertain-
Net, an Internet broadcaster that provides news and related information; and
Answer.com, a Web site that will answer any question you might have and which has already been acquired by another company. Last year Bill expanded his operations into
Silicon Valley. He wanted to be close to the acton and take advantage of ldealab's abil-
ity to quickly transform some of these Internet opportunities into successful ventures.
Growing these start-ups is a challenge to Bill Gross, and although there is high
risk in the Internet industry, Bill feels that ldealab will continue to stay focused on
its mission.l
joint
CHAPTER
14
ventutes, acquisitions, and mergers. Finally, this chapterprovides some useful advice for
those entrepreneurs who need to negotiate to obtain the human and f,rnancial resources
necessary to fuel business growth.
FRANCHISING
franchising An
arrangement whereby a
franchisor gives exclusive
rights of local distibution
to a franchisee in return
for payment of royalties
and conformance to
'?n arrangement wherby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of local distribution to independent retailers
in return for their payment of royales and conformance to standardized operating procedures."2 The person offering the franchise is known as the
franchisor T\e franchs is the
person who purchases the franchise and is given the opportunity to enter a ner/ business with
a better chance to succeed than if he or she were to start a new business from scratch.
Franchising is
standrdized operating
procedures
Jranchisor
The person
One of the most impofant advantages of buying a franchise is that the entrepreneur does
not have to incur all the risks associated with creating a new business. Table 14.1 summarizes the important advantages of a franchise- Typically, the aeas that entrepreneurs have
problems with in starting a new venture are product acceptance, management expertise,
meeting capital requirements, knowledge of the market, and operating and structural controls. In franchising, the risks associated with each are minimized throueh the franchise relationship, as discussed in the following.
Product Acceptance The franchisee usually enters into a trusiness that has an accepted
name, product, or service. In the case of Subway, any person buying a franchise will be using the Subway name, which is well known and established throughout the United Sttes.
The franchisee does not have to spend resources trying to establish the credibility of the
business. That credibility already exists based on the years the franchise has existed. Subway has also spent millions of dollars in advertising, thus building a favorable image of the
products and services offered. An entrepreneur who tries to start a sandwich shop would be
unknown to the potential customers and would require signifrcant effort and resources to
build credibility and a reputation in the market.
Management
rial
Expertise
for
414
PART
FROM FUNDING THE VENruRE TO LAUNCHING. GROWING, AND ENDING THE NEW VENruRE
example, requires all its franchisees to spend time at its school, where everyone takes
classes in these areas. In addition, some franchisors require their new franchisees to
actually work with an existing franchise owner or at a company-owned store or facilify
to get on-the-job training. Once the franchise has been started, most franchisors will
offer managerial assistance on the basis of need- Toll-free numbers are also available so
that the franchisee can ask questions anytime. Local ofhces for the larger franchises
continually visit the local franchisees to offer advice and keep owners informed of new
developments.
The training and education offered is actually an important criterion that the entrepreneur should consider in evaluating any franchise opportunity. If the assistance in staf-up is
not goo4 the entrepreneur should probably look elsewhere for opportunities unless he or
she already has extensive experience in the field.
Knowledge of the Market Any established franchise business offers the entrepreneur
years of experience in the business and knowledge of the market. This knowledge is usually reflected in a plan offered to the franchisee that details the profile of the target customer and the strategies that should be implemented once the operation has begun. This is
particularly important because of regional and local differences in markets. Competition,
media effectiveness, and tastes can vary widely from one market to another. Given their
experience, franchisors can provide advice and assistance in accommodating any ofthese
differences.
Most franchisors will be constantly evaluating market conditions and determining the
most effective strategies to be communicated to the franchisees. Newsletters and other publications that reflect new ideas and developments in the overall market are continually sent
to franchisees.
Operating and Structural Controts Two problems that many entrepreneurs have in
starting a new venture are maintaining quality control of products and services and escablishing effective managerial controls. The franchisor, particularly in the food business, will
identify suppliers that meet the quality standards established. In some instances, the supplies are actually provided by the franchisor. Standardization in the supplies, products, and
CHAPTER
14
services provided helps ensure that the entrepreneur will maintain quality standards
that are
so important. Standadization also supports a consistent image on which the franchise
business depends for expansion.
cost Advantages The mere size of a franchised company offers many advan[ages to
the franchisees. The franchisor can purchase supplies in large quantities, thus achieving
economies of scale that would not have been possible otherwise. Many franchise businesses produce parts, accessories, packaging, and raw materials in large quantities, and
then in turn sell these to the franchisees. Franchisees are usually required to purchase
these items as part of the franchise agreement, and they usually beneht from lower
prices.
One of the biggest cost advantages of franchising a business is the ability to commit
larger sums of money to advertising. Each franchisee contributes a percentage of sales
Sf-N f,
RE:CA
"' '
lruf
RfT
EE
i.":.'
pS
. " ':'.
-,'..: :':,,
,.ii , t'..
."."'
''
'''l
na-
'
'
: -.
";;;;;-;r;;;;
in more than
For other businesses, the downturn carres the scent of ADVICE TO AN ENTREpRENEUR
An ndividual who is looking to start and grow a business
opportunty. Ron Gonen, co-founder and chief executive
cer of RecycleBank, says the sudden need for cities and house- approaches you and asks you the following questions:
offi-
.;;;;;;;;;
il
r.""ivlootinq
new business?
forawaytogetdisposableincome,we,reataunqtmei 2. Whyare"greenopportunities"soattractiveduringan
our growth curve," Gonen says. He says families can earn
up
re-
landfills.
l1:::^1tT*"0
F"TiliJl;"ll',Jt:::;T:i1;i:.rH:TT,i,ff;:"1".,:jl:i"J:J,"."
,,n^llbir/"on,"nyd"c2008/sb2008
t218 856857.htnr
,.
CHAPTER
T4
DOERNALSOURCES 417
may
N
dow Works franchises.
The franchisee
by another company.
difficult-
Types of Franchises
There are three available types of franchises.s The first type is the 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. ln some
instances, they are required to meet quotas established by the manufacturers, but as the
is
case for any franchise, they benefit from the advertising and management support provided
by the franchisor-
The
doin
Th
of
lnn.
can be
and method
and
Holidav
information.
A third type offranchise offers services. These include personnel agencies, income tax
prepaation companies, and real estate agencies- These franchises have established names
and reputations and methods ofdoing 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.
418
PART
Franchising opportunities have often evolved from changes in the environment as well
as important social trends. Several of these are discussed in the following.T
Good health. Today people are eating healthier food and spending more time keeping
fit. Many franchises have developed in response to this trend. For example, Bassett's
Original Turkey was created in response to consumer interest in eating foods lower in
cholesterol, and Booster Juice was created to provide freshjuice and smoothies as a
healthy alternative to other snacks and drinks. PeterTaunton founded Snap Fitness Inc.
in 2003 to offer patrons a convenient and affordable place to work out, and Gary
women-only fitness center.
Heavin created Curves for Women
Time saving or convenience. More and more consumers prefer to have things delivered
to them as opposed to going out of their way to buy them. In fact, many food stores
now offer home delivery services. In 1990, Auto Critic of America Inc. was started as
a mobile car inspection service. About the same time, Ronald Tosh started Tubs To Go,
a company that delivers Jactzzis to almost any location for an average of $ 100 to $200
-a
per night
Health care. There is an increasing number of opportunities in health care for aging
people. For example, Senior Helpers was founded in 2001 and started franchising in
2005 to offer care for seniors so that they can live independently in the comfort of their
own home. Healthsource Chiropractic and Progressive Rehab started franchising in
?N6 andoffers chiropractic care with "Progressive Rehabilitation" where chiropractors
work side by side with therapists, massage therapists, and athletic trainers.
The second baby boom. Today's baby boomers have had babies themselves, which has
resulted in the need for a number of child-related service franchises. Child care
franchises such as KinderCare and Living and L,earning are thriving. In 1989, rwo
aftomeys, David Pickus and Lee Sandoloski, opened Jungle Jim's Playland. This is an
indoor amusement park with small-scale rides in a 20,D- to 27,000-square-foot
facility. One franchise, Computertots, teaches classes on computers to preschoolers.
This franchise has spread to 25 locations in 15 states.
INVESTING IN A FRANCHISE
Franchising involves many risks to an entrepreneur. Although we read about the success of
McDonald's or Burger King, for every one of these successes there are many failures. Franchising, like any other venture, is not for the passive person. It requires effort and long
hours, as any business does, since duties such as hiring, scheduling, buying, and accounting are still the franchisee's responsibility.
Not every franchise is right for every entrepreneur. He or she must evaluate the franchise
alternatives to decide which one is most appropriate. A number of factors should be assessed before making the hnal decision.
|
Unproven versus proven franchise. There are some trade-offs in investing in a proven
or unproven franchise business. Whereas an unproven franchise will be a less expensive investment, the lower investment is offset by more risk. In an unproven franchise,
the franchisor is likely to make mistakes as the business grows. These mistakes could
inevitably lead to failure. Constant reorganization of a new franchise can result in confusion and mismanagement. Yet, a new and unproven franchise can offer more excitement and challenge and can lead to significant opportunities for large prohts should
the business grow rapidly. A proven franchise offers lower risk but requires more
financial investment.
with and without your lawyer. To discourage dishonesty, tell your opponent you will independently verify
the important stuff. lf you can, do it. By the way, ex-
fla
do
cla
clobbered.
in
ntrue. "
ii""?:::",:il"ilT:,81i:ll"Jx' ffiyt[.;;:;:":#,#;"i,:",
www.enreDreneur.com.
The purchase ofa franchise should entail an assessment of the financial stability of the franchisor. A potential franchisee should seek
answers to the following questions:
How many franchises are in the organization?
How successful is each of the members of the franchise organization?
Are most of the prohts of the franchise a function of fees from the sale of franchises
or from royalties based on proirts of franchisees?
Does the franchisor have management expertise in production, hnance, and
marketing?
.
'
'
'
Some of the preceding information can be obtained from the profrt-and-loss statements
of the franchise organization. Face-to-face contact with the franchisor can also indicate
the success of the organization. It is also worthwhile to contact some of the franchisees
directly to determine their success and to identify any problems that have occurred. If
hnancial information about the franchisor is unavailable, the entrepreneur may purchase a
419
42O
PART
FROM FUNDING THE VENTT'RE TO LAUNCHING. GROWING, AND ENDING THE NEW VENTURE
hnancial rating from a source such as Dun & Bradstreet. Generally, the following are
good external sources of information:
.
.
.
.
.
.
.
Franchise association
Other franchisees
Government
Accountants and lawyers
Libraries
Franchise directories and journals
Business exhibitions
3. Potential marketfor
In general, most of the preceding information should be provided in the disclosure staement or the prospectus. The Federal Trade Commission's Franchise Rule requires franchisors to make full presale disclosure in a document that provides information about 20
separate aspects of a franchise offering.8 The information required in this disclosure is summarized in Table 14.2. Some of the information will be comprehensive and some will be
sketchy. There are always weaknesses that must be evaluated before making a commitment.
The disclosure statement represents a good resource, but it is also important to evaluate the
other services mentioned earlier in this chapter.
Front-end procedure fees, royalty payments, expenses, and other information should be
compared with those of franchises in the same field, as well as in different business areas.
If a franchise looks good as an investment, the entrepreneur may request a franchise package
from the franchisor, which usually contains a draft franchise agreement or contract. Generally,
this package will require a deposir of $400 to $600, which should be tully refundable.
The contract or franchise agreement is the hnal step in establishing a franchise arrangement. Here a lawyer experienced in franchising should be used. The franchise agreement
contains all the specifrc requirements and obligations ofthe franchisee. Things such as the
exclusivity of tenitory coverage will protect against the franchisor's granting another franchise within a certain radius of the business. The renewable terms will indicate the length
of the contract and the requirements. Financial requirements will stipulate the initial price
for the franchise, the schedule of payments, and the royalties to be paid. Termination of
franchise requirements should indicate what will happen if the franchisee becomes disabled or
dies and what provisions ae made for the family. Terminating a franchise generally results in
more lawsuits than any other issue in franchising. These terms should also allow the franchisee
to obtain fair maket value should the franchise be sold. Even though the agreement may be
standad, the franchisee should try to negotiate important items to reduce the investment risk.
CHAPTER
14
JOINT VENTURES
With the increase in business risks, hypercompetition, and failures, joint ventures have occurred with increased regularity and often involve a wide variety of players.e Joint ventures
are not a new concept, but rather have been used as a means of expansion by entrepreneurjoint venture Two or
more companies forming
a
new company
422
PART
FROM FUNDING THE VENruRE TO LAUNCHING, GROWING. AND ENDING THE NEW VENTURE
businesses, and the public sector.l0 Joint ventures have occurred between such rivals as
General Motors and Toyota as well as General Electric and Westinghouse. They have occured between the United States and foreign concerns to penetrate an international market,
and they have been a good conduit by which an entrepreneurcan enter an intemational maket.
Whenever close relationships between two companies are being developed, concems
about the ethics and ethical behavior of the potential partner may arise.
is still between two or more private-sector companies. For example, Boeing, Mitsubishi,
Fuji, and Kawasaki entered into ajoint venture for the production of small aircraft to shae
technology and cut costs. Microsoft and NBC Universal formed a partnership to create a
cable news channel (MSNBC). There is an elaborate cost-sharing arrangement between e
different entities of the partnership.
Otherprivate-sectorjoint ventures have had different objectives, such as entering new markets (Corning and Ciba-Geigy as well as Kodak and Cetus), entering foreign markets (AT&T
and Olivetti), and raising capital and expanding markets (U.S. Steel and Phong lron and Steel).
Some joint ventures are formed to do cooperative research. Probably the best known of
these is the Microelectronics and ComputerTechnology Corporation (MCC). Supported by
13 major U.S. companies, this for-proht venture does long-range research with scientists
who are loaned to MCC for up to four years before returning to their competing companies
to apply the results of their research activities. MCC retains title to all the resulting knowledge and patents, making them available for license to the companies participating in the
program. Another type of joint venture for reseach development is the Semiconductor
Research Corporation, located in Triangle Park, North Carolina. A not-for-proht research
organization, it began with the participation of I I U.S. chip manufacturers and computer
companies. The goal of the corporation is to sponsor basic research and train professional
scientists and engineers to be future industry leaders. Members of SRC programs have invested $l.l billion in cutting-edge semiconductor research supporting over 7,000 students
and 1,598 faculty members at 237 universities worldwide.rt
Industry-university agreements qeated for the purpose of doing research are another
type of joint venture that has seen increasing usage. However, two major problems have
kept these types ofjoint ventures from proliferating even faster. A proht corporation has the
objective ofobtaining tangible results, such as a patent, from its research investment and
wants all proprietary rights. Universities want to share in the possible hnancial returns from
the patenl but the university researchers want to make the knowledge available through research papers. In spite of these problems, numerous industry-university teams have been
established. In one joint venture agreement in robotics, for example, Westinghouse retains
patent rights while Carnegie-Mellon receives a percentage of any license royalties. The university also has the right to publish the research results as long as it withholds from publication any critical information that might adversely affect the patent.
The joint venture agreement between Celanese Corporation andYale University, created
for researching the composition and synthesis of enzymes, took a somewhat different
form----cost sharing. Although Celanese assumes the expense of any needed supplies and
equipment for the research, as well as the salaries of the postdoctoral researchers, Yale pays
the salaries ofthe professors involved. The research results can be published only after a
454ay waiting period.
Interuational joint ventures, discussed in Chapter 5, are rapidly increasing in number
due to their relative advantages. Not only can both companies share in the earnings and
growth, but the joint venture can have a low cash requirement if the knowledge or patents are
CHAPTER
14
capitalized as a
new internation
financing
come
jo
th
il*'i":il
l.
invol
ventu
hout this chemis
the parties
. The
joint
ew entity in light
if the managers
a low
likelihood
sources that will be provided. Good relationships must be nurtured between the managers in thejoint venture and those in each parent company.
3. The
expectations of the results of the joint venture must be reasonable. Far too often,
at least one of the partners feels that a joint venture will be the cure-all for other corporate problems. Expectations of a joint venture must be realistic.
4. The timing
must be right. With environments constantly changing, industrial conditions being modied, and markets evolving, a particular joint venture could be a success one year and a failure the next. Intense competition leads to a hostile envionment
and increases the risks of establishing a joint venture. Some environments are just not
conducive to success. An entrepreneur must determine whether the joint venture will
offer opportunities for growth or will penalize the company, for example, by preventing it from entering certain markets.
A joint venture is not a panacea for expanding the entrepreneurial venture. Rather, it
should be considered one ofmany options for supplementing the resources ofthe firm and
responding more quickly to competitive challenges and market opportunities. The effective
424 PAR 5
FROM FUNDING THE VENTURE TO I-AUNCTIING, GROWNG, AND ENDING THE NEW VENTURE
ofjoint ventures
as a sategy
ACOUISITIONS
Another way the entrepreneur can expand the venture is by acquiring an existing business.
Acquisitions provide an excellent means of expanding a business by entering new makets
acqukitinn purchasing company. An acquisition is the purchase of an entie companf or part of a company; by
alt or part of a
company
definition, the company is completely absorbed and no longer exists independently- An ac-
lJ[*il*ffi
ffi"Llltr;??lllllli,lL*:trf ,il1fiT["L*;*i*"s
invorved
Although one ofthe key issues in buying a business is agreeing on a price, successful
acquisition of a business actually involves much, much more. In fact, often the structure of
the deal can be more important to the resultant success of the transaction than the actual
;rr,:tTT3.*;
*{fl t*T*T:ffi :il"#f;,ff"}il"*:trlHt"f#fi ":#;:ff
Advantages of an Acquisition
For an entrepreneur, there are many advantages to acquiring an existing business:
l.
Established business. The most signifrcant advantage is that the acquired firm has an
established image and track record. If the frrm has been profitable, the entrepreneur
need only continue its current strategy to be successful with the existing customer
base.
be concerned
with frnding supplien, channel members, hiring new employees, or creating customer
awareness, more time can be spent assessing opportunities to expand or strengthen the
existing business and tapping into potential synergies between the businesses.
CHAPTER
14
EXTERMLSOURCES 425
Disadvantages of an Acquisition
Although we can see that there are many advantages to
acquiring an existing busiuess,there
also disadvantages. The importance ofeach ofthe
advantag and disadvantages
3re
be weighed carefully with other expansion optrons.
l'
should
Marginal success record. Most ventures that are for sale have
an erratic, marginally
successful, or even unprohtable 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. For example, if the store layout is poor, this
factor can be rectified;
but if the location is poor, the entrepreneur might o
etter using some other expansion method.
2'
-After
balancing the pros and cons ofthe acquisition, the entrepreneur needs
to determine
Synergy
The concept that "the whole is greaer than the sum ofits parts"
applies to the integration
of an acquisition into the enEepreneur's venture. The synergy should
occur in both the business concept, with the acquisition
overall goals,
and the financial performance. The
ottom line, af_
fecting both long-term gains and fu
most frequent
causes of an acquisition's failure to meet its objectives.
' . Ais,.sr:eru
.I
. :1
- .,
,
'
1: i
.
',
.:
_.
_ ,. ..:,
.-... -:: -_
.'.., ....r
:.
'which doein't give inventorspatent protection,
jmes Tiicion,49. and'Anthony
- but does allow them to'show their ideas to peolonOeis t ACM Enterprisei in ,
pfq. f'lt is an inexpensive way of protection that
:
.
(ACM),
allows inventors one year for research and develManager
Card
Jhe Auto
opment," Iscione says. ln 2001, he applied for his
that holds. driuerll"i."ns"
"
utility patent.
and up to five credit cards. When users push one
the
selected
case,
on
the
2.
Decide what hetp you need. Because Tiscione had
buttons
the
six
of
never developed a product before. he felt he
credit card is dispensed.
patents.'l I
foundonlycou|dbuyone.Thepositive
major role in moving the
to mine," h
e
search did I
4. Locate a production source. Tiscione's first stop
re than just save
research on
,'l
was the Hong Kong Chamber of Commerce, which
Tiscione money: was trying to hedge my bets
has an office in 5an Francisco. "They sent me a list
before investing dollars in attorney fees, engiof companies I e-mailed," he says' He narrowed
neering design, and prototypes. I also wanted to
it down to one-but only signed the final agreesee what other ideas were outthere. lwas surment after visiting the company several times and
Before
prised no one else ever had the idea."
viewing a few trial production pieces'
patent,
provisional
long, Tiscione applied for a
ass
assets
and/or
the
,, ,
ADVICE TO AN ENTREPRENEUR
An inventor has read the preceding article and comes
to you for advice. ,,Th
to do,,,
he says, "l don't
have
oney
to
tacted MJ Media,
1.
tages
brokers
People who
companies
sell
*" j*a
buyers through
a commission
on
42A
PART
FROM FUNDING THE VENruRE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE
Accountants, attorneys, bankers, business associates, and consultants may also know of
good acquisition candidates. Many of these professionals have a good working knowledge
of the business, which can be helpful in the negotiations.
It is also possible to hnd business opportunities in the classihed sections of the newspaper or in a trade magazine. Since these listings are usually cornpletely unknown, they may
involve more risk but can be purchased at a lower price.
Determining the best option for an entrepreneur involves significant time and effortThe entrepreneur should gather as much information as possible, read it carefully, consult
with advisors and experts, consider his or her own situation, and then make a construc-
tive decision.
MERGERS
,nl8.r Joining two or
more companres
A merger----or a transaction involving two, or possibly more, companies in which only one
company survives-is another method of expanding a venture. Acquisitions are so simila
to mergers that at times the two terms are used interchangeably. A key concern in any
merger (or acquisition) is the legality of the purchase. The Deparlment of Justice frequently
issues guidelines for horizontal, vertical, and conglomeratre rnergers which further define
the interpretation that will be made in enforcing the Sherman Act and Clayton Act. Since
the guidelines are extensive and technical, the entrepreneur should secure adequate legal
advice when any issues arise.
Why should an entrepreneur merge? There are both defensive and offensive strategies
for a merger, as indicated in Figure 14.1. Merger motivations range from survival to protection to diversification to growth. When some technical obsolescence, market or raw material loss, or deterioration of the capital structure has occurred in the entrepreneur's venture,
a merger may be the only means for survival. The merger can also protect against market
encroachment, product innovation, or an unwalTanted takeover. A merger can provide a
great deal of diversihcation as well as growth in market, technology, and hnancial and
managerial strength.
How does a merger take place? It requires sound planning by the entrepreneur. The
merger objectives, particularly those dealing with earnings, must be spelled out with the
Source: F. T. Haner, Business Polc, Plaming, ond Struteg (Cambridge, MA: Mnthrcp,1976)' p.399.
CHAPTER
14
ACCESSINGRESOURCESFORGROWTH FROM
DCTERNALSOURCES 42g
it would be
of retum.
LEVERAGED BUYOUTS
leveraged bayoul (LBO)
Purchasing an existing
venture by any employee
group
or
plan
1' The
430
PART
will
of
the relationshiP
be allocated between
the parties
integratian tsk
Exploring possible
mutual benefits from the
relationship so that the
"size of the pie" can be
increased
CHAPER
14
ments. B
gotiation
ating wit
reservaton
pi.ce The
of
entrepreneur is indifferent
about whether to accept
the agreement or choose
the alernative
bargaining
zone The
range of outcomes
between the
entrepreneur's reservation
price and the reservation
price of the other party
431
432
PART
FROM FUNDING THE VENruRE TO IUNCHING. GROWING. AND ENDING THE NEW VENTURE
Being aware of the assessments that need to be made is an important step toward a successful negotiation but requires stra0egies for eliciting information from the other party that can
benefit the distributive and/or integrative elements of a negotiation. Again based on the work
of Bazerman and Neale (1992),13 we offer a number of these straegies. These strategies should
be thought of as tools. No one tool is perfect for every job. Some jobs require that a number of
different tools be used simultaneously, while other jobs require thaf ttre tools be used sequentially. The entrepreneur needs to make his or her own decision as to which strategies should be
used and when. This may not be known in advance, and the entrepreneur might experiment
with different sategies to get an idea of which ones will work best for the current negotiation1: Buitd Trust and Share Information As has been discussed, the best nego'
tiated outcome likely arises from integration, where the parties find mutually beneficial
trade-offs. To find them requires both parties to have information about each other's underlying issues and the relative importance of those issues. Although providing information is
beneficial to integration, it can be detrimental to the entrepreneur in distributing benefits if
Strategy
the other party has kept hidden his or her own preferences (e.g., the other party is awae of
the entrepreneur's reservation price but the entrepreneur is unaware of the other party's
reservation price). Therefore, releasing information requires trust-a trelief that the other
party will not act opportunistically to the detriment of the entrepreneur.
Building trust is an important aspect of negotiation and is important for the ongoing relationship if an agreement is reached. One way to start this process is to share some information with the other party, such as the relative importance of a particular issue (not one's
reservation price). The other party may reciprocate by also sharing information, as part
of an incremental process of building trust. If possible, the entrepreneur should assess
the other party's trustworthiness (maybe by investigating the other party's previous relationships). If the other party appears to be untrustworthy, then the worst outcome for the
entrepreneur would be that an agteement is reached, because a relationship with an untrustworthy partner can be detrimental to the long-run performance of the firm-
CHAPTER
14
would prefer
to have a lower "up-front- fee for the technology and a greater
royuity percentage.
Both
parties perceive that they do better based on their expectations
of sares.similar license agreement would be mutually benehcial when the
entrepreneur has
-lessArisk
aversion than the other party-that is, when the entrepreneur
is more willing to
give up a certain gain from the up-front fee br a greater,
but uncertain, stream ofrevenue
frol an increased royalty payment. Alternatively, differences in time preference
could lead
to the preceding negotiated license agreement. The entrepreneur
prefers to accept less now
for more late whereas the licensee is prepared to pay more later,
when the income from
IN REVIEW
SUMMARY
434
PART
FROM FUNDING THE VENTURE TO LAUNCHING, GROWING, AND ENDING THE NEW VENTURE
skilled employees. Besides. the cost of an acquisition can be cheaper than other mechanisms for growth. However, history suggests that acquisitions have only a marginal
success record. Entrepreneurs seem to be overly <onfident about their ability to
achieve envisioned synergies, integrate organizational cultures, and retain key employees. After balancing the pros and cons of the acquisition, the entrepreneur needs to
determine a fair price for the business.
Mergers and leveraged buyouts are other ways that entrepreneurs can grow their
businesses. An essential skill for all these alternatives is the ability of the entrepreneur
to negotiate. Good negotiation involves two tasks. The first task involves determining
how the benefits of the relationship are going to be distributed between the parties.
The second task is exploring the mutual benefits that can be gained f rom the relationship. To negotiate in a way that maximizes benefits requires the entrepreneur to use
information about one's own preferences and those of the other party to create an
outcome that is mutually beneficial. This requires an initial assessment of oneself and
the other party and the use of strategies to elicit more information during the negotiation interactions to better inform those initial assessments. To these ends, this chapter
offered four important assessments an entrepreneur should make and four strategies
RESEARCH TASKS
1. Find information about three joint ventures that were failures, and be prepared to
discuss the underlying reasons for the failure in each case.
2.
Search on the Internet for franchises for sale. Choose three. What commonalities are
there across the businesses and the information provided? Wht differences are
there? For one of these businesses, obtain all franchise information. For this business,
what are the benefits of being a franchisee rather than setting up an independent
business? What are all the associated costs of being a franchisee for this business?
3. Interview three franchisees to better understand ther relationship with the
f
ranchisor.
4.
5.
Find three reports of acquisitions that were unsuccessful. Why were these
acquisitions deemed unsuccessful?
ie
'l
2.
Being a franchisor seems to be a mechanism for growth, but what are the growth
prospects for entrepreneurs who are franchisees? lsn't the entrepreneur limited
in his or her ability to pursue all the differenttypes of growth strategies? ls being
a franchisee simply substituting one type of employment for another type of
employment? How can a franchisee grow his or her business(es)?
Recently the Chinese government has been encouraging foreign firms to enter
into joint venture relationships with local (Chinese) firms. What are the benefits
to the Chinese economy from these joint venture relationships? What are the
benefits to the local Chinese firm? What are the benefits to the foreign firm?
What is the impact of the joint venture on the foreign firm's domestic economy?
CHAPTER
14
435
3. ldentify
SELECTED READINGS
Bazerman, Max H.; and Jared R. curhan. (2ooo). Negotiatio.n.
Annuar Review
.1.
Psychology, vol. 51, no.
pp. 279_315.
of
Gulati, Ranjay; and Monca c. Higgins. (2003). which Ties Matter when?
The contingent Effects of Interorganizational Partnerships on IPO Success.
Strategic Management
lournal, vol. 24, no. 2, pp. 12745.
This paper investigates the contingent value of interorganizational
relationships at
the time of a young firm's initiar public offering (p. Resu/b show
that ties to
436
PART
FROMFUNDINGTHEVENTURETOLAUNCHING.GROWING.ANDENOINGTHENEWVENTURE
Holmberg, Stevan R.; and Kathryn Boe Morgan. (2003). Franchise Turnover and Failure:
New Research and Perspectives. Journal of Businessventuring, vol. 18, no. 3, pp. 403-19.
This paper's new franchise failure concept reconcles many prio seemingly inconsistent study results based largely on franchisors' suveyl Overall franchisee turnover
rates are significant and appear to have increased over time.
Katila, Ritta; Jeff Rosenberger; and Kathleen Eisenhardt. (2008). Swimming with
Sharks: Technology Ventures, Defense Mechanisms and Corporate Relationships. Adminstrative Science Quarterly, vol. 53. no. 2, pp. 29r-332-
own
Kenis, Patrick; and David Knoke. (2002). How Organizational Field Networks 5hape
Interorganizational Tie-Formaton Rates. Academy of Management Reviey vol.27'
no.2, pp.275-94.
The authors investigate the impact of communietion in field-level nelvvorks on rates
of formation of interorganizational collaborative fiet such as strategic alliances and
joint ventures.
Marino,Louis;KarenStrandholm;KevinH.Steensma;andMarkK'Weaver'(2002)'The
Moderating Effect of National Culture on the Relationship between Entrepreneurial
Orientatio and Strategic Alliance Portfolio Extensiveness. Entrepreneurship: Theory &
Practice, vol.26, no. 4, PP. 145-61.
This article examines the moderating effect of national culture on the relationship
between entrepreneuria! orientation and strategc alliance portfolio exfensiveness.
Michaef, Steven C. (2003). First Mover Advantage through Franchising. Journal of Business Venturing, vol. 18, no. 1, pp. 61-81.
program.
02). Firm Resources as ModeraChen
Strategic Alliances in Semicontors of the Relationship betw
l. 45. no. 3, pp' 52746'
ps.
Academy of
ductor Start-U
resource-rich firms access
markets,
The results of this study indicate that, in volatile
firms are /ess lkely to
resource-poor
whereas
alliances
through
resources
external
do so. However, in relatively stable markets, this relatonshp reverses, and resourceDoor firms become more active in alliance formation'
pearce . John A.; and Louise Hatfield. (2002). Performance Effects of Alternative Joint
Venture Resource Responsibility Structures. Journal of Business Venturing, vol. 17, no. 4'
pp.343-65.
CHAPTER
14
ACCESSINGRESOURCESFORGROWTHFROM EXTERNALSOURCES
437
l, pp.
193-212.
END NOTES
1.
2.
8'
9.
pp. 86-93.
and T. J. Nanteil,
"corporate combinations and common Stock Returns: The case of
Joint
Ventures," Journal of Finance 40 (June 19g5). pp.519_36.
10. For a discussion of some different types of joint ventures, see R. M.
cyert,
"Estabf ishing university-lndustry Joint Ventures.,' Research
Management2S
(January-February r 985), pp- 27-28; F. K. Berrew, "The
Joint veniurer-a way
into Foreign Markets.', Harvard Business Review (July_August lfiga), pp.
ag9
and 54; and Kathryn Rudie Harriga n, strategies for iointentures (Lexington,
MA: Lexington Books, 19g5).
11. Semicond uctor Research corporation, www-src.orglmember/a
bouvsrc.asp.
12. Max H. Bazerman and Margaret A. Neare, rttegotiiting Rationaily (New york:
Free Press. 1 992).
13. tbid.
&