Business Acquisition Questions
1 Now more than ever, entrepreneurs are seeking strategies that minimize the risks, management issue, and valuation challenges and maximize profits. Existing businesses provide a good alternative for the entrepreneur to leverage on the already established market to maximize profits compared to starting a business from scratch. Start to face numerous challenges and often fail due to many unknowns in the market. The existing business demonstrates a track record and portfolio that help investors track the performance of the business to determine the amount allocated to the business. From this perspective, venture capital firms are quick to offer loans to individuals/companies seeking to purchase businesses with a compelling promise to grow and low-risk profile (Brian, 2020).
2 Before deciding to purchase an existing business, it is pertinent to review these four documents to ascertain the credibility of the business. The first document is the Company’s Articles of Incorporation and amendments. The second is the Company’s Bylaws and all amendments. It is of paramount importance to illuminate the desired changes that the former leaders managed to enact for the proper running of the business. Thirdly the buyer should review the company’s minute. This booklet comprises of all minutes and resolutions of shareholders, directors executive committees and other governing groups. Finally, the entrepreneur should examine the company’s organizational chart. These documents should be reviewed in the presence of an attorney; insurance advisors who have ensured the business you are purchasing (FindLaw, 2020).
3 Valuation of a business using the going concern involves a detailed examination of the current and prospects of the business. Most of the acquired companies are evaluated and valued according to the growing concern approach. This approach is based on the notion that the company’s assets will continue to accumulate profit irrespective of the time; it will be in the market. Typically this means that accompanies value is calculated based on the amount of its future profitability, intangible assets and goodwill such as company’s brand names, customer loyalty, trademarks and patents. In this case, a company on sale can charge a higher rate that is higher compared to the liquidation value (Kenton Will, 2020).
4 Entrepreneurs have two distinct options during the sale of a business. Ideally, the company can opt for an asset sale or an entity sale. In an asset sale, the organization sells its assets to the buyer but remains in control of the business shares; therefore, the selling company continues to enjoy the ownership interests (Allbusiness, 2020).
5 A franchisor requires the franchisee to follow the stipulated laws and regulations governing the sale of a business. Through this, the franchisor can protect the interests of the franchisee and save the trademark image of a company. Also, franchisors require franchisees to form a private separate legal entity to minimize risks, sanctions that may affect the running and operation of the franchise (Spadealaw, 2020).
6 Business formatting franchise inextricably links the franchisor’s success to the success of the buyer on a long term basis, unlike traditional distribution models that are designed to benefit the sellers only. This type of franchising creates a win-win situation for all the participants involved. In this regard, a well-established franchise creates a conducive environment for the growth and success of both sellers and buyers. Business format franchise also offers a powerful incentive for participants to support the franchising system (Which Franchise, 2020).
7 Franchisee play a central role in the franchise arrangement. Franchising bridges the existing management and labor gaps in the market. For instance, when the franchise experiences a financial crisis, the franchisee is in a position to hire new workforce and expand the business to deliver high quality of service and products to the target market. The franchise creates broad brand awareness and if the franchise is selling the flagship products builds brand image of the parent company. In furtherance, the franchise increases goodwill and ventures into new markets. Also, franchising accelerates the speed of growth of a market and allows the need to gain a competitive edge in the market. Through this, the parent company can saturate markets and compete with large corporations since franchisee performs most of the task (Entreprenuer, 2020).
8 According to business consultants franchisors the ability to convert implicit knowledge is a crucial asset to the growth and development of a franchise. With a rigid management framework, the franchisee can alter the management policies of a franchise to match that of the parent company. Efforts to convert the tacit knowledge can cause drastic changes in the nature and dynamic process of the knowledge creation that leads to systematic control and dissemination of knowledge (Emerald Insight, 2010).
- The due diligence process the financial statement paints a picture of the financial capacity and capability of the business. The financial statements examine the extent and nature of the liabilities, assets, problematic contracts, litigation risks, intellectual property issues, debts in an organization. From this perspective, the financial statement provides a clear picture of the business economic outlook to eliminate potential risks that may be surrounding a business. Through the detailed analysis of an organization financial power, the buyer will have an in-depth understanding of the mitigation and negotiation measures to employ during the merger and acquisition(Forbes, 2019). /
10 Over the last decade, mergers and acquisition have become highly prevalent in the contemporary business environment. Since1800 unions have taken the business environment by storm due to the high computing power in the global landscape. Historically the great depression of 2007 triggered horizontal mergers of companies. The financial crisis began numerous horizontal mergers of companies which were known as the excellent merger movement in the US business environment. The second significant event that caused multiple mergers and acquisition is the regulatory shocks enacted in the wake of 2014 by the United States bank. The laws mandated for the elimination of regulatory barriers that may have prevented business considerations. Next, in line are the technological shocks that alter the performance and operation of a business and forces it to consolidate its assets with another company to remain in place.
11 The organizational characteristics influence an international joint venture and structural mechanisms that determine the knowledge acquisition and absorption processes. Initially, the parent company establishes the key performance indicators the international joint venture should operate on. It also illustrates the values, direction, and nature of the business. During this stage, the parent company does not micro-manage the venture but establishes a communication framework that aligns with the International joint ventures. However, franchising can attract numerous problems within the parent company the franchisor making the transition process seamless for the international joint venture. Through a well-integrated communication and management framework, the parent company shows commitment and enhances ease of knowledge acquisition (Tsang, Nguyen, & Erramilli, 2004).
12 A buyer interested in a merger and acquisition should be keen on crosschecking the selling company’s registration documents, list of directors, status and role in the company’s assets and investment. As part of due diligence process the buyer should examine the ITR documents for the period not exceeding five years, a comprehensive list of the all the companies branches and subsidiaries, market structure and position in the stock exchange market and plans of investing in the stock exchange market. The buyer should conduct an official analysis of the market demographics, market penetration and customer base in the different countries the company operates. Lastly, it is of paramount importance for the buyer to cross-examine the minutes the shareholders and board of directors meetings since the company or business was founded (Finance Management, 2020).
13 Acquisition refers to the process of purchasing company’s/business assets, shares by another company. Nowadays, the acquisition is a commonplace, especially with the ever-changing business environment. There are two distinct types of investments, namely: leveraged buyout and bailout acquisition. A leveraged buyout is an acquisition that involves the purchase of a company through the use of borrowed funds to fulfil the selling valuation. On the other hand, buyout bailout is consists of the acquisition of a failing company due to financial instability. Most of the time government provides funds to ensure the survival of the business to avoid the bankruptcy of the company (Dunleavy, 1986).
- In the event of a merger, the buying company injects money/resources into the parent company that revitalizes the company. For this reason, the company can increase its profits, thus meeting its financial goals in the process. In a merger, there is a drastic change in management. This boosts the parent company and boosts the morale and motivation of the existing employees, thus increasing output per production. Additionally, mergers help a company regain its position in the stock exchange market(Kathryn, 1988).
15 A congeneric merger is a type of merger involving two businesses operate within the same business environment and have a similar customer base but do not necessarily offer the same products (Rosemary, 2019).
References
Allbusiness. (2020). Selling Your Business: Entity Sale vs. Asset Sal. Retrieved from Allbusiness: https://www.allbusiness.com/selling-your-business-entity-sale-vs-asset-sale-3881519-1.html
Brian, H. (2020). Buying an Existing Business Versus Starting a Business. Retrieved from Chron: https://smallbusiness.chron.com/buying-existing-business-versus-starting-business-2477.html
Dunleavy, P. S. (1986). Leveraged Buyout, Management Buyout, and. Fordham Urban Law Journal.
Emerald Insight. (2010). Knowledge creation and business format franchising. Retrieved from Emerald Insight: https://www.deepdyve.com/lp/emerald-publishing/knowledge-creation-and-business-format-franchising-ewqmdMxodw
Entreprenuer. (2020). The 9 Advantages of Franchising. Retrieved from Entreprenuer: https://www.entrepreneur.com/article/252591
Finance Management. (2020). HomeMergers And AcquisitionsDue Diligence Checklist – Merger and Acquisition. Retrieved from Finance Management: https://efinancemanagement.com/mergers-and-acquisitions/due-diligence-checklist-merger-and-acquisition
FindLaw. (2020). Buying a Business: Due Diligence Checklist. Retrieved from FindLaw: https://www.findlaw.com/smallbusiness/starting-a-business/buying-a-business-due-diligence-checklist.html
Forbes. (2019). A Comprehensive Guide To Due Diligence Issues In Mergers And Acquisitions. Retrieved from Forbes: https://www.forbes.com/sites/allbusiness/2019/03/27/comprehensive-guide-due-diligence-issues-mergers-and-acquisitions/?sh=47c56125743e
Kathryn, S. (1988). Going Priv Going Private and Going Under: Le ate and Going Under: Leveraged Buy aged Buyouts and the outs and the. Indiana Law Journal.
Kenton Will. (2020). Going-Concern Value. Retrieved from Investopedia: https://www.investopedia.com/terms/g/going_concern_value.asp
Rosemary, C. (2019). Conglomerate and Congeneric. Retrieved from Balancesmb: https://www.thebalancesmb.com/conglomerate-and-cogeneric-mergers-392843
Spadealaw. (2020). Should Franchisors Allow or Require Franchisees to File Fictitious Name Registrations? Retrieved from Spadealaw: https://www.spadealaw.com/resources/should-franchisors-allow-or-require-franchisees-file-fictitious-name-registrations
Tsang, E., Nguyen, D. T., & Erramilli, K. (2004). Knowledge Acquisition and Performance of International Joint Ventures in the Transition Economy of Vietnam. Journal of International Marketing, 82-103.
Which Franchise. (2020). The 6 Different Franchise Formats. Retrieved from Which Franchise: https://whichfranchise.co.za/about-franchising/6-different-franchise-formats/
