Acquiring Business Flashcards
How can a business be acquired?
- entering a franchise agreement
- starting a new business from scratch
- buying an existing business
- expanding/growing an existing business
What is franchising?
When one party (franchiser) grants another party (franchisee) the right to use it’s trademark as well as produce and market a product or service according to certain specifications
What are the characteristics of franchising?
- it is a marketing strategy, not a form of ownership
- it is a tried and tested, successful business concept. Good experience for an inexperienced entrepreneur
- Franchisee buys rights to sell the products/services of the franchiser
What rules must the franchisee follow?
The franchisee must:
- not deviate from the menu
- follow the design of the store as told by the franchiser
- only advertising from the franchiser
What are the costs associated with franchising?
INITIAL LUMP: sum payment to secure right to trade in the name of the business (10 years)
FURNISHING COSTS
MANAGEMENT FEE: only if franchiser assists with set-up. This is called a turnkey operation
ROYALTIES: payment for use of trademark. 5%-10% of turnover
ADVERTISING FEE: payment towards group advertising (1,5%)
What are the advantages for the franchisee?
- benefits from selling an established name
- has access to advice from franchiser
- franchise agreement offers franchisee legal protection
- more creditworthy
- franchise forums (franchisees help each other)
What are the disadvantages for a franchisee?
- high costs
- frustrating for a creative person
- sometimes there’s a lack of support from the franchiser
- may become boring for an entrepreneur who seeks challenges
What are the advantages for a franchiser?
- expand business quickly without too much capital
- franchisees are more committed to make a profit
- franchisees are responsible for the day-to-day running of the franchise
What are the disadvantages for the franchiser?
- can be difficult to keep training and assisting franchisee.
- franchiser does not have direct control over franchisee
- negligence by you one franchisee may lead to the entire franchise getting a bad name
- time consuming admin duties in collecting royalties and controlling the brand
What does FASA stand for and what do they do?
- Franchise Association of South Africa
- They act as an arbitrator in disputes between franchisers and franchisees. They govern the behaviour of both parties ensuring they both act ethically.
What is the Franchisee Forum?
Enables franchises to work together and share information to improve efficiency
Who registers with FASA
The franchiser
What is the contract between a franchisee and franchiser called?
Franchise agreement
Which are the three ways in which you can buy an existing business?
Mergers, takeovers (hostile) and joint ventures (still two businesses)
What is backward integration?
Control over raw materials/suppliers
What is forward integration?
Control over distribution of own products
What is horizontal integration?
Buying up and controlling the competition
What factors must be considered when buying an existing business?
- amount of capital available
- is the business in a convenient place for me
- does the business sell products/services which interest me
- what is the level of current staff competency
What is outsourcing?
The act of one company contracting with another company to provide services that might otherwise be performed by in-house employees
What are the advantages of outsourcing?
- the business can focus more on its core function
- the 3rd party is an expert in their field
- outsourcing has fixed costs
- cuts down administration
- service is only payed for when needed
What are the disadvantages of outsourcing?
- management has less control
- company outsourcing may not have the same values as the business
- lack of work ethic/negligence by the outsourcing company may lead to customers being unhappy with the business
What is a lease and what is leasing?
A lease is a contract agreement between a lessee (user) to pay the lessor (owner) for the use of the asset
Leasing is the process by which a firm can obtain the use of a certain fixed asset for which they pay contractual, periodic, tax deductible payments
What are the disadvantages of leasing?
- ownership is never transferred
- leasing agreement can be more complex to manage
- it can be more expensive then if you buy the asset
What are the advantages of leasing?
- capex (capital expenditure) is reduced
- no need to pay repairs and maintenance
- leasing is tax deductible
