Buying a Business

Contributed by

Neeraj Hirani

Objective

• Advantages of buying a business

• Disadvantages of buying a business

• Steps involved in buying a business

• Becoming a franchisee

Advantages

• Easier to start

• Established customer base

• Established supplier network

• Goodwill exists

• Equipment already installed

• Free advice from previous owner

Advantages (cont.)

• No scouting for locations, land deals, etc

• Presence of experienced employees

• Revenue starts sooner

• Banks may be more willing to lend

• Inventory in place (with past records)

• Possibility of phasing payments to previous owner

Disadvantages

• Existing bad reputation is now yours• Equipment may be outdated• You may end up paying high• Location may stink• Contractual relationships may be unfavourable• You inherit bad employees• The business / industry may be dying

What to do

• Visit the business

• Visit again

• Find out why is the owner selling

• Go to competitors, customers, suppliers

Items to be investigated

• Capital equipment

• Accounts receivable

• Contracts

• Customer lists

• Employees

Cont.

• Statutory dues

• Other liabilities

• Licenses and permits

• History (partnerships / bankruptcies)

Valuation

• Asset appraisal– Replacement value– Market value– Book value

• Future earning capitalisation– Adding a continuing value of the firm to it

Kinds of purchase

• Asset purchase

• Stock purchase

(escrow account)

Buying a Franchise

Advantages

• Reduction of risk

• Turnkey operations

• Standardised products and systems

• Standardised finance & a/c systems

• Collective buying power

• Supervision & consulting readily available

Advantages (cont.)

• National & local advertising

• Point-of-sale advertising

• Uniform packaging

• Ongoing R & D

• Financial assistance??????

• Site selection guidance

Advantages (cont.)

• Obviously….an established Brand

• Sales and marketing asistance

• Training

• Assistance to acquire certification (HACCP, ISO etc)

Items to investigate

• Is the product / industry growing, stable or on the decline

• Local demographics

• Traffic / city planning variables (in case of retail outlets)

Investigate the franchisor

• Market share of franchisor

• Market share growth

• Reputation of franchisor

• How long has it been in business

• Lawsuits (particularly from franchisees)

• Structure of company

Ask about other franchisees

• How many are there

• Where are they located

• What is the average topline / bottomline

• Failure rate

• Current expansion plans

• Any guaranteed territories

• Master franchisees

Ask other franchisees

• Is it a good deal? Why / why not?

• What is the real profit

• Relationship with franchisor

• Are you happy with the support

• What is lacking

• Competition

• Seasonality of business

Scrutinise agreement

• What goods & services are to be bought from franchisor - optional? alternatives?

• Training and its costs

• On-site management help and its cost

• Franchise fee – fixed / floating / installments

• Royalty payments

Scrutinise agreement (cont.)

• Ongoing charges for advertising

• Other fees (site location fee, accounting fee, upgrade fee)

• What fees are refundable and when (while opting out)

• Legal / arbitration clauses

• Actual cost of starting operations

Scrutinise agreement - 3

• Can you sell your franchise

• Will the franchisor repurchase it

• Renewal rights after franchise expires

• Options on new franchises being offered

• Right to transfer to children etc

• Restrictions on setting up competing businesses – now or later