The current report is devoted to the franchising and financing options applicable to Bright Sparks Software limited. When conducting this research concepts related to franchising as an option to the company’s financing are made. The report also presents a critical assessment of finance options available to expand the business including benefits and limitations in the Bright Sparks Software limited business expansion. Several financing options to Bright Sparks Software are discussed as well as appropriate recommendations with regard to the business’ financial need.
Finance is the lifeblood of a successful entrepreneurial or start up business. Usually, access to funding determines whether an entrepreneurial business like Bright Sparks Software limited dies in the infancy or succeeds. The report highlights the financing options to Bright Sparks Software limited entrepreneurial profitable venture. Being that the business is viable, i.e. it has successful history of trading and cash and/profit generation and that the management team are able to adjust to the business model to the current business climate, the business is able to secure enough funding from the following financing options.
Based on the viability and entrepreneurial nature of the business, grants may be sourced to finance the expansion. A range of supports and grants are available for entrepreneurial viable businesses from the state agencies. Securing the grant through Small Business Innovation Research Program is applicable. Grants programs are basically designed for innovative businesses. Bright Sparks Software limited is innovative and viable at the same time; therefore, it stands a better chance to win the regional, minority or state grant opportunities available. Grant aid is an applicable financing option since it is free money. Besides, investors like leverage provided by grants.
Small Business Loans are successful and most common means for which entrepreneurial businesses like Bright Sparks Software limited can obtain additional capital for expansion. This is due to the fact that banks participating in SBA program usually additional loan or capital on extremely attractive terms and conditions. Small business administration debt financing is best since it loosens credit flow. Since it guarantees lenders against portion of loss incurred on loan, it is the best source of capital for expansion. They also charge relative competitive interest rates.
Equity financing
Equity financing is applicable for Bright Sparks Software limited expansion. Accordingly, both private and personal equity is applicable. Tim Bright and Martin Sparks should consider personal equity. Bright Sparks Software limited promoter’s own funding is most appropriate. The investment of own money in the business is likely to show the potential investors the level of commitment to business success. For this reason, the owners should consider using personal savings in expanding the business. Combining personal savings with external sources of debt and equity permit owners to benefit from the effects of leverage.
The most common advantage of using personal savings for business expansion funding is that it is easy to access. It does not require unwarranted long applications to complete; neither does it demand any paperwork nor interest payments. Lastly, it guarantees owners full responsibility and control of the business. Besides, it is appropriate as it reduces the general risks associated with bank debts.
The business may as well use private equity for expansion. The following private equity sources may be appropriate.
Business angels or angel investors
These are basically private entity investors who pump capital in viable and profitable businesses. Although they seek active managerial participation, their contribution of business experience and know how may substantially boost the performance of the business. Besides, since they anticipate faster returns on their investment in businesses they invest in, they are appropriate source of funding. In effect, Angeles investors may be considered simply because they provide considerable good amount of money, usually to a tune of $1 million. They also present businesses which they invest in with sound networking opportunities. Business Angeles are as well considerably patient about their investments.
Venture capitalists
A venture capital is the money invested in high performing innovative businesses usually for stake in the company. Just like angel investors, besides the massive funding, venture capitalists come with massive wealth of expertise and support that guarantees success. Venture capitalists funding is however tome sensitive. They demand quicker return on their investments. Nonetheless, its acceptance presents potential loss of control and independence of owners--Tim Bright and Martin Sparks--as they actively take part in the business’ board. They may thus push certain strategic agenda not in line with that of the business.
Family and friends
Family and friends stand a better option for providing additional capital for expansion. It is appropriate since family and friends hardly demand equity stake in any business. Its upside is that it involves less contractual or legal strings, very convenient and may be available quickly. However, this source of funding may be unreliable and family members may be unprofessional.
A general drawback of equity financing is simply that the owners must give up the control and independence of the business. A situation that owners welcome equity partners, it simply means that some part of the business is sold and therefore retaining control over the business in the future is doubtable. Besides, investors may come in with their own control strategies and plans for the business and since that they are part of the business, owners must comply even if it is hard to buy the idea. Lastly, equity financing may be very complicated as accountants and attorneys advice are most needed. Therefore, paperwork must be filed before either party commit itself. It may thus not be timely besides being inflexible.
Commercial bank loans
This is a form of debt financing. With the Bright Sparks Software limited sound operating history and financial performance, debt financing through commercial bank loans is an appropriate source of additional funding for expansion. They offer short term, med term or long term capital funding. In addition they are in a position of financing all asset needs; equipment, working capital as well as real estate. Therefore, the business is likely to generate adequate cash flow to help cover payment of interest.
Commercial banks scarcely have influence on the business control or turn over a company’s equity. The business is able to get unsecured loans. Therefore, Bright Sparks Software limited should opt for a business loan that usually has a repayment period of three to fifteen years. This funding option is applicable as it is reliable, convenient and does not demand stringent collateral.
Besides, the owners may go for asset financing or enter into a leasing agreement where the asset is hired at some defined rate. However, this option may not appropriate since the lenders asset ownership is non-transferable. The most appropriate commercial loan is the European Investment Bank (EIB) loan scheme which offer attractively priced medium term finance specifically for entrepreneurial expansion.
Unlike other financing options, commercial banks are flexible. A significant advantage of debt financing is that it provides owners with financial freedom; their debt is limited to the loan repayment period. After the borrowed money is repaid, the lender has no further claim on the business. Despite its advantages, it may charge higher interest rate on the loan that may ultimately drain a business its cash flow. Also, they may demand assurance of loan repayment. This may call for a guarantor or a secured interest like mortgage on owners’ assets. It may be a limiting source if secured assets are not available.
In depth critical assessment of franchising and its relevance to the scenario given
Bright Sparks Software limited owners have an approach of taking their product national. Taking the business to the national may call for expansion through franchising. In essence, franchising is a model of business where several different owners share a brand name of a single business. Accordingly, it is a powerful tool for that aids in the distribution of goods and services, as well as for expansion nationally.
As a form of business expansion, buying a franchise constitutes buying the support systems and rights to operate and own a business already designed to the owners. Franchise outlets are established in different locations. Every location is forced to use same operating system, company name, management system, and purchasing procedures. On the other hand, franchisees pay the initial royalties and fee based on the revenues to the franchisers.
Method of distribution
Primarily, franchising is a method of distributing goods and services. It is a technique of business that aids in conveniently taking goods to consumers. As a method of distribution of its goods, Bright Sparks Software limited owners may go for either an affiliation mode of franchising, product franchises or business format franchises for products. By increasing its distribution outlets, the company is likely to expand take its products national.
Method of expansion
Franchising best suits the owners’ intention of going national with their products. The Bright Sparks Software’s business has customers spread along the South Coast but they have an approach to take their product national. This state guarantees the use of franchising to expand the business and consequently expand the scale of the business activity. Besides, when the owners use franchising as a method expansion, simply, additional capital formation will as well be realized. As opposed to the traditional methods of raising growth capital like commercial and bank financing, public or private security placements, or venture capital lending, franchising will help the business have additional capital formation as follow.
Using franchising, Bright Sparks Software limited owners will appropriate the capital, the effort and managerial talent of its franchisees. The franchisee, thus, will make a considerable contribution of capital to the expansion and strengthening of both the goodwill and the scale that is associated with The Bright Sparks Software limited brand and business. The owners are certain that the infrastructure will change if they go national and therefore more may be needed. To effectively acquire the needed infrastructure, franchising will definitely see franchisees offer capital, effort and managerial talent that may be part of infrastructure missing and therefore making relevant option for expansion and capital formation. Besides, the business is rapidly growing and therefore to advance its marketing goals, franchising is a sure way to expand the business.
However, for this type of business, franchising may not be a better alternative of expansion and capital formation. It is evident that the owners of the business are primarily involved in selling a product under a brand identification that is very important to them. The level of control and involvement, the regulatory burdens and costs of franchising may not be in line with the owners’ expansion needs and commercial goals. A franchise option therefore will only be appropriate if the marketing plan outlines a comparatively high degree of participation or control in brand prominence and retail operations as an identification tool at the retail levels.
Franchising of course will be a better option of business expansion and capital formation if the owners (franchisors) objective is to lay down the business format. Therefore, the owners may as well offer consulting services or provide intellectual property rights but not brand identification.
Current franchising models that the owners may choose
The owners of the business can choose either of the following franchising business modes. This is however dependent on the owners’ intent.
Single unit franchise model
In essence, the owners may just open one unit in a specific location. Owners have the right to allow one business to operate in a specified geographical area (Anderson 2010). The franchisee may be given the exclusive rights of operating and owning only one franchise in the location, but with similar operation structure and brand name (Kwblank77 2011). In direct franchising model, the owners may only grant additional franchises based on the performance of the first area.
Area development
This model of franchising guarantees the Bright Sparks Software limited owners to grant the area developer or the franchisee limited right to operate and open numerous franchised businesses in a broader geographic area (Kwblank77 2011). For instance, the owners may grant the location developers to open businesses that electronically handle and record bookings from the businesses’ own website in the entire region (Kwblank77 2011). The franchisees will however have to open predetermined number of stores or franchises in a defined time frame as may be required by the owners (Anderson 2010). The franchises must be opened in the territory as dictated by schedule.
Master franchising
In this model, the owners may grant the franchisee an exclusive right to open franchises in n extremely wider territory. The master franchisee should be in a position to expand the system or owners business in areas that they cannot access or familiar with (Finkelstein 2011). Also, the owners may give franchisee full right to sub-franchise, i.e. they may allow the franchisees to franchise within their locations as opposed to operating them themselves. Basically, this makes the master franchisee the franchisor in a defined territory. Master franchisor can decide to undertake either single, sequential or area developer to help it develop the territory it operates (Finkelstein 2011).
Sequential franchising model
The owners may as well give the franchisee in a given location to purchase an additional franchise, one at a time. For instance, having opened its initial franchise in location A, and upon its success, the franchise business will as well grant the franchisee to franchise another business in location B.
The owners of the Bright Sparks Software limited option of using franchising as an option to financing the growth of the business is justified as under.
If the owners choose franchising as their expansion option, they are likely to benefit from rapid expansion of the distribution network. For the reason that franchising involves the application of managerial talent, capital, as well as personnel resources of the franchisees, it will allow growth of distribution systems of the business more rapidly than when it uses its own personnel resources and capital.
Franchising will require lesser commitment of capital in the distribution system than vertically integrated schemes like venture capitalists or other form of joint equity arrangements. Basically, this will allow the owners capital and financial structure and resources be dedicated to administrative and marketing needs. Lesser structured models like sales agents and dealerships may as well cost the owners a far much less capital.
Because franchising involves submission of loyalty management skill, and because the franchisee will have a financial stake in the business, it must guarantee full financial and managerial support for its success. At the retail level, the business will still have intensified management. Conversely, it will benefit from a reduction in costs associated to labour simply because the franchisees’ own managerial involvement.
Usually, franchising reduces compliance costs. The owners will thus benefit from a reduced compliance costs resulting from countless legal local requirements of running the business. The business will thus not be liable to use and sales tax permit, payroll taxes, environmental compliance or laws governing employment, zoning laws, licenses, as well as the local’s consumer protection regulations. As opposed to the vertical integration forms of expansion like Angeles investors or venture capitals, through franchising, the owners will be able to shift the compliance responsibility costs to the local franchisees. This ultimately reduces the business’ operating expenses hence increasing profitability.
These reflections imply that franchising is exceptionally efficient method of expansion, more so to a geographically remote potential markets. Therefore, the owners should consider franchising strategy for financing the growth of the business as it does not interfere with the management structure and control like the vertical integration expansion options like angel investors, venture capitalists or debt financing.
References
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