T1: t7: Avenues Of Acquiring A Business

Question 1

Four reasons why entrepreneurs may decide to purchase an existing business

Answer 1

• the buyer can investigate the past records of the company
• easier to raise finance if business has good history and image
• immediate cash flow as there’s already established customers
• many problems have already been solved

Question 2

Definition of franchising

Answer 2

• a license to use the name, idea, processes, goodwill of an existing business in specific geographical area
• business that has established name, products, reputation

Question 3

Types of franchising

Answer 3

• product franchise
• system franchise
• manufacturing franchise

Question 4

Parties involved in franchising

Answer 4

• franchisee
• franchisor

Question 5

Definition of franchisee

Answer 5

• party who pays for franchise in fees and portion of profit
• person buying the franchise

Question 6

Definition of franchisor

Answer 6

Person who owns the rights and trademarks of a business and which grants the rights to operate a branch of the business to another party (franchisee) in exchange for a fee and portion of the profits

Question 7

Advantages of franchising

Answer 7

• other successful franchises can be studied before making a commitment
• business will use a recognized brand name and trademark
• business will benefit from any advertising/promotion by franchisor
• supplier relationships have already been established

Question 8

Disadvantages of franchising

Answer 8

• may be restrictions in franchise agreement on how you can operate business
• franchisor might go out of business
• other franchises might give the business a bad reputation
• percentage of sales is usually shared with franchisor

Question 9

Contractual implications of franchising

Answer 9

• initial duration of franchise and any renewal rights
• policies that govern product/service
• nature and extent of rights granted to franchisee
• form of ownership that franchise will operate under

Question 10

Four payments that the franchise agreement specifies

Answer 10

• initial fee
• monthly management fee
• fees for machinery and equipment
• fees for advertising

Question 11

Definition of outsourcing

Answer 11

• entails transferring certain functions to subcontractor
• subcontractor is someone that isn’t employed by the business but provides goods/services to the business
• these suppliers could be manufacturers or distributors

Question 12

Advantages of outsourcing

Answer 12

• business personnel costs are lower (eg. Employee benefits and wages)
• production time is shortened
• flexibility to change subcontractors whenever necessary
• taxes are lower as producers are independent contractors

Question 13

Disadvantages of outsourcing

Answer 13

• business has less control over activities, and this could have undesirable results
• subcontractor has less commitment to the business
• sometimes the business has to face monopoly pricing and has to bear the cost
• business is dependent on the subcontractor for its production process. Therefore, communication problems could cause frustration, and the vendor’s problems could cause job losses in the company

Question 14

Contractual implications of outsourcing

Answer 14

• business and subcontractor will enter into a formal agreement
• business pays subcontractor for goods/service
• agreement needs to be very specific to avoid legal action (eg. It must include who pays for damages)

Question 15

Definition of leasing

Answer 15

When owner of asset agrees to allow lessee to use asset for specific period for a fee

Question 16

Parties involved in a lease agreement

Answer 16

• lessee
• lessor

Question 17

Definition of lessee

Answer 17

Person/business that pays to use asset for a specific period of time

Question 18

Definition of lessor

Answer 18

Person/business that allows lessee to pay to use asset for specific period of time and receive money

Question 19

Advantages of leasing

Answer 19

• business gains use of asset with less initial expenditure that if needed if asset were purchased
• business can acquire lastest technology without having to invest large amounts of capital
• leasing improves cash flow of business
• for lessee, lease payments are tax deductible

Question 20

Disadvantages of leasing

Answer 20

• lessee is bound by a contract even when a business may not need the items
• lease payments are treated as expenses rather than equity payments towards an asset
• paying lease payments towards a property, the business won’t benefit from any appreciation in value of the property
• lease agreement is a complex process and requires thorough documentation and proper examination of an asset being leased

Question 21

Contractual implications of leasing

Answer 21

• lessor and lessee enter into formal agreement
• lessee rents asset for a specific period of time
• lessee pays leasing charges to lessor in regular installments, usually monthly installments