2. 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.
3. 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.
4. 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• The equipment could be old and outdated.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.
5. 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 company’s 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.
6. Buying a Business
• Preliminary information collection
• Site visit
• Scrutiny
• Additional information collection
• Negotiation
• Transition
7. Getting Information
• The industry
• Accountants, lawyers
• Bankers
• Advertisements
• Others
8. 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
9. Valuation
• Value of assets
– Book value
– Replacement value
– Market value
• Return on investment
• Payback period
• Discounted cash flow
10. Negotiations
Elements other than cash:
• Combination of stock and cash
• Accounts receivable
• Lease; with option to buy
• Non-compete clause
11. Common Mistakes While Buying
• Scrutunise claims
• Risk vs returns
• Further investment
• Valuation of receivables
• Antagonising the seller
12. 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
14. 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
franchisee’s employees before letting a new franchisee
start the business.
15. 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.
16. 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 franchisor’s 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.
17. Choosing a Franchisor
• The franchisor’s 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.
18. The Franchise Agreement
• The size and location of space needed
• The franchise fee including down
payment and continuing royalties
• Refundable deposits
• A franchisee’s allotted territory
• The range of products and services
which are offered by the franchisor
19. 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
