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Entrepreneurship ­ MGT602
VU
Lesson 44
NEW VENTURE EXPANSION STRATEGIES AND ISSUES (Continued....)
LEARNING OBJECTIVES
1.
To explain the methods for expanding the venture.
2.
To discuss the types of joint ventures and their uses.
3.
To discuss the concepts of acquisitions and mergers.
4.
To discuss the appropriateness and uses of leveraged buyouts.
5.
To discuss the different types of franchises.
6.
To identify the steps in evaluating a franchise opportunity.
DISADVANTAGES OF AN ACQUISITION
Marginal success record
Most ventures for sale have an erratic, or even unprofitable, record. It is important to review
the records and meet important constituents to assess the future potential.
Overconfidence in ability-Even though the entrepreneur brings new ideas, the venture may never
be successful for reasons not possible to resolve
Key employee loss
Often when a business changes hands key employees also leave. In a service business, it is
difficult to separate the actual service from the person who performs it. Incentives can
sometimes be used to assure that key employees will remain with the business.
Overvalued
If the entrepreneur has to pay too much for a business, the return on investment will not be
acceptable. The entrepreneur will need to establish a reasonable payback to justify the in-
vestment.
DETERMINING THE PRICE FOR AN ACQUISITION
Some of the key factors used in determining price for an acquisition are assets, owner's equity, earnings,
stock value, customer base, personnel and image. The price paid should provide the opportunity to get a
reasonable payback and good return on the investment.
Valuation Approaches
Ratios measuring profitability, activity, and liquidity can also be helpful in evaluation. Using the
asset valuation method, the entrepreneur values the underlying worth of the business based on its
assets.
a.
The figure obtained using book value should be only a starting point, as it
reflects the accounting practices of the company.
b.
In adjusted book value the stated book value is adjusted to reflect the actual
market value.
c.
Another method is to determine the amount that could be realized if the
assets were sold or liquidated.
d.
The final method is the replacement value-the current cost of replacing the
tangible assets.
Another way of evaluating a firm is to calculate the prospective cash flow from the business.
a.
Positive cash flow is cash received from the operation of the business.
b.
A negative cash flow, signifying the company is losing money, can have tax
advantages.
c.
Final cash flow value, the terminal value, is a source of cash when the
entrepreneur sells the business.
Earnings valuation capitalizes earnings of a company by multiplying earnings by the appropriate
factor (the price earnings multiple.)
a.
The question of earnings involves determining the appropriate earnings
period as well as the type of earnings.
b.
The earnings period can be either historical earnings or future earnings.
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Entrepreneurship ­ MGT602
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c.
Earnings before interest and taxes (EBIT) are the most frequently used.
d.
It is appropriate to select a price earnings multiple of a publicly traded stock
similar to the company being evaluated.
The valuation of a business is important in determining the feasibility of the acquisition.
SYNERGY
Synergy is "the whole is greater than the sum of the parts." With reference to the venture synergy refers to
the phenomenon in which two or more discrete influences or organizations acting together create
an effect greater than that predicted by knowing only the separate effects of the individual
organizations.
An acquisition should positively impact the bottom line.
Lack of synergy is a frequent cause of the acquisition failing to meet goals. Evaluation should
consider the upside potential, downside risks, and vulnerability to changes in markets and
technology. Some of the warning signs include poor corporate communications, poorly
prepared financial statements, and few new products.
The evaluation process begins with financial analysis.
Past operating results indicate the potential for future performance. Areas of weakness, such as
too much leverage, should be carefully evaluated.
In considering a firm's product lines study the past, present, and future.
The life cycle and present market share of each of the present products should be evaluated.
Also consider the compatibility of the firm's product lines. A method for evaluating the
product line is the S or life-cycle curve plotting sales and margins for each product over time.
The future of the firm's products and market position is affected by its research and
development.
In addition to the absolute dollar amount of R&D spending, it is important to determine
whether expenditures are directed by the firm's long-range plans. The output and success of
new products developed should be compared with the expenditures.
The entrepreneur should evaluate the firm's entire marketing program and capabilities.
Care should be taken in evaluating the established distribution system, sales force, and
manufacturer's representatives. The entrepreneur can also gain insight by look at the
company's marketing research efforts.
The nature of the manufacturing process is important in deciding whether to acquire a
particular firm.
The entrepreneur should rate the management and key personnel of the candidate firm.
Specific Valuation Method
Step 1: Compound the current revenue level forward to yield a revenue level at time of liquidity.
Step 2: Multiply the future revenue level times the expected after-tax profit margin to produce an
expected earnings level.
Step 3: Multiply the estimated earnings level at time of liquidity times the expected price/earnings
ratio to give a future market valuation.
Step 4: Calculate the present value factor.
Step 5: Divide the future company value by the present value factor to give a present value.
Step 6: Divide the required capital by the present company value to obtain a minimum ownership
for the investment required.
Structuring the Deal
The deal structure involves the parties, the assets, the payment form, and the timing of the payment.
There are two means of acquisitions.
The entrepreneur may directly purchase the firm's entire stock using funds from an outside lender.
Another option is a bootstrap purchase, acquiring a small amount of the firm for cash then pur-
chasing the remainder by a long-term note.
Locating Acquisition Candidates
There are professional business brokers, operating similarly to a real estate broker that represents the seller.
Accountants, attorneys, bankers, business associates, and consultants may be aware of good candidates.
It is also possible to find opportunities in the classified sections of the newspaper or trade magazine.
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Analyzing Candidates
The entrepreneur should gather as much information as possible, read it carefully, consult with advisors,
consider the situation, and then make a constructive decision. A profile containing acquisition criteria and
prospect data can guide initial screening. Once the prospect passes the initial checklist, more rigorous
analysis can evaluate the acquisition.
MERGERS
A merger is a transaction involving two or more companies in which only one company survives.
Acquisitions are so similar to mergers, that the terms are often used interchangeably. A key concern in any
merger or acquisition is the legality of the purchase. The Department of Justice frequently issues guidelines
for horizontal, vertical, and conglomerate mergers. Merger motivations range from survival to protection to
diversification to growth. A merger requires sound planning by the entrepreneur. Merger objectives must
be spelled out with the resulting gains for the owners of both companies delineated.
The entrepreneur must evaluate the other company's management and resources to ensure that the weak-
nesses of one do not compound those of the other. The entrepreneur should establish a climate of mutual
trust. The same methods for valuing the entrepreneur's company can be used to determine the value of a
merger candidate. The process involves looking at the synergistic product/market position, the new market
position, and undervalued financial strength. A common procedure is to estimate the present value of
discounted cash flows and the expected after-tax earnings attributable to the merger.
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Table of Contents:
  1. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:DEFINITION OF ENTREPRENEUR
  2. THE NATURE AND IMPORTANCE OF ENTREPRENEURSHIP:Possibility of New Venture Formation
  3. ENTREPRENEURIAL PROCESS/START UPS:GOVERNMENT AS AN INNOVATOR
  4. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND:ENTREPRENEURIAL PROCESS
  5. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…)
  6. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):CLIMATE FOR ENTREPRENEURSHIP
  7. THE ENTREPRENEURIAL AND ENTREPRENEURIAL MIND (continued…):PROBLEMS AND SUCCESSFUL EFFORTS
  8. THE INDIVIDUAL ENTREPRENEUR:ENTREPRENEURIAL BACKGROUND AND CHARACTERISTICS
  9. THE INDIVIDUAL ENTREPRENEUR (continued…):Personal Values, Work History, MOTIVATION
  10. THE INDIVIDUAL ENTREPRENEUR (continued…):ROLE MODELS AND SUPPORT SYSTEMS
  11. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES:INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES, Minority interests
  12. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):DIRECT FOREIGN INVESTMENT
  13. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):BARRIERS TO INTERNATIONAL TRADE
  14. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):ENTREPRENEURIAL PARTNERING
  15. INTERNATIONAL ENTREPRENEURIAL OPPORTUNITIES (continued…):SOURCES OF NEW IDEAS
  16. CREATIVITY AND THE BUSINESS IDEA:METHODS OF GENERATING NEW IDEAS, CREATIVE PROBLEM SOLVING
  17. CREATIVITY AND THE BUSINESS IDEA:PRODUCT PLANNING AND DEVELOPMENT PROCESS
  18. LEGAL ISSUES FOR THE ENTREPRENEUR:NEED FOR A LAWYER, PATENTS
  19. LEGAL ISSUES FOR THE ENTREPRENEUR:TRADEMARKS, LICENSING
  20. LEGAL ISSUES FOR THE ENTREPRENEURS:PRODUCT SAFETY AND LIABILITY, INSURANCE
  21. CREATING AND STARTING THE VENTURE:WHAT IS THE BUSINESS PLAN, PRESENTING THE PLAN
  22. CREATING AND STARTING THE VENTURE (Continued….):WRITING THE BUSINESS PLAN
  23. CREATING AND STARTING THE VENTURE (Continued….):
  24. CREATING AND STARTING THE VENTURE (Continued….):WHY SOME BUSINESS PLANS FAIL, MARKETING PLAN
  25. THE MARKETING PLAN:MARKET RESEARCH FOR THE NEW VENTURE
  26. THE MARKETING MIX:STEPS IN PREPARING THE MARKETING PLAN
  27. THE ORGANIZATIONAL PLAN:DEVELOPING THE MANAGEMENT TEAM, LEGAL FORMS OF BUSINESS
  28. THE ORGANIZATIONAL PLAN (Continued….)
  29. THE ORGANIZATIONAL PLAN (Continued….):THE LIMITED LIABILITY COMPANY
  30. THE FINANCIAL PLAN:OPERATING AND CAPITAL BUDGETS
  31. THE FINANCIAL PLAN (Continued….):PRO FORMA INCOME STATEMENTS, PRO FORMA CASH FLOW
  32. PRO FORMA SOURCES AND USES OF FUNDS:PERSONAL FUNDS, FAMILY AND FRIENDS
  33. PRO FORMA SOURCES AND USES OF FUNDS:COMMERCIAL BANKS
  34. BANK LENDING DECISIONS:SMALL BUSINESS ADMINISTRATION LOANS
  35. SOURCES OF CAPITAL:GOVERNMENT GRANTS
  36. SOURCES OF CAPITAL:PRIVATE PLACEMENT, BOOTSTRAP FINANCING
  37. CAPITAL SOURCES IN PAKISTAN:PROVINCIAL LEVEL INSTITUTIONS, FINANCIAL INSTITUTIONS
  38. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  39. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  40. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  41. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  42. PREPARING FOR THE NEW VENTURE LAUNCH: EARLY MANAGEMENT DECISIONS (Continued….)
  43. NEW VENTURE EXPANSION STRATEGIES AND ISSUES:JOINT VENTURES, ACQUISITIONS
  44. NEW VENTURE EXPANSION STRATEGIES AND ISSUES (Continued….):DETERMINING THE PRICE FOR AN ACQUISITION
  45. ENTREPRENEURSHIP & PAKISTAN:GENDER DEVELOPMENT STATUS WOMAN AS AN ENTREPRENEUR IN PAKISTAN