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CHAPTER 3:

3.0

ENTREPRENEURIAL ORGANISATION
Introduction

Ownership a business is probably one of the most fulfilling ways of making a living
The entrepreneurs need to know the forms of business organizations available and the

strengths and weaknesses of each business form before they register their businesses.
should be aware of the rules and regulations governing business organizations and

business support system available for them


3.1

Factors in selecting a business ownership

an individual who is thinking of launching a new business should consider the following
factors in selecting a proper form of ownership
3.1.1 Capital
the main element that determines the types of business one should venture in is capital
if the individual possess a small amount of capital, he should venture in a sole
proprietorship instead of a company because the cost of forming a company is relatively
high
capital also determines the probability of individual obtaining credit or loans from
external sources
most debtors are willing to grant loans to the company because there is a guarantee
agreement when the loan is approved
companies pledge their own assets as collateral on the given loans

3.1.2 Personal Assets


personal assets have to be taken into account when selecting the kind of business one
wants to venture in
personal assets are liable to the creditor if losses are incurred either in a sole
proprietorship or a partnership
Companies there is a separate entity between shareholders property and members of
the boards and the company
assets will not be affected although the company incurs losses, all losses will be borne
by the company
3.1.3
Span of Control
if an individual wants to have a bigger span of control and authority, sole proprietorship
is the best form of ownership
in partnership, the span of control is shared among the partners
in company, the person who responsible for initiating the business will not necessarily
be the director of the company throughout his lifetime
3.1.4
Sharing of Information
if an individual decides not to share information with his counterparts, it is advisable
for him to form a sole proprietorship
because in partnership and companies, there is no confidential information among the
partners, members of the company or creditor

3.2

Type of Business Ownership


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3.2.1 Sole Proprietorship


Definition: is an attractive form of legal status for a new business
it is formed under the Business Registration Act 1956 (Amendment 1978) and The
Procedures of Business Registration 1957
this form of business structure is solely owned and operated by one individual, this
mean that it has a single owner
also known as a sole trader
is the simplest business structure
it owned by one individual, but it need not to be carried out by that individual alone ,
can have a large number of employees
Malaysian citizens who are permanent residents can register a business as a sole
proprietor
Characteristics of successful sole proprietor
is willing to accept sole responsibility for the firms performance, success or failure of
the firm rests on the shoulders of the sole proprietor
is willing to work long hours
has strong organizational skills, leadership skills and communication skills
Had previous experience working in the industry in which he is competing in at
present. This experience would give him an edge in understanding the competition and
the wants and needs of his customers

Advantages
Ease of information

Total independence in decisionmaking / freedom of choice

Description
due to its ease of information and discontinuance, sole
proprietorship is the most widely used legal form of
organization
although the owner must register the name of the
business with the state and may have to obtain an
occupational licence, the legal requirements of
establishing a sole proprietorship are minimal
the business can be started fairly easily with minimal
capital requirements
it has fewer formalities and restrictions associated with a
sole proprietorship when compared to any other legal
form of ownership
has total independence in decision-making
is his own boss and has complete control over the way
the firm is run


Retaining all business profits
No requirement for authorisation
and disclosure of financial reports

Taxation Advantage

Confidentiality

Fewer legal restrictions

Disadvantages
Unlimited liability

Lack of continuity

Lack of experience and ability

Incurs all losses

Limited access to funds

Limited skills

Long working hours

Relative difficulty in obtaining longterm financing

this eliminates the chances of disagreements among


owners which may create conflicts and delay the
decision-making process
will get full profits as his personal property
financial reports need not be published and checked by
authorised auditors
there is no requirement for public disclosure of accounts
business affairs can be kept private
receives favourable tax treatment in the early years of
the business whereby he only needs to pay personal
income tax/single taxation and not business tax
earning of sole proprietors are considered as personal
income and may be subject to lower taxes compared to
earnings of other forms of businesses
an owner is not required to make any public disclosure
of trading figures
needs to adhere to a minimum number of formalities and
legal requirements in the creation of the business
Description
is entirely responsible for the debts and risks of the
business
failure in the business may mean a loss of personal
property
there is no limit on the amount of debts for which a sole
proprietors is liable to
if the owner dies, judged insane or simply withdraws
from the business, the business ceases operations
business operation depend on one individual and his
ability, training and expertise which will limit its
discretion and scope
financial reports need not be published and checked by
authorised auditors
there is no requirement for public disclosure of accounts
business affairs can be kept private
has very limited access to funds
businesses that require heavy initial investments are
seldom operated as a sole proprietorship
funds may be insufficient if the owner wishes to expend
rapidly
may have a limited skills and find himself forced to
make decisions in area of business operations which is
lacks expertise
will find it difficult to take days off for holidays
may have to work long hours
because the enterprise rest exclusively on the owner, a
sole proprietor often faces difficulty in raising long-term
capital

3.2.2 Partnership
Definition: is formed under the Business Registration Act 1956 (Amendment 1978) and
the Procedures of Business Registration 1957
it is a business owned by at least two or more individuals but not exceeding 20 people

the owners of the business are called partners


each partner contributes money, labours or skills
each shares the profits as well as the losses of the business
partners of a firm are always recommended to prepare an agreement on the articles or
partnership
a partnership agreement clearly outlines the financial and managerial contributions of
each partner and carefully delineates the roles of partners in the partnership
Types of partnership
General partnership - all partners have unlimited liabilities, they are personally liable
for all obligations of the firm
Limited partnership some of the partners have limited liabilities, they share the firms
profits and losses but do not take an active role in managing the company
the limited partners will only be liable to extent of their contribution, responsibilities
would not extend to the management of the company but they would share the
companys profits and losses
a limited partnership must have at least one general partner who accept unlimited
liability and a general partner manages the company receives a salary and shares the
firms profits or losses

Advantages
Increase in resources for capital

Distribution and sharing of business


risks

Direct rewards

Taxation advantage

Combined talents and business


acumen
Ease of formation

Ability to specialize

Disadvantages
Unlimited liability

Limited life span

Description
the presence of more than one owner means that more
than one individual is providing funds for the business
It is possible to pool the wealth and resources of all the
partners
all partners jointly share responsibility for the success or
failure of the business
any losses will be absorbed by more than one partner
partners are motivated to put forth their best effort as
they will directly share the companys profits
Most partnerships pay taxes as individuals, thus
escaping the higher tax rate assessed against
corporations
All partners ability is added with a better range of skills.
ideas and expertise
A partnership can be established by only meeting a few
legal requirement
unlike a sole proprietorship, whereby the single owner
must be the jack of all trades, a partnership allows
partners to focus on their area of specialization, can
improve efficiency
Description
although some partners can have limited liability, least
one partner must be general partner who will assume
unlimited liability
all partners are personally liable for the debts of the
business even those debts were incurred by one partners
mismanagement or dishonesty without the other
partners knowledge
if the partnership is sued or severe financial difficulty is
encountered, the partners can lose much more than the
amount invested in the partnership
the partnership may end if any one of the partners


Lack of continuity

Shared profits

Shared control

Conflict

suffers from mental disorder, falls bankrupt, resigns or


dies.
the life span of the partnership depends on the spirit of
teamwork among the partners
if any one of the partner dies, is judged insane or simply
withdraws from the business, the partnership
arrangement ceases
however, business operations can be continued based on
the rights of survivorship and the possible creation of a
new partnership
this new partnership can be established with the
remaining members or by adding new members to the
partnership
any profits earned by the partnership will be shared
among all partners
with more than one owner, the possibility of partners
disagreeing on how the business should run can emerge
this can delay the decision-making process and create an
ill will among the partners
the tendency for disagreements and conflicts to happen
is high
the action of one partner will affect other partners as
well

3.2.3 Company
Definition: are registered as legal entities and are formed by several individuals who
own property, draw contracts and employ people
all companies in Malaysia are governed by the Companies Act 1965
there are 2 types of companies which are:
i.
private limited companies
ii.
public limited companies
Private Limited Company
is a company limited by shares and owned by a group of people with at least two or
more individuals but not exceeding 50 people who pool their capital and work
together to form a company
a private limited company is medium in size
the members personal liabilities are limited to the par value of their shares and
cannot sell shares to general public
the name of a private limited company ends with the word Sendirian Berhad or
with its abbreviation Sdn. Bhd which is means that it is owned by a group of people
the term limited means it has a legal identify of its own that is separated from the
people who own it
even in liquidation, the creditors claims are restricted to the assets of the company
the principle advantage is the shareholders are not liable as individuals for the
business debts beyond the paid-up value of their shares, this applies even if the
shareholders are working directors, unless the company has been trading fraudulently
or wrongfully
the owners of a company are called shareholders
shareholder elect a board of a directors who are responsible for establishing the
general policies or the corporation and appointing the president and other key officers
of the company
in a private limited company, ownership is held by a small number of investors and
the stock is not readily available to other investor

Advantages
Limited ability

Perpetual life

Attracting skilled employees

Ease of expansion

Independent of the members and


shareholder

Ease of raising capital

Disadvantages
High set-up

High taxation

Limited membership

Lacked of freedom in the transfer of


ownership

Regulations

Description
the liabilities of the companys members are limited to
the capital contributed to the company
the shareholders personal assets are not affected
the life span of the business is not dependent upon the
age or resignation of its members
can attract the interest of skilled employees because the
companys life span is guaranteed
Size is not a barrier
generally it is easier to expand and develop a private
limited company because of its simplicity in equity
participation
Shareholder are not burdened with the management of
the business because the responsibility of managing and
running business is held by the Board of Directors, who
are appointed by the companys shareholders
Funds are easily acquired by exchanging shares of
ownership or obtaining loans from financial institutions
funds can be accumulated from time to time
Description
cost of setting up a private company is high
costs include payment charged according to authorised
capital, professional fees, filling charges, printing of the
companys Memorandum of Association and Articles of
Association, share certificates and the companys seal
the company must pay corporate tax as well as personal
income tax
the earnings are subject to double taxation
any earnings of the company are first taxed as income to
the corporation
the number of members in a private limited company
cannot exceed 50 individuals
only has the authority to transfer ownership of its
members shares with the approval of the companys
Board of Directors
is subject to more rules and regulations
must always abide by the rules and fulfil the terms set by
the Companies Commission of Malaysia (CCM)
is not allowed to offer or sell any shares or debentures to
the general public

Public Limited Company


is a company limited by shares with at least seven or more individuals and there is
no maximum limit in terms of membership
is very large in size and raises capital through the sale of shares and is run by a
board of directors elected by the shareholders
the company shows its status by using the word Berhad or its abbreviation Bhd
after the companys name
the term public means publicly held
in other words, the shares of stock can be easily purchased or sold by investors
the public can also buy and sell the shares of the company
the company would publish a prospectus if it not listed in the stock market

however, if it listed in the Malaysian stock market the public can buy and sell the
shares

Advantages
Limited ability

Perpetual life

Transfer of ownership

Ease of expansion

Economies of scale

Relative ease of securing capital in


large amounts

Increase in ability and expertise

Disadvantages
High set-up costs

High taxation
Agency problem

Regulations

Restriction of activities

Financial disclosure

Description
the stockholders liability is limited to the individuals
investment in the company
this is the maximum amount of money the individual
can lose if the company suffer a loss
the company has a separate life and distinct from that of
its owners and can continue for an indefinite period
ownership can be transferred through the sale of stock to
interested buyers
Sizes is not a barrier
a public limited company has a greater potential for
expansion
operational output is bigger which enables the firm to
enjoy economies of scale
capital can be acquired through the issuance of bonds
and shares of stock
capital also be obtained through short-term loans made
against the assets of business or personal guarantees of
the major stockholders
the corporation is able to draw on the expertise and skills
of a number of individuals, ranging from major
stockholders to professional managers who are
employed in the company
Description
a large amount of organizing expenses is involved in
forming a corporation
various taxes must be paid by a company
the company is normally run by professional managers
unfortunately, sometimes the interests of managers are
not parallel with the interests of its owners
extensive government regulations and reports are
required by the state and federal agencies which often
results in a great deal of paperwork and bureaucracy
Corporate activities are limited by the charter and by
various laws
when the stocks of a company are publicly traded,
investors have the right to examine the corporations
financial data within certain limits
this may force the firm to disclose more information
about its operations and financial status than it would
desire

3.3
Comparison and Distinction between a Company, Partnership and SoleProprietorship
1

Company
Structure
a company is a person
separate from its members

Partnership

Sole-proprietorship

two or more persons


carrying on business with a
view of profit

Individual in business on his


own

10

Registration
Need to be registered with
the Register of Companies
as a company
Transferability
Shares in a company are
generally transferable
although the rights of
transfer may be restricted
Management
Members of a company as
such are neither its
managers (directors) nor is
agents
Number of members
There is no maximum
number of members
expect where it is a private
company, in which case
the maximum is fifty
Constitution
A company must be
constituted in writing, that
is by a Memorandum and
Articles of Association
Capital and liability
Capital subscribed by
members for their shares
cannot ordinarily be
returned to them, but in a
limited company they are
not liable for its debts once
they hold fully paid shares
Borrowing powers
Companies can borrow for
purposes covered by their
objects as contained in
their Memorandum of
Association
Security over assets
Companies can use current
assets as security by
creating floating charges
Rules, procedure and
information
Companies are subject to
various statutory rules of

Need to register their


Need to register his business
business under the
under the Registration of
Registration of Business Act Business Act 1956
1956
Generally, a partner cannot
transfer his status as a
partner to someone else
without the consent of all
the other partners

A sole-proprietor may
transfer his business to
someone else

Partners are agents of the


firm for carrying on its
business in the ordinary
course of business and are
generally entitled to manage
the firm

The sole proprietor owns


and manages the firm
himself and can employ
employees to manage the
firm for him

The maximum is twenty.


There is no ceiling on the
number of members for
professional firms

There is only one person in


a sole-proprietorship

Partners may withdraw


capital but their liability for
the firms debt to its
creditors is unlimited

A sole-proprietor may also


withdraw capital. His
liability for the firms debts
to its creditors is unlimited

Partners may withdraw


capital but their liability for
the firms debts to its
creditors is unlimited

A sole proprietor may also


withdraw capital. His
liability for the firms debt
to its creditors is unlimited

Partners have unrestricted


powers of borrowing in
terms of amount and
purpose

A sole proprietor has


unrestricted power of
borrowing

Partners cannot create


floating charges but they
can mortgage the firms
assets

A sole proprietor cannot


create floating charges but
can mortgage the firms
assets

Partnership may be formed


informally and they need
not supply information to

Sole proprietorships are


formed informally and
information about the firm

procedure and are required


to supply certain
information to the public
Dissolution
A company is dissolved by
winding up and liquidation
which is a formal
procedure

11

3.4

the public

need not be published

Partnership may be
dissolved informally
e.g by agreement of the
partners

Sole proprietorship may be


dissolved informally by the
sole proprietor himself

Factors in starting a new entrepreneurial venture

a critical factors that need to b e emphasiz ed in initiating a new


business venture are

law and
regulation

competit
ors

capita
l

size of
business

location of
bu siness

interest, k nowledge and


experience

3.5

Alternatives in starting a new entrepreneurial venture


an entrepreneur has several ways to start a new venture
ventures that are most frequently practised by entrepreneurs can be classified into
three forms which are start-up company, buy an existing company and franchise
3.5.1

Start-up Company

is a venture whereby an entrepreneur creates a completely new business starting from


scratch
usually an entrepreneur will use his own funds from his savings or borrow from others

those who want to start their own business usually need to have a lots of experience,
knowledge, skills and interest in the related field
involves the invention of new products or services
any new venture goes through three phases, that is restart-up phase and post start-up
phase
i.

Restart-up Phase
- starts with the inception of an idea and ends when the doors are ready to
open for business
Start-up Phase
- begins with the introduction of sales activities and ends with the
establishment of concrete business

ii.

iii.

Post Start-up Phase


- Ends when the venture is terminated, closed or the entrepreneur loses control
over the surviving business entity

3.5.2

Buy an existing company

is buying or acquiring either the shares of existing company or all the assets in an
existing company or business
buying a company that is already established may involved less work compared to
starting from scratch
there are several steps and processes that need to be considered in buying an existing
company:
i.

Personal priority
an entrepreneur needs to consider his priority that is personal factors, lifestyles
and aspirations before starting to look for a desired business
they has to think about what he can bring to the business and what he would
like to get back in return
an entrepreneurs expectation are as follows:
a) Earnings what level of profit does he need to look for to accommodate
his needs?
b) Commitment is he prepared for all the hard work and money that he
will need to put in into the business for it to be successful
c) Strength - what kind of business opportunities will give him the chance to
put his background, experience and skills to good use?
d) Type of business what forms of ownership (sole proprietorship,
partnership or company) that he is interested in buying?
e) The business sector has he learned as much as he can about the chosen
industry so that he can compare different businesses?

ii.
Evaluating business opportunities
the entrepreneur can find potential opportunities by reading classified
advertisement, discussing opportunities with business brokers and checking
industry sources
should resist the temptation to buy the first business that looks good
it would be worthwhile to make an appointment with the business sellers or
brokers for an initial introduction to the opportunity

the business sellers should provide him with brief financial reports, history,
price and reasons for selling the business and it will allow the entrepreneur to
know more about the business and how long it has been on sale
iii.
Reviewing a potential target
the potential target must be closely examined to determined how well it has
been managed and maintained
for service businesses, the entrepreneur should talk to its employees and even
its customers
a checklist of information must be prepared, should include the following
aspect:
a) complete financial accounting of operations, including all income tax
return and sales tax forms for the past year
b) a list of all assets to be transferred to the new owner, including an
itemized breakdown of all inventory as of the last accounting period
iv. Agreement for financing
without proper financing, a business acquisition cannot move forward
successfully
there are several funding options that can be utilized by an entrepreneur
lenders generally require the following details:
a) details of the business/sales particulars
b) accounts for last three years
c) financial projections
d) details of their personal assets and liabilities
v. Conducting due diligence
due diligence is similar to detective work
it is the process of gathering information by conducting investigations,
searches and inquiries and is vital to any shares or assets purchased
the result of due diligence may help an entrepreneur to decide:
a) whether to proceed with an acquisition
b) whether to buy shares or assets
c) how much to pay and how to allocate the purchase price
d) the matters that need to be covered in the purchase agreement for his
protection
the process should guide entrepreneurial decision-making by providing
valuable insights into the new business which gives the entrepreneur a good
estimation of the value at which a transaction should be undertaken and the
warranties and indemnities that should be obtain from vendors as part of the
deal
vi. Preparing the formal agreement
the preparation of a formal agreement gives the buyer and seller the
opportunity to come up with a basic agreement and tie down a number of
smaller matters, which may not have been thought of by the parties in their
initial negotiations
The three basic components of the formal agreement are as follows:
a) Basic elements of the agreement
- The first part of the agreement will usually cover the basic elements
of the agreement the parties, the assets or shares being purchased, the
purchase price, adjustments to the purchase price, how and when the

purchase price and adjustments will be paid and how taxation will be
handled
b) Representations and warranties
- The second part focuses on representations and warranties. These
primarily given by the seller to the entrepreneur. The entrepreneur has
first to consider what facts and issues are important to his decision to
purchase the business and the amount he is willing to pay. Then in
addition to conducting due diligence on those matter, the entrepreneur
will look for a representation or warranty from seller that the facts
represented to the seller are true. This is intended to protect the
entrepreneur should there be other facts or information he does not
know about or if the seller has misled him on some important matter.
c) Closing matters
- This portion of the agreement generally states the closing date and
what must be exchanged at the time of closing the agreement. It will
also set out any special conditions of closing which must be met before
the sale can be finalized. The typical conditions of closing are as
follows:
All representations and warranties given prior to closing
continues to remain true and accurate as the date closing
The entrepreneur will receive the purchases assets or shares free
and clear of all encumbrances except those which have been
agreed
Any special license or consents have been received
All government clearance certificates or approvals have been
received
All other documents that from part of the transaction have been
signed and received
The entrepreneur has tendered the payment as promised in the
agreement
vii.

Ready for business


the entrepreneur is the proud owner of the new business
if he has conducted due diligence and has a good purchase agreement
in place, he is well on his way to success
the entrepreneur may need ongoing consultations with the prior owner,
so it is always wise to keep a good working relationship with him
he may also require ongoing assistance from his team of advisors
because even though the transaction is complete the work has just
begun

3.5.3 Franchise

a franchise is any arrangement in which the owner of a trademark, trade name or


copyright has license others to use it and sell its goods or services
also known as an agreement which gives a person or a group of people known as
the franchisee the right market the product services and from which the license has
been obtained
the franchisee (a purchaser of the franchise) is generally legally independent but
economically dependent on the integrated business system of the franchiser (the
seller of the franchise)

3.6

a franchise can operate as independent businessperson but still realize the


advantages of a regional or national organization, examples: McDonald & KFC
the franchisers trademark identifies a franchisees business
the franchiser continuously supplies training, marketing and other support, offers
products and services on an exclusive basic and sets certain standards of
performance
the franchiser receives a continuing royalty based on the gross sales of the
franchisees business
offering a franchise subjects the franchiser to the Federal Trade Commission (FTC)
and state regulation which require the disclosure of statements to accompany such
an offering
Regulations for franchise offerings are different according to states but if a
franchiser has complied with FTC regulations, then most states accept that the
franchiser has complied with the states franchise regulations.
The purpose of franchise regulations is to ensure that all information is disclosed to
someone purchasing a franchise.
FTC Franchise Regulations require disclosure of a great deal of information
regarding the advertising, offering, licensing, contracting, selling, or other
promotions of a franchise
According to the FTC Franchise Regulations, the items that need to be disclosed
are:
i.
The name of the franchiser;
ii.
Any fictitious names of the franchiser;
iii.
The trademark of the franchiser;
iv. The last five years of business experience of the franchiser's directors and
officers;
v. Whether the franchiser's directors or officers have been convicted of or
plead nolo contendere (a Latin word which means I do not wish to contend')
to any crime involving fraud during the past seven) years;
vi.
Whether the franchiser's directors or officers have been a party to, settled,
or convicted of a civil action involving fraud during the past seven years;
vii.
Whether the franchiser's directors or officers have filed for bankruptcy, or
been adjudged bankrupt, been reorganized due to being insolvent during the
past seven years;
viii.
All terms of the franchise agreement, including how to terminate, modify
and sell it, and
ix.
Information on site selection, training programmes, financial statements and
other franchisees.
The costs of franchising comprise basic franchise fee, insurance, opening product
inventory, remodelling and leasehold improvements, utility charges, payroll, debt
services, bookkeeping and accounting fees, regal and professional fees, state and
local licences, permits and certificates.

Advantages and Disadvantages of Each Alternative

There are several advantages and disadvantages of a start-up company, buying an existing
company and a franchise
3.6.1

Advantages and disadvantages of a start-up company


Advantages

Disadvantages

Long process
Complete freedom
It requires a lot of time; money and
The freedom of making own decisions on
additional effort to search for a strategic
answering all types of questions such as
location, obtain licences; purchase machines,
when, how and what type of products or
find new suppliers, and hire and train new
services that is to be produced.
workers to perform advertising activities.
Maximum risk
Opportunity for creativity
In the initial stage of the venture, the
The opportunity to use one's idea and
entrepreneur will obtain minimal profits or
develop his own image by identifying
losses due to the large expenditure on
customers' emotions.
numerous items related to a start-up
company.
Authority
Difficulty in obtaining funds
The freedom to select an ideal location, plant, Difficulty in obtaining loans from financial
equipment, products or services, employees, institutions because these institutions have a
suppliers and bankers. These opportunities low confidence in the new venture compared
determine the success of a venture.
to an established business.
Extra effort
Free from government intervention
There are no existing customers for this
The ability to avoid any undesirable
company. The entrepreneur needs to put in a
precedents
lot of effort to attract new customers. Sales
policies, procedures and legal commitments
will expand very slowly and it will take a
of the existing firm.
long time before the business brings in
profits.
Immediate operations
No historical record
There would not be existing groundwork There are no historical business records in
operations as this business will start from which the entrepreneur can forecast sales,
scratch.
expenditure and profits.
The entrepreneur will be able to make
changes to the business.
3.6.2

Advantages and disadvantages of buying an existing company


Advantages

Disadvantages

Immediate operations
Some of the groundwork operations would
already have been done in getting the
business running.

Cost
Entrepreneurs often need to invest a large
amount upfront and will have to allocate
some money for professional less of
solicitors, surveyors and accountants, which
may be overpriced

Existing intangible assets


There may be existing customers, a reliable
income, a reputation to capitalize and build
on and a useful network of contacts.
Establish group of employees and
suppliers
Existing employees will have the experience
that the new entrepreneur can draw on. Many
of the problems would have been discovered
and solved. The entrepreneur can always
resell the business
Less competition

'Inherited' employees may be unsuitable


The new entrepreneur may clash with the
company's existing managers and employees.
Equipment and goods may be obsolete or
inefficient
Inventory may be stale. Equipment and
goods maybe inefficient and obsolete
Uncollectible receivables

Buying a business may eliminate a


competitor that the entrepreneur would have
had if he were to have started from scratch.
He can use the previous owner, experience in
facing competition.
Easier financing
It may be easier for the entrepreneur to get
financing facilities, as the business would
have a proven record of accomplishment

Receivables listed on the balance sheet may


be stale and uncollectible. The previous
owner may have created an ill will with his
customers and suppliers

Outstanding contracts
The entrepreneur will need to honour or
renegotiate any outstanding contracts that the
previous owner has in place.
Problems
Quick cash flow
There may be inherent problems in the
Existing inventory and receivables can business some of which may not be apparent
generate income starting from the first day of until after the sale of products services. The
operations by the new entrepreneur
entrepreneur should to find out why the
owner is selling the business
Continuous success
It may already have the best location. Location may have become unsatisfactory
Equipment would have been installed as Change and innovation can be difficult to
well. Inventory would already be in place and implement.
trade credit would have been established
3.6.3

Advantages and disadvantages of a franchise


Advantages

Training and guidance


The franchiser will usually provide both
training and guidance to the franchisee.

Brand name appeal


An individual who buys a well-known
national franchise, especially a large and
famous one, has a good chance to succeed.
The franchiser's name is the drawing card for
the establishment. People are often aware of
the products or services offered by a national
franchise and prefer it compared to those
offered by outlets which are not well known
Proven track record
The franchiser has already proven that his
business operations are successful. As an
organization, they have been around for at
least five to ten years and must have 50 or
more units. Thus, it should not be difficult to
see how successful the operations have been.
If all of the units are still operating and the
owners report that
they are performing well financially, it can be

Disadvantages
Franchiser control
The franchiser generally exercises control
over business operations in order to achieve a
certain degree of uniformity. If the
entrepreneur does
not follow the franchiser directions, his
franchise license may not be renewed when
the contract expires
Unfulfilled promises
Many franchisees find the promised
assistance from the franchiser not
forthcoming. Quite often, instead of being
able to purchase supplies at a cheaper price
through the franchiser, many operators find
themselves paying higher prices for the
supplies. If the franchisee complains, their
agreement with the franchiser may be
terminated, revoked or not renewed.
Franchise fees
The more successful the franchiser is, the
greater the franchise fees would be. A
franchisee will have to pay a continual
royalty based on sales, usually between 5 to
12 percent. Most franchisers require buyers
to have 25 to 50 percent of the initial costs in
cash. The rest can be borrowed from the
organization itself.

certain the franchiser has proven that the la1


out and location of the store, the pricing
policy, the quality of goods or services and
the overall management are successful
Proven management style
Franchisers often provide franchisees with
guidance in production and management
methods that have been a track record of
proven success
Name recognition
Obtaining a franchise from a well-known
franchiser can provide franchisees with a
recognized name that can greatly increase the
demand for their product. Franchisers often
support their brands with extensive
advertising.
Financial support
Sometimes, franchisers sometimes are
willing to provide financial support to help
franchisees get started. In many franchise
arrangements, the franchisee can purchase
materials and supplies from the franchiser on
credit, which can be a significant source of
short-term financing.

Shared profits
Franchisees typically have to pay fees and
share profits with the franchiser in exchange
for the benefits of operating the franchise.
Annual payments can amount to 8 percent or
more of the franchise's annual revenue.
Less control
Because the franchisee must agree to abide
by guidelines set by the franchiser, the owner
of a franchise loses a certain amount of
independence and flexibility.