Question

Shema is planning to start a new business selling frozen foods. However, she was approached by her old friend who intends to sell the profitable frozen foods business to her. Her friend’s business sells a variety of frozen foods and located in Kuala Lumpur with an average monthly sales of RM300,000. Now, Shema has to decide whether she should go ahead with her own plan to create her own business or to buy the existing business from her old friend.

1. As a business consultant, describe to Shema the advantages and disadvantages of the two alternatives. Which of the two alternatives would you recommend to Shema? Justify your recommendation.

2. Should Shema conduct a due diligence before buying the business? Why? Justify your answer.

3. If Shema decided to buy the existing business, what are the five factors that she needs to consider before buying the business?

Answer 1

a When a person thinks to start any business ,then there are many challenges in front of him before starting.He has to decide that what option will best suit him.

Here,Shema planned to start a new business selling frozen food.And one of her friend offered her own buisness of monthly sale of RM300000 to Shema. Now there is an option for seema to start her own business or to acquire the already existing ones.Now let us consider the advantages and disadvantages of both the aspects.

Advantages of taking over existing business

1 The existing business already have a customer base. The customers are well aware about the products and its quality.

2 .All the systems and procedures of the business are already set up.

3.Shema dont have to take the burden of hiring employees in acquiring the existing business.

4.The business already has a good market base and reputation. Marketing a new product is often a difficult task.

5.Its often easier to get financing an existing business than to start a new one.

Now the disadvantages of acquiring a existing business

1.While acquiring an existing business ,we have to look at each and every aspect of the business.

2.Consideration of the location, employees and its relationship with the customers is a difficult task.

3.Generally acquiring existing business is more costly than starting a new business.

Setting up a new business

Advantages

1. When we start a new business we employ everything as per our own requirement.

2. Capital requirement is generally less than the acquisition of existing business.

3.The location of the business and the products to be sold all are as per our need.

4.Once a successful business is established and it has gained the customers trust, then  it can create more profit then the already existing business.

disadvantages

1. Marketing a new business is often quite difficult.

2.It takes years for a company to gain reputation.

3. For a new business it becomes difficult to build a customer base and to gain trust of the customers.

Both the options have pros and cons of their own.While starting a new business there are many hurdles as to gaining the customers trust , building market base, hiring of employees,choosing a good location for the business and many more.If Shema is worried about this difficulties of establishing a new business then she can take over an existing business which is having all the facilities already available as such infrastructure, sales revenue,good customer base, good marketing base, and also the brand and reputation. Its often easier to get finance an existing business than to start a new one.And many legal rights like the patents,copyrights will also become profitable for a business.So choosing of the alternatives depends upon the preception of Shema regarding its business. If she is ready to face the challenges of the new buisness then she can set up her own business or else acquire the existing ones.

a. YES , Shema should conduct due deligence before buying the existing business.

When purchasing an existing business ,it is very important to set up an team consisting of bankers, accountants so that all the relevant information regarding the business can be known. Through due deligence all the important factors of the business will be known to Shema . While taking an existing business it is very important to look for their customers and suppliers and track all the records of it.

When an existing business is taken over , the most important thing which needs to be considered is that why the business is being put for sale? what could be the reason for selling the business? The financial ratios and the performance of the business is needed to be considered and whether the business will be profitable in future sholuld also be considered.

The marketing postion of the business and its loyalty are the most important factors to be considered for an existing business.The legal history of the business should be thoroughly reviewed to know about the claims , properties, disputes and restrictions of the business.It is very important to know that the business has a good relationship with its customers and suppliers.

Many of the things are not disclosed in front of the buyers of the existing business . So it is for the buyer who has to figure out and consider everything of the existing business regarding its legal claims, copyrights ,trade marks and other undisclosed aspects. The future of the business should also be evaluated so that the prosperity and the profitablity of the business in coming years could be known.

a Before buying the existing business the five factors which Shema need to be considered are:

1. Strength of the business- Shema need to see the current maketing strength of the business. She has to look whether the business is profitable and can gain her in future .

2.Customer Relationship- Customers are the main pillars for any business. It is very important to have a good relationship with the customers as a business runs with the help and support of its customers.

3.Legal history- It is very important to consider the legal history of any business, whether the business was involved if any fraud in the past or there is any legal claim against the business , whether the business is involved in sny fradulent activities. This is main apect to be considered.

4. Financial performance- The financial performance of a buisness witn respect to past and the plan for the future must be considered.The financial ratios must be analysed so that the profit of each year and the expenses incurred is known. The debt capital will also be known through tha analysis of financial performance

5.Reputation - the most important asset of any business is its reputation.The bussiness gains market strength , acquires capital is all because of the reputation it has incurred through its efforts. The reputation of the existing business need to be considered.

So these are the factors to be considered before buying the existing business.