Small Business Management Study Set 3
Quiz 6 :
Taking Over an Existing Business
Summary: FS is a venture capitalist in Ca looking for a different kind of deal that any venture capitalist normally does. FS was keen on two start up businesses which were bio tech companies and were about to collapse. He believed that collaboration of these two firms would help them to revive. One of the firms was SV found by JS. It has lost its capital and funding from its investors. The other firm was I in Co founded by DS and JO. This firm was not able to raise funds for clinical trials. This firm had already approached FS for investment, but he could not fund due to bad economy, common bias against early-stage businesses, and a huge percentage of US investors in vaccines for emerging economies. Both DS and JO raised $250,000 in angel funding and national institute of health for their initial animal trials of their vaccine. Therefore, FS convinced DS and JO to merge with SV. Therefore, both settled for a deal. Both the companies were given equal value and setup for them to carry over the business. Inference: In case of the both the CEO living in different continents and having lesser possibility of knowing each other, the chances for the merger are very less. The identical field that the companies operate from might have made it possible for the merger. But since both the companies were new start up businesses that did not attract many investors, the chance for the merger process was small. The chances for the merger is low in case of the CEOs not knowing each other, because both these businesses were started from the scratch and developed to an evident stage. Thus, the owners would not allow it to be taken over by any other person without knowing the capability of the other person. The move made by FS to make the CEOs meet each other and discuss their views on the business is the right move, as this would help them to understand the potential of each business and arrive at a conclusion about the future of the business.
Situation: The financial records of the business which are to be bought have been analyzed and it is found that the company has excellent current and quick asset ratio by industry standards, but it has not paid the bills on time and its cash is low. Inference: It is given that the business has excellent current and quick asset ratio but the cash is low. The formula for calculating quick ratio is: From the above equation, the greater the value of its result the greater is the liquidity of the company. Since it is given that the business has excellent ratio it is clear that the business has higher current assets than current liability. In spite of excellent ratio, the cash is said to be low. This situation might have risen due to increase in the accounts receivable account for the business. Since accounts receivable is an asset, it increases the firm's asset value in the books but the cash in hand would be considerably low. In this case, the buyer must determine how many of the accounts are collectible and how many must be discounted. This is necessary because receivables that have crossed 120 days are less worthy than those within 30 days time period. This process is called aging accounts receivable. Based on the life of the receivables, the decision can be made.
Approaches to start a new business: The common approaches for any person who has an interest to start an own business are: • To buy out an existing business • To acquire a franchised business • To start a new firm Advantages of purchasing an existing business: Out of the given above three choices, the option to buy out an existing firm seems more viable due to the following reasons: • It avoids most of the risks involved in starting up a business. • The business is already a success and is established. • This could cut the marketing costs in order to reach the potential customers. • The base for a business system like that of land, personnel, capital, accounting and inventory already exists for the business. • Since the business would have most probably reached the growth phase in the product life cycle, the buyer can plan for the business based on the historical figures rather than projections. • There is more chance for the buyer to reach a breakeven point quickly. Disadvantages of purchasing an existing business: There are a few disadvantages of purchasing an existing business too: • The inventory or the equipment for the business may be outdated. • There are chances for the business to have liabilities from the past business contracts. • The employees may not fit the benchmark that the buyer expects. • The perception of the business may be difficult to change.