Aquiring Businesses

Question 1

What are the reasons for buying an existing business?

Answer 1

• entrepreneur wants to own business, but does now want to start from scratch
• strategic: backwards integration (better control of stock)/forward integration (better control of distribution)/market consideration: businesses combine to work together
• diversify business activities

Question 2

What is franchising?

Answer 2

An agreement between franchiser and franchisee for the franchisee to distribute the franchiser’s product/service under their name

Question 3

Discuss the characteristics of franchising

Answer 3

• franchise agreement has to be signed (contract between 2 parties that creates obligations on both side)
• marketing tool, not a form of ownership
• franchisee buys package from franchiser and sells in a particular area
• business owned but must pay comission on sales to franchiser (5-10% turnover)
• franchiser has to spend time training the franchisee
• difficult to distinguish franchises because they are all standardized
• franchisee does day to day running of business
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Question 4

Discuss the costs of franchising

Answer 4

• Franchise fee: initial lump sum of money to buy rights to trade under franchisers name
• royalties: commission on sales
• turnkey operation: if franchiser helps franchisee set up, management fee charged

Question 5

Discuss the advantages and disadvantages of the franchisee

Answer 5

Adv:

• greater chance of success bc benefits off success and name of franchiser
• able to get advice and training from franchiser
• able to apply for borrowed capital easier, benefits off reputation of franchise
• franchise forums, franchisees work together

Dadv

• high costs
• conformed to strict prescriptions
• entrepreneur might get bored
• franchiser might not support

Question 6

Discuss the advantages and disadvantages for the franchiser

Answer 6

Adv:

• distribution of products to a wider variety (expand business)
• don’t have to do day to day runnings
• franchisees committed to success of franchise

Dadv:

• does not have direct control of success of franchise
• lots of Admin
• difficult to keep training

Question 7

What is FASA?

Answer 7

Franchising association of South Africa

• regulates the relationship between franchisee and franchiser.
• makes sure it is ethical
• acts as arbitrator in a dispute

Question 8

What is outsourcing?

Answer 8

Sub-contracting function that allows a third party to compete a day to day activity

Question 9

Discuss the advantages and disadvantages of outsourcing

Answer 9

Adv:

• third party is an expert, quality of that sector will be high
• business only outsourced when needed
• fixed cost: no extra expenses required e.g.: uif
• business can focus more on core functions
• third party outsourced is not the responsibility of the owner

Dadv:

• your business is not their main priority
• outsourced business might not have the same values as yours, conflict of interest
• less control over outsourced function

Question 10

What is leasing?

Answer 10

Agreement between lessor (owner) and lessee (borrower) in order for the lessee to use the lessors fixed asset provided that they pay monthly installments

Question 11

Discuss the advantages and disadvantages of leasing

Answer 11

Adv:

• capital expenditure reduced (good if you don’t have enough capital)
• does not have to spend money on repairs and upgrades
• tax deductible

Dadv:

• never have owenweship of asset
• less cost effective for long term because you could end up paying more than the value of the asset in installments