Acquiring Business

Question 1

How can a business be acquired?

Answer 1

• entering a franchise agreement
• starting a new business from scratch
• buying an existing business
• expanding/growing an existing business

Question 2

What is franchising?

Answer 2

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

Question 3

What are the characteristics of franchising?

Answer 3

• 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

Question 4

What rules must the franchisee follow?

Answer 4

The franchisee must:
- not deviate from the menu
- follow the design of the store as told by the franchiser
- only advertising from the franchiser

Question 5

What are the costs associated with franchising?

Answer 5

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%)

Question 6

What are the advantages for the franchisee?

Answer 6

• 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)

Question 7

What are the disadvantages for a franchisee?

Answer 7

• 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

Question 8

What are the advantages for a franchiser?

Answer 8

• 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

Question 9

What are the disadvantages for the franchiser?

Answer 9

• 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

Question 10

What does FASA stand for and what do they do?

Answer 10

1. Franchise Association of South Africa
2. They act as an arbitrator in disputes between franchisers and franchisees. They govern the behaviour of both parties ensuring they both act ethically.

Question 11

What is the Franchisee Forum?

Answer 11

Enables franchises to work together and share information to improve efficiency

Question 12

Who registers with FASA

Answer 12

The franchiser

Question 13

What is the contract between a franchisee and franchiser called?

Answer 13

Franchise agreement

Question 14

Which are the three ways in which you can buy an existing business?

Answer 14

Mergers, takeovers (hostile) and joint ventures (still two businesses)

Question 15

What is backward integration?

Answer 15

Control over raw materials/suppliers

Question 16

What is forward integration?

Answer 16

Control over distribution of own products

Question 17

What is horizontal integration?

Answer 17

Buying up and controlling the competition

Question 18

What factors must be considered when buying an existing business?

Answer 18

• 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

Question 19

What is outsourcing?

Answer 19

The act of one company contracting with another company to provide services that might otherwise be performed by in-house employees

Question 20

What are the advantages of outsourcing?

Answer 20

• 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

Question 21

What are the disadvantages of outsourcing?

Answer 21

• 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

Question 22

What is a lease and what is leasing?

Answer 22

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

Question 23

What are the disadvantages of leasing?

Answer 23

• ownership is never transferred
• leasing agreement can be more complex to manage
• it can be more expensive then if you buy the asset

Question 24

What are the advantages of leasing?

Answer 24

• capex (capital expenditure) is reduced
• no need to pay repairs and maintenance
• leasing is tax deductible