ACQUIRING AN ESTABLISHED VENTURE:

Meaning of acquisition
An acquisition is a corporate action in which a company buys most, if not all, of the
target company's ownership stakes in order to assume control of the target firm.
Acquisitions are often made as part of a company's growth strategy whereby it is more
beneficial to take over an existing firm's operations and niche compared to expanding on
its own. Acquisitions are often paid in cash, the acquiring company's stock or a
combination of both.
Acquisitions can be either friendly or hostile. Friendly acquisitions occur when the target
firm expresses its agreement to be acquired, whereas hostile acquisitions don't have the
same agreement from the target firm and the acquiring firm needs to actively purchase
large stakes of the target company in order to have a majority stake.
Advantages of buying a business
Buying a business is generally considered less risky than starting your own business,
especially if you can buy a well-managed, profitable business for the right price.
Consider these advantages:

The difficult start-up work has already been done. The business would have plans
and procedures in place.
Buying an established business means immediate cash flow.

The business will have a financial history, which gives you an idea of what to
expect and can make it easier to secure loans and attract investors.

You will acquire existing customers, contacts, goodwill, suppliers, staff, plant,
equipment and stock.

A market for your product or service is already established.

Existing employees and managers will have experience they can share.

Disadvantages of buying a business

Keep in mind that not every business on the market is a good prospect. Many owners will
be selling unprofitable or under-performing businesses. While this can be a chance to buy
and develop a cheap business, it can also be a risky investment. Consider these
disadvantages:

The business might need major improvements to old plant and equipment.
You often need to invest a large amount up front, and will also have to budget for
professional fees for solicitors and accountants.
The business may be poorly located or badly managed, with low staff morale.

External factors, such as increasing competition or a declining industry, can affect

future growth.

Under-performing businesses can require a lot of investment to make them

profitable.

Considerations for evaluating business opportunities

WHAT IS A BUSINESS OPPORTUNITY?
A business opportunity can be defined as a sound business
idea which forms the basis upon which an entrepreneur makes a firm investment
decision.
FACTORS TO CONSIDER WHEN EVALUATING VIABLE BUSINESS
OPPORTUNITIES
An entrepreneur needs to determine whether the business
idea they have in mind is viable or not. When evaluating the viability of the
business opportunity, the following factors need to be taken into consideration:
1) Potential for growth:
An opportunity is said to be viable, when it has the ability to grow and expand.
2) Infrastructure:
Easy access to infrastructure such as roads, water, electricity, telephone and postal
services among others enables business enterprises easily make orders for goods
and deliver them hence reducing operating expenses. With low operating
expenses, profits can be maximized.

3) Market for the goods and services:

An entrepreneur has to access potential and actual market for the goods and
services he would like to sell. There must be a clearly defined market if the
opportunity is to be considered.
4) Rewarding to the investor:
The opportunity should be rewarding to the investor (cost-benefit consideration).
He should consider the expected returns against the expected cost to ensure that
the benefits outweigh the cost.
5) Price structure:
One has to put into consideration the price-structure of the goods and services he
would like to offer. Goods and services, which are subjected to constant inflation,
are likely to change in terms of price.
6) Competition and Competitive advantage:
Competition is regarded as a threat to business of similar kinds operating in a
similar location. Although competition is a threat, it is healthy in the sense that it
goes along the way in controlling price of goods offered. It is crucial for
entrepreneurs to consider opportunities where competition is not high as this will
enable them to get reasonable market share. They should venture where
competitive advantage is.
7) Incentives:
Offered by the government and Non-Governmental Organizations, incentives are
legitimate business opportunities to exploit as they save on costs. E.g. duty free
importation of sugar and maize, tax waivers, e.t.c.
8) Legal Consideration:
The new idea should be in line with the legal regulatory framework e.g. an idea to
sell drugs may not be viable because it is illegal.
9) Financial viability:
The assessment of financial viability is of significant importance when looking at
the viability of the business. Capital investment requirements, break even analysis,
cash flow projections, profitability of the business have to be analyzed. This is

because they determine the sustenance of the business in the market-mix.

10) Personnel, Training and Management:
Before starting a business, it is necessary to make an assessment of the required
personnel training and management. Look at the ability, cost of hiring and training
human resource. Management efficiency will enable the business to succeed.
Methods of valuing a business
If A buys a company, he buys its stock (equity) and assumes its debt (bonds and loans).
Buying a companys equity means that he actually gain ownership of the company if
you buy 50 percent of a companys equity, you own 50 percent of the company.
The commonly used methods for evaluating the worth of a business are:
1. Market valuation
2. Discounted cash flow (DCF) analysis
3. Comparable transactions method
4. Multiples method.
Market Valuation
Now lets look at the major techniques of valuation. Well begin with market valuation, as
it is the simplest way to value a publicly traded firm. A publicly traded firm is one that is
registered on a stock exchange (like the National Stock Exchange or NSE). The
companys stock can be bought and sold on that exchange. Most companies we are
familiar with, such as HUL, Infosys, and Tata Motors, are publicly traded. Every publicly
traded company is required to publish an annual report, which includes financial figures
such as annual revenues, income, and expenses.
The value of a publicly traded firm is easy to calculate. All you need to do is find the
companys stock price (the price of a single share), multiply it by the number of shares
outstanding, and you have the equity market value of the company. (This is also known
as market capitalization or market cap).
The market price of a single share of stock is readily available from publications like The
Economic Times, the number of shares outstanding also can be obtained from the
company publications, and you can calculate the market value.
Once you determine the market value of a firm, you need to figure out either the discount
or premium that it would sell for if the company were put on the market. When a
company sells for a discount it is selling for a value lower than the market value; when it
sells for a premium, it is selling for a value greater than the market value. Whether a
company sells at a premium or a discount depends on those supply and demand forces.

Typically, if someone wants to acquire a firm, it will sell for a price above the market
value of the firm. This is referred to as an acquisition premium. If the acquisition is a
hostile takeover, or if there is an auction, the premiums are pushed even higher. The
premiums are generally decided by the perception of the synergies resulting from the
purchase or merger.

Discounted Cash Flow (DCF)

There are two ways to value a company using the DCF approach:
Adjusted Present Value (APV) method
Weighted Average Cost of Capital (WACC) method
Both methods require calculation of a companys free cash flows (FCF) as well as the net
present value (NPV) of these FCFs.
( For details refer Financial Management books)
Comparable Transactions
To use the comparable transactions technique of valuing a company, you need to look
at the comparable transactions that have taken place in the industry and accompanying
relevant metrics such as multiples or ratios (e.g., price paid: EBITDA). For example,
when NationsBank was considering acquiring Montgomery Securities, it likely studied
comparable transactions, such as Bankers Trusts acquisition of Alex Brown or Bank of
Americas acquisition of Robertson Stephens. In other words, NationsBank looked at
other acquisitions of investment banks by financial institutions that had taken place in the
recent past, ascertained the relevant multiples at which these firms were acquired (EBIT
or Book Value, for example) and applied these multiples to the company which they were
trying to value.
With the comparable transactions method, you are looking for a key valuation parameter.
That is, were the companies in those transactions valued as a multiple of EBIT, EBITDA,
revenue, or some other parameter.
Multiple Analysis or Comparable Company Analysis
Quite often, there is not enough information to determine the valuation using the
comparable transactions method. In these cases, you can value a company based on
market valuation multiples, which you can do using more readily available information.
Examples of these valuation multiples include price/earning multiples (also known as P/E
ratios, this method, which compares a companys market capitalization to its annual
income, is the most commonly used multiple) EBITDA multiples, and others. Once you

have done this, you can add debt to ascertain enterprise value. When using these methods,
you look at which multiples are used for other companies in the industry to ascertain
equity value.

FRANCHISING
Franchising is a business model in which many different owners share a single brand
name. A parent company allows entrepreneurs to use the company's strategies and
trademarks; in exchange, the franchisee pays an initial fee and royalties based on
revenues. The parent company also provides the franchisee with support, including
advertising and training, as part of the franchising agreement.
Franchisees enjoy the benefit of strength in numbers, and will gain from economics of
scale in buying materials, supplies and services, such as advertising, as well as in
negotiating for locations and lease terms. By comparison, independent operators have to
negotiate on their own, usually getting less favorable terms. Some suppliers won't deal
with new businesses or will reject your business because your account isn't big enough.
Franchisees perspective
Once an entrepreneur has decided on the franchise route , next step is in choosing the
right one. With so many franchise systems to choose from, the options can be confusing.
He should start by investigating various industries that is of interest to find those with
growth potential. Narrow the choices to a few industries the entrepreneur is most
interested in, then analyze the geographic area to see if there's a market for that type of
business. If so, contact all the franchise companies in those fields and ask them for
information on their franchise opportunity. After putting the necessary research on
different franchisors on their reputation and background, the entrepreneur has to gather
more information by the following methods:

Interviews with the franchisor

Interviews with existing franchisees
Examination of the franchise's Uniform Franchise Offering Circular (UFOC)
Examination of the franchise agreement
Examination of the franchise's audited financial statements
An earnings-claim statement or sample unit income (profit-and-loss) statement
Trade-area surveys
List of current franchisees
Newspaper or magazine articles about the franchise
A list of the franchisor's current assets and liabilities

Through this research, the entrepreneur will come to know:

If the franchisor--as well as the current franchisees--are profitable

How well-organized the franchise is
If it has national adaptability
Whether it has good public acceptance
What its unique selling proposition is
How good the financial controls of the business are
If the franchise is credible
What kind of exposure the franchise has received and the public's reaction to it
If the cash requirements are reasonable
What the integrity and commitment of the franchisor are
If the franchisor has a monitoring system
Which goods are proprietary and must be purchased from the franchisor
What the success ratio is in the industry

After gaining the necessary information only the entrepreneur should sign an agreement
with the franchisor.