Lecture 18

Franchising Summary
Franchising is a business model where independent owners (franchisees) pay fees to a parent
company (franchiser) to use its brand, products, and business system. The franchisee benefits
from experience, management training, brand recognition, and standardized operations.
Benefits of Franchising:
 Management Support: Training for both startup and ongoing operations.
 Brand Appeal: Use of a recognized name, making the business more attractive.
 Quality Control: Consistent product/service standards.
 Advertising: National marketing campaigns.
 Financial Help: Some franchisers offer financial assistance.
 Proven System: A tested business model.
 Centralized Purchasing: Better prices on supplies.
 Territorial Protection: Reduced competition within a defined area.
 Increased Success: Higher chances of success with a proven system.
Drawbacks of Franchising:
 Costs: High initial investment and ongoing royalties (1-11% of sales).
 Strict Guidelines: Franchisees must follow standard operations, limiting creativity.
 Suppliers: Only approved suppliers may be used.
 Limited Choices: Restrictions on product lines.
 Contract Issues: Fixed terms, often around 10 years, with potential for non-renewal.
 Training Problems: Some franchises provide inadequate training.
 Saturation: Too many franchises in one area may reduce profitability.
 Less Independence: Franchisees have less control over business decisions.
How to Buy a Franchise:
 Look for franchises with a strong concept, profitability, and solid training.
 Ensure it fits your budget and business goals.
 Make sure the franchise has a good relationship with existing franchisees.
Trends Shaping Franchising:
 Multiple-unit Franchising: Owning more than one franchise.
 International Opportunities: Expanding franchises globally.
 Nontraditional Locations: Smaller, unique business sites.
 Conversion Franchising: Turning independent businesses into franchises.
 Master Franchising: Owning the rights to sell franchises in a specific area.
 Piggybacking: Operating franchises in shared spaces.
In conclusion, franchising offers a pathway to business ownership with a proven model but
comes with certain costs and limitations. Understanding the benefits, drawbacks, and trends is
key to making a successful investment.
Franchising Summary

Franchising is a business model where independent owners (franchisees) pay fees to a parent company
(franchiser) to use its brand, products, and business system. The franchisee benefits from experience,
management training, brand recognition, and standardized operations.
Benefits of Franchising:

 Management Support: Training for both startup and ongoing operations.

 Brand Appeal: Use of a recognized name, making the business more attractive.

 Quality Control: Consistent product/service standards.

 Advertising: National marketing campaigns.

 Financial Help: Some franchisers offer financial assistance.

 Proven System: A tested business model.

 Centralized Purchasing: Better prices on supplies.

 Territorial Protection: Reduced competition within a defined area.

 Increased Success: Higher chances of success with a proven system.

Drawbacks of Franchising:

 Costs: High initial investment and ongoing royalties (1-11% of sales).

 Strict Guidelines: Franchisees must follow standard operations, limiting creativity.

 Suppliers: Only approved suppliers may be used.

 Limited Choices: Restrictions on product lines.

 Contract Issues: Fixed terms, often around 10 years, with potential for non-renewal.

 Training Problems: Some franchises provide inadequate training.

 Saturation: Too many franchises in one area may reduce profitability.

 Less Independence: Franchisees have less control over business decisions.

How to Buy a Franchise:

 Look for franchises with a strong concept, profitability, and solid training.

 Ensure it fits your budget and business goals.

 Make sure the franchise has a good relationship with existing franchisees.

Trends Shaping Franchising:

 Multiple-unit Franchising: Owning more than one franchise.

 Nontraditional Locations: Smaller, unique business sites.

 Conversion Franchising: Turning independent businesses into franchises.

 Master Franchising: Owning the rights to sell franchises in a specific area.

 Piggybacking: Operating franchises in shared spaces.

In conclusion, franchising offers a pathway to business ownership with a proven model but comes with
certain costs and limitations. Understanding the benefits, drawbacks, and trends is key to making a
successful investment.

Lecture 19

Franchising and Financial Planning Summary

Myths of Franchising:

1. Franchises never fail – Franchises can fail just like any business.

2. Lower startup costs – Franchise costs are often higher than advertised.

3. Bigger franchise = more success – Size doesn't guarantee success.

4. Improving the business system – Following the franchiser’s system is crucial; altering it can lead
to failure.

5. All franchises are the same – Different franchises have varying systems, costs, and
requirements.

6. Absentee ownership works – Most franchises require active management for success.

7. Anyone can succeed – Success depends on the individual’s skills and fit for the business.

8. Franchising is the cheapest option – Franchises can be expensive with fees and royalties.

9. Franchiser solves all problems – The franchiser provides support, but franchisees must manage
daily operations.

10. Full control after opening – Franchisees must operate within the franchiser's system.

Detecting Dishonest Franchisers:

 Claims of a “standard contract.”

 Failure to provide disclosure documents.

 Inadequate operations manuals.

 Promises of high earnings without proof.

 High franchisee turnover.

 Reluctance to share franchisee list.

 “Get rich quick” promises.

The Right Way to Buy a Franchise:

 Evaluate yourself – Assess personal strengths and weaknesses.

 Research the market – Understand the target market and competition.

 Consider options – Compare different franchise opportunities.

 Talk to existing franchisees – Gain insights on the franchise’s real-life operations.

 Ask tough questions – Inquire about earnings, terms, and support.

 Make an informed choice – Choose a franchise that aligns with personal and financial goals.

Importance of Financial Planning:

 Many entrepreneurs fail to track and analyze financial data, leading to business
mismanagement.

 One-third of entrepreneurs lack a financial plan, and only 11% use financial statements in
managerial planning.

 Financial planning is essential for business success and can be easy to implement.

Basic Financial Reports:

1. Balance Sheet – Shows a firm’s worth at a specific time.

o Assets: Items of value owned by the business.

o Liabilities: Financial obligations to creditors.

o Owner’s Equity: Capital invested by owners and accumulated profits.

2. Income Statement – Measures revenue vs. expenses over time to determine net income or loss.

3. Cash Flow Statement – Tracks the movement of cash in and out of the business.
 o Operating, Investment, and Financing Activities are all recorded.

Mistakes in Projected Financial Statements:

 “Conservative” assumptions without proper data.

 Lack of assumptions or scenario analysis.

 Top-down assumptions without considering market conditions.

 Not accounting for bad debts, loan payments, taxes, depreciation, or founder salary.

 No breakeven analysis.

Ratio Analysis:

 Ratio analysis simplifies financial data and helps compare businesses of different sizes.

 Only 27% of small business owners use ratios to manage their businesses effectively.

 Ratios serve as indicators of financial health and operational efficiency.

Advantages of Ratio Analysis:

 Simplifies complex financial statements.

 Allows comparison between businesses.

 Helps identify trends and key financial metrics.

 Assists in quick evaluations without needing to read all financial reports.

Key Ratios:

1. Liquidity Ratios – Measure the ability to meet short-term obligations:

o Current Ratio = Current Assets / Current Liabilities

o Quick Ratio = Quick Assets / Current Liabilities

2. Leverage Ratios – Measure a company’s debt levels:

o Debt Ratio = Total Debt / Total Assets

o Debt to Equity = Total Debt / Total Equity

o Times Interest Earned = EBIT / Total Interest Expense

3. Operating Ratios – Assess the effectiveness of resource use:

o Average Collection Period = Days in Period / Receivables Turnover Ratio

o Average Payable Period = Days in Period / Payables Turnover Ratio

o Net Sales to Total Assets = Net Sales / Total Assets

4. Profitability Ratios – Measure a company’s efficiency:

o Net Profit on Sales = Net Income / Net Sales

o Return on Assets = Net Income / Total Assets

o Return on Equity = Net Income / Owner’s Equity

Interpreting Ratios:

 Ratios offer comparisons and insights into financial health but should be evaluated in context.

 Identifying “red flags” helps determine potential issues and areas for improvement.

 Comparing ratios with industry standards helps measure performance.

Limitations of Ratio Analysis:

 Different companies operate in unique conditions, so comparisons may not always be accurate.

 Financial data is affected by estimates and assumptions.

 Ratios analyze past performance, while business owners need to focus on future decisions.

Breakeven Analysis:

 The breakeven point is when revenue equals expenses, with no profit or loss.

 It’s a key tool for determining the minimum sales required to stay in business or achieve specific
profit targets.

 Steps to Calculate Breakeven Point:

1. Identify fixed and variable expenses.

2. Calculate the contribution margin (1 - variable expenses/net sales).

3. Use the formula: Breakeven Point = Total Fixed Costs / Contribution Margin.

Breakeven Chart:
  The chart shows the relationship between sales volume, total expenses, and revenue to help
visualize breakeven points.

In conclusion, understanding financial planning, financial reports, and ratio analysis is essential for
franchise success. Avoid common mistakes in projections, use proper financial ratios for analysis, and
accurately determine breakeven points to ensure the business operates efficiently and remains
profitable.

Lecture 20

This material covers the critical aspects of capital for small businesses, focusing on the types of capital
required, sources of equity and debt financing, and the factors that influence capital raising. Here's a
breakdown of the key points:

Three Types of Capital

1. Fixed Capital: Used to purchase permanent or long-term assets like buildings, land, or
equipment.

2. Working Capital: Employed for day-to-day operations, including inventory, wages, bills, etc.

3. Growth Capital: Used for business expansion or changing the business direction.

Equity vs. Debt Capital

 Equity Capital:

o Represents the owner's personal investment and is often referred to as "risk capital."

o Does not need to be repaid with interest.

o Requires giving up ownership in the business.

 Debt Capital:

o Must be repaid with interest.

o Carries a liability on the company’s balance sheet.

o May be more challenging to secure for small businesses due to high-risk factors.

Sources of Equity Capital

 Personal Savings: The most common and primary source of initial capital.

 Friends and Family: Often the next option, but it comes with risks that could strain personal
relationships.

 Angels: Private investors who fund start-up companies in exchange for ownership equity.
  Partners: Individuals who invest capital, expertise, or skills in the business.

 Corporate Venture Capital: Large corporations that invest in start-ups and provide additional
resources like marketing or technical expertise.

 Venture Capital: Private firms investing in high-growth potential companies, typically at various
stages.

 Public Stock Offering: Raising capital by offering shares to the public, typically via an initial
public offering (IPO).

Sources of Debt Capital

 Short-Term Loans: These include commercial loans, lines of credit, and floor planning to cover
immediate needs.

 Long-Term Loans: These involve installment loans or contracts for more substantial
investments.

 Commercial Banks: Often the go-to for small business loans but may reject applications for
various reasons, such as insufficient collateral, weak business plans, or inadequate
creditworthiness.

 Other Lenders: Equipment suppliers, commercial finance companies, asset-based lenders, and
savings and loan associations.

The "Secrets" to Successful Financing

1. Choosing the Right Sources: The financing decisions will have long-term effects on the business.

2. Vast Information: The internet has a wealth of resources that can help find financing options.

3. Thorough Preparation: A strong, clear business plan is essential when approaching lenders and
investors.

4. Chemistry with Investors: Ensure that there is alignment between the entrepreneur and the
investors.

Layered Financing

 Layering involves securing capital from various sources to meet a business’s financial needs.
Entrepreneurs should explore multiple avenues for funding, combining equity and debt capital.

Venture Capital & Going Public

 Venture Capital: Typically a significant source of funding for businesses that are in the expansion
phase. It’s a competitive field with a low acceptance rate.
  IPO: An Initial Public Offering can be an effective way for companies to raise large sums of
capital but has its challenges like loss of control and public scrutiny.

Bank Loan Rejections and Remedies

 Common reasons for rejection include a lack of knowledge about the business, an unconvincing
business plan, insufficient collateral, and an unrealistic loan request. Entrepreneurs can improve
their chances by providing thorough documentation and clear financial plans.

Conclusion

Successfully securing capital is crucial for business growth and expansion. Entrepreneurs must be
resourceful, creative, and well-prepared to access the various sources of equity and debt capital that
best suit their business’s needs.

Let me know if you need any further elaboration on any of these concepts or have specific questions
related to capital raising!

Lecture 21

This lecture on E-Commerce explores key aspects of selling online, the factors entrepreneurs should
consider, and the myths to avoid when venturing into e-commerce. Here's a detailed summary:

Benefits of Selling on the Web:

 Increased Revenues & Profits: 72% of small online businesses report increased sales, with 65%
seeing higher profits.

 Global Reach: The ability to expand into global markets.

 24/7 Operation: Online businesses are always open, enabling customers to shop at any time.

 Improved Customer Service: The Web's interactive nature helps businesses engage with
customers more effectively.

 Cost Reduction: Many small businesses experience savings due to lower administrative costs.

 Business Growth: E-commerce enables quicker business expansion.

 Tracking Sales: Websites provide detailed metrics like conversion rates to track performance.

Despite these benefits, many small businesses still lack a web presence. Some reasons include
misconceptions about their product’s suitability for online sales or concerns over cost and time.

Factors to Consider Before Launching E-Commerce:

 Integrating the Web into your overall business strategy is crucial for success.
  Establishing a strong, lasting relationship with customers is even more important online.

 Ongoing investment in time, money, and talent is required to create a meaningful presence.

 Success must be measured continuously, as customer preferences change rapidly.

Assessing Your Company’s Online Potential:

Entrepreneurs should evaluate their product’s broad appeal, the potential for selling beyond local
markets, delivery feasibility, cost advantages, and the effectiveness of drawing customers to the site.

12 Myths of E-Commerce and How to Avoid Them:

1. Myth 1: Setting up a business online is easy and inexpensive.

o Reality: Initial investment is just the start; follow-up costs include redesigning websites,
increasing hardware, and expanding customer service.

2. Myth 2: If I launch a site, customers will come.

o Reality: Marketing and promotion are key; you need to actively drive traffic to your site.

3. Myth 3: Making money online is easy.

o Reality: Online retailers spend a significant portion of their revenue on marketing and
advertising.

4. Myth 4: Privacy isn't important.

o Reality: Privacy is a huge concern for consumers, and addressing it can increase sales.

5. Myth 5: Technology is the most important aspect.

o Reality: Strategy is just as important as technology.

6. Myth 6: A website is enough; no strategy is needed.

o Reality: A solid strategy is essential for success.

7. Myth 7: Customer service is not crucial online.

o Reality: Good service is vital, as poor service leads to abandoned shopping carts.

8. Myth 8: Flash enhances websites.

o Reality: Simple, user-friendly designs are more effective.

9. Myth 9: Only the homepage matters.

o Reality: Every part of your site needs attention and quality.

 Reality: Both online and offline sales have their place.

11. Myth 11: The retail sector holds the greatest opportunity in e-commerce.

 Reality: E-commerce opportunities are broad, and niche markets are also highly profitable.

12. Myth 12: It’s too late to get on the Web.

 Reality: There is always room for innovation and new entrants.

Strategies for E-Success:

 Focus on a market niche and create a community.

 Attract customers by offering freebies and promoting your site both online and offline.

 Establish credibility through your website, forming strategic alliances, and optimizing search
engine results.

Designing a Killer Website:

 Understand your target customers and give them what they want.

 Choose a short, memorable domain name that reflects your business.

 Ensure your website is easy to navigate and has a simple, efficient checkout process.

 Provide clear product information, secure transaction assurances, and shipping details.

 Regularly update and test your website for smooth operation.

 Hire professionals if necessary to design the site.

Entrepreneurs in Action – Bill Gates:

Bill Gates emphasizes hard work, accountability, and perseverance. He advises that:

 Life isn’t always fair, and self-esteem comes through accomplishments, not just accolades.

 The world expects you to prove yourself through hard work and learning from mistakes.

 Flipping burgers is not beneath anyone’s dignity but an opportunity to gain experience.

 Life is not divided into semesters, and it doesn’t stop for summers; work towards goals
constantly.

 Real life is not like television—actions speak louder than words.

Lecture 22