Avenues of Acquiring A New Business

AVENUES OF ACQUIRING
A BUSINESS
Easier to raise finance if the business has a good history/image.
Reason why Immediate cash flow as there are already established customers.
entrepreneurs Market research has already been done and there is an
may decide to established customer base.
purchase an Distribution/Supply links/Staff/Network is/are already

established.
existing A market for business products or services has already been
business established.
Existing employees and managers may have experience they can

share.
Many business problems have already been solved.

Types of avenues of acquiring
businesses
Franchising
Meaning franchising
• Franchising refers to the purchase of a business idea.
• The entrepreneur will obtain premises and the right to • Examples of a franchise
offer the same products/services, with specific rules and
regulations as per the agreement. • McDonalds
• Franchising is the practice of using another person’s • Kentucky Fried Chicken (KFC)
business model and it can be seen both as a marketing
and a distribution. • Fish & Chips
• Franchising involves two parties: • Food lovers
o Franchisor-the person who sells the right to trade
in the products/services. • Filling stations
o Franchisee-the person who purchase the right to
reproduce the idea by offering the same
products/services.
• The franchisor grants the franchisee the right to
distribute its products and trademarks for a percentage
of gross monthly sales and a royalty fee.
Advantages and disadvantages of franchising
Advantages of franchising
Disadvantages of franchising
• It allows businesses to buy a well-known brand which guarantees sales and good
return. • Acquiring a franchise can be an expensive initial layout
• Purchasing a franchise is cheaper than starting a new business. • There are often restrictions in the agreement and terms of how the business
• Franchising reduces long-term financial risk. should be operated.
• A business is based on a proven idea and the product and service are tried and • Many creative entrepreneurs feel limited as to how much they can grow/expand
tested. their ideas.
• A franchisee can get support from the franchisor, which often includes training, • One poorly performing outlet may risk the reputation of the entire franchise.
advice, and marketing.
• A large portion of profits is paid in royalties, and often the franchisors do not deliver
• Forms of financing that are not available to the public are often available to on their promises.
franchisees.
• It is often difficult to sell a franchise/terminate a contract.
• Purchasing a franchise could be cheaper than starting your own business.
• The start-up cost many be a challenge without assistance from the franchisor.
• Businesses are able to use a recognised brand name and registered trademark,
which helps with advertising and marketing.
• The systems/operations/goods and services are well established.
• There is often access to group support from other franchisees and a network of
communication and legal advice.
• Established suppliers give bulk discounts as they form part of a larger group.
• The marketing and advertising costs are shared so they are often lower than for a
non-franchised business.
• Management advice is often provided, so it is not necessary to be a business

expert.
Contractual Implication of franchising
• The franchisor and franchisee must sign a franchise agreement which is legally binding on both parties. The agreement must cover the
following aspects:
o Confidentiality clause.
o Tax requirements.
o Disclosure documents
o Settlement of disputes
o How to sell or transfer the franchise
o Total investment
o How to deal with trademarks, patents and logos.
o Advertising policies
o The initial duration of the franchise and any renewal rights.
o The policies that govern the product or service.
o Royalties and service fees payable.
o Termination clause and its consequences
o Training and operational support provided by the franchiser
o The obligations of the franchiser and franchisee
o The nature and extent of the rights granted to the franchisee.
o The form of ownership that the franchise will operate under
Outsourcing
Meaning of outsourcing Examples of outsourcing
• IT outsourcing
• Outsourcing is when a business buys • Legal outsourcing
goods/services from another business • Security
to do the job instead of the business
• Cleaning
performing the function themselves.
• Recruitment
• One of the reasons for outsourcing is • Transport
that a business may not have sufficient • Staff training
capital to purchase the equipment to • Call centres
perform a specific function. • Computer installation and maintenance
• Accounting functions such as managing salaries and
wages.
• Catering services
Advantages and disadvantages of
outsourcing Disadvantages of outsourcing
•
•
Risk of losing sensitive data and the loss of confidentiality
Risks such as bankruptcy and financial loss cannot be controlled
Advantages of outsourcing
• Lack of Organizational Learning and innovative capacity.
• Outsourcing allows the business to focus on important • Managing the outsource provider could be more difficult than managing
business activities rather support activities. employees.
• A business has access to resources and equipment for a • Confidential issues could be at risk if the information is given to another company
who performs the function that is outsourced.
specific function.
• Outsourcing can create a crisis for the business if the outsource provider
• The production team is often shortened and quality is suddenly terminates its contract.
often improved because specialists are performing the • There may be a lack of personal care/quality as the business is not personally
function for the business. involved in the execution of the function
• A company is able to reduce costs as outsourcing can • Hidden costs and legal problems may arise if the outsourcing terms and
conditions are not clearly defined.
lead to a decrease in staff, remuneration, control and
operating costs. • Losing management control of business functions mean that the business may
no longer be able to control operations
• The business can focus on its vision /goals and to apply • Not understanding the culture of the outsourcing provider and the location where
its staff more effectively in its core business. you outsource to may lead to poor communication /lower productivity.
• Improved access to skilled people as the outsourced work • Problems with quality can arise if the outsourcing provider doesn't have proper
processes
will be done by highly skilled people without the company
having to employ them. • If important functions are being outsourced, an organization is mightily dependent
on the outsourcing provider.
• Fixed cost and overhead costs are lower for the business. • Outsourcing provider may work with other customers, they might not give full
time/ attention to a single company resulting in delays and inaccuracies in the
• Outsourcing will provide continuity during periods of high work output.
staff turnover.
• Labour unions are opposed to outsourcing, especially where labour brokers are
used.
Contractual implications of outsourcing
• A contract will protect and regulate the rights and responsibilities

of both parties involved. Some aspects that may be included in
the contract are:
o An exact description of the service/product.
o Duration of the contract
o A detailed description of the duties and the responsibilities of
both parties.
o Confidentiality
o Payment terms and conditions.
o Penalties for not delivering the agreed services
Meaning of leasing
Leasing • Leasing is the method whereby a

business pays for the use of an asset
e.g. equipment, land, material etc.
• The person who owns the asset is
known as the lessor
• The lessee is the person who uses the
asset.
• The lessor will make the asset available
to the lessee, who lease the asset in
return for an agreed amount called
leasing charges.
• The leasing fee usually includes a
maintenance fee and insurance fee.
• The lessor has to repair /replace the
asset if needed. Examples of leasing
• This is a method gives businesses the • Office equipment
option of obtaining the use of an asset
for a certain period, instead of buying the • Vehicles
asset
• Trailer
• Machines
• Clothing rental
businesses
Advantages of leasing for the lessor
• Leasing improves the cash flow of the business.
Advantages •
•
Leasing is regarded as an expense for the lessee and is therefore not regarded as debt.
The lessor receives a continual rental income.
and •
•
The lessor can get quantity discount by buying goods in bulk to supply various lessees.
The lessor receives a continual rental income.
disadvantages •
•
The asset can be returned to the lessor when it is no longer needed.
Makes budgeting and planning easier and it provides better control over cash flow.
•
of leasing •
•
Retains ownership of the asset, which can be sold to recover money at the end of the lease
There is no large financial outlay as the cost is spread over a number of months/years.
The lessor normally covers the maintenance/ replaces any damaged parts or equipment.
• There are tax advantages as rental payment are calculated as operating costs and therefor tax deductible.
• It is easy to lease a better/ newer version of the product without the capital outlay.
Disadvantages of leasing
• The lessee does not own the asset.
• The lessor has control over the financial obligation of the lessee.
• Some leases require the lessee to maintain and repair the asset.
• A large amount of money is spent on an asset every month, the total of which is a lot more than what the asset is worth.
• Maintenance agreements are usually expensive and non-negotiable.
• The agreement cannot be ended without a penalty.
• The lessee is responsible for maintenance even though they do not own the item.
• The total monthly cost can be increased.
• The lessor may not be able to sell the asset after the lease if it has not been kept in good condition.
• The lessor is committed to the contract and may not reclaim the asset before the lease expires.
• The lessee is committed to the contract and may have to pay for the lease even if they have no further use for the item.
Contractual implications of leasing
• The lease agreement will indicate whether the lessee becomes
the owner of the asset after the lease period for a fee or not.
● The following details must be stated on the lease agreement:
o Names of the parties entering the lease agreement/contract.
o Duration/Period of the lease
o Detailed description of what is being leased.
o Conditions of renewal
o The monthly amount payable
o Any conditions such as deposits, insurance and security
o Details of how the instalment will be calculated.
o Any specific conditions for renewing the lease at the end of the contract
period.
o The procedure and liability for legal costs if a dispute arises.
o The procedure if the lessor or lessee become insolvent
o Detail of insurance, maintenance and restrictive use, up-front payment and
instalments.

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AVENUES OF ACQUIRING

entrepreneurs Market research has already been done and there is an

may decide to established customer base.

purchase an Distribution/Supply links/Staff/Network is/are already

existing A market for business products or services has already been

Existing employees and managers may have experience they can

Many business problems have already been solved.

• The systems/operations/goods and services are well established.

• Management advice is often provided, so it is not necessary to be a business

• A contract will protect and regulate the rights and responsibilities

Leasing • Leasing is the method whereby a

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