Table of Contents

PART I 2
1. INTRODUCTION TO ENTREPRENEURSHIP 2
1.1. Meaning and Definitions of Terms 2
1.1.1. Entrepreneurship 2
1.1.2. Entrepreneur 2
1.2. Nature and Characteristics of Entrepreneurship 3
1.3. Qualities of successful entrepreneurs 5
1.4. Theories of Entrepreneurship 6
PART II 9
2. FORMS OF BUSINESS OWNERSHP 9
2.1. Types of business ownership 9
2.1.1. Scope of Business Organization 9
2.2. Importance of Business Organization 11
2.3. Factors of consideration before starting a business 13
2.4. Sole Proprietorship and its Characteristics 18
2.5. Partnership and its Characteristics 24
PART III 32
3. WAYS OF STARTING A BUSINESS 32
3.1. Starting a new business 32
3.1.1. Research Your Target Markets 34
3.1.2. Researching Your Competition 35
3.2. Buying an Existing Business 37
3.3. Advantages and Disadvantages of Buying an Existing Business 37
3.4. The Steps in Acquiring a Business 41
3.5. The Acquisition Process 43
3.6. The Five P’s of Negotiating 44
3.7. Determining the Value of a Business 45
3.8. Buying an existing business is a big decision 46
3.9. A Checklist of Information to Gather 46
3.10. The Interested Buyer’s Checklist 48

PART I
1. INTRODUCTION TO ENTREPRENEURSHIP
1.1. Meaning and Definitions of Terms
1.1.1. Entrepreneurship
Entrepreneurship is the process of seeking businesses opportunities under conditions
of risk. Or a Process of creating something new and assuming the risks and rewards.

Therefore;
Entrepreneurship is the process of creating something new of value by devoting the
necessary time and effort, by accepting and acknowledging the necessary risks
(financial, psychological, and social), and receiving the resulting rewards (monetary and
personal satisfaction).

1.1.2. Entrepreneur
An entrepreneur is an individual who creates a new business, bearing most of the risks
and enjoying most of the rewards. The process of setting up a business is known as
entrepreneurship. The entrepreneur is usually seen as an innovator, a source of new
ideas, goods, services, and business/or procedures.

Entrepreneurs play a key part in any economy, using the skills and initiative required to
anticipate needs and conveying good new ideas to market. Entrepreneurship that shows
to be successful in taking on the risks of creating a startup is rewarded with profits,
fame, and continued growth opportunities. Entrepreneurship that fails results in losses
and less prevalence in the markets for those involved.

Therefore;
 A person who undertakes the risk of starting a new business scheme is called an
entrepreneur.
 An entrepreneur creates a firm to realize their idea, known as entrepreneurship,
which aggregates [collections] capital and labor in order to produce goods or
services for profit.
 Entrepreneurship is highly risky but also can be highly rewarding, as it serves to
generate economic wealth, growth, and innovation.
 1.2. Nature and Characteristics of Entrepreneurship
The main characteristics of entrepreneurship are given below:
i. Economic Activity:
Entrepreneurship is primarily an economic activity because it involves the creation and
operation of an enterprise. It is basically concerned with the production and distribution
of goods and services and optimally utilizes the resource towards productive use.
 
ii. Entrepreneurship Involves Innovation:
Entrepreneurship involves changing, revolutionizing, transforming, and introducing new
approaches. Entrepreneurship is an innovative function as it involves doing things in a
new and better way. Innovation may take several forms, such as a new product, a new
source of raw material a new market, a new method of production, not yet applied in a
particular branch or, manufacturing etc.

iii. Goal-oriented Activity:

The entrepreneur who creates and operates enterprises seeks to earn profits through
satisfaction of needs of consumers; hence, entrepreneurship is a goal-oriented
activity. Entrepreneurship emphasizes results, achievements and targets achieved. It is
work done not imaginary plans or paper decisions. Hence entrepreneurship is a goal
oriented activity.

iv.  Value Creation:

Next, we find that the process of creating value is a characteristic in describing
entrepreneurship. Through entrepreneurship, new products, services, transactions,
approaches, resources, technologies, and markets are created that contribute some
value to a community or marketplace. We can also see value created when, through
entrepreneurship; resources are transformed into outputs such as products or services.
During this transformation process, value is created because the entrepreneur is
fashioning something worthwhile and useful. Drucker says, “Until entrepreneurial act,
every plant is a seed and every mineral just like another rock”.

v.  Enterprise Creation:
 The next characteristic of entrepreneurship is enterprise creation. In order to pursue the
perceived opportunities for innovation and to create value, there must be organized
efforts and actions. Someone must take the initiative to do something – take action to
get the entrepreneurial venture up and running. Entrepreneurship is a creative response
to changes in the environment. It involves innovation or introduction of something new
or improved. An entrepreneur is an agent to effect change.

vi.  A Function of Risk Bearing:

Risk is an inherent and inseparable element of entrepreneurship. An entrepreneur works
under uncertainties and he assumes the uncertainty of future. In the pursuit of profit,
there is possibility of loss also.

vii. Entrepreneurship Implies Growth:

The next characteristic in entrepreneurship is growth. One major difference between
entrepreneurial ventures and other small businesses is the emphasis on growth.
Entrepreneurship is about growing a business and pursuing opportunities as they arise.
It’s not about standing still or being content to stay in one market or with one product.

viii. Managerial Skill and Leadership Function:

Managerial skill and leadership are the most important features of entrepreneurship. An
entrepreneur must have the ability to lead and manage. He provides direction, create
work culture, and build teamwork and cohesiveness among employees.

ix. Organizing Function:

It is the ability to bring together productive resources of society. Entrepreneur
coordinates and control the efforts of all the persons engaged in his enterprises. He
harnesses [joins/bring toegehr] land, labour, capital and other resources of for the
benefits of mankind. Therefore, an entrepreneur is called as an organization builder.

x. Another Characteristics of entrepreneurship is a recognition that entrepreneurship

can take place in both profit and not-for-profit environments.
Although we tend to assume that entrepreneurial activity is geared at making a profit
 (and we agree that much of it is), entrepreneurship also occurs in social service
agencies, in community arts organizations, or in other types of not-for profit settings.

1.3. Qualities of successful entrepreneurs

i. Perseverance

Perseverance means to keep going and not give up, even if it's hard. Perseverance is
commitment, hard work, patience, endurance. Perseverance is being able to bear
difficulties calmly and without complaint. Perseverance is trying again and again.
Perseverance is commitment, hard work, patience, endurance.

Does not get deflated by failure but becomes even more determined to succeed in the
future.

ii. Initiative

Anticipates problems in advance and solve them in an efficient way. Creates self-
imposed standards and enjoys taking responsibility.

iii. Self-Confidence

This means that; "Freedom from doubt; belief in yourself and your abilities."

Entrepreneurs; Know themselves and others.

iv. Creative Thinking

Have the proficiency [skill/ability] to turn an existing product into a better one.

v. Knowledge-seeking

Always looking out to gain more knowledge, from failure as well as success. Keep
updated with information that can lead to growth.

vi. Delegator

Doesn’t try to do every task single handedly. Uses the knowledge of the team to
delegate work to the appropriate member.

vii. Relationship-Builder

Possesses the ability to influence, convince and inspire and build relationships that aid
growth.
viii. Commitment to Others

Has the integrity to fulfill promises made to customers, suppliers and, most importantly,
employees can be trusted.

ix. Risk Taker

Willing to take risks. Able to calculate risk and make quick decisions when needed.

1.4. Theories of Entrepreneurship

Theories of entrepreneurship are very essential as they help to explain what
entrepreneurship entails and the following are the theories of entrepreneurship;

1. Economic theories of entrepreneurship

The economic theory is among of the main economic theories of entrepreneurship. This
theory declares that; the economy and entrepreneurship are closely linked together.
Entrepreneurship and economic growth can only work when the economic conditions
are favorable. As such, it is usually hard for entrepreneurs to realize growth when the
economy is doing poorly. This theory further states that entrepreneurs find motivation in
the presence of economic incentives which include industrial policy, policies of taxation,
financial and resource sources, availability of infrastructure, investment opportunities,
marketing opportunities, availability of information regarding the conditions of the
market and technology among others . An entrepreneur is therefore a risk taker because
he can never fully predict about the favorability of the economic conditions in future.

2. Sociological theories of entrepreneurship

This theory argues that; the success of an entrepreneur is affected by their social
culture. They are more likely to achieve growth in particular social settings. Among the
social aspects that affect an entrepreneur include the social values, customs, taboos,
religious beliefs and other cultural activities. He or she has to conform to the social
expectations when carrying out their business.

3. Entrepreneurship Innovation theory

An entrepreneur does not merely conduct business to better their lives alone. Rather,
through their activities, they are able to cause development in the economy and the
society at large. The inventor of this theory, Joseph Schumpeter, argued that an
entrepreneur develops by being creative and having a foresight. One of the creative
things that an entrepreneur does is introduce a new product. A new product often
comes to solve a certain problem in the society or make it more convenient. Another
innovative aspect is that in a bid to achieve growth and have more profits, an
entrepreneur introduces a new production method. Notably, enhanced production
methods lead to a reduction in the cost of production and an increase in the goods
manufactured. Innovation also comes in when an entrepreneur opens a new market.
This is often done after the identification of a growth opportunity or a void in the
economy. The discovery of new sources of raw materials and establishment of
organization are also aspects of entrepreneurs being innovators. These activities of an
entrepreneur lead to the creation of jobs and accessibility of commodities, thus
improving the economy.

4. Psychological theory

According to this theory, an entrepreneur experiences growth when the society has
several individuals with the necessary psychological characteristics. These
characteristics include having a vision, being able to face opposition and having the
need to achieve highly. A person can only possess these traits during their upbringing,
when they excel, when they are self-reliant and when there is low father dominance.

5. Theory of high achievement/Theory of achievement motivation

Actually not all people are interested in being entrepreneurs as far David McClelland
who argued that; people who aim to become entrepreneurs must have a need for
achievement, a need for affiliation and a need for power. These act as the basis upon
which an entrepreneurial personality is established. Achievement motivation has a lot of
significance in entrepreneurship because it is the one that leads to economic and social
development. Entrepreneurs always want to achieve success in their endeavors. The
need for power comes from the urge to gain dominance in a certain field and thus
cause influence among other people. The need for affiliation comes from the urge to
motive of maintain friendships with other people.
Notably, the need for achievement stands out amongst the others. It was identified
through an experiment known as Kakinada Experiment by David McClelland. Therefore
at the end of the study, David McClelland came up with two conclusions about the
characteristics of entrepreneurs.

a) The first was that entrepreneurs do things in new and better ways.

b) The second was that they make decisions under uncertain conditions.

High achievement motivation is a sign that an individual is likely to become an

entrepreneur because they are passionate about it. As such, even though they are
stressed, lack money or face external pressures, they will work hard to become
successful. Additionally, through the experiment, it was found out that the performance
of an entrepreneur can be enhanced through education and training.

6. Resource based theories

As far as these theories are concerned, entrepreneurs require resources to go about

their businesses. Their efforts must be combined with resources such as time, money
and labor. Failure to access resources can cause their efforts to become futile. Capital,
for instance, enables an entrepreneur to growth their business. Other aspects that can
be considered as essential resources include access to information, education and
leadership. Getting sufficient resources can be quite hectic at times and that is why
entrepreneurs are considered to be people who require to work hard and smart.

7. Opportunity based theory

Since entrepreneurs has the aim of being successful, therefore they grab [take] any
opportunity they come across. These opportunities are made available through the
changes in technology, society or culture. Notably, as these changes occur, consumers
change their preferences. An entrepreneur must therefore take those changes as
opportunities of succeeding in their businesses. Also, technology sets a basis upon
which innovation is created and facilitated. Therefore, this theory suggests that
entrepreneurs are always on the lookout for opportunities that will enable them increase
the growth of their ventures.

8. Status withdrawal theory

The theory claims that; entrepreneurial aggressiveness can be created when people of a
certain class lose the prestige they initially had or when they belong to a minority group.
Entrepreneurship, if done correctly, can help a person live a satisfactory and content life.
Therefore, individuals will attempt by all means to become as prestigious as they were
in the past. If they come from a minority group, they must better their lives by working
hard at being entrepreneurs. Also, being a successful entrepreneur evokes respect from
the society. Producing an innovative product or service that will help solve various
societal concerns can make a person to be highly valued and admired by the community.
As such, some people aim at achieving this admiration, fame or popularity through
entrepreneurship.

Thus; It is essential for aspiring entrepreneurs to know these theories. This can help
them in knowing what to expect and the field in which they should exercise their
entrepreneurial skills and abilities.

PART II
2. FORMS OF BUSINESS OWNERSHP

2.1. Types of business ownership

Forms of business ownership and type of business help describe how the business is
organized and run, thus we call this as Business organization.

Therefore; Business organization is an act of grouping activities into effective

cooperation to obtain the objective of the business.

2.1.1. Scope of Business Organization

The scope of business organization can be defined as under:

A. Sole Proprietorship
According to D.W.T. Stafford
“It is the simplest form of business organization, which is owned and controlled by one
man.”

Sole proprietorship is the oldest form of business organization which is owned and
controlled by one person. In this business, one man invests his capital himself. He is
all in all in doing his business. He enjoys the whole of the profit.

The features of sole proprietorship are:

i. Easy Formation
ii. Unlimited Liability
iii. Ownership
iv. Profit
v. Management
vi. Easy Dissolution

B. Partnership
Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.

It has the following features:

i. Legal Entity
ii. Profit and Loss Distribution
iii. Unlimited Liability
iv. Transfer of Rights
v. Management
vi. Number of Partners

C. Joint Stock Company

A joint stock company is a voluntary association of persons created by law. It has a
separate legal entity apart from its members. It can sue (take legal action) and be sued
in its name.
The joint stock company has the following feature:
i. Creation of Law
ii. Separate Legal Entity
iii. Limited Liability
iv. Transferability of shares
v. Number of Members
vi. Common Seal

D. Cooperative Societies
According to Herrik:
“Cooperation is an action of persons voluntarily united for utilizing reciprocally (equally)
their own forces, resources or both under mutual management for their common profit
or loss.”

Cooperative Societies are formed for the help of poor people. It is formed by
economically weak persons of the society. In this form of organization, all members
enjoy equal rights of ownership.

The features of cooperative society are as under:-

i. Easy Formation
ii. Protection of Mutual Interest
iii. Limited Liability
iv. Equal Distribution of Wealth
v. Equal Rights

E. Combination
Business combinations are formed when several business concern undertaking units
are combined to carry on business together for achieving the economic benefits. The
combination among the firms may be temporary or permanent.

The salient (main) features of business combination are:

 i. Economy in Production
ii. Effective Management
iii. Division of Labour
iv. Destructive Competition

2.2. Importance of Business Organization

The following points elaborate the role of business organizations:

1. Distribution
Another benefit of business organization is that it solves the problems of marketing and
distribution like buying, selling, transporting, storage and grading, etc.

2. Feedback
An organization makes possible to take decisions about production after getting the
feedback from markets.

3. Finance Management
It also guides the businessman that how he should meet his financial needs which is
very beneficial for making progress in business.

4. Fixing of Responsibilities
It also fixes the responsibilities of each individual. It introduces the scheme of internal
check. In this way chances of errors and frauds are reduced.

5. Minimum Cost
It helps in attaining the goals and objectives of minimum cost in the business.

6. Minimum Wastage
It reduces the wastage of raw material and other expenditures. In this way the rate of
profit is increased.

7. Product Growth
Business organization is very useful for the product growth. It increases the efficiency
of labour.

8. Quick Decision
Business organization makes it easy to take quick decisions.

9. Recognition Problems
Business organization makes it easy to recognize the problems in business and their
solutions.

10.Reduces the Cost

Business organization is useful in reducing the cost of production as it helps in the
efficient use of factors of production.

11.Secretariat Functions
It also guides the businessman about the best way of performing the secretarial
functions.

12.Skilled Salesmen
It is also a benefit of the business organization that it provides the skilled salesmen for
satisfying various needs of the customers.

13.Transportation
Another benefit that; it guides the businessman that what type of transport he should
utilize to increase the sales volume of the product.

2.3. Factors of consideration before starting a business

Pre-Requisites of Business
Following are the main pre-requisites of a successful business:
1. Selection
The first and most important decision before starting a new business is its selection. If
once a business is established, it becomes difficult to change it. One should make a
detailed investigation in the selection of business.

2. Feasibility Report
A person should prepare the feasibility report about the business to be started. This
report will provide the facts and figures whether business is profitable or not.

3. Nature of Business
There are various types of business like manufacturing, trading and services. The
businessman should decide that what type of business he would like to start.

4. Demand of Product
The businessman also keeps in view the demand of the product which he wants to sell.
If the demand is inelastic (inflexible/rigid), the chances of success are bright. If the
demand of a product is irregular, seasonal and uncertain, such business should not be
started.

5. Size of Business
The Size of business means the scale of business. The size of business depends upon
the demand of commodity in the market and organizational ability of entrepreneur. The
determination of size of business is an important decision of a person.

6. Availability of Capital
Availability of capital is an important factor in the business. Capital is required for the
purchase of land, machines, wages and raw materials. A businessman must decide
that how much capital he can arrange.

7. Business Location
A businessman has to select the place where he wants to start his business. He should
select that place where raw material, cheap labour and transportation facilities are
available. He should also check the location of business competitors.

8. Government Policy
The businessman should also carefully consider the policies of government before
starting a new business. Some areas are declared as ‘tax free zones’ and for some
particular businesses the loan is provided without any interest.

9. Availability of Raw Material

Availability of Raw material is essential to produce the goods at low cost. Sometimes
the raw material is to be imported which may create problem for him. So a
businessman must keep this factor in mind.

10.Availability of Machines
Availability of new machines is also an important factor for a business. A businessman
must see whether these machines are easily available inside the country or not. If these
are to be imported then it may create the problems for him.

11.Availability of Labour
Skilled and efficient labour is essential to run the business in profit. But if efficient and
skilled labour is not available where business is going to be started then it will not be
profitable.

12.Means of Transportation
Quick and cheap means of transportation are essential for low cost of production and
high profit rate. A businessman must keep in view this factor.

13.Power Resources
There must be availability of power resources like water, oil, coal and electricity. So
businessman must keep in view this factor.
14.Hiring Employees
A businessman must hire the efficient and competent employees in the business. The
proper training must be given to employees.

15.Product Pricing
A businessman must decide the price of his product. In the beginning the price must be
low. He must keep in view that whether he will cover cost of his product and other
expenses with such price.
1.1. Functions of Business
Following are the main functions of a business:
1. Production
Production of goods and services is the first main function of the business. The
production must be regular. The goods and services must be produced in such a way
which can satisfy human needs.

2. Sales
The sale is another important function of the business. Sales are of two types:
 Cash sales
 Credit sales

The sale must be regular and at reasonable price. It is very difficult job because there is
hard competition in each market.

3. Finance
It is also an important function of the business to secure finance. Finance is required
for establishment and expansion of business. There are two sources of raising funds:
(a) Owner’s Capital
(b) Borrowed Funds

4. Management Function
“To do things efficiently and effectively” is known as management. The functions of
management are:
i. Planning
ii. Organizing
iii. Leading
iv. Controlling
v. Staffing
The management also provides direction for all subordinates.

5. Innovation
In this era of competition, for the survival of business, innovation is essential. The
businessman must try to find new techniques of production because the business may
not sell present output in future.

6. Accounting
Another function of the business is to maintain its records properly. To record the
business activities is called accounting. With proper accounts, the owner can know the
actual performance of business and chances of fraud are reduced.

7. Marketing
Marketing involves the design of the products acceptable by the consumers and the
conduct of those activities which facilitate the transfer of ownership between seller and
buyer.

Through marketing, goods are moved from producers to consumers. It is an important

function of the business. This function includes buying, selling, transportation, product
designing and storage, etc. The concept of marketing mix is very important in
marketing. It includes four Ps:
i. Product
ii. Price
iii. Place
iv. Promotion

8. Quality Improvement
Quality of product must be improved to increase the sale. If quality of product is poor
then business may suffer a loss.

9. Motivation
Motivation is very essential for increasing the efficiency of employees. Motivation
encourages the employees to give their best performance.

10. Research
Research is also an important function of any business. Research is a search for new
knowledge. By research, business becomes able to produce improved and new goods.
The research is of two types:
i. Basic Research
ii. Applied Research

1. Public Relations
It is very important function to make friendly relations with public, in this way sales
volume is increased.
2.4. Sole Proprietorship and its Characteristics

Sole proprietorship is a simple and oldest form of business organization. Its formation
does not require any complicated legal provision like registration etc.
It is a small-scale work, as it is owned and controlled by one person, and operated for
his profit. It is also known as “sole ownership”, “individual partnership” and “single
proprietorship”.

Following are the main characteristics of sole proprietorship:

1. Capital
In sole proprietorship, the capital is normally provided by the owner himself. However, if
additional capital is required, such capital can be increased by borrowing.

2. Easy Dissolution
The sole proprietorship can be easily dissolved, as there are no legal formalities
involved in it.

3. Easily Transferable
Such type of business can easily be transferred to another person without any
restriction.

4. Freedom of Action
In sole proprietorship, single owner is the sole master of the business, therefore, he has
full freedom to take action or decision.

5. Formation
Formation of sole proprietorship business is easy as compared to other business,
because it does not require any kind of legal formality like registration etc.

6. Legal Entity
In sole proprietorship, the business has no separate legal entity apart from the sole
traders.
7. Legal Restriction
There are no legal restrictions for sole traders to set up the business. But there may be
legal restrictions for setting up a particular type of business.

8. Limited Life
The continuity of sole proprietorship is based on good health, or life or death of the sole
owner.

9. Management
In sole proprietorship, the control of management of the business lies with the sole
owner.

10.Ownership
The ownership of business in sole proprietorship is owned by one person.

11.Profit
The single owner bears full risk of business, therefore, he gets total benefit of the
business as well as total loss.

12.Size
The size of business is usually small. The limited ability and capital do not allow the
expansion of business.

13.Success of Business
The success and goodwill of the sole proprietorship is totally dependent upon the ability
of the sole owner.

14.Secrecy
A sole proprietorship can easily maintain the secrecy of his business.

15.Unlimited Liability
A sole proprietor has unlimited liability. In case of insolvency (bankruptcy) of business,
even the personal assets are used by the owner to pay off the debts and other liabilities.
Advantages of Sole Proprietorship

Following are the advantages of sole proprietorship:

1. Contacted with the customers

In sole proprietorship a businessman has direct contact with the customer and keeps in
mind the like and dislikes of the public while producing his products.

2. Direct Relationship with Workers

In sole proprietorship a businessman has direct relationship with workers. He can
better understand their problems and then tries to solve them.

3. Easy Formation
Its formation is very easy because there are not legal restrictions required like
registration etc.

4. Easy Dissolution
Its dissolution is very simple because there are no legal restrictions required for its
dissolution (closure/termination) and it can be dissolved at any time.

5. Easy Transfer of Ownership

A sole proprietorship can easily be transferred to other persons because of no legal
restriction involved.

6. Entire Profit
Sole proprietorship is the only form of business organization where the owner enjoys
100% profit.

7. Entire Control
In sole proprietorship the entire control of the business is in the hands of one person.
He can do whatever he likes.

8. Flexibility
There is great flexibility in sole proprietorship. Business policies can easily be changed
according to the market conditions and demand of people.

9. Honesty
The sole master of the business performs his functions honesty and effectively to make
the business successful.

10.Independence
It is an independent form of business organization and there is no interference of any
other person.

11.Personal Satisfaction
As all the Business activities are accomplished under the supervision of sole owner, so
he feels personal satisfaction that the business is running smoothly.

12.Prime (Major/Main) Credit Standing

A sole proprietor can borrow money more easily because of unlimited liability.

13.Quick Decisions
Sole proprietor can make quick decisions for the development and welfare of his
business and in this way can save his time.

14.Personal Interest
A sole proprietor takes keen interest in the affairs of business because he alone is
responsible for profit and loss.

15.Saving in Interest on Borrowed Capital

Sometimes, a sole proprietor borrows money to increase his capital, from his relatives,
without interest.

16.Saving in Legal Expenses

As there are no legal restrictions for the formation of sole proprietorship so it helps in
increasing savings as legal expenses are reduced.

17.Saving in Management Expenses

The owner of the business himself performs most of the functions so it reduces the
management expenses.

18.Saving in Taxes
The tax rates are very low on sole proprietorship because it is imposed on the income
of single person.

19.Secrecy
It is an important factor for the development of business. A sole trader can easily
maintain the secrecy about the techniques of production and profit.

20.Social Benefits
It is helpful in solving many social problems like unemployment etc.

Disadvantages of Sole Proprietorship

The disadvantages of sole proprietorship can be narrated as under:

1. Continuity
The continuity of sole proprietorship depends upon the health and life of the owner. In
case of death of the owner the business no longer continues.

2. Chances of Fraud
In sole proprietorship, proper records are not maintained. This increases the chances of
errors and frauds for dishonest workers.

3. Expansion Difficulty
In sole proprietorship, it is very difficult to expand the business because of the limited
life of proprietor and limited capital.
4. Lack of Advertisement
As the sources of single person are limited so he cannot bear the expense of
advertisement, which is also a major disadvantage.

5. Lack of Capital
Generally, one-man resources are limited, so due to financial problems he cannot
expand his business.

6. Lack of Inspection and Audit

In sole proprietorship there is lack of inspection and audit, which increases the chances
of fraud and illegal operations.

7. Lack of Innovation
Due to fear of suffering from loss, a sole proprietor does not use new methods of
production. So, there is no invention or innovation.

8. Lack of Public Confidence

The public shows less confidence in this type of business organization because there is
no legal registration to control and wind up the business.

9. Lack of Skilled Persons

One person cannot hire the services of qualified and skilled persons because he has
limited resources. It is also a great disadvantage.

10.Management Difficulty
One person cannot perform all types of duties effectively. If he is a good accountant, he
may not be a good administrator. Due to this, business suffers a loss.

11.Much Strain (Stress) on Health

In this type of business organization there is much strain on the health of the
businessman because he alone handles all sorts of activities.
12.Not Durable
This type of business organization is not durable because its existence depends upon
the life of sole proprietor.

13.Permanent Existence
In this type of business there is a need of permanent existence of a businessman. In
case of absence from business for few days may become the cause of loss.

14.Risk of Careless Drawings

In sole proprietorship owner himself is a boss. There is no question to his decisions or
actions. So, there is a risk of careless drawings by him.

15.Risk of Loss
In case of sole proprietorship a single person bears all the losses, whereas in the case
of partnership or Joint Stock Company all the partners or members bear the loss.

16.Unlimited Liability
In sole proprietorship there is unlimited liability. It means, in case of loss personal
property of the owner can be sold to satisfy the claimants. It is a great disadvantage.

From the above-mentioned detail, we come to the point that despite the above
disadvantages, sole proprietorship is an important form of business organization. This
is due to the fact that its formation is very easy and due to unlimited liability the owner
takes great care and interest in the business, because in case of loss, he is personally
responsible. As he enjoys entire profit, this factor also encourages him to work with
great efficiency which promotes his business.

2.5. Partnership and its Characteristics

Partnership is the second stage in the evolution of forms of business organization. It

means the association of two or more persons to carry on as co-owners, i.e. a business
for profit. The persons who constitute this organization are individually termed as
partners and collectively known as firm; and the name under which their business is
conducted is called “The Firm Name”.

In ordinary business the number of partners should not exceed 20, but in case of
banking business it must not exceed 10.

The main characteristics of partnership may be narrated as under:

1. Agreement
Agreement is necessary for partnership. Partnership agreement may be written or oral.
It is better that the agreement is in written form to settle the disputes.

2. Audit
If partnership is not registered, it has no legal entity. So there is no restriction for the
audit of accounts.

3. Agent
In partnership every partner acts as an agent of another partner.

4. Business
Partnership is a business unit and a business is always for profit. It must not include
club or charitable trusts, set up for welfare (wellbeing).

5. Cooperation
In partnership mutual cooperation and mutual confidence is an important factor.
Partnership cannot take place with cooperation.

6. Dissolution
Partnership is a temporary form of business. It is dissolved if a partner leaves, dies or
declared bankrupt.

7. Legal Entity
If partnership is not registered, it has no legal entity. Moreover, partnership has no
separate legal entity from its members and vice versa.

8. Management
In partnership all the partners can take part or participate in the activities of business
management. Sometimes, only a few persons are allowed to manage the business
affairs.

9. Number of Partners
In partnership there should be at least two partners. But in ordinary business the
partners must not exceed 20 and in case of banking business it should not exceed 10.

10.Object
Only that business is considered as partnership, which is established to earn profit.

11.Payment of Tax
In partnership, every partner pays the tax on his share of profit, personally or individually.

12.Profit and Loss Distribution

The distribution of profit and loss among the partners is done according to their
agreement.

2. Registration
Many problems are created in case of unregistered firm. So, to avoid these problems
partnership firm must be registered.

3. Relationship
Partnership business can be carried on by all partners or any of them can do the
business for all.

4. Share in Capital
According to the agreement, every partner contributes his share of capital. Some
partners provide only skills and ability to become a partner of business and earn profit.

5. Transfer of Rights
In partnership no partner can transfer his shares or rights to another person, without the
consent of all partners.

6. Unlimited Liability
In partnership the liability of each partner is unlimited. In case of loss, the private
property of the partners is also used up to pay the business debts.

Advantages of Partnership
Following are the advantages of partnership:
1. Simplicity in Formation
This type of business of organization can be formed easily without any complex legal
formalities. Two or more persons can start the business at any time. Its registration is
also very easy.

2. Simplicity in Dissolution
Partnership Business can be dissolved at any time because of no legal restrictions. Its
dissolution is easy as compared to Joint Stock Company.

3. Sufficient Capital
Partnership can collect more capital in the business by the joint efforts of the partners
as compared to sole proprietorship.

4. Skilled Workers
As there is sufficient capital so a firm is in a better position to hire the services of
qualified and skilled workers.

5. Sense of Responsibility
As there is unlimited liability in case of partnership, so every partner performs his duty
honestly.
6. Satisfaction of Partners
In this type of business organization each partner is satisfied with the business because
he can take part in the management of the business.

7. Secrecy
In partnership it is not compulsory to publish the accounts. So, the business secrecy
remains within partners. This factor is very helpful for successful operation of the
business.

8. Social Benefit
Two or more partners with their resources can build a strong business. This factor is
very helpful in solving social problems like unemployment.

9. Expansion of Business
In this type of business organization, it is very easy to expand business volume by
admitting new partners and can borrow money easily.

10.Flexibility
It is flexible business and partners can change their business policies with the mutual
consultation at any time.

11.Tax Facility
Every partner pays tax individually. So, a firm is in a better position as compared to
Joint Stock Company.

12.Public Factor
Public shows more confidence in partnership as compared to sole proprietorship. If a
firm is registered, people feel no risk in creating relations with such business.

13.Prime Credit Standing

The liabilities of partners are unlimited, so the banks and other financial institutions
provide them credit easily.

14.Minority Protection
In partnership all policy matters are decided with consent of each partner. This gives
protection to minority partners.

15.Moral Promotion
Partnership is the best business for small investors. It promotes moral courage of
partners.

16.Distribution of Work
There is distribution of work among the partners according to their ability and
experience. This increases the efficiency of a firm.
17.Combined Abilities
Every partner possesses different ability, which helps in running the business effectively,
when combined together.

18.Absence of Fraud
In partnership each partner can look after the business activities. He can check the
accounts. So, there is no risk of fraud.

Disadvantages of Partnership
The disadvantages of partnership are enumerated one by one as under:

1. Unlimited Liability
It is the main disadvantage of partnership. It means in case of loss, personal property
of the partners can be sold to pay off the firm’s debts.

2. Limited Life of Firm

The life of this type of business organization is very limited. It may come to an end if
any partner dies or new partner enters into business.
3. Limited Capital
No doubt, in partnership, capital, is greater as compared to sole proprietorship, but it is
small as compared to Joint Stock Company. So, a business cannot be expanded on a
large scale.

Qn: Explain the difference between Partnership and Joint Stock Company
4. Limited Abilities
As financial resources of partnership are limited as compared to Joint Stock Company,
so it is not possible to engage the services of higher technical and qualified persons.
This causes the failure of business, sooner or later.

5. Limited number of Partners

In partnership, the number of partners is limited, so the resources are also limited. That
is why business cannot expand on large scale.

6. Legal Defects (shortcomings)

There are no effective rules and regulations to control the partnership activities. So, it
cannot handle large-scale production.

7. Lack of Interest (commitment)

Partners do not take interest in the business activities due to limited share in profit and
limited chances of growth of business.

8. Lack of Public Confidence

As there is no need by law to publish accounts in partnership, so people lose confidence
and avoid dealing and entering into contract with such firm.

9. Lack of Prompt Decision

In partnership all decisions are made by mutual consultation. Sometimes, delay in
decisions becomes the cause of loss.

10.Lack of Secrecy
In case of misunderstandings and disputes among the partners, business secrets can
be revealed.

11.Chances of Dispute among Partners

In partnership there are much chances of dispute [disagreement-quarrel, clash] among
the partners because all the partners are not of equal mind.

12.Expansion Problem
Partnership business may not be expanded due to limited number of partners, limited
capital and unlimited liability.

13.Frozen Investment
It is easy to invest money in partnership but very difficult to withdraw it.

14.Risk of Loss
There is a risk of loss due to less qualified and less experienced people.

15.Transfer of Rights
In partnership no partner can transfer his share without the consent of all other partners.

Therefore;
From the above-mentioned findings, we come to this point that despite the above
disadvantages, partnership is an important form of business organization. This is
because its formation is very easy and due to unlimited liabilities, partners take great
interest in business, because in case of loss they are personally responsible.
 PART III

3. WAYS OF STARTING A BUSINESS

Most people have good business ideas, but not all of them have the characteristics
needed to make their businesses succeed. Successful entrepreneurs are those who
have the qualities discussed previously. Mind you that; some of these factors are inborn
traits, others can be learned, and still others are external and harder to control. The
more of these factors you have on your side, the greater your chances of success.

3.1. Starting a new business

Therefore the following are the steps you need to consider on starting a new starting a
business

STEP 1: Define a Market Need

A good business idea fills a need that exists in the market. You may have come up with
your business idea because you, your friends or your family saw a need for a product or
service you couldn’t find. Maybe the product or service exists, but you think you can do
it better. Here are some questions to ask:
 What need does my product or service fill?
 What problem does it solve?
 What are the features and benefits of my product or service? (“Features” are the
components of your product. For instance, a bicycle’s features might include a
high-tech braking system and puncture-proof tires. The “benefits” of those
features are safety and a smoother ride.)
 What is my competitive advantage? (How is your idea different from or better
than the competition?)
 What is my business model? (How will you produce, deliver and market the
product or service, and how will you make money?)
 A good business idea fills a need that exists in the market. You may have come
up with your business idea because you, your friends or your family saw a need
for a product or service you couldn’t find.
STEP 2: Examine Your Personal Background
If you don’t yet have a firm business idea in mind, assessing your life and work
experience can help you come up with one. If you do have a business idea, review your
past experience to see how well it supports your concept.

CONSIDER: how do my skills and experience fit with my idea? Suppose you want to
open a bakery. If you have worked in food service or retailing, those skills will help you in
running your new business. If you haven’t, you may need to learn more about these
industries and gain experience before you move forward.

How risk-tolerant am I? How does my experience affect my startup risk? Past

experience can minimize the risk of starting a business. Many people dream of opening
restaurants, but this industry has a high failure rate. If you have no restaurant
experience, your risk will be even greater.

Taking into account your experience and the potential risk of your startup, assess how
comfortable you feel with moving forward. How can I modify my idea to fit my
experience? If your idea seems too risky given your experience, consider an alternative.
Using the example above, for instance, a person with no restaurant experience might
consider a lower-risk business such as catering or a cupcake shop.

Do I ¬have the passion to sell this idea to others? You need to be able to convince
customers, investors and potential partners that your business idea is worthwhile.

Get input on your business idea by giving a SCORE Mentor, friend or family member an
“elevator pitch” (two minutes or less) explaining your business concept. Have them ask
you questions and offer honest feedback. Hearing what someone else thinks of your
idea will help you clarify your ideas.

STEP 3: Research Your Industry

Another way to fine-tune your business idea is by researching the industry you want to
enter. You’ll want to know;
a) Growth trends: How fast can a business in this industry expect to grow?
 b) Profitability: What kind of profit can you expect to make? What are average
margins in the industry?
c) Trends: What current and future trends (demographic, economic, and global) are
affecting the industry?
d) Life cycle: The chart below illustrates the concept of life cycle. Ideally, you want
to choose an industry that’s either at an early stage in its life cycle or in the
reinvention stage. Choosing an industry in the mature or declining stages makes
it harder to compete.

Another way to fine-tune idea is by researching the industry you want to enter

STEP 4: Consider Your Target Market

Who will your business serve? You can’t be all things to all people. To create a winning
concept, you need to narrow your market focus. Ask yourself these questions:
a) Channel position: Where in the sales chain will your customers fall? In other
words, are you selling to retailers, wholesalers, consumers or other businesses?
b) Number: How big is your potential market?
c) Income level/ability to pay: Are your customers upscale or bargain hunters?
d) Demographics: What are the demographic characteristics of your market
(location, company size, sex, age, marital status and education level)?
e) Lifestyle: Are your target customers urban or rural? How do they spend their work,
leisure and personal time?
f) Habits: What are the spending habits of your target market? Where do they shop
and how do they buy?

3.1.1. Research Your Target Markets

Once you have identified potential target markets, you need to gather data on the
following:
a) Channel position: Which possible sales channels will your business use? Are
certain channels more profitable than others, easier to enter or simpler to work
with? Are some channels growing while others are shrinking? Carefully research
the costs and potential profit of each channel.
 b) Geographic location: If you’re starting a local business such as a restaurant or
retail store, you’ll be targeting customers in a specific geographic area. If you’re
starting an e-commerce business, you may be selling to customers nationwide
and even globally. Wherever your customers will be, gather information about
that location. What local, regional, national and global factors will affect the
target market in that location?
c) Customer demographics:
Drill down into your customer demographic by researching the following:
i. Spending: Income is important, but you also want to know how your target
market spends that income. What percentage of their income goes to your
type of product or service? How much discretionary income do they have?
ii. Gender, age, race and marital status: Targeting “women” as a market is
too broad because not all women behave the same way. You’ll need to
research specific niches within broader categories. For example, married
women behave differently than single women; moms behave differently
than childless women.
iii. Buying habits and behavior: What makes your target market buy? Where
do they buy? (Online? In boutiques? In superstores?) What marketing
tactics work best on them? How often do they buy your product or service
and how much do they spend?
d) Market size: How big is your target market? Is it growing or is it in decline? Find
data for the past three years plus future projections. Targeting a market that’s
shrinking is generally not a good idea.
e) Realistic market penetration: Just as important as the market size is how much
of that market you can realistically hope to capture. This is where researching
your competition comes in.

3.1.2. Researching Your Competition

Here’s what you need to find out about your competitors.

a) Business model: What sales channels do your competitors use and how do they
make money?
b) Size: How big are your competitors? Will you be competing against other small
 businesses, national corporations or regional chains?
c) Location: Are your competitors local, regional, national or overseas? Are they
brick-and-mortar locations or do they sell only online?
d) Profitability: How profitable are your competitors? What are the average margins
in your industry and among your specific competitors?
e) Market strategy: How do your competitors position themselves? Are they
businesslike or informal? Low-price leaders or premium products? Do they offer
hand-holding service or a do-it-yourself atmosphere?
f) Features/benefits: What are the features and benefits of your competitors’
products or services? How do they compare to yours?
g) Price: What prices do your competitors charge? Do they offer discounting,
bundling or subscription plans?
h) Efficiency: How are your competitors staffed? How many employees do they
have? Do they outsource work or work virtually? What kinds of overhead costs do
they have? How do your competitors position themselves? Are they businesslike
or informal? Low-price leaders or premium products? Do they offer hand-holding
service, or a do-it-yourself atmosphere?
Spy
You can’t learn everything you need to know about competitors from publicly available
sources. Collecting critical information also requires some investigations. Here’s where
to get the news story:
a) The competitor: Sometimes you can get information directly from the competitor.
Call their business or visit their website or location pretending to be a customer
seeking information. Sign up for their email newsletters or follow them on
Facebook or Twitter to see what marketing methods they’re using. Sometimes,
geographically distant competitors will be willing to give you advice and ideas if
they feel you aren’t going to be competing for the same customer base.
b) Suppliers: You’ll need to contact potential suppliers to research your costs and
product availability. While you’re at it, see if you can get information about
competitors.
c) Competitors’ customers: Social media has made it easier to contact your
competitors’ customers and ask what they like (and don’t like) about the
 competition. You can also see what the competitors’ customers are saying about
them online.
d) Trade associations: Trade associations will not reveal information about specific
companies, but they do have general information about benchmarks, trends and
averages in your industry.
e) The internet: Set up a Google Alert on your competitors to receive news and
information about them. Search online articles to learn about their growth
strategies and future plans.

3.2. Buying an Existing Business

Things to Consider Before Buying a Business

Prospective buyers must be sure that they discover the answers to the following
fundamental questions: Is the right type of business for sale in the market in which you
want to operate? What experience do you have in this particular business and the
industry in which it operates? How critical is experience in the business to your ultimate
success? What price and payment method are reasonable for you and acceptable to the
seller?

Should you start the business and build it from the ground up rather than buy an
existing one? What is the company’s potential for success? What changes will you have
to make – and how extensive will they have to be – to realize the business’s full
potential? Will the company generate sufficient cash flow to pay for itself and leave you
with a suitable return on your investment?

3.3. Advantages and Disadvantages of Buying an Existing Business

If you want to start your own business, the number of choices available are almost
infinite: starting from zero, buying a franchise, partnering. If you don't have previous
business experience, however, it may make sense to consider buying an existing
business, which can put you ahead of the competition by throwing you directly into the
business world. Before you make the final decision, though, here are some of the merits
and demerits of previously established businesses and how to deal with them.

The Advantages of Buying an Existing Business

It gives you the advantage of an established customer base.

People will already know the place, so the costs of advertising will be less. You will also
avoid the uncertain initial period, where attracting customers to the business can turn
into a full-time job in itself. A business plan and marketing method should already be in
place. A market for the product or service will have already been demonstrated

An Existing Business May Already Have the Best Location

When the location of the business is critical to its success (as is often the case in
retailing), it may be wise to purchase a business that is already in the right place.
Employees and Suppliers Are Established An existing business already has experienced
employees who can help the new owner through the transition phase. Experienced
employees enable a company to continue to earn money while a new owner learns the
business.

A Successful Existing Business May Continue to Be Successful

The previous management team already has established a customer base, built supplier
relationships, and set up a business system. The customer base inherited in a business
purchase can carry an entrepreneur while he studies how the business has become
successful and how to build on that success.

Equipment Is Installed and Productive Capacity Is Known

In an existing business, a potential buyer can determine the condition of the plant and
equipment and its capacity before buying. The previous owner may have established an
efficient production operation through trial and error, although the new owner may need
to make modifications to improve it.

Inventory Is in Place and Trade Credit Is Established

The proper amount of inventory is essential to both controlling costs and generating
adequate sales volume. If a business has too little inventory, it will not have the quantity
and variety of products it needs to satisfy customer demand. However, if a business
has too much inventory, it is tying up excessive capital unnecessarily, thereby increasing
costs and reducing profitability. In addition, previous owners have established trade
credit relationships with vendors that can benefit the new owner.

The New Business Owner Hits the Ground Running

Entrepreneurs who purchase existing businesses avoid the time, costs, and energy
required to launch a new business. Entrepreneurs who buy existing successful
businesses do not have to invest a lifetime building a company to enjoy its success.

The New Owner Can Use the Experience of the Previous Owner

The new owner can trace the impact on costs and revenues of the major decisions that
the previous owner made and can learn from his mistakes and profit from his
achievements. In many cases, the previous owner spends time with the new owner
during the transition period, giving the new manager the opportunity to learn about the
policies and procedures in place and the reasons for them. After all, most owners who
sell out want to see the buyer succeed in carrying on their businesses.

Easier Financing

Attracting financing to purchase an existing business often is easier than finding the
money to launch a company from scratch. Many existing businesses already have
established relationships with lenders, which may open the door to financing through
traditional sources such as banks.

It’s a Bargain

Some existing businesses may be real bargains. The current owners may need to sell
on short notice, which may lead them to sell the business at a low price. The more
specialized a business is, the greater the likelihood is that a buyer can find a bargain. If
special skill or training is required to operate a business, the number of potential buyers
will be significantly smaller. If the seller wants a substantial down payment or the entire
selling price in cash, few buyers may qualify; however, those who do may be able to
negotiate a good deal.

Disadvantages of Buying an Existing Business

You will inherit all problems that run with the business. If the previous owner had trouble
attracting new customers, paying the lease, or running new campaigns, you will have to
deal with everything to set things right before you can even start to think about moving
forward. If the business has a history of disappointing customers, you may also have a
hard time convincing people that things will change under your direction.

It’s a “Loser” A business may be for sale because it is struggling and the owner wants
out. In these situations, a prospective buyer must be wary. Business owners sometimes
attempt to disguise the facts and employ creative accounting techniques to make the
company’s financial picture appear much brighter than it really is. Few business sellers
honestly state “It’s losing money” as the reason for putting their companies up for sale...
If an analysis of a company shows that it is poorly managed or suffering from neglect, a
new owner may be able to turn it around.

The Previous Owner May Have Created Ill Will

Just as ethical, socially responsible business dealings create goodwill for a company,
improper business behavior creates ill will. Customers, suppliers, creditors, or
employees may have extremely negative feelings about a company’s reputation
because of the unethical actions of its current owner.

Employees Inherited with the Business May Not Be Suitable

Previous managers may have kept marginal employees because they were close friends
or because they started with the company. A new owner, therefore, may have to make
some very unpopular termination decisions. For this reason, employees often do not
welcome a new owner because they feel threatened by change. Some employees may
not be able to adapt to the new owner’s management style, and a culture clash may
result. If it reveals that existing employees are a significant cause of the problems a
business faces, the new owner will have no choice but to terminate them and make new
hires..
The Business Location May Have Become Unsatisfactory
Prospective buyers should always evaluate the existing market in the area surrounding
an existing business as well as its potential for expansion. Buyers must remember that
they are buying the future of a business, not merely its past. A location in decline may
never recover. If business success is closely linked to a good location, acquiring a
business in a declining area or where demographic trends are moving downward is not
a good idea.

Equipment and Facilities May Be Obsolete or Inefficient

Potential buyers sometimes neglect to have an expert evaluate a company’s facilities
and equipment before they purchase it. Only later do they discover that the equipment is
obsolete and inefficient and that the business may suffer losses from excessively high
operating costs.

Change and Innovation Are Difficult to Implement

It is easier to plan for change than it is to implement it. Methods, policies, and
procedures the previous owner used in a business may have established precedents
that a new owner finds difficult to modify.

Inventory May Be Outdated or Obsolete

Inventory is valuable only if it is salable.

Smart buyers know better than to trust the inventory valuation on a firm’s balance sheet.
A prospective buyer must judge inventory by its market value.

The Business May Be Overpriced

Each year, many people purchase businesses at prices far in excess of their value,
which can impair the companies’ ability to earn a profit and generate a positive cash
flow. If a buyer accurately values a business’s accounts receivable, inventories, and
other assets, he or she will be in a better position to negotiate a price that will allow the
business to be profitable..

3.4. The Steps in Acquiring a Business

The steps involved in the right way to buy a business are:
Analyze your skills, abilities, and interest.

Prepare a list of potential candidates (Remember the “hidden market.”) Investigate and
evaluate candidate businesses and select the best one. Explore financing options.
Ensure a smooth transition.

The primary focus is to identify the type of business you will be happiest and most
successful owning. Consider, for example, the following questions: What business
activities do you enjoy most? Least? Why? Which industries or markets offer the
greatest potential for growth? Which industries interest you most? Least? Why? What
kind of business do you want to buy? What kinds of businesses do you want to avoid?
What do you expect to get out of the business? How much time, energy, and money can
you put into the business? What business skills and experience do you have? What
skills and experience do you lack? How easily can you transfer your skills and
experience to other types of businesses? In what kinds of businesses would that
transfer be easiest? How much risk are you willing to take?

Prepare a List of Potential Candidates

Once you know what your goals are for acquiring a business, you can begin your search.
Do not limit yourself to only those businesses that are advertised as being “for sale.” In
fact, the hidden market of companies that might be for sale but are not advertised as
such is one of the richest sources of top-quality businesses. Many businesses that can
be purchased are not publicly advertised but are available either through the owners or
through business brokers and other professionals. Although they maintain a low profile,
these hidden businesses represent some of the most attractive purchase targets a
prospective buyer may find.

Investigate and Evaluate Candidate Businesses and Evaluate the Best One

Finding the right company requires patience. Although some buyers find a company
after only a few months of looking, the typical search takes much longer, sometimes as
much as two or three years. Once you have a list of prospective candidates, it is time to
do your homework. The next step is to investigate the candidates in more detail: What
are the company’s strengths? Weaknesses? Is the company profitable? What is its
overall financial condition? What is its cash flow cycle? How much cash will the
company generate? Who are its major competitors? How large is the customer base? Is
it growing or shrinking? Are the current employees suitable? Will they stay? What is the
physical condition of the business, its equipment, and its inventory? What new skills
must you learn to be able to manage this business successfully?

Explore Financing Options

The next challenging task in closing a successful deal is financing the purchase.
Although financing the purchase of an existing business usually is easier than financing
a new one, some traditional lenders shy away from deals involving the purchase of an
existing business. Those that are willing to finance business purchases normally lend
only a portion of the value of the assets, and buyers often find themselves searching for
alternative sources of funds.

Ensure a Smooth Transition

Once the parties strike a deal, the challenge of making a smooth transition immediately
arises. No matter how well planned the sale is, there are always surprises. For instance,
the new owner may have ideas for changing the business—sometimes radically—that
cause a great deal of stress and anxiety among employees and the previous owner. To
avoid a bumpy transition, a business buyer should do the following: Concentrate on
communicating with employees. Business sales are fraught with uncertainty and
anxiety, and employees need reassurance. Be honest with employees. Avoid telling
them only what they want to hear. Share with the employees your vision for the
business in the hope of generating a heightened level of motivation and support. Listen
to employees. They have first-hand knowledge of the business and its strengths and
weaknesses and usually can offer valuable suggestions for improving it. Consider
asking the seller to serve as a consultant until the transition is complete. The previous
owner can be a valuable resource, especially to an inexperienced buyer

The Legal Aspects of Buying a Business

Lien – creditors’ claims against an asset. Bulk transfer – protects business buyer from
the claims unpaid creditors might have against a company’s assets. Contract
assignment – buyer’s ability to assume rights under seller’s existing contracts.

Restrictive covenant – contract in which a business seller agrees not to compete with
the buyer within a specific time and geographic area. Ongoing legal liabilities – physical
premises, product liability, and labor relations.

3.5. The Acquisition Process

1. Identify and approach candidate 2. Sign nondisclosure statement 3. Sign letter of

intent 4. Buyer’s due diligence investigation 5. Draft the purchase agreement 6. Close
the final deal 7. Begin the transition Negotiations

1. Approach the candidate. If a business is advertised for sale, the proper approach is
through the channel defined in the ad. Sometimes, buyers will contact business brokers
to help them locate potential target companies. If you have targeted a company in the
“hidden market,” an introduction from a banker, accountant, or lawyer often is the best
approach. During this phase, the seller checks out the buyer’s qualifications, and the
buyer begins to judge the quality of the company.

2. Sign a nondisclosure document. If the buyer and the seller are satisfied with the
results of their preliminary research, they are ready to begin serious negotiations.
Throughout the negotiation process, the seller expects the buyer to maintain strict
confidentiality of all of the records, documents, and information he receives during the
investigation and negotiation process. The nondisclosure document is a legally binding
contract that ensures the secrecy of the parties’ negotiations.

3. Sign a letter of intent. Before a buyer makes a legal offer to buy the company, he
typically will ask the seller to sign a letter of intent. The letter of intent is a non-binding
document that says that the buyer and the seller have reached a sufficient “meeting of
the minds” to justify the time and expense of negotiating a final agreement. The letter
should state clearly that it is non-binding, giving either party the right to walk away from
the deal. It should also contain a clause calling for “good faith negotiations” between
the parties. A typical letter of intent addresses terms such as price, payment terms,
categories of assets to be sold, and a deadline for closing the final deal.

4. Buyer’s Due Diligence. While negotiations are continuing, the buyer is busy studying
the business and evaluating its strengths and weaknesses. In short, the buyer must “do
his homework” to make sure that the business is a good value.

5. Draft the Purchase Agreement. The purchase agreement spells out the parties’ final
deal! It sets forth all of of the details of the agreement and is the final product of the
negotiation process.

6. Close the final deal. Once the parties have drafted the purchase agreement, all that
remains to making the deal “official” is the closing. Both buyer and seller sign the
necessary documents to make the sale final. The buyer delivers the required money,
and the seller turns the company over to the buyer.

7. Begin the Transition. For the buyer, the real challenge now begins: Making the
transition to a successful business owner!

Sources: Adapted from Buying and Selling: A Company Handbook, Price Waterhouse,
(New York: 1993) pp.38-42;Charles F. Claeys, “The Intent to Buy,” Small Business
Reports, May 1994, pp

3.6. The Five P’s of Negotiating

Preparation - Examine the needs of both parties and all of the relevant external factors
affecting the negotiation before you sit down to talk.

Poise - Remain calm during the negotiation. Never raise your voice or lose your temper,
even if the situation gets difficult or emotional. It’s better to walk away and calm down
than to blow up and blow the deal.

Patience - Don’t be in such a hurry to close the deal that you end up giving up much of
what you hoped to get. Impatience is a major weakness in a negotiation.

Persuasiveness - Know what your most important positions are, articulate them, and
offer support for your position.
Persistence - Don’t give in at the first sign of resistance to your position, especially if it
is an issue that ranks high in your list of priorities.

3.7. Determining the Value of a Business

Question #1: "When Did the Owner Decide to Sell the Business?"

In some ways, buying an existing business is like buying a used car. If you've ever
bought a used car, you probably asked the dealer why the previous owner sold the car in
the first place. And then the car dealer probably told you that the previous owner was a
little old lady who only drove it church and was recently placed in a nursing home.
Business buyers have a similar curiosity about the owner's decision to sell. Owners
usually respond with an answer from the seller's playbook. Variations of "I'm ready to
retire," "It's time to do something else," and "It's time to give someone else a chance"
lead the pack. Yet much of the time, the reason behind the owner's decision to sell is
less important than when the owner decided to put the business on the market. Ideally,
the answer buyers should look for is that the listing didn't arise suddenly, but came as
the result of a well-thought out, multi-year plan conceived by the owner as a means of
achieving his personal and business goals. If that's true, the owner should be able to
provide the buyer with a copy of the plan upon request. But if the owner's decision to list
the business happened quickly, that could be a red flag that the business is in trouble,
that there are economic threats on the horizon, or that the owner hasn't taken the time
to properly prepare due diligence materials.

Question #4: "What Would the Seller Do to Increase Sales and Profits"
More than anything else, buyers need to create opportunities to inject a dose of reality
into the buying decision. Presumably, the person who is most qualified to offer a
realistic perspective about the business and its future growth prospects is its owner.
Yet sellers often prefer to paint a rosy portrait of the company rather than simply telling
it like it is. One of the ways a buyer can break through a reluctant seller's defenses is to
invite the owner to make suggestions about how to increase capacity, market share and
profitability. With the right approach, a buyer's appeal to owner expertise can change the
seller's posture from defensive to collaborative.
3.8. Buying an existing business is a big decision

Buying an existing business is a big decision. It is critical that, as a prospective buyer,

you spend time investigating the business prior to making the decision to purchase.
Obtaining information about the business can help you make a well-informed decision.
You must be prepared to carefully assess all business records and risks while searching
for any "skeletons in the closet." The following is a checklist of information to gather
about the business. This checklist serves as a guide in investigating the business.
Throughout the process, consider your goals, objectives, and strategic plans for the
business. Analyze your financial expectations and time constraints to confirm that you
can make the business succeed. Keep in mind that a good investment for one person
may not be a good choice for someone else. Much of the information in the checklist
can be obtained by interviewing the seller and asking questions. Other information can
be learned by obtaining important business documents such as financial statements,
tax returns, leases, etc. You can also gain information through observations or by
talking with employees (if given permission by the seller). Keep in mind that
communication between the prospective buyer and the seller is important. The seller
provides invaluable experience and knowledge that the prospective buyer needs in order
to make a decision about purchasing the business. The seller also has a great deal of
knowledge that would be beneficial after transfer of ownership. However, be mindful of
the seller's point-of-view when gathering information. The seller likely has invested
much time, energy, and money in the business. A tactful approach to the investigation
process can be advantageous during the negotiation phase.

3.9. A Checklist of Information to Gather

Financial Information
A prospective buyer should request access to business financial records. This financial
information is key to understanding past profitability of the business as well as
projected future success. If the seller cannot provide adequate information, the buyer
must make the decision to either terminate efforts or move forward at his/her own risk.
If bank financing is involved, the lender will require adequate financial information.

Obtain the proposed selling price and determine what is included in the sale.
How much of the selling price is allocated towards real estate, goodwill, equipment,
inventory, etc.? What is the actual market value of those assets?

Determine the type of sale. Will it be an asset or stock purchase? Establish whether or
not the buyer will assume any business obligations or debts such as unpaid balances of
accounts payable. If so, obtain all current loan terms, documents, etc.

Acquire business balance sheets and income statements (for at least three year-end
statements and interim for current year), and federal business tax returns (at least the
past three years). Confirm that all past taxes (state and federal) originating from the
business are paid.

Determine whether additional working capital will be needed to conduct business

operations after the sale.

Business and Operational Information

Obtain business history. What kind of reputation does the business have? How long has
this business been established? Include the development/progress of the business and
ownership structure. Determine whether upgrades are required as well as identify
needed changes to business operations. Are any leasehold improvements, equipment
purchases, or general updates to the business necessary? What would be the costs of
these updates? Obtain a copy of the franchise agreement, if applicable. Will another
franchise fee or a transfer fee have to be paid? Obtain a copy of the proposed buy/sell
agreement (unsigned) or information in writing about the proposed terms of the
buy/sell transaction. Request an explanation of seller's reason for selling the business.
Investigate any business leases for equipment, property, etc. Are leases transferable?
Investigate zoning laws to ensure compliance. Determine whether or not the buyer will
be able to continue utilizing the firm's intellectual property such as business name,
patents, trademarks, trade secrets, product names, and any other proprietary
information. Research any licenses that may be required to maintain business
operations. What are the costs? Determine whether or not the seller will offer a non-
compete agreement after transfer of ownership. Investigate whether there are any
customer product warranties issued by the company that may be future obligations.
Inform Management/Personnel action

Learn about staffing requirements and key employees. Analyze the roles and salaries of
all employees in the business. Will you keep existing employees and/or key
management during the transition? Do you have the experience and expertise to
manage this new acquisition? Obtain a copy of existing employee contracts and benefit
packages, if applicable. Determine the likelihood that existing employees will stay with
the business after the transfer of ownership. Establish whether or not the seller is
willing to stay on for a period of time after ownership transfers in order to provide
knowledge and support

Market and Industry Information

Identify the products/services the firm provides. What is the current pricing system? Do
you plan to alter the product/service mix? Are existing inventories and supplies included
with the sale? What level of inventory will be in the business at the time of transfer?
Does inventory consist of high quality saleable inventory or predominantly old inventory
that will be difficult to sell? Acquire a list of competitors, suppliers, and
clients/customers, if possible. Can you retain customers and sustain revenues? Will
existing vendors offer the new owner the same terms as the current owner? Will you
forge new relationships with different suppliers or continue with current operations?
Determine the market area of the business and method of distribution. Fully understand
the business's customer geography and target market. How large is the current
customer base? Is there an opportunity to grow the customer base? Research the
industry. Is this industry growing? What are its strengths and weaknesses? Are there
any emerging opportunities or threats? Gather information on current demand,
seasonality, buying patterns, etc. Consider changes in the business environment which
would affect operations and profit potential. The seller may have access to industry
journals and information. In addition, outside industry research will likely be necessary.

3.10. The Interested Buyer’s Checklist

Documents involved when you buy a business

Before you sign the contract: seller has to provide contract of sale, copy of lease,
section 52 statement prepare proposed assignment of lease obtain title search obtain
search of business name or company name.  When you sign the contract: seller has to
provide signed contract return signed copy of contract to seller pay preliminary or full
deposit and seller to supply receipt for deposit. Immediately after settlement: lodge
applications for transfer of registration of business name transfer all necessary permits,
licenses, registrations and certificates.

Therefore;
How to Buy a Business Starting from scratch isn't the only way to get started. Buying an
existing business can help you hit the ground running. That is why as a buyer this is
what you need to know to find a great deal.

When most people think of starting a business, they think of beginning from scratch--
developing your own ideas and building the company from the ground up. But starting
from scratch presents some distinct disadvantages, including the difficulty of building a
customer base, marketing the new business, hiring employees and establishing cash
flow...all without a track record or reputation to go on.

Buying an existing business is less risky than starting from scratch. When you buy a
business, you take over an operation that's already generating cash flow and profits.
You have an established customer base, reputation and employees who are familiar
with all aspects of the business. And you don't have to reinvent the wheel setting up
new procedures, systems and policies--since a successful formula for running the
business has already been put in place. On the downside, buying a business is often
more costly than starting from scratch. However, it's easier to get financing to buy an
existing business than to start a new one.

Bankers and investors generally feel more comfortable dealing with a business that
already has a proven track record. In addition, buying a business may give you valuable
legal rights, such as patents or copyrights, which can prove very profitable. Of course,
there's no such thing as a sure thing--and buying an existing business is no exception. If
you're not careful, you could get stuck with obsolete inventory, uncooperative
employees or outdated distribution methods. To make sure you get the best deal when
buying an existing business, be sure to follow these steps.