A Presentation on

Alternatives to Mergers and Acquisitions

(Joint Ventures & Franchising)
Presented By:

Ahmad Zeeshan
Ahsan Imtiaz Siddiqi
Sumble Munir
Ayman Ata Muhammad
Presented To:
Muhammad Sohail Khalil

26 October, 2011
 GROWTH STRATEGY ALTERNATIVE
JOINT VENTURES
Joint venture is a legal structure available as an
acquisition alternative for today's small and growing
companies.
Joint ventures are typically structured as partnership or a
newly formed co-owned corporation where 2 or more
parties are brought together to achieve a series of
strategic and financial objectives. (short or long term)
Careful thought should be given by the companies who
are willing to explore this strategy in terms of selecting a
partner they are looking for and what resources they
would be contributing.
 GROWTH STRATEGY ALTERNATIVE
JOINT VENTURES
Joint Ventures, Strategic Partnering, Cross Licensing
and Technology, transfer agreements are all strategies
designed;

To obtain

1. Direct capital infusion in exchange for equity and intellectual

property or distribution rights.
2. A capital substitute where the resources which would
otherwise be obtained with the capital are obtained through
joint venturing
3. A shift of the burden and cost of development (through
licensing) in exchange for a potentially more limited upside.
 GROWTH STRATEGY ALTERNATIVE
JOINT VENTURES
In searching for a joint venture partner extensive due
diligence is required
A list of key objectives and goals should be developed
and comparison should be done with those of the final
candidates, understand the corporate culture and
decision making process within each company.

Over here following issues are to be considered

1. How does it fit with your own processes?

2. What about each perspective partner's previous
experiences and track record with other joint venture
relationships?
 GROWTH STRATEGY ALTERNATIVE
JOINT VENTURES
3. Why did these previous relationships succeed or fail?

In many cases the smaller companies looking for joint

venture partners windup selecting a much larger goliath
which offers a large number of financial and non financial
resources which will allow the smaller company to achieve
its growth plans.
The motivating factors under these circumstances for the
larger company is to get access and distribution rights to
new technologies products and services.
In turn the larger company offers access to pools of capital,
research and development, personal distribution channels
and general contracts which the small company desperately
needs.
 GROWTH STRATEGY ALTERNATIVE
JOINT VENTURES
But careful proceeds are required
Be sensitive to the politics, red tape and different management
practices that may be in place at a larger company that will be
foreign to many smaller firms.

4. WHY CONSIDER A JOINT VENTURE OR STRATEGIC

ALLIANCE?

Develop a new market( domestic/international)

Develop a new product
Develop/ share technology
Combine complementary technology
Pool resources to develop a production/distribution facility
 GROWTH STRATEGY ALTERNATIVE
JOINT VENTURES
Acquire capital
Execute a government contract
Access a distribution network or sales/marketing
capability.
Each strategy has its respective advantages and
disadvantages
The capital rich joint venture partners brings the necessary
financial resources to achieve companies objectives but
cannot contribute experience to the industry
On the other hand the larger competitors may offer certain
operational and distribution synergies and economies of
scale but may seek greater control over product
corporations management decision.
 Difference Between Joint
Ventures & Strategic Alliance
 Joint Ventures

Joint ventures are structured either at:

1. Horizontal distribution
2. Vertical distribution

Horizontal Joint Venture is almost alternative

to merger, where two companies are operating
at the same level at distribution
Vertical Joint Venture is where companies and
its suppliers or distributors enter into a deal with
each other.
 Documentation Involved

Clearly drafted documentation is required for

joint ventures, which will involve

Share holder agreement

The memorandum of article of association of the

joint venture companies
Following strategic issues can be dealt before entering
into a Joint Venture

Legal names of the parties should be clearly stated along with their
purpose

The status of the joint venture should be clear

Standard representation and warranty from each venturer should be

taken, that they are satisfied with the due diligence process

Capital and property contribution of each joint venturer should be

clear, and its detailed description of profit and loss distribution
should be clearly defined

Deadlock is a contractual clause in share holder's agreement, which

determines how much disagreement on key issues will be resolved
by management of the enterprise
Following strategic issues can be dealt before entering
into Joint Venture

Establishment of mutually agreed policy regarding

transferability of shares should be designed

If joint venture is to set up a new business they must

take the consent of their employees and share holders

If the minority share holders have more then 25% voting

capital in the joint venture company, they will have power
to block any extra ordinary resolution, covering a limited
section such as reduced share capital
 Cross Boarder Joint Ventures

If one or more of the participants or any part of the joint

venture business is based outside the country has to
form a vehicle company in an overseas jurisdiction.

The difference in legal tradition and rules between

common law countries can give rise to difficulties which
venture may be characterized differently in several
jurisdictions

Venture should seek legal advice from professionals

qualified in the relevant overseas jurisdiction.
 Termination

It is important to identify at the outset any events which it

is agreed will terminate the joint venture
Events which terminate the joint venture commonly
include the following
The expiry of the definite term;
Insolvency of either party
Change of control of one of the party
The violation of terms in the agreement by any party.
 Franchise

A license that describes the relationship

between the franchisor and franchisee
including use of trademarks, fees, support and
control
 Common Franchise terms
Franchise agreement the legal, written contract between the
franchisor and franchisee which tells each party what each is
supposed to do.
Franchisee the person or company that gets the right from the
franchisor to do business under the franchisors trademark or trade
name
Franchisor the person or company that grants the franchisee the
right to do business under their trademark or trade name
Trademark the franchisors identifying marks, brand name and
logo that are licensed to the franchisee
Royalty the regular payment made by the franchisee to the
franchisor, usually based on a percentage of the franchisees gross
sales
UFOC the Uniform Franchise Offering Circular, UFOC, is one
format for the disclosure document which provides information
about the franchisor and franchise system to the prospective
franchisee
 What Is a Franchise?

A franchise is the agreement or license between two

legally independent parties which gives:

A person or group of people (franchisee) the right to

market a product or service using the trademark or
trade name of another business (franchisor)
The franchisee the right to market a product or
service using the operating methods of the franchisor
The franchisee the obligation to pay the franchisor
fees for these rights
The franchisor the obligation to provide rights and
support to franchisees
 Franchise agreement

Franchisor Franchisee
Owns trademark or Uses trademark
name Expands business
Provide support like with franchisors
training, advertising & support
training. Pays fees
Receives fee
 Types of Franchises

Product distribution franchises simply sell the franchisors

products and are supplier-dealer relationships. In product
distribution franchising, the franchisor licenses its trademark
and logo to the franchisees but typically does not provide them
with an entire system for running their business. The industries
where you most often find this type of franchising are soft drink
distributors, automobile dealers and gas stations.
Examples; Some familiar product distribution franchises include:
Pepsi
Exxon
Ford Motor Company
 Types of Franchises
Business format franchises, on the other hand, not only
use a franchisors product, service and trademark, but also
the complete method to conduct the business itself, such
as the marketing plan and operations manuals. Business
format franchises are the most common type of franchise.

USA Today reported that the 10 most popular franchising

opportunities are in these industries:
fast food retail
service automotive
restaurants maintenance
building and construction retailfood
business services lodging
 Types of Franchise Arrangements

Single-unit (direct-unit) franchise

Multi-unit franchise:
- Area Development
- Master Franchise (sub-franchising)
 Types of Franchise Arrangements
A single-unit (direct-unit) franchise is an agreement where the
franchisor grants a franchisee the rights to open and operate ONE
franchise unit. This is the simplest and most common type of
franchise. It is possible, however, for a franchisee to purchase
additional single-unit franchises once the original franchise unit
begins to prosper. This is then considered a multiple, single-unit
relationship.

A multi-unit franchise is an agreement where the franchisor grants

a franchisee the rights to open and operate MORE THAN ONE unit.
There are two ways a multi-unit franchise can be achieved:
an area development franchise or
a master franchise.
 Types of Franchise Arrangements

In area development franchise, a franchisee has the right to open

more than one unit during a specific time, within a specified area.
For example, a franchisee may agree to open 5 units over a five
year period in a specified territory.

A master franchise agreement gives the franchisee more rights

than an area development agreement. In addition to having the right
and obligation to open and operate a certain number of units in a
defined area, the master franchisee also has the right to sell
franchises to other people within the territory, known as sub-
franchises. Therefore, the master franchisee takes over many of the
tasks, duties and benefits of the franchisor, such as providing
support and training, as well as receiving fees and royalties.
 Advantages & Disadvantages
of Franchising
Advantages

Owning a franchise allows you to go into business for yourself, but

not by yourself.
A franchise provides franchisees with a certain level of
independence where they can operate their business.
A franchise provides an established product or service which already
enjoys widespread brand name recognition. This gives the
franchisee the benefits of customer awareness which would
ordinarily take years to establish.
A franchise increases your chances of business success because
you are associating with proven products and methods.
Franchises may offer consumers the attraction of a certain level of
quality and consistency because it is mandated by the franchise
agreement
 Advantages & Disadvantages
of Franchising
Disadvantages

The franchisee is not completely independent. Franchisees are required to

operate their businesses according to the procedures and restrictions set
forth by the franchisor in the franchise agreement. These restrictions usually
include the products or services which can be offered, pricing and
geographic territory. For some people, this is the most serious disadvantage
to becoming a franchisee.
In addition to the initial franchise fee, franchisees must pay ongoing royalties
and advertising fees.
Franchisees must be careful to balance restrictions and support provided by
the franchisor with their own ability to manage their business.
A damaged, system-wide image can result if other franchisees are
performing poorly or the franchisor runs into an unforeseen problem.
The term (duration) of a franchise agreement is usually limited and the
franchisee may have little or no say about the terms of a termination.
 Beginning Your Search

WHAT ARE YOUR OPTIONS WHEN YOU BEGIN

YOUR BUSINESS?

Start a new business

Buy a new franchise
Buy an existing franchise
 Starting A New Business

Advantages Disadvantages
+ usually lower start-up cost requires more time
and energy
+ independence and creative freedom high risk of failure
+ freedom with location and procedures takes longer to
become profitable
+ no inherited problems from financing may be more
an existing business difficult to obtain
 Buying A New Franchise
Advantages
reduced risk of failure
proven methods and products
start-up assistance
collective purchasing power
research and development
association and synergy with other
franchisees
easier to obtain financing
Disadvantages
costs more (fees,
royalties, supplies)
smaller profit margins
lack of independence and
freedom
a franchisors problem may
become your problem
 Buying An Existing Franchise

Advantages Disadvantages
the business is already up Tangible limitations:
and running
risk and uncertainty may be reduced design problems
the basic infrastructure is in place: location problems
established location merchandise problems
existing customers and reputation Intangible limitations:
employees customer or employee ill will
vendors pricing problems
policies and procedures inadequate procedures
cash flow lease problems
no start-up period- quicker profitability potentially higher costs to buy

easier to obtain financing legal liability in inheriting

lawsuits
 Some General Guidelines

What Business to start?

What are your experiences, skills and market know-how
What and Who are your target market? Customers and
Vendors
Make Profit potential your most important consideration
In order to Start a Business You Have to have Money!
In order to Stay in Business You Have to make Money!
Determine Your Working Capital Needs, Source of
Funding etc
Thank you