Two months ago, Terry Smith had been so confident that he would soon own his
own Beano's Ice Cream franchise, that he had put an "I LOVE BEANO'S ICE CREAM" bumper sticker on his Honda. As he looked at it now, he noticed how faded it had become in such a short time. He wondered if in fact it had been a short time - or a lifetime.
Until recently, Smith had rarely second-guessed himself. After carefully researching an issue, he would base his decision on the facts and then proceed - without looking back.
Now, however, he knew he had to put all of the momentum from the past six months to one side. He had to forget about the months spent investigating franchises, selecting Beano' s, writing his business plan, and looking for financing. He had to forget about the fact that he had found only one prospective partner who could finance the deal - Barney Harris - and that he and his partner had spent several more months negotiating to purchase the franchise. He had to push away his own emotional investment in the deal now and make one more critical decision: should he go into partnership with Harris?
If he signed the partnership proposal that Barney Harris had given him, Smith would get his franchise. If he did not sign the agreement, he may or may not ever see his dream come to life. It depended on whether he decided to make a counter offer, to look for a new partner, or to walk away from the deal altogether. It was that simple: sign it and get all the marbles, or risk everything for the chance to get something better.
Now, as Smith looked at his faded bumper sticker, he realized that he had to evaluate the proposal in the context of the whole franchise deal. The question was not just, "Is this a good partnership proposal?" The real question was, "Given the potential of this particular franchise, and given my financial and managerial needs, will this proposal help me reach my goals?"
In the fall of 1995, Terry Smith, a 36-year-old marketing representative for a Fortune 500 telecommunications firm in Cleveland, was among the thousands of employees who were downsized.
At first, he investigated the possibility of working for other major corporations in Cleveland. His education (a B.S. in biology and an MBA) and experience made him very marketable. During the seven years he had spent with the telecommunications firm, he had developed a solid reputation in his field. In a relatively short time, he received several job offers for about $60,000 per year.
And yet . . . Smith felt reluctant to jump back into a large corporation. He realized that as a new employee, he would be among the first to be cut, if his employer experienced a downturn. Did he want to go through that again?
Smith had had a positive experience as an entrepreneur during the years he was in college getting his degrees. He had started a successful mobile music company. While it had not made him a millionaire, it had paid for his education and living expenses, even though he had worked only when he could take time away from his studies.
One day, he found himself captivated by an article in Entrepreneur magazine. It pointed out that the number of downsized executives who were turning to entrepreneurship had doubled over the past two years. In 1993, between six and eight percent started their own businesses; in 1995, over twelve percent did so.
Smith decided that he needed to explore his options as an entrepreneur. He knew the down sides of owning a business: the long hours, the stress, problems with employees, paperwork, and a lack of benefits. However, he felt that these could be outweighed by the opportunity to make all of the important decisions himself.
After several months of research, he decided to seriously explore the purchase of an ice cream franchise in Gainesville, Florida, called Beano's Ice Cream Shoppe, which cost $275,000 (see Exhibits 1-3 for the estimated costs and financial statements for a Beano's franchise). Smith had a net worth of $50,000 and a liquidity of $20,000, which meant that he had to obtain financing.
BEANO'S ICE CREAM SHOPPE, INC.'S BACKGROUND
Beano's was founded by Bill Hogan, Jeff Pricer, and Annie Aubey, three former executives who had grown weary of the corporate world. In 1968, they founded Beano's based on a secret ice cream recipe.
Since opening its first ice cream shop, Beano's has become one of the most respected ice cream companies in the U.S., selling superpremium ice cream, low-fat and non-fat frozen yogurt, and ice cream novelties. Sales and net income for Beano's have been increasing in recent years. Net sales have increased from $48 million in 1989 to $120 million in 1993. Net income has increased from $1.5 million to $6.7 million over the same time period. In the last quarter of 1994, net sales totaled $27,193,000, up two percent from $26,532,000. Overall, 1994 net sales went up from $120,328,000 to $128,802,000, an increase of seven percent.
Exhibit 1 Investment Breakdown of a Beano's Ice Cream Shoppe Franchise Expenditure Dollars Franchise Fee $ 30,000 Design & Architecture Fees $ 15,000 Real Estate & Improvements $ 80,000 Professional Fees $ 2,000 Equipment $ 40,000 Signage & Graphics $ 15,000 Miscellaneous Opening Costs $ 7,000 Initial Inventory $ 11,000 Working Capital $ 75,000 Total: $275,000
[TABULAR DATA FOR EXHIBIT 2 OMITTED]
The company …