Turnaround, Merger & Acquisition Strategies – Franchise and Licensing Guide

Turn Around Management  

It is a process dedicated to corporate renewal. It uses analysis and planning to save troubled companies and returns them to solvency. Turnaround Management involves management review, activity-based costing, root failure causes analysis, and SWOT analysis to determine why the company is failing. Once analysis is completed, a long-term strategic plan and restructuring plan are created. These plans may or may not involve a bankruptcy filing. Once approved, turnaround professionals begin to implement the plan, continually reviewing its progress and make changes to the plan as needed to ensure the company returns to solvency. Turn around strategic derive their name from the action involved that is reversing a negative trend.

Before turn around strategies can be formulated one must identify the Root Causes of Strategic distress or crisis –

1. Poor Strategy
2. Poor Business Model / Execution
3. High Operating cost.
4. Insufficient resource
5. Unsuccessful R&D project
6. Excessive debt burden.
7. Inadequate financial control

Managing Turnaround 

There are three ways in which turnaround can be handled

1. The existing chief executive and management tea handles the entire turnaround strategies with the advisory support of a specialist external consultant
2. In another situation, the existing team withdraws temporarily and an executive consultant or turnaround specialist is employed to do the job.
3. The last method involves the replacements of the existing team, especially the chief executive or merging the sick organization with a healthy one.

Elements in a Turnaround Strategy

1. Change in the top management
2. Neutralizing external pressure
3. Initial control
4. Identifying quick payoff activities
5. Quick cost reductions
6. Revenue generations
7. Assets liquidation for cash generation
8. Mobilization of the organization
9. Better internal co-ordination.

The Turn Around Process frequently involves the following stages

1. Management Changes – Consultant may be called in to manage the turnaround of the firm.
2. Situational analysis – It is performed to evaluate the prospect of survival. Assuming the firm is worth turning around, depending on the root cause of the distress one or more of the turnaround strategies may be selected and presented to the board - 
• Change of top management 
• Reformulation of Strategy 
• Revenue Increase 
• Cost reduction.
3. Emergency action plan – Achieve Positive cash flow as soon as possible by eliminating departments, reducing staff e.tc
4. Business restructuring - Once positive cash flow is achieved, the strategic plan is implementing, improving continuing operations, adjusting product mix and repositioning products if necessary.
5. Return to normalcy – The Company becomes profitable and the change is internalized. Employees regain confidence in the firm and emphasis is placed on growing the restructured business while maintaining a strong balance sheet.

Merger Strategies 

It is a combination of two or more organization in which one acquires the assets and liabilities of the other in exchange for shares or cash or both the organization are dissolved and the assets and liabilities are combined and new stock is issued. For the organization which acquires another, it is an acquisition for the organization which is acquired, it is a merger. If both organizations dissolved them identify to create a new organization, it is consolidation. for examples – In Indian corporate world such as polyolefin industries with NOCIL e.tc

Types of Mergers

1. Horizontal Merger- It takes place when there is a combination of two or more organization in the same business. For instance, a company making footwear combines with another footwear company.
2. Vertical Merger – It take place when there is a combination of two or more organization, not necessarily in the same business which create complementarily either interim of supply of materials. For instance, a footwear company combines with a leather tannery.
3. Concentric mergers – It take place when there is a combination of two or more organization related to each other in terms of customer functions, customer groups. Thus, a footwear company combining with a hosiery form making socks.
4. Conglomerate Merger – It take place when there is a combination of two or more organization unrelated to each other either in terms of customer functions or alternative technologies. For examples footwear company combining with a pharmaceutical firm.

Reasons for Merger

For a merger to take place, two organizations have to act. One is the buyer organization and other is the seller. Both these types of organizations have a set of reasons on the basis of which they merge.

1. Why the buyer wishes to merge –
• To increase the value of organizational stock
• To improve stability of earning & sales.
• To reduce competition.
• To acquire needed resources quickly.
• To take advantage of synergy.
2. Why the seller wishes to merge –
• To increase the value of the owner's stock and investment.
• To increase growth rate.
• To acquire resources to stabilities operations.
• To benefits from tax legislation.
• To deal with top management succession problem.

Acquisition or Take Over 

It is common way for acquisition and may be defined as -The attempt of one firm acquires ownership or control over another against the wishes of the latter's management. many takeovers may not have any elements of surprise and may not necessarily be against the wishes of the acquired firm. It is a popular strategic alternative adopted by Indian companies. the post liberalization period has been an increasing use of takeover strategies as a mean of rapid growth major companies which have been taken over included Ashok Leyland, Dunlop, ACC e.tc

How Take Over Take Place

• Spell out the objective
• Assess management quality
• Check the compatibility of business style
• Anticipate and solve the problem early
• Treat people dignity & concern.

Reason for Takeovers'

1. Rational Reason –
• Quick growth
• Diversification
• Reducing Competition
• Creating goodwill.
2. Irrational Reasons –
• Greed or Lust to become rich
• To accumulate wealth
• To build an Industrial empire.

Types of Takeovers 

1. Hostile Takeover – It is resisted or expected to be opposed by the existing management or professional. Here the shares are picked up from the open markets and controlling interest is obtained. Examples- NEPC bid for Modiluft.
2. Friendly Takeover – it is done by mutual consent with the existing management or professionals. Tata tea takeover of consolidated coffee & Asian coffee is an example of friendly takeovers.

Pro and cons of Takeovers 

For –

1. Offer easy growth opportunities
2. Create mobility of resource
3. Avoid gestation periods &hurdles involved in new projects
4. Offer a chance to sick unit to survive
5. Open up alternative for selective divestment.

Against –

1. Professionalism gets replaced by money power.
2. It does not create any real asset for society
3. The interest of minority shareholders is not protected
4. Stress & strain are created
5. Exposed to threat of takeover.

Franchising 

It is a term which can be applied to just about any area of Economic Endeavour. Franchising encompasses products and services from the manufacture, supply for manufacture, processing, distribution and sale of goods, to the rendering of services, the marketing of those services, their distribution and sale. It may be defined as a business arrangement which allows for the reputation, (goodwill) innovation, technical know-how and expertise of the innovator (franchisor) to be combined with the energy, industry and investment of another party (franchisee) to conduct the business of providing and selling of goods and services.

What Makes a Good Franchise? 

Franchising to the uninformed is often seen as easy money or a get rich quick scheme. These perceptions are usually the result of looking from the outside and seeing a successful, flourishing business, being run efficiently, with charm and grace - seemingly with a minimum of fuss. Successful franchises are the result of innovation, initiative, investment and industry. A good franchise is always sparked by a good idea which fills a market need. The good idea, for example the “Hire-a-Hubby”, “Mr. Green” or the “All Around” concepts happened along at the right time and at the right place – The good idea was reinforced by the initiative and drive of their creator to make the idea work. A blueprint “system” for repeating success was established, developed, updated and monitored requiring the investment of time, money and innovation. This innovation ensured that client expectations are met, anticipated and managed and, of course – the innovation resulted in a unique, memorable and exclusive name being devised and a unique brand established

Advantages of Owning a Franchise

1. Freedom of employment
2. Proven brand, trade mark, recognition
3. Industry know-how
4. Reduced risk of failure
5. Access to proprietary products or services
6. Bulk buying advantages

Things to be Aware of When Choosing a Franchise

1. Franchising is business. It is the buying and selling of goods and services and, like every business transaction, requires careful thought before the transaction action is completed.
2. Buying a franchise is just the same as buying into any business. The purchase needs to be made in the cold light of day and not on impulse.
3. Balance sheets need to be looked at and bottom lines investigated. The franchise should also be compared with similar franchises in similar areas so the at pears are compared with pears and realistic expectations and incomes ascertained.
4. The most overlooked aspect of franchising and one that is invariably taken for granted is the Intellectual Property owned by the franchisor – or in some cases not owned by him.
5. A name-brand availability search is therefore essential and should be performed by a professional search service.
6. Other aspects of Intellectual Property such as patent ownership, copyright and marketing wishes should also be investigated and their ownership (right to use) determined.

Licensing 

There is no such thing as a standard license. Every arrangement is unique and has its own special requirements, aims and objectives. All licenses should be read and re-read and should be placed before a licensing professional or IP professional before being signed. Needless to say, every license should be clear to all parties concerned. The individual parties should be aware of the obligations that the contract places on them, the conditions that have to be met and the time lines by which specific functions are to be performed. All of these features should be transparent and measurable. Each party should also be acutely aware of the other parties’ responsibilities. Territorial or geographical boundaries should be made clear, as should all payment obligations and the amounts that are to be paid (and how they are calculated). All payment, dates should be clearly laid out, preferably in a schedule. Penalties, such as default payments, breach of contract conditions, rights to assign, the term of the contract, and the right to renew is also important considerations that are often overlooked or not fully understood. Bonus conditions might also be negotiated and should not be dismissed in a licensing agreement There are, though certain features that should be considered in the development of every license.

The following is a list of some of the things that should be considered:

1. Is the license exclusive, i.e. granted to only one person, or non-exclusive?
2. Can the licensee sub-license?
3. Who pays for prosecution and maintenance of any Intellectual properties
4. Who is responsible for filing for further improvement patents in overseas?
5. In whose name will the applications be made in?
6. Who pays for any matters such as preparation of the license, record of licensee, etc?
7. Is there a required commitment on the part of the licensee to fully exploit the invention?
8. What is the term of license?
9. Is there a right to renew?

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Sandeep Ghatuary

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