Question

Expanding Gregory’s – Greg and John has owned Gregory’s Greek Restaurant for over thirty years. The restaurant overlooks a river and offers visitors a lovely view of the countryside. Over the years, the restaurant’s popularity has grown through word-of-mouth advertising, and now guest often wait up to two hours on the weekend before being seated. Greg and John have been approached by Capstone Developers, which wants to use the Gregory’s Greek Restaurant concept in a mixed-use development it is putting together. It seems that one of Capstone’s managers ate at Gregory’s and loved the concept. Capstone Developers put together an investment proposal for Greg and Andy requesting to use their concept and cash equity for the deal.

The following are excerpts from the offer:
· Use of the Gregory Greek Restaurant name in exchange for limited partnership units in the new restaurant.
· A request for a 45% equity investment from Greg and John on the total project cost of $3,000,000. In return for their investment, they will receive 25% ownership and 25% of all cash flows, with Capstone reserving 75%.
· With an estimated $175,000 in cash flows in Year 1 and a 10% growth rate over the next decade, the return on equity looks very promising.
· Capstone Developers, as the general partner, will retain all operating rights, including the right to decide when the restaurant and property will be sold.

Identify and explain the positive and negative aspects of the proposal business entity for Greg and John

Answer 1

Positive :-

Buying a business can save prospective owners a lot of time and money starting operations from scratch, but some drawbacks associated with acquiring an established business make the purchase decision one that requires analysis of existing relationships, funding and brand recognition. While prospective owners can avoid start-up costs and risks when buying an established company, they must contend with other exposures.

Established Clientele

Already-established businesses have a built-up clientele, which is a major advantage for the buyer. It can take years to attract clients and many thousands of dollars in marketing costs to reach a break-even point and turn a profit. Although not all customers stay after a transfer of ownership -- this varies depending on the nature of the business – many do. Opening a new business instead comes with the risk that customers will not respond because the market for those products or services is already saturated.

Vendor Relationships

Having vendor relationships in place makes running a business and providing products or services that much easier. Business partners who can provide quality materials are essential for maintaining profit margins and meeting customer requirements. It can take months or possibly years to find reliable partners for start-ups, and many new companies must suffer through bad relationships and poor-quality products to find the right vendors. This can make it difficult to get a business going and turn a profit in the early years.

Debt

Many business buyers use debt to fund deals and acquire their new company. The size of the obligation can be risky, given the purchase price and nature of the business. Although start-ups also require large capital outlays, these ventures normally have larger equity capital structures. This is because many lenders do not loan start-ups money, as they don’t have an established track record.

Reputation

Established businesses have a reputation in the community and markets in which they operate, an this can be positive and negative. If a company has a loyal following and a track record of fair dealings with consumers, buying the entity and its brand is advantageous. However, if a business has encountered legal difficulties, it may have a poor reputation and less potential for growth. Evaluating a company’s past dealings and accreditation with professional or community organizations, such as the Better Business Bureau, are important before finalizing a deal.