BUYING A BUSINESS

By

Rajeev Roy
Associate Professor & NEN Faculty Leader XIMB

BUYING A BUSINESS

CHAPTER 7 ENTREPRENEURSHIP By

RAJEEV ROY
OXFORD UNIVERSITY PRESS 2008

Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008

Chapter objectives
To list the benefits of buying an existing business To list the disadvantages of buying an existing business To discuss the possible sources of information about a business for sale To describe a step by step process of buying a business To tabulate the factors to be investigated before a purchase To understand various methods of valuing a business To discuss the major mistakes made in buying a business To understand the concept of franchising To list the benefits of being a franchisee To discuss the factors important in evaluating a franchise opportunity To describe the elements of a franchise agreement

Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008

Advantages of Buying a Business

Buying an existing business will enable you to go around a lot of problems likely to crop up in opening a business. The existing business would have already got some licenses and government approvals which would be otherwise difficult to get. Land is scarce and it is difficult to find an appropriate location. An existing business is likely to come bundled with the land. The plant and machinery have already been bought and have been installed and tested. Employees are experienced. A supplier base has already been established.
Entrepreneurship Oxford University Press, 2008

Rajeev Roy, XIMB

Advantages of Buying a Business

There is a readymade market. A distribution network has been set up and money and effort has already been invested in establishing a rapport with retailers and wholesalers. Goodwill and reputation would have been built up. Cash flow is going to start immediately. Banks may be more willing to lend to a business with running operations, an established customer base and a steady cash flow. It might be cheaper than setting up new operations. The former owner may be persuaded to guide you in the early days. This free advice may prove to be invaluable.
Entrepreneurship Oxford University Press, 2008

Rajeev Roy, XIMB

Disadvantages
The industry as a whole is not doing well and the situation is not likely to improve in the near future. The owner may not have been truthful about the business. The equipment could be old and outdated. The location is bad or is likely to become bad. Employees may be unproductive or incapable of meeting the standards required of them.
Entrepreneurship Oxford University Press, 2008

Rajeev Roy, XIMB

Disadvantages
Any bad reputation that the business had acquired amongst suppliers, distributors and other people in the industry is likely to pass on to you. The previous owner may have got into some unfavourable long term contractual obligations The inventory lying in stores could be obsolete or unfit for use. If the companys products have not been received well by the market it will be harder to gain market share than it would have been for a new product.
Entrepreneurship Oxford University Press, 2008

Rajeev Roy, XIMB

Buying a Business
Preliminary information collection Site visit Scrutiny Additional information collection Negotiation Transition

Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008

Getting Information
The industry Accountants, lawyers Bankers Advertisements Others

Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008

Scrutiny
Financial statements Other statutory documentation Valuation of capital equipment Inventory Licenses and permits Contracts with customers and suppliers Debt and accounts payable Accounts receivable Reputation of the firm
Entrepreneurship Oxford University Press, 2008

Rajeev Roy, XIMB

Valuation
Value of assets
Book value Replacement value Market value

Return on investment Payback period Discounted cash flow

Entrepreneurship Oxford University Press, 2008

Rajeev Roy, XIMB

Negotiations
Elements other than cash: Combination of stock and cash Accounts receivable Lease; with option to buy Non-compete clause

Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008

Common Mistakes While Buying

Scrutunise claims Risk vs returns Valuation of receivables Antagonising the seller

Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008

McDonalds
Arguably the most successful franchise chain Operates 30,000 outlets in over 100 countries Became a success after Ray Croc bought it from the McDonald Brothers
Rajeev Roy, XIMB
Entrepreneurship Oxford University Press, 2008

Franchising

Advantages of a Franchise
By taking a franchise, you get a proven system of operation. The franchisor allows you the use of an established brand name. The franchisees can also use professionally designed point of sale advertising materials, packaging material, posters and print and TV ads. This brand recognition is driven by national and regional advertising programmes. The franchisor will often train the franchisee and the franchisees employees before letting a new franchisee start the business.
Entrepreneurship Oxford University Press, 2008

Rajeev Roy, XIMB

Advantages of a Franchise
Ongoing product development and research is another advantage of being with a franchise chain. Large companies can gain from economies of scale but that would not be possible for individual entrepreneurs. The cost of starting up the franchise operations and the ongoing operating costs are very well documented by the franchisor and the details are shared with all prospective franchisees. A franchisor can add value by putting a quality program in place. The franchisor often does market research to find out if the market is big enough to support an outlet.
Entrepreneurship Oxford University Press, 2008

Rajeev Roy, XIMB

Choosing a Franchisor
It is good to get into an industry that is growing and shows signs of sustaining a rate of high growth over the next few years. It is also important to take into account, the performance of the franchisors products in the market. It is better to choose a franchisor, which has been in this business for a long time. It is disadvantageous to become one of the initial franchisees in a chain. The reputation of the franchisor counts for a lot.
Rajeev Roy, XIMB
Entrepreneurship Oxford University Press, 2008

Choosing a Franchisor
The franchisors relationship with other franchisees is also a very important factor to consider. Take a close look at the profitability indicated in the figures shared by the franchisor. Some of the assumptions made while arriving at those figures may need to be changed. It might need a good amount of investigation to come up with accurate estimates of the success rate of franchisees.
Rajeev Roy, XIMB
Entrepreneurship Oxford University Press, 2008

The Franchise Agreement

The size and location of space needed The franchise fee including down payment and continuing royalties Refundable deposits A franchisees allotted territory The range of products and services which are offered by the franchisor
Entrepreneurship Oxford University Press, 2008

Rajeev Roy, XIMB

The Franchise Agreement

Training and who pays for it Advertising and who pays for it Any other assistance No-compete clauses Dispute resolution and legal recourse

Rajeev Roy, XIMB

Entrepreneurship Oxford University Press, 2008