GDE BUSINESS STUDIES GRADE 11 NOTES CHAPTER 6

BUSINESS STUDIES
GRADE 11
TERM ONE
CHAPTER SIX
BUSINESS VENTURES
AVENUES OF ACQUIRING A BUSINESS
Educators: Mr. Simethi and Ms Sejake
Emais: [email protected] or [email protected]
TABLE OF CONTENTS

TOPICS PAGES
Exam guidelines for avenues of acquiring 1
a business
Terms and definitions 3
Reason why entrepreneurs may decide to 4
purchase an existing business.
Meaning, advantages, disadvantages and 4-5
contractual of franchising
Meaning, advantages, disadvantages and 6-7
contractual of outsourcing
Meaning, advantages, disadvantages and 7-9
contractual of leasing
Identifying business avenues from 9
scenarios/case studies/statements
Activity to be completed before/on the 20th 10
April 2020

This chapter consists of 9 pages.

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GDE BUSINESS STUDIES GRADE 11 NOTES CHAPTER 6

CONTENT DETAILS FOR TEACHING, LEARNING AND ASSESSMENT

PURPOSES

AVENUES OF ACQUIRING A BUSINESS

Learners must be able to:

• Explain/Discuss/Justify/Motivate the reason why entrepreneurs may decide to

purchase an existing business.
• Outline/Mention/Discuss/Explain/Describe the advantages, disadvantages and
contractual implications of the following business avenues:
o Franchising
o Outsourcing
o Leasing
• Identify/Name business avenues from scenarios/case studies/statements.
• Conduct research on the viability and benefits of franchising, outsourcing and
leasing

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Terms and Definitions

TERM DEFINITION
Royalties Payments made to the franchisor by the franchisee
based on the turnover of the business.
Vendor A person or a business to whom a function is
outsourced.
Franchising When a person or a business gives another business
or person the right to sell the same goods or services
subject to certain criteria or regulations.
Franchisee Individual who purchases the right to use the
trademark or business model.
Franchisor Individual who sells the right of the trademark or
business model in return for franchise royalty fee. (
Leasing Method where a business can pay for the use of an
asset rather than buying it outright for itself.
Lessor Person or business who owns the assets
Lessee Person using the assets.
Outsourcing When a business buys goods or services from
another business or pays another business to carry
out a function instead of it doing it itself.
Goodwill The amount of money the business owner wants for
the good trade name he or she has built up, the
customer base, the branding of the business, etc.
Solvent The value of the company’s assets exceeds that of
the liabilities.
Liquid The company has enough cash to pay daily
expenses.
Profitable Income exceeds expense

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1 Reason why entrepreneurs may decide to purchase an existing business

• Easier to raise finance if the business has a good history/image.
• Immediate cash flow as there are already established customers.
• Market research has already been done and there is an established
customer base.
• Distribution/Supply links/Staff/Network is/are already established.
• A market for business products or services has already been established.
• Existing employees and managers may have experience they can share.
• Many business problems have already been solved.

2 Types of avenues of acquiring businesses

2.1 Franchising
2.1.1 Meaning franchising
• Franchising refers to the purchase of a business idea.
• The entrepreneur will obtain premises and the right to offer the same
products/services, with specific rules and regulations as per the agreement.
• Franchising is the practice of using another person’s business model and it can
be seen both as a marketing and a distribution.
• Franchising involves two parties:
o Franchisor-the person who sells the right to trade in the
products/services.
o Franchisee-the person who purchase the right to reproduce the idea by
offering the same products/services.
• The franchisor grants the franchisee the right to distribute its products and
trademarks for a percentage of gross monthly sales and a royalty fee.

Examples of a franchise
• McDonalds
• Kentucky Fried Chicken (KFC)
• Fish & Chips
• Food lovers
• Filling stations

2.1.2 Advantages and disadvantages of franchising

Advantages of franchising
• It allows businesses to buy a well-known brand which guarantees sales and good
return.
• Purchasing a franchise is cheaper than starting a new business.
• Franchising reduces long-term financial risk.
• A business is based on a proven idea and the product and service are tried and
tested.
• A franchisee can get support from the franchisor, which often includes training,
advice, and marketing.
• Forms of financing that are not available to the public are often available to
franchisees.

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• Purchasing a franchise could be cheaper than starting your own business.

• Businesses are able to use a recognised brand name and registered trademark,
which helps with advertising and marketing.
• The systems/operations/goods and services are well established.
• There is often access to group support from other franchisees and a network of
communication and legal advice.
• Established suppliers give bulk discounts as they form part of a larger group.
• The marketing and advertising costs are shared so they are often lower than for
a non-franchised business.
• Management advice is often provided, so it is not necessary to be a business
expert.
Disadvantages of franchising
• Acquiring a franchise can be an expensive initial layout
• There are often restrictions in the agreement and terms of how the business
should be operated.
• Many creative entrepreneurs feel limited as to how much they can grow/expand
their ideas.
• One poorly performing outlet may risk the reputation of the entire franchise.
• A large portion of profits is paid in royalties, and often the franchisors do not
deliver on their promises.
• It is often difficult to sell a franchise/terminate a contract.
• The start-up cost many be a challenge without assistance from the franchisor.

2.1.3 Contractual Implication of franchising

• The franchisor and franchisee must sign a franchise agreement which is legally
binding on both parties. The agreement must cover the following aspects:
o Confidentiality clause.
o Tax requirements.
o Disclosure documents
o Settlement of disputes
o How to sell or transfer the franchise
o Total investment
o How to deal with trademarks, patents and logos.
o Advertising policies
o The initial duration of the franchise and any renewal rights.
o The policies that govern the product or service.
o Royalties and service fees payable.
o Termination clause and its consequences
o Training and operational support provided by the franchiser
o The obligations of the franchiser and franchisee
o The nature and extent of the rights granted to the franchisee.
o The form of ownership that the franchise will operate under

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2.2 Outsourcing
2.2.1 Meaning of outsourcing
• Outsourcing is when a business buys goods/services from another business to
do the job instead of the business performing the function themselves.
• One of the reasons for outsourcing is that a business may not have sufficient
capital to purchase the equipment to perform a specific function.

Examples of outsourcing
• IT outsourcing
• Legal outsourcing
• Security
• Cleaning
• Recruitment
• Transport
• Staff training
• Call centres
• Computer installation and maintenance
• Accounting functions such as managing salaries and wages.
• Catering services

2.2.2 Advantages and disadvantages of outsourcing

Advantages of outsourcing
• Outsourcing allows the business to focus on important business activities rather
support activities.
• A business has access to resources and equipment for a specific function.
• The production team is often shortened and quality is often improved because
specialists are performing the function for the business.
• A company is able to reduce costs as outsourcing can lead to a decrease in
staff, remuneration, control and operating costs.
• The business can focus on its vision /goals and to apply its staff more effectively
in its core business.
• Improved access to skilled people as the outsourced work will be done by highly
skilled people without the company having to employ them.
• Fixed cost and overhead costs are lower for the business.
• Outsourcing will provide continuity during periods of high staff turnover.

Disadvantages of outsourcing
• Risk of losing sensitive data and the loss of confidentiality
• Risks such as bankruptcy and financial loss cannot be controlled
• Lack of Organizational Learning and innovative capacity.
• Managing the outsource provider could be more difficult than managing
employees.

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• Confidential issues could be at risk if the information is given to another

company who performs the function that is outsourced.
• Outsourcing can create a crisis for the business if the outsource provider
suddenly terminates its contract.
• There may be a lack of personal care/quality as the business is not personally
involved in the execution of the function
• Hidden costs and legal problems may arise if the outsourcing terms and
conditions are not clearly defined.
• Losing management control of business functions mean that the business may
no longer be able to control operations
• Not understanding the culture of the outsourcing provider and the location where
you outsource to may lead to poor communication /lower productivity.
• Problems with quality can arise if the outsourcing provider doesn't have proper
processes
• If important functions are being outsourced, an organization is mightily
dependent on the outsourcing provider.
• Outsourcing provider may work with other customers, they might not give full
time/ attention to a single company resulting in delays and inaccuracies in the
work output.
• Labour unions are opposed to outsourcing, especially where labour brokers are
used.

2.2.3 Contractual implications of outsourcing

• A contract will protect and regulate the rights and responsibilities of both parties
involved. Some aspects that may be included in the contract are:
o An exact description of the service/product.
o Duration of the contract
o A detailed description of the duties and the responsibilities of both parties.
o Confidentiality
o Payment terms and conditions.
o Penalties for not delivering the agreed services

2.3 Leasing
2.3.1 Meaning of leasing
• Leasing is the method whereby a business pays for the use of an asset e.g.
equipment, land, material etc.
• The person who owns the asset is known as the lessor
• The lessee is the person who uses the asset.
• The lessor will make the asset available to the lessee, who lease the asset in
return for an agreed amount called leasing charges.
• The leasing fee usually includes a maintenance fee and insurance fee.
• The lessor has to repair /replace the asset if needed.
• This is a method gives businesses the option of obtaining the use of an asset
for a certain period, instead of buying the asset

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Examples of leasing
• Office equipment
• Vehicles
• Trailer
• Machines
• Clothing rental businesses

2.3.2 Advantages of leasing for the lessor

• Leasing improves the cash flow of the business.
• Leasing is regarded as an expense for the lessee and is therefore not
regarded as debt.
• The lessor receives a continual rental income.
• The lessor can get quantity discount by buying goods in bulk to supply
various lessees.
• The lessor receives a continual rental income.
• The asset can be returned to the lessor when it is no longer needed.
• Makes budgeting and planning easier and it provides better control over cash
flow.
• Retains ownership of the asset, which can be sold to recover money at the end
of the lease
• There is no large financial outlay as the cost is spread over a number of
months/years.
• The lessor normally covers the maintenance/ replaces any damaged parts or
equipment.
• There are tax advantages as rental payment are calculated as operating costs
and therefor tax deductible.
• It is easy to lease a better/ newer version of the product without the capital
outlay.

Disadvantages of leasing
• The lessee does not own the asset.
• The lessor has control over the financial obligation of the lessee.
• Some leases require the lessee to maintain and repair the asset.
• A large amount of money is spent on an asset every month, the total of which is
a lot more than what the asset is worth.
• Maintenance agreements are usually expensive and non-negotiable.
• The agreement cannot be ended without a penalty.
• The lessee is responsible for maintenance even though they do not own the
item.
• The total monthly cost can be increased.
• The lessor may not be able to sell the asset after the lease if it has not been
kept in good condition.
• The lessor is committed to the contract and may not reclaim the asset before
the lease expires.
• The lessee is committed to the contract and may have to pay for the lease even
if they have no further use for the item.

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2.3.3 Contractual implications of leasing

• The lease agreement will indicate whether the lessee becomes the owner of the
asset after the lease period for a fee or not.
• The following details must be stated on the lease agreement:
o Names of the parties entering the lease agreement/contract.
o Duration/Period of the lease
o Detailed description of what is being leased.
o Conditions of renewal
o The monthly amount payable
o Any conditions such as deposits, insurance and security
o Details of how the instalment will be calculated.
o Any specific conditions for renewing the lease at the end of the contract
period.
o The procedure and liability for legal costs if a dispute arises.
o The procedure if the lessor or lessee become insolvent
o Detail of insurance, maintenance and restrictive use, up-front payment and
instalments.

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Business Studies Activity 2

Instructions:
1. Type your answers and email them to your teacher using Font Arial 12 and
spacing of 1,5.
2. Email your work to your teacher, [email protected] or
[email protected]
3. Answer all the questions in point form
4. Submission date 20 April 2020

Example of a scenario on acquiring business avenues

WISE LWAZI VENTURING
Lwazi and his sons have realized that it is not always necessary to start a business from
scratch. They approached an existing business and concluded a contract to be given a right
to sell their similar products within some regulations. The younger son became smarter
when he realised that their small items that require regular maintenance can make money
for them by contracting it to another business. But his billionaire daughter proved to the
world that it is effective when a business decides to focus on its vision and improve their
quality by allowing specialists to perform other duties on their behalf.

• Identify THREE ways of acquiring a business avenue from the scenario

above. Motivate your answer by quoting from the scenario
Use the table below as a guide to answer this question
BUSINESS AVENUE MOTIVATION
1.
2.
3.
• Outline THREE contractual implications of EACH type of acquiring business
avenues identified above
• Discuss the advantages of EACH type of acquiring business avenues
identified above.

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