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Options for going into business

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ë ssues to consider before going into

business
ë
tarting a new business
ë urchasing an existing business
ë ntering a franchise system
ë omparison of options
ë rocedural steps when starting a
business venture.
    

ë xplain the 3 major issues that all

prospective entrepreneurs and small-
business owners must consider before
going into business
ë ompare and contrast the advantages
and disadvantages of starting a new
business.
    

ë Outline the factors to take into account

when assessing a business for purchase
ë xplain the different ways of calculating a
business purchase price
    

ë escribe how a franchise operates

ë se the µ6 step¶ process to organise your
strategy for going into business
 V    

here are essentially 3 major options for

going into business:
ë aunch a new (start-up) business venture
ë urchase an existing firm
ë nter a franchise arrangement
         
 

ë ny business venture is driven by

3 forces:
± ersonal goals and abilities of the
owner/entrepreneur
± What resources are available to the
business owner (money, staff, etc)?
± he nature of the business opportunity
itself
    !   "
 


ë he owner can shape his or her own
vision
ë lexibility ² fewer constraints on owner
ë ost minimisation ² often cheaper to
start
ë
ew lifestyle goals ² can ensure
business and personal goals are closely
aligned from the outset
    !   "
  

# 
ë ard to raise capital
ë ack of an established customer base
ë ay suffer cash flow problems
ë equires considerable effort to learn how
to operate the business effectively
(µlearning curve expenses¶)
 R   $ 

ome costs are common to all new

enterprises, such as:
ë icenses and permits required to operate
the business
ë Working capital
ë ommunications equipment (such as
telephones, computers, fax machines)
ë Operating plant and equipment
 R   ! %$&
  

ë
taff recruitment expenses

ë nsurance
ë aw materials (or trading stock)
ë ental of premises (unless working from
the owner¶s home)
ë
tationery
In addition, there will also be industry-
specific expenses.
 =   '    

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ë an begin trading immediately
ë asier to arrange finance for the venture
ë stablished track record of the firm allows
a more objective evaluation of likely future
performance
 =   '    

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ë ay µinherit¶ existing liabilities
ë ess flexible than a start-up
ë ifficult to establish purchase price
 ï
     

hree major techniques used by sellers

(vendors) and purchasers:
1. arket-based valuations
2. sset-based valuations
3. arnings-based (cash flow) valuations
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*   )  

ë simply the µcurrent market¶ price for a
particular type of firm

ë aelling price = aelling price of similar firms

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+ 
 
 
ë common µindustry multiple¶ that is used to
estimate the most likely purchase price of
the practice
ë aelling price = Turnover × atandard
industry multiple
 $ 
 

nvolves setting a price after examining the

assets and liabilities of the business:
V) 

ë asking price is set by first calculating the
worth of all the firm¶s assets
ë aelling price = Tangible assets + Intangible
assets í Liabilities
 $ 
 

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ë simple book value method relying on the
books of account
 $ 
 

 ,   

ë value of the business if it was to be
broken up and sold as individual assets,
rather than continuing to operate it as a
going concern
 $ 
 

+
 

ë the cost of replacing all of the firm¶s
tangible assets (at current market costs)
 ï $ %
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+  
ë based on the assumption that the risk and
return of a business should be reflected in
its selling price. t works on a formula
which includes the estimated future profit
earnings:
ë a

  
 

 
 ï $ %
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#  
!
ë reduces (discounts) the future cash
income generated by the business back
to its current value

u
ë alue = u + terminal value
u

w
È
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ë Why is the business being sold?

ë Will existing staff remain if the business
is sold?
ë What debts/liabilities exist?
ë an all licenses and permits to operate
be transferred?
ë ow accurate are the financial
accounts?
 Ú   )

ë What is the future state of the industry ²

is demand increasing or decreasing?
ë s the lease on the premises secure?
ë What is the condition of the physical
assets?
ë Will existing customers remain loyal if
business has new ownership?
 ï     

ë n increasingly common form of business

operation.
ë n arrangement whereby the originator of
a business product or operating system
permits another business owner to sell
these goods, and/or to use the business
operations system, on his or her behalf.
 ï     

ë 
  ( a small firm
receives permission to sell a particular
product from an established parent
organisation, but remains legally
independent of that parent.
 ï     

ë ypically has lower failure rates than new

start-ups.
ë ood for small business owners seeking
security
ë ess suitable for entrepreneurial types.
 ï     

ë - ( he business or individual

who is given contractual permission to
operate a particular business franchise
system or sell a product by the original
owner of the same.

ë - (  business or individual who

owns the right to a particular business
franchise system or product.
 ï     

=  (
ë gives the small business operator the
right to sell a particular commodity, or set
of goods.
ë ranchisee is a distribution mechanism
for good or service; has a large measure
of independence about how their
business is operated.
 ï     

=   %.&(

ë ranchisor¶s role is limited to ensuring
that sufficient stock is made available,
and that the franchisee is selling the
product at a satisfactory price.
 ï     

V    (
ë  situation where the franchisor not only
supplies the product, but also gives
comprehensive guidelines about how the
business is run (e.g. conald¶s).
ë ll aspects of organising and operating
the business have already been
investigated, pre-tested and successfully
implemented by the franchisor.
     

ë he new business owner is spared the

task of developing an operating system
ë
ew business owner learns less
µby mistakes¶
ë ustomers are usually attracted by the
presence of an established product.
     

ë ower failure rate

ë ranchisors provide continuing training
for franchisees
ë re-organised access to raw materials
and supplies
ë aising capital can also be easier
 #     

ë ccess to these systems does not come

cheaply
ë urchase price is often quite high
ë ranchisees have to pay a proportion of
their profits to the franchisor
ë ranchisees are restricted to serving a set
market
 #     

ë ranchisees subject to contractual

arrangement, and as such have a limited
lifespan
R    
=
 !   
  

-  /
( he process of going

into business
 

ë here are 3 factors which influence all

business ventures:
± the personal goals, desires, experience
and abilities of the owner/entrepreneur
± the financial, human and other
resources available
± and the nature of the business
opportunity itself.
 

ë here are 3 different ways of getting into

business:
± starting a new business
± buying an existing operation
± or entering into a franchise
arrangement.
ë ach has their own advantages and
disadvantages.
 

ë here are 3 main ways of setting a price:

± market-based valuations,
± asset-based valuations
± and earnings-based (cash flow)
valuations.
 

here are 6 steps involved in the process

of evaluating business options. fter
these steps, the intending business owner
must critically evaluate which business
avenue is the best option.