Assessing A New Venture's Financial Strength and Viability: Bruce R. Barringer R. Duane Ireland

Chapter 8
Assessing a New
Venture’s Financial
Strength and
Viability
Bruce R. Barringer
R. Duane Ireland
©2010 Pearson Education 8-1
Chapter Objectives
1 of 2
1. Explain the two functions of the financial

management of a firm.
2. Identify the four main financial objectives of
entrepreneurial ventures.
3. Explain the difference between historical and pro
forma financial statements.
4. Explain the purpose of an income statement.
5. Explain the purpose of a balance sheet.

Chapter Objectives
2 of 2
6. Explain the purpose of a statement of cash flows.

7. Discuss how financial ratios are used to analyze and
interpret a firm’s financial statements.
8. Discuss the role of forecasts in projecting a firm's future
income and expenses.
9. Explain what a completely new firm bases its forecasts
on.
10. Explain what is meant by the term percent of sales
method.

Financial Management
1 of 2
• Financial Management
– Financial management deals with two things:
• raising money and
• managing a company’s finances in a way that achieves the highest
rate of return

Financial Management
2 of 2
The financial management of a firm deals with questions

such as the following on an ongoing basis:
• How are we doing? Are we making or losing money?

• How much cash do we have on hand?
• Do we have enough cash to meet our short-term obligations?
• How efficiently are we utilizing our assets?
• How does our growth and net profits compare to those of our industry peers?
• Where will the funds we need for capital improvements come from?
• Are there ways we can partner with other firms to share risk and reduce the
amount of cash we need?
• Overall, are we in good shape financially?
Financial Objectives of a Firm
1 of 3

2 of 3
• Profitability
– Is the ability to earn a profit.
• Many start-ups are not profitable during their first one to three years
– training employees and building their brands.
• However, a firm must become profitable to remain viable and provide
a return to its owners.
• Liquidity
– Is a company’s ability to meet its short-term financial
obligations.
• Even if a firm is profitable, it is often a challenge to keep enough
money in the bank to meet its routine obligations in a timely manner.

3 of 3
• Efficiency
– Is how productively a firm utilizes its assets relative to its
revenue and its profits.
• Southwest Airlines, for example, uses its assets very productively.
Its turnaround time, or the time its airplanes sit on the ground while
they are being unloaded and reloaded, is the lowest in the airline
industry.
• Stability
– Is the strength and vigor of the firm’s overall financial
posture.
• For a firm to be stable, it must not only earn a profit and remain
liquid but also keep its debt in check.

The Process of Financial Management
1 of 4
• Importance of Financial Statements

– To assess whether its financial objectives are being met,
firms rely heavily on analysis of financial statements.
• A financial statement is a written report that quantitatively
describes a firm’s financial health.
• The income statement, the balance sheet, and the statement of cash
flows are the financial statements entrepreneurs use most
commonly.
• Forecasts
– Are an estimate of a firm’s future income and expenses,
based on past performance, its current circumstances, and
its future plans.

2 of 4
• Forecasts (continued)
– New ventures typically base their forecasts on an estimate
of sales and then on industry averages or the experiences of
similar start-ups regarding the cost of goods sold and other
expenses.
• Budgets
– Are itemized forecasts of a company’s income, expenses,
and capital needs and are also an important tool for
financial planning and control.

3 of 4
• Financial Ratios
– Depict relationships between items on a firm’s financial
statements.
– An analysis of its financial ratios helps a firm determine
whether it is meeting its financial objectives and how it
stakes up against industry peers.
• Importance of Financial Management
– Many experienced entrepreneurs stress the importance of
keeping on top of the financial management of the firm.

4 of 4

Financial Statements
• Historical Financial Statements

– Reflect past performance and are usually prepared on a
quarterly and annual basis.
• Publicly traded firms are required by the SEC to prepare financial
statements and make them available to the public.
• Pro Forms Financial Statements
– Are projections for future periods based on forecasts and
are typically completed for two to three years in the future.
• Pro forma financial statements are strictly planning tools and are
not required by the SEC.

Importance of Keeping Good Records
The first step towards prudent

financial management is
keeping good records.

New Venture Fitness Drinks
• New Venture Fitness Drinks

– To illustrate how financial statements are prepared, we
used New Venture Fitness Drinks, the fictitious sports
drink company introduced in Chapter 3.
• New Venture Fitness Drinks has been in business for five years.
• Targeting sports enthusiasts, the company sells a line of nutritional
fitness drinks.
• The company’s strategy is to place small restaurants, similar to
smoothie restaurants, near large outdoor sports complexes.
• The company is profitable and is growing at a rate of 25% per year.

Historical Financial Statements
Three types of historical financial statements
Financial Statement Purpose
Reflects the results of the operations of a firm over a

Income Statement specified period of time. It records all the revenues and
expenses for the given period and shows whether the
firm is making a profit or is experience a loss.
Balance Sheet Is a snapshot of a company’s assets, liabilities, and

owners’ equity at a specific point in time.
Summarizes the changes in a firm’s cash position for

Statement of cash flows a specified period of time and details why the
changes occurred.

Historical Income Statements

Historical Balance Sheets
1 of 2

Historical Balance Sheets
2 of 2
Liabilities and Shareholder’s Equity

Historical Statement of Cash Flows

Ratio Analysis
• Ratio Analysis
– The most practical way to interpret or make sense of a
firm’s historical financial statements is through ratio
analysis, as shown in the next slide.
• Comparing a Firm’s Financial Results to Industry
Norms
– Comparing a firm’s financial results to industry norms
helps a firm determine how it stakes up against its
competitors and if there are any financial “red flags”
requiring attention.

Historical Ratio Analysis

Forecasts
1 of 4
• Forecasts
– The analysis of a firm’s historical financial statements are
followed by the preparation of forecasts.
– Forecasts are predictions of a firm’s future sales, expenses,
income, and capital expenditures.
• A firm’s forecasts provide the basis for its pro forma financial
statements.
• A well-developed set of pro forma financial statements helps a firm
create accurate budgets, build financial plans, and manage its
finances in a proactive rather than a reactive manner.

Forecasts
2 of 4
• Sales Forecast
– A sales forecast is projection of a firm’s sales for a
specified period (such as a year).
– It is the first forecast developed and is the basis for most of
the other forecasts.
• A sales forecast for a new firm is based on a good-faith estimate of
sales and on industry averages or the experiences of similar start-
ups.
• A sales forecast for an existing firm is based on (1) its record of
past sales, (2) its current production capacity and product demand,
and (3) any factors that will affect its future product capacity and
product demand.

Forecasts
3 of 4
Historical and Forecasted Annual Sales for New Venture Fitness Drinks

Forecasts
4 of 4
• Forecast of Costs of Sales and Other Items

– Once a firm has completed its sales forecast, it must
forecast its cost of sales (or cost of goods sold) and the
other items on its income statement.
– The most common way to do this is to use the percentage-
of-sales method, which is a method for expressing each
expense item as a percentage of sales.

Percentage of Sales Method

Pro Forma Financial Statements
• Pro Forma Financial Statements

– A firm’s pro forma financial statements are similar to its
historical financial statements except that they look
forward rather than track the past.
– The preparation of pro form financial statements helps a
firm rethink its strategies and make adjustments if
necessary.
– The preparation of pro forma financials is also necessary if
a firm is seeking funding or financing.

Types of Pro Forma Financial Statements
Financial Statement Purpose
Pro Forma Income Shows the projected results of the operations of a

Statement firm over a specific period.
Shows a projected snapshot of a company’s

Pro Forma Balance assets, liabilities, and owner’s equity at a specific
Sheet point in time.
Pro Forma Statement Shows the projected flow of cash into and out of a
of Cash flows company for a specific period.

Pro Forma Income Statements

Pro Forma Balance Sheets
1 of 2

Pro Forma Balance Sheets
2 of 2
Liabilities and Shareholder’s Equity

Pro Forma Statement of Cash Flow

Ratio Analysis
• Ratio Analysis
– The same financial ratios used to evaluate a firm’s
historical financial statements should be used to evaluate
the pro forma financial statements.
– This work is completed so the firm can get a sense of how
its projected financial performance compares to its past
performance and how its projected activities will affect its
cash position and its overall financial soundness.

Ratio Analysis Based on Historical and
Pro-Forma Financial Statements

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Copyright ©2010 Pearson Education, Inc.

©2010 Pearson Education
Building a New-
Venture Team
Bruce R. Barringer
R. Duane Ireland

Chapter Objectives
1 of 2
1. Identify the primary elements of a new venture team.

2. Explain the term liabilities of newness.
3. Discuss the difference between heterogeneous and
homogenous founding teams.
4. Identify the personal attributes that strengthen a
founder's chances of successfully launching an
entrepreneurial venture.
5. Describe how to construct a “skills profile,” and
explain how it helps a start-up identify gaps in its new-
venture team.

Chapter Objectives
2 of 2
6. Describe a board of directors and explain the

difference between inside directors and outside
directors.
7. Identify the two primary ways in which the
nonemployee members of a start-up’s new-venture
team help the firm.
8. Describe the concept of signaling and explain why
it’s important.
9. Discuss the purpose of forming an advisory board.
10. Explain why new venture firms use consultants for
help and advice.
New Venture Team
• New Venture Team

– Is the group of founders, key employees, and advisers that
move a new venture from an idea to a fully functioning
firm.
– Usually, the team doesn’t come together all at once.
Instead, it is built as the new firm can afford to hire
additional personnel.
– The team also involves more than paid employees.
• Many firms have boards of directors, boards of advisers, and
professionals on whom they rely for direction and advice.

Liabilities of Newness
• New ventures have a high propensity to

fail.
• The high failure rate is due in part to
Liabilities of liabilities of newness, which refers to the
Newness fact that new companies often falter
because the people involved can’t adjust
fast enough to their new roles and because
the firm lacks a track record of success.
• Assembling a talented and experienced
management team is one path that firms
can take to overcome these limitations.
Separate Elements of a New Venture Team

The Founder or Founders
1 of 2
• Founder or Founders
– The characteristics of the founder or founders of a firm and
their early decisions have a significant impact on the
manner in which the new venture team takes shape.
• Size of the Founding Team
– Studies have shown that 50% to 70% of all new ventures
are started by more than one individual.
– It is believed that new ventures that are started by a team
rather than a single individual have an advantage.

The Founder or Founders
2 of 2
Factors That May Contribute to a

Founders’ Success
• Firm started by a team
Qualities of • Higher education
Founders • Prior entrepreneurial experience
• Relevant industry experience
• The ability to “network” effectively

Factors that Contribute to a Founder or
Founders’ Success
1 of 3
• Firm Started by a Team

– Start-ups started by a team can provide greater resources, a
broader diversity of viewpoints, and a broader array of other
positive attributes than ventures started by individuals.
• Higher Education
– Entrepreneurial skills are enhanced through higher
education.

Founders’ Success
2 of 3
• Prior Entrepreneurial Experience

– Founders familiar with the entrepreneurial process are more
likely to avoid costly mistakes than founders without similar
experience.
• Relevant Industry Experience
– Founders with relevant industry experience are more likely
to have:
• Better established professional networks.
• More applicable marketing and management skills.

Founders’ Success
3 of 3
• Broad Social and Professional Network

– Founders with broad social and professional networks have
potential access to additional know-how, capital, and
customer referrals.

Recruiting and Selecting Key Employees
• Recruiting Key Employees

– Startups vary in terms of how quickly they need to add
personnel.
– In some instances, the founders will work alone for a
period of time. In other instances, employees are hired
immediately.
– A skills profile is a chart that depicts the most important
skills that are needed and where skills gaps exist in a new
firm.

Skills Profile for New Venture Fitness Drinks

The Roles of the Board of the Directors
1 of 2
• Board of Directors
– If a new venture organizes as a corporation, it is legally
required to have a board of directors.
– A board of directors is a panel of individuals who are
elected by a corporation’s shareholders to oversee the
management of the firm.
– A board is typically made up of both inside directors and
outside directors.
• An inside director is a person who is also an officer of the firm.
• An outside director is someone who is not employed by the firm.

The Roles of the Board of the Directors
2 of 2
• Formal Responsibility of the Board

– A board of directors has three formal responsibilities.
• Appoint the officers of the firm.
• Declare dividends.
• Oversee the affairs of the corporation.
• Frequency of Meetings and Compensation
– Most board of directors meet three to four times a year.
– New ventures are more likely to pay their board members
in company stock or ask them to service on a voluntary
basis rather than pay a cash honorarium.

What a Board of Directors Can Do to Help
a Start-Up Get Off to a Good Start
Function Importance of Function
Although a board of directors has formal

Provide governance responsibilities, its most useful role is
Guidance to provide guidance and support to the firm’s
managers.
Another function of a board of directors is to lend

Lend legitimacy to a firm. Well-known and respected
Legitimacy board members bring instant credibility to a firm.

Rounding out the Team: The Role of
Professional Advisors
Board of Advisors
Lenders and Investors Other Professionals

Board of Advisors
1 of 2
• Board of Advisors
– A board of advisors is a panel of experts who are asked by
a firm’s managers to provide counsel and advice on an
ongoing basis.
– Unlike a board of directors, an advisory board possesses no
legal responsibility for the firm and gives nonbinding
advice.
– An advisory board can be established for general purposes
or can be set up to address a specific issue or need.

Board of Advisors
2 of 3
• Board of Advisors (continued)

– Many people are more willing to serve on a company’s
board of advisors than its board of directors because it
requires less time and there is no potential legal liability
involved.
– Like the members of a board of directors, the members of a
company’s board of advisors provide guidance and lend
credibility to the firm.

Board of Advisors
3 of 3
• Guidelines to Organizing a Board of Advisors

– Advisors will become disillusioned if they don’t play a
meaningful role in the firm’s development and growth.
– A firm should look for board members who are compatible
and complement one another in terms of experience and
expertise.
– When inviting people to serve on its board of advisors, a
company should carefully spell out to the individuals
involved the rules in terms of access to confidential
information.

Lenders and Investors
• Lenders and Investors

– Lenders and investors have a vested interest in the
companies they finance, often causing them to become
very involved in helping the firms they fund.
– Like the other non-employee members of a firm’s new
venture team, lenders and investors help new firms by
providing guidance and lending advice.
– In addition, a firm’s lenders and investors assume the
natural role of providing financial oversight.

Ways Lenders and Investors Add Value to
an Entrepreneurial Firm
1 of 2
Provide insight into the

Help identify and recruit key
markets that the new venture
management personnel
plans to enter
Help the venture fine-tune its Serve as a sounding board

business model for new ideas
Serve on the new venture’s

Provide introductions to board of directors or board of
additional sources of capital advisors

Ways Lenders and Investors Add Value to
an Entrepreneurial Firm
2 of 2
Help to arrange business

Recruit customers partnerships
Serve on the board of Provide a sense of stability

directors or board of advisors and calm

Other Professionals
• Other Professionals
– The other professionals that make up a firm’s new venture
team include attorneys, accountants, and business
consultants.
• Business Consultants
– A business consultant is an individual who gives
professional or expert advice.
– Business consultants fall into two categories: paid
consultants and consultants who are available for free or at
a reduced rate through a nonprofit of governmental agency.

Quiz:
1/8 sheet
by pair

1. Choose the best answer.
• _____ is the group of founders, key
employees, and advisers that move a
venture from an idea to a fully
functioning firm.
A.A venture capitalist team
B.A board of directors
C.An executive committee
D.A new venture team
• Attending entrepreneurship-focused
workshops, speaker series, and
entrepreneurship boot camps is a way to
overcome what is referred to as the
________.
A.liability of newness
B.entrepreneurial fear factor
C.poor quality of founders
D.lack of networking opportunities
• A founding team comprised of executives
who all worked together in pharmaceutical
sales since graduating from college, where
they each majored in human biology, would
best be described as________.
A.heterogeneous
B.homogenous
C.versatile
D.diverse

• Which of the following is MOST
suggested as a consistent predictor of
future entrepreneurial performance?
A.prior entrepreneurial experience
B.relevant industry experience
C.networking
D.a lot of money

• Which of the following is NOT a formal
responsibility of a board of directors?
A.appoint the firm's officers
B.manage the firm's day-to-day transactions
C.declare dividends
D.oversee the affairs of the corporation

True or False
6. Studies show that the majority of new ventures
are started by more than one individual.
7. It is generally believed that new ventures
started by a team have an advantage over
those started by an individual.
8. The Chief Executive Officer (CEO) of a new
venture always is chosen from among the
firm's founders.

True or False
9. If a new venture organizes as a
corporation, it is legally required to have a
board of directors.
10.Expert advice to new ventures from
consultants can be obtained for free or
reduced rates from nonprofit agencies..

Chapter 12
The Importance of
Intellectual
Property
Bruce R. Barringer
R. Duane Ireland
Chapter Objectives
1 of 2
1. Define the term “intellectual property” and describe

its importance.
2. Discuss the four major forms of intellectual
property: patents, trademarks, copyrights, and trade
secrets.
3. Specify the rules of thumb for determining whether
a particular piece of intellectual property is worth
the time and expense of protecting.
4. Describe the six-step process for obtaining a patent.
5. Identify the four types of trademarks.

Chapter Objectives
2 of 2
6. Identify the types of material that are eligible for

copyright protection.
7. Discuss the legal environment that facilitates trade
secret protection.
8. Identify the most common types of trade secret
disputes.
9. Describe some of the physical measures that firms
take to protect their trade secrets.
10. Explain the two primary reasons for conducting an
intellectual property audit.

The Importance of Intellectual Property
• Intellectual Property
– Is any product of human intellect that is intangible but has
value in the marketplace.
– It is called “intellectual” property because it is the product of
human imagination, creativity, and inventiveness.
• Importance
– Traditionally, businesses have thought of their physical
assets, such as land, buildings, and equipment as the most
important.
– Increasingly, however, a company’s intellectual assets are the
most important.

Determining What Intellectual
Property to Protect
Criteria 1 Criteria 2
Determine whether the Decide whether the

intellectual property in intellectual property in
question is directly question has value in
related to the firm’s the marketplace.
competitive advantage.

Common Mistakes Firms Make in Regard
to Protecting Their Intellectual Property
Not properly identifying Not fully recognizing

all of their the value of their
intellectual property. intellectual property.
Not using their

Not legally protecting the
intellectual property as
intellectual property
part of their overall
that needs protecting.
plan for success.

The Four Key Forms of Intellectual
Property
Patents Trademarks
Copyrights Trade Secrets

Patents
• Patents
– A grant issued by the government through the
Intellectual Property Office of the Philippines (IP
Philippines).
– It is an exclusive right granted for a product, process
or an improvement of a product or process which is
new, inventive and useful.
– This exclusive right gives the inventor the right to
exclude others from making, using, or selling the
product of his invention during the life of the patent.
– A patent has a term of protection of twenty (20) years
providing an inventor significant commercial gain

Proper Understanding for What a
Patent Means
A patent does not give its owner the right to make, use or sell an invention:
rather, the right granted is only to exclude others from doing so.
As a result, if an inventor obtains a patent for a new kind of computer chip,
and the chip would infringe on a prior patent owned by Intel, the inventor
has no right to make, use, or sell the chip.
To do so, the inventor would need to obtain permission from Intel. Intel may
refuse permission, or ask that a licensing fee to be paid for the rights to
infringe on its patent.
While this system may seem odd, it is really the only way the system could
work. Many inventions are improvements on existing inventions, and the
system allows the improvements to be (patented) and sold, but only with the
permission of the original inventors, who usually benefit by obtaining
licensing income in exchange for their consent.
Three Basic Requirements for Obtaining a
Patent

Types of Patents
Type Type of Invention Covered Duration
New or useful process, machine, 20 years from

Utility manufacturer, or composition of material or the date of the
any new and useful improvement thereof. original
application.
14 years from
Invention of new, original, and ornamental the date of the
Design design for manufactured products. original
application.
20 years from
Any new varieties of plants that can be
Plant the date of the
reproduced asexually.
original
application.
Business Method Patents
(Special Utility Patent)
• Business Method Patent

– A business method patent is a patent that protects an
invention that is or facilitates a method of doing business.
– The most notable business method patents that have been
awarded:
• Amazon.com’s one click ordering system.
• Priceline.com’s “name-your-price” business model.
• Netflix’s method for allowing customers to set up a rental list of
movies to be mailed to them.

The Process of Obtaining a Patent

Patent Infringement
• Patent Infringement
– Takes place when one party engages in the unauthorized
use of another party’s patent.
– The tough part (particularly from a small entrepreneurial
firm’s point of view) is that patent infringement cases are
costly to litigate.

Trademarks
• Trademark
– A trademark is any word, name, symbol, or device used to
identify the source or origin of products or services and to
distinguish those product or services from others.
– Trademarks also provide consumers with useful
information.
• For example, consumers know what to expect when they see an
Abercrombie & Fitch store.
• Think how confusing it would be if any retail store could use the
name Abercrombie & Fitch.

Illustration of the Multifaceted Nature of
Trademark Protection
Name is trademarked
Symbol is trademarked
Slogan is trademarked

Types of Trademarks
1 of 2
Type Types of Marks Covered Duration
Any word, name, symbol, or device

used to identify and distinguish one Renewable every
Trademark 10 years, as long
company’s goods from another.
as the mark
Examples: Dell, Nokia, CarePages,
remains in use.
Netflix, Dogster, Fitbit
Similar to trademarks; are used to Renewable every

Service mark identify the services or intangible
10 years, as long
activities of a business, rather than a
business’s physical products. as the mark
remains in use.
Examples: Amazon.com, Orbitz,
eBay, Overstock.com

Types of Trademarks
2 of 2
Type Types of Marks Covered Duration
Trademarks or service markets used

by the members of a cooperative, Renewable every
Collective 10 years, as long
association, or other collective group.
mark as the mark
Examples: Rotary International,
remains in use.
International Franchise Association
Marks, words, names, symbols, or Renewable every

Certification devices used by a person other than
10 years, as long
mark the owner to certify a particular
quality about a good or service. as the mark
remains in use.
Examples: Florida Oranges, ISO
9000, Underwriters Laboratories

What is Protected Under Trademark Law
1 of 2
Item Example(s)
Words Ready Solar, Activate Drinks, Jott
Numbers 3M, MSNBA, 1-800-FLOWERS

and letters
Designs
Nike swoosh logo
and logos
Sounds MGM’s lion’s roar

What is Protected Under Trademark Law
2 of 2
Item Example
Fragrances Stationary treated with a special fragrance
Shapes Unique shape of the Apple iPod
Colors Nexium—the “purple pill”
Trade dress The layout and décor of a restaurant

Exclusions From Trademark Protection
Item Example
Immoral or Profane words
scandalous matter
Labeling oranges “Fresh Florida
Deceptive matter Oranges” that aren’t grown in Florida
Phrases like “golf ball” and “fried chicken”

Descriptive marks are descriptive and can’t be trademarked
Surnames Common surnames like “Andersen” or

“Smith” can’t be trademarked
The Process of Obtaining a Trademark

Copyrights
• Copyrights
– A copyright is a form of intellectual property protection
that grants to the owner of a work of authorship the legal
right to determine how the work is used and to obtain the
economic benefits from the work.
– A work does not have to have artistic merit to be eligible
for copyright protection.
• As a result, things such as operating manuals and sales brochures
are eligible for copyright protection.

What is Protected By a Copyright?
Literary works Musical compositions
Computer software Dramatic works
Pantomimes and Pictorial, graphic, and

choreographic works sculptural words

Exclusions From Copyright Protection
• The Idea-Expression Dichotomy

– The main exclusion is that copyright laws cannot protect
ideas.
• For example, an entrepreneur may have the idea to open a soccer-
themed restaurant. The idea itself is not eligible for copyright
protection. However, if the entrepreneur writes down specifically
what his or her soccer-themed restaurant will look like and how it
will operate, that description is copyrightable.
• The legal principle describing this concept is called the idea-
expression dichotomy.
• An idea is not copyrightable, but the specific expression of an idea
is.

Obtaining a Copyright
• How to Obtain a Copyright

– Copyright law protects any work of authorship the moment
it assumes a tangible form.
– Technically, it is not necessary to provide a copyright
notice or register work with the U.S. Copyright Office.
– The following steps can be taken, however, to enhance
copyright protection.
• Copyright protection can be enhanced by attaching the copyright
notice, or “copyright bug” to something.
• Further protection can be obtained by registering the work with the
U.S. Copyright Office.

Copyright Infringement
1 of 2
• Copyright Infringement
– Copyright infringement occurs when one work derives
from another or is an exact copy or shows substantial
similarity to the original work.
– To prove infringement, a copyright owner is required to
show that the alleged infringer had prior access to the
copyrighted work and that the work is substantially similar
to the owner’s.

Copyright Infringement
2 of 2
• The illegal downloading of

music is an example of
copyright infringement.
• Copyright infringement costs
the owners of copyrighted
material as estimated $20
billion per year in the U.S.
alone.

Trade Secrets
• Trade Secrets
– A trade secret is any formula, pattern, physical device,
idea, process, or other information that provides the owner
of the information with a competitive advantage in the
marketplace.
– Trade secrets include marketing plans, product formulas,
financial forecasts, employee rosters, logs of sales calls,
and similar types of proprietary information.
– The Federal Economic Espionage Act, passed in 1996,
criminalizes the theft of trade secrets.

What Qualifies For Trade Secret Protection?
1 of 2
• Trade Secret Protection

– Not all information qualifies for trade secret protection
– In general, information that is know to the public or that
competitors can discover through legal means doesn’t
qualify for trade secret protection
– Companies protect trade secrets through physical measures
and written documents.

What Qualifies For Trade Secret Protection?
2 of 2
The strongest case for trade secret protection is

information that is characterized by the following
• Is not known outside the company.

• Is known only inside the company on a “need-to-know” basis.
• Is safeguarded by stringent efforts to keep the information
confidential.
• Is valuable and provides the company a competitive advantage
• Was developed at great cost, time, and effort.
• Cannot be easily duplicated, reverse engineered, or
discovered.

Physical Measures for Protecting Trade
Secrets
Restricting access Labeling documents
Password protecting Maintaining logbooks

computer files for visitors
Maintaining logbooks for Maintaining adequate

access to sensitive overall security
material measures

Conducting an Intellectual Property Audit
1 of 2
• Intellectual Property Audit

– The first step a firm should take to protect its intellectual
property is to complete an intellectual property audit.
– An intellectual property audit is conducted to determine the
intellectual property a firm owns.
– There are two reasons for conducting an intellectual
property audit:
• First, it is prudent for a company to periodically determine whether
its intellectual property is being properly protected.
• Second, it is important for a firm to remain prepared to justify its
valuation in the event of a merger or acquisition.

Conducting an Intellectual Property Audit
2 of 2
• The Process of Conducting an Intellectual Property

Audit
– The first step is to develop an inventory of a firm’s existing
intellectual property. The inventory should include the
firm’s present registrations of patents, trademarks, and
copyrights.
– The second step is to identify works in progress to ensure
that they are being documented and protected in a
systematic, orderly manner.

States of America.

True or False
• Although intellectual property has no
value in the marketplace, it is important
to firms because it is the result of
human imagination and inventiveness.
• The loss to a business of intellectual
property assets can be as costly as the
loss of physical property like
equipment and buildings.

• The title of the textbooks for each of your
classes is excluded from copyright
protection.
• A patent must be extraordinarily creative.
• A trademark is any word, name, symbol, or
device used to identify the source or origin
of products or services and to distinguish
those product or services from others.

Chapter 13
Preparing for and

Evaluating the
Challenges of Growth
Bruce R. Barringer
R. Duane Ireland

1/8 sheet per pair
• Why do you need to grow as a firm?
– 2 sentences

Chapter Objectives
1 of 2
1. Explain the term sustained growth.

2. Describe how firms can properly prepare for growth.
3. Discuss the six most common reasons firms pursue
growth.
4. Explain the importance of knowing the stages of
growth.
5. Describe the most important factors for firms to
focus on during each stage of growth.

Chapter Objectives
2 of 2
6. Describe the managerial capacity problem and how it

inhibits firm growth.
7. Discuss the challenges for firms growth imposed by
adverse selection and moral hazard.
8. Discuss the day-to-day challenges of growing a firm.
9. Explain why “cash flow management” is a challenge
for growing a firm.
10. Explain how “quality control” can become a
challenge for growing a firm.

Sustainable Growth
• Growth
• Sustainable growth

Three Things a Business Can Do to Prepare
For Growth
1 of 3
Important Realities
• Not all businesses have the
potential to be aggressive
#1--Appreciate the growth firms.
Nature of Business • A business can grow too
Growth fast.
• Business success doesn’t
always scale.

For Growth
2 of 3
• It is important that a business

not lose sight of its core
strategy as it prepares to
Stay Committed to a grow.
Core Strategy • If a business becomes
distracted or starts pursuing
every opportunity for growth
that’s its presented, it can
easily stray into areas where
its at a disadvantage.
For Growth
3 of 3
• A firm should establish

growth-related plans.
• Writing a business plan
Plan for Growth greatly assists in preparing
growth plans.
• It’s also important for a firm
to determine, as soon as
possible, what its growth
strategies will be.

Reasons for Growth
1 of 3
Reason for Growth Explanation
Economics of Occur when increasing production lowers

scale the average cost of each unit produced.
Economics of Occur when the scope (or range) of a firm’s

scope operations creates efficiencies.

Reasons for Growth
2 of 3
Market Occurs when a firm holds the number one or

Leadership the number two position in an industry or
niche market in terms of sales volume.
Influence, Larger businesses usually have more

Power, and influence and power than smaller firms.
Survivability

Reasons for Growth
3 of 3
Accommodate Sometimes firms are compelling to grow to

the Growth of accommodate the growth of a key customer.
Key Customers
Attract and Growth is a firm’s primary mechanism to

Retain Talented generate promotional opportunities for
Employees employees.

Managing Growth
It’s important for a business owner to know the stages of growth, along
with the unique opportunities and challenges that each stage entails.

Stages of Growth
1 of 5
• Introduction
– Start-up phase where a business determines what its core
strengths and capabilities are.
– The main challenge is to make sure the initial product or
service is right.
– It’s important to document what works and what doesn’t
work during this stage.

Stages of Growth
2 of 5
• Early Growth
– Generally characterized by increasing sales and heightened
complexity.
– Two important things must happen for a business to be
successful in this stage.
– The founder must start working “on the business” rather “in
the business.”
– Increased formalization must
take place, and the business
has to start developing policies
and procedures.

Stages of Growth
3 of 5
• Continuous Growth
– The need for structure and formalization increases.
– Often the business will start developing related products
and services.
– The toughest decisions take place in this stage.
– One tough decision is whether the owner of the business
and the current management
team has the experience and
the ability to take the business
further.

Stages of Growth
4 of 5
• Maturity
– A business enters the maturity stage when its growth stalls.
– At this point, a firm is typically more intently focused on
managing efficiently than developing new products.
– Well-managed firms often look for partnering opportunities or
opportunities for acquisitions or licensing deals to breath new
life into the firm.
– If new growth cannot be achieved
through a firm’s existing product
mix, the “next generation” of
products should be developed.

Stages of Growth
5 of 5
• Decline
– It is not inevitable that a business enter the decline stage.
– Many American businesses have long histories and have
adapted and survived over time.
– A business’s ability to avoid decline hinges on the strength
of its leadership and its ability to adapt over time.

Challenges of Growth
• Managerial Capacity Problem

• Day-to-Day Challenges of
Two categories of
Growing a Firm
challenges for
firms growth

Managerial Capacity Problem
1 of 6
• Managerial Capacity
– Firms are collections of productive resources that are
organized in an administrative framework.
– As a firm goes about its routine activities, it recognizes
opportunities to grow.
– The problem with this scenario is that firm’s are not always
prepared or able to grow, because of limited “managerial
capacity."

2 of 6
• A Firm’s Administrative Framework

– A firm’s administrative framework consists of two kinds of
services that are important to firm growth.
• Entrepreneurial services generate new market, product, and service
ideas, while managerial services administer the routine functions of
the firm and facilitate the profitable execution of new
opportunities.
• New product and service ideas require substantial managerial
services (or managerial capacity) to be successfully implemented.
• This is a complex problem because if a firm has insufficient
managerial services to properly implement its new product and
service ideas, it can’t grow.

3 of 6
• A Firm’s Administrative Framework (continued)

– Continuation From Previous Slide
• The reason a firm can’t quickly increase its managerial services (to
take advantage of new product or service ideas) is that it is
expensive to hire new employees, it takes time for new hires to be
socialized into the culture of a firm, and it takes time for new
employees to acquire firm-specific skills and establish trusting
relationships with other members of the firm.
• When a firm’s managerial resources are insufficient to take
advantage of its new product and service opportunities, the
subsequent bottleneck is referred to as the managerial capacity
problem.

4 of 6
• Additional Challenges
– As a firm grows, it is faced with the dual challenges of
adverse selection and moral hazard.
• Adverse selection means that as the number of employees a firm
needs increases, it becomes increasingly difficult for the firm to
find the right employees, place them in appropriate positions, and
provide adequate supervision.
• Moral hazard means that as a firm grows and adds personnel, the
new hires typically do not have the same ownership incentives as
the original founders, so the new hires may not be as motivated as
the founders to put in long hours and may even try to avoid hard
work.

5 of 6
Basic Model of Firm Growth

6 of 6
Impact of the Managerial Capacity Problem

Day-to-Day Challenges of Growing a Firm
1 of 3
Challenge Explanation
Cash Flow A firm requires an increasing amount of cash

Management as it grows.
If growth comes at the expense of a

Price Stability competitor’s market share, a price war could
ensue.

2 of 3
Challenge Explanation
Quality An increase in firm activity can result in

Control quality control issues if a firm is not able to
increase its resources to handle the extra work
Capital Capital constraints are an ever-present

Constraints problem for growing firms

3 of 3
• There are few things

more stressful than cash-
flow challenges.
• This entrepreneur is
diligently managing his
cash-flow to make sure
there is money in the
bank to pay his vendors
and meet his payroll.

States of America.

True or False
• Most firms want to grow at a deliberate
pace, but sometimes firms are forced
into a high-growth mode sooner than
they would like.
• A business can never grow too fast.
• The thing that makes a business
successful may suffer as a result of
growth.

True or False
• Writing a business plan rarely assists
developing growth-related plans.
• The reality is that a company must
actively and carefully manage its
growth for it to expand in a healthy and
profitable manner.

Chapter 14
Strategies for Firm

Growth
Bruce R. Barringer
R. Duane Ireland

Chapter Objectives
1 of 2
1. Explain the difference between internal growth

strategies and external growth strategies.
2. Identify the keys to effective new product
development.
3. Explain the common reasons new products fail.
4. Discuss a market penetration strategy.
5. Explain “international new venture” and describe
its importance to entrepreneurial firms.
6. Discuss the objectives a company can achieve by
acquiring another business.

Chapter Objectives
2 of 2
7. Identify a promising acquisition candidate’s

characteristics.
8. Explain “licensing” and how it can be used as a
growth strategy.
9. Explain “strategic alliances” and describe the
difference between technological alliances and
marketing alliances.
10. Explain “joint ventures,” and describe the
difference between a scale joint venture and a link
joint venture.

Internal and External Growth Strategies
1 of 2
Internal Growth Strategies External Growth Strategies
Involve efforts taken Rely on establishing

within the firm itself, relationships with third
such as new product parties, such as mergers,
development, other acquisitions, strategic
product related alliances, joint ventures,
strategies, and licensing, and
international expansion. franchising.

Internal and External Growth Strategies
2 of 2

Internal Growth Strategies
New product Other product-

development related strategies
International
expansion

Advantages and Disadvantages of Internal
Growth Strategies
Advantages Disadvantages
• Incremental, even-paced growth. • Slow form of growth.
• Provides maximum control. • Need to develop new resources.

• Preserves organizational culture. • Investment in a failed internal growth
strategy can be difficult to recoup.
• Encourages internal
entrepreneurship. • Adds to industry capacity.
• Allows firms to promote from within.

New Product Development
1 of 3
• New Product Development

– Involves the creation and sale of new products (or services)
as a means of increasing firm revenues.
– In many fast-paced industries, new product development is
a competitive necessity.
• For example, the average product life cycle in the computer
software industry is 14 to 16 months.

2 of 3
Keys to Effective New Product and Service

Development
• Find a niche and fill it.

• Develop products that add value.
• Get quality right and pricing right.
• Focus on a specific target market.
• Conduct ongoing feasibility analysis.

3 of 3
Common Reasons That New Products Fail
• Inadequate feasibility analysis.

• Overestimation of market potential.
• Bad timing.
• Inadequate advertising and promotions.
• Poor service.

Other Product Related Strategies
1 of 2
Product Strategy Description
Improving an Often a business can increase its

Existing Product or revenues by simply increasing the
Service quality of an existing product or service.
Increasing Increasing the sales of a product or service

Market through greater marketing efforts or through
Penetration increased production capacity.

Other Product Related Strategies
2 of 2
Product Strategy Description
Extending Product Making additional variations of a

Lines product so it will appeal to a broader
range of clientele.
Geographic Growth via expanding to additional

Expansion geographic locations .

International Expansion
1 of 3
• International Expansion
– Another common form of growth for entrepreneurial firms.
– International new ventures are businesses that, from their
inception, seek to derive significant competitive advantage
by using their resources to sell products or services in
multiple countries.
– Although there is vast potential associated with selling
overseas, it is a fairly complex form of growth.

2 of 3
• Foreign-Market Entry Strategies

– Exporting
• Producing a product at home and shipping it to a foreign market.
– Licensing
• An arrangement whereby a firm with the proprietary rights to a
product grants permission to another firm to manufacture that
product for specified royalties or other payments.
– Joint Ventures
• Involves the establishment of a firm that is jointly owned by two or
more otherwise independent firms.
– Fuji-Xerox is a joint venture between an American and a Japanese
company.

3 of 3
• Foreign-Market Entry Strategies

– Franchising
• An agreement between a franchisor (a company like McDonald’s
Inc., that has an established business method and brand) and a
franchisee (the owner of one or more McDonald’s restaurants).
– Turnkey Project
• A contractor from one country builds a facility in another country,
trains the personnel that will operate the facility, and turns over the
keys to the project when it is completed and ready to operate.
– Wholly Owned Subsidiary
• A company that has made the decision to manufacture a product in
a foreign country and establish a permanent presence.

External Growth Strategies
Mergers and
Licensing
Acquisitions
Strategic Alliances Franchising

and Joint Ventures (Chapter 15)

Advantages and Disadvantages of External
Growth Strategies
• Reducing competition. • Incompatibility of top management.
• Access to proprietary products. • Clash of corporate cultures.

• Gaining access to new products. • Operational problems.
• Gaining access to new markets.
• Increased business complexity.
• Access to technical expertise.
• Loss of organizational flexibility.
• Access to an established brand name.
• Economies of scale. • Antitrust implications.
• Diversification of business risk.

Mergers and Acquisitions
• Mergers and Acquisitions

– An acquisition is the outright purchase of one firm by
another .
– A merger is the pooling of interests to combine two or more
firms into one.
• Purpose of Acquisitions
– Acquiring another business can fulfill several of a
company’s needs, such as:
• Expanding its product line.
• Gaining access to distribution channels.
• Achieving competitive economies of scale.

The Process of Competing an Acquisition

Licensing
1 of 3
• Licensing
– The granting of permission by one company to another
company to use a specific form of its intellectual property
under clearly defined conditions.
– Virtually any intellectual property a company owns that is
protected by a patent, trademark, or copyright can be
licensed to a third party.
• Licensing Agreement
– The terms of a license are spelled out by a licensing
agreement.

Licensing
2 of 3
Type of Licensing Description
Technology The licensing of proprietary technology

Licensing that the licensor typically controls by
virtue of a utility patent.
Merchandise The licensing of a recognized trademark or

and Character brand that the licensor typically controls
Licensing through a trademark or copyright.

Licensing
3 of 3
• Character licensing, for example,

represented a major source of
revenue for Pixar in its early
years.
• Popular characters, like Marlin
and Dory from Finding Nemo,
adorn products as diverse as
dinner plates and sleeping bags.

Strategic Alliances
1 of 2
• Strategic Alliances
– A strategic alliance is a partnership between two or more
firms developed to achieve a specific goal.
– Strategic alliances tend to be informal and do not involve
the creation of a new entity.
– Participating in strategic alliances can boost a firm’s rate of
product innovation and foreign sales.

Strategic Alliances
2 of 2
Type of Alliance Description
Technological Feature cooperation in R&D,

Alliances engineering, and manufacturing.
Marketing Typically match a company with excess

Alliances distribution capacity with a company that
has a product to sell.

Joint Ventures
1 of 2
• Joint Ventures
– A joint venture is an entity created when two or more firms
pool a portion of their resources to create a separate, jointly
owned organization.
– A common reason to form a joint venture is to gain access
to a foreign market. In these cases, the joint venture
typically consists of the firm trying to reach a foreign
market and one or more local partners.

Joint Ventures
2 of 2
Type of Joint Description

Venture
Partners collaborate at a single point in
Scale Joint Venture the value chain to gain economies of
scale in production or distribution.
Positions of the partners are not

Link Joint
symmetrical, and the partners help each
Venture
other access adjacent links in the value
chain.

Advantages and Disadvantages of Participating
in Strategic Alliances and Joint Ventures
• Gain access to a specific resource. • Loss of proprietary information.

• Economies of scale. • Management complexities.
• Risk and cost sharing. • Financial and organizational risks.
• Gain access to a foreign market. • Risk becoming depending on a partner.
• Learning. • Partial loss of decision autonomy.
• Speed to market. • Partners’ cultures may clash.
• Neutralizing competitors. • Loss of organizational flexibility.
• Blocking competitors.
States of America.

Chapter 15
Franchising
Bruce R. Barringer
R. Duane Ireland

Chapter Objectives
1 of 2
1. Explain franchising and how it differs from other

forms of business ownership.
2. Describe the difference between a product and
trademark franchise and a business format franchise.
3. Explain the differences among an individual
franchise agreement, an area franchise agreement,
and a master franchise agreement.
4. Describe the advantages of establishing a franchise
system as a means of firm growth.

Chapter Objectives
2 of 3
5. Identify the rules of thumb for determining when

franchising is an appropriate form of growth for a
particular business.
6. Discuss the factors to consider in determining if
owning a franchise is a good fit for a particular
person.
7. Identify the costs associated with buying a franchise.
8. Discuss the advantages and disadvantages of buying
a franchise.

Chapter Objectives
3 of 3
9. Identify the common mistakes franchise buyers

make.
10. Describe the purpose of the Franchise Disclosure
Document.

Introduction to Franchising
• Introduction
– Franchising is growing in popularity.
– Nearly 910,000 franchise outlets operate in the U.S.
– Franchises account for 1/3 of all retail sales in the U.S.
• History
– The word “franchise” comes from an old dialect of French
and means privilege or freedom.
– Many of the most popular franchises, including KFC
(1952), McDonald’s (1955), and H&R Block (1958) started
as early as the 1950s.

What is Franchising?
• Franchising
– Franchising is a form of business organization in which a
firm that already has a successful product or service
(franchisor) licenses its trademark and method of doing
business to another business or individual (franchisee) in
exchange for a franchise fee and an ongoing royalty
payment.
– Some franchisors are established firms (like McDonald’s)
while others are first-time enterprises being launched by
entrepreneurs.

Two Types of Franchise Systems
1 of 3
• Product and Trademark Franchise

– An arrangement under which the franchisor grants to the
franchisee the right to buy its products and use its trade
name.
– This approach typically connects a single manufacturer
with a network of dealers or distributors.
• For example, General Motors has established a network of dealers
that sell GM cars and use the GM trademark in their advertising
and promotions.
• Other examples of product and trademark franchisors include
agricultural machinery dealers, soft drink bottlers, and beer
distributorships.

2 of 3
• Business Format Franchise

– An arrangement under which the franchisor provides a
formula for doing business to the franchisee along with
training, advertising, and other forms of assistance.
– Fast-food restaurants, convenience stores, and motels are
well-known examples of business format franchises.
• Business format franchises are by far the most popular form of
franchising, particularly for entrepreneurial firms.

3 of 3
• Panera Bread is an example

of a business format franchise.
• Panera provides its franchisees
a strong brand and a method
for doing business.
• In return, each franchisee must
pay an initial franchise fee and
ongoing royalties.

Types of Franchise Agreements
1 of 3
Individual Franchise Agreement

2 of 3
Area Franchise Agreement

3 of 3
Master Franchise Agreement

When to Franchise
From the Franchisor’s Point of View
1 of 2
• Approach Franchising With Caution and Care

– Establishing a franchise system should be approached
carefully and deliberately.
– Franchising is a complicated business endeavor, and an
entrepreneur must look closely at all its aspects before
deciding to franchise.
• Regulations
– An entrepreneur should also be aware that over the years a
number of fraudulent franchise organizations have come and
gone and have left financially ruined franchise owners
behind.

When to Franchise?
2 of 2
• When Is Franchising Most Appropriate?

– Franchising is most appropriate when a firm has a strong or
potentially strong trademark, a well-designed business
method, and a desire to grow.
– A franchise system will ultimately fail if the franchisee’s
brand doesn’t add value for customers and its business
method is flawed or poorly developed.

Steps to Franchising a Business

Qualities for Look for in Prospective
Franchisees
• Good work ethic.

• Ability to follow instructions.
• Ability to operate with minimal supervision.
• Team oriented.
• Experience in the industry in which the franchise competes.
• Adequate financial resources and good credit history.
• Ability to make suggestions without becoming upset if the
suggestions are not adopted.
• Represents the franchisor in a positive manner.

Ways Franchisors Can Develop the
Potential of Their Franchisees
• Provide mentoring that supersedes routing training.

• Keep operating manuals up-to-date.
• Keep product, services, and business systems up-to-date.
• Solicit input from franchisees to reinforce their importance in
the larger franchise system.
• Encourage franchisees to develop a franchise association.
• Maintain the franchise system’s integrity.

Advantages and Disadvantages of Franchising
As a Method of Business Expansion
• Rapid, low-cost market expansion. • Profit sharing.

• Income from franchise fees and • Loss of control.
royalties.
• Friction with franchisees.
• Franchisee motivation.
• Managing growth.
• Access to ideas and suggestions.
• Differences in required business skills.
• Cost savings.
• Legal expenses.
• Increased buying power.

Buying a Franchise
From the Franchisee’s Point of View
1 of 3
• Buying a Franchise
– Purchasing a franchise is an important business decision
involving a substantial financial commitment.
– Potential franchise owners should strive to be as well
informed as possible before purchasing a franchise and
should be aware that it is often legally and financially
difficult to exit a franchise relationship.

Buying a Franchise
2 of 3
Answering the following questions will help

determine if franchising is right for you
• Are you willing to take orders? Franchises are typically

very particular about how outlets operate.
• Are you willing to be part of a franchise “system” rather
than an independent businessperson?
• How will you react if you make a suggestion to your
franchisor and your suggestion is rejected?
• What are you looking for in a business? How hard do you
want to work?

Buying a Franchise
3 of 3
Answering the following questions will help

determine if franchising is right for you
• How willing are you to put your money at risk?

• How will you feel if your business is operating at a net
loss but you will have to pay royalties on your gross
income?

The Costs Involved With Buying a Franchise
1 of 3
• Initial Franchise Fee

– The initial fee varies depending on the franchisor.
• Capital Requirements
– The costs vary but may include the cost of buying real estate,
the cost of putting up a building, the purchase of inventory,
and the cost of obtaining a business license.
• Continuing Royalty Payment
– Typically 3% to 7% of monthly gross income.

2 of 3
• Advertising Fees
– Franchisees are often required to pay into a national or
regional advertising fund.
• Other Fees
– Other fees may be charged for various activities, including:
• Training additional staff.
• Providing management expertise when needed.
• Providing computer assistance.
• Providing a host of other items or support services.

3 of 3
Initial Costs to the Franchisee of a Sample of Franchise Organizations

Advantages and Disadvantages of Buying a
Franchise
• A proven product or service • Cost of the franchise.

within
• Restrictions on creativity.
an established market.
• Duration and nature of commitment.
• An established trademark or
• Risk of fraud, misunderstandings, or
business system.
• Franchisor’s training, technical lack of franchisor commitment.
• Poor performance on the part of other
support, and managerial expertise.
• An established marketing franchisees.
network. • Potential for failure.
• Availability of financing (varies).
• Potential for business growth.
Steps in Purchasing a Franchise

Watch Out! Common Misconceptions
About Franchising
• Franchising is a safe investment.

• A strong industry ensures franchise success.
• A franchise is a “proven” business system.
• There is no need to hire a franchise attorney or an accountant.
• The best systems grow rapidly and it is best to be part of a rapid-growth
system.
• I can operate my franchise outlet for less than the franchisor predicts.
• The franchisor is a nice person—he’ll help me out if I need it.

Legal Aspects of the Franchise Relationship
• Federal Rules and Regulations

– The offer and sale of a franchise is regulated at the federal
level.
• According to Federal Trade Commission (FTC) rule 436,
franchisors must furnish potential franchisees with written
disclosures that provides information about the franchisor, the
franchised business, and the franchise relationship.
• In most cases, the disclosures are made through a lengthy document
referred to as the Franchisor Disclosure Document (FDD).
• The FDD contains 23 categories of information that give a
prospective franchisee a broad base of information about the
background and financial health of the franchisor.

More About Franchising
1 of 2
• Franchise Ethics
– The majority of franchisors and franchisees are highly
ethical.
– There are certain features of franchising, however, the
make it subject to ethical abuse. These features are as
follows:
• The get rich quick mentality.
• The false assumption that buying a franchise is a guarantee of
business success.
• Conflicts of interest between franchisors and franchisees.

More About Franchising
2 of 2
• International Franchising
– International opportunities for franchising are becoming
more prevalent for the following two reasons:
• The markets for certain franchised products in the U.S. have
become saturated (i.e., fast food).
• The trend towards globalization continues.
– Steps to take before buying a franchise overseas:
• Consider the value of the franchisor’s name in the foreign country.
• Get a good lawyer.
• Determine whether the product or service is salable in the foreign
country.
• Find out how much training and support you will receive from the
franchisor.

States of America.


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Chapter 8

1. Explain the two functions of the financial

©2010 Pearson Education 8-2

6. Explain the purpose of a statement of cash flows.

©2010 Pearson Education 8-3

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The financial management of a firm deals with questions

• How are we doing? Are we making or losing money?

©2010 Pearson Education 8-6

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• Importance of Financial Statements

©2010 Pearson Education 8-9

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• Historical Financial Statements

©2010 Pearson Education 8-13

The first step towards prudent

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• New Venture Fitness Drinks

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Financial Statement Purpose

Reflects the results of the operations of a firm over a

Balance Sheet Is a snapshot of a company’s assets, liabilities, and

Summarizes the changes in a firm’s cash position for

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Liabilities and Shareholder’s Equity

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• Forecast of Costs of Sales and Other Items

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• Pro Forma Financial Statements

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Financial Statement Purpose

Pro Forma Income Shows the projected results of the operations of a

Shows a projected snapshot of a company’s

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1. Identify the primary elements of a new venture team.

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6. Describe a board of directors and explain the

• New Venture Team

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