Chapter Seven
Managing Growth and Transaction
CHAPTER SEVEN
MANAGING GROWTH AND TRANSACTION
New Venture Expansion Strategies And Issues
A.Joint Ventures
A joint venture is a separate entity involving two or more
participants as partners. They involve a wide range of
partners, including universities, businesses, and the public
sector.
The cooperation of two or more individuals or
businesses in which each agrees to share profit, loss and
control in a specific enterprise.
Foreign investors may join with local investors to create a
joint venture company in which they share ownership and
control.
B. ACQUISITIONS
An acquisition is the purchase of a company or a part of it in
such a way that the acquired company is completely
absorbed and no longer exists.
• An acquisition or takeover is the purchase of one business
or company by another company or other business entity.
• When one company takes over another and clearly
establishes itself as the new owner, the purchase is called an
"acquisition".
• "Acquisition" usually refers to a purchase of a smaller firm
by a larger one. Eg. Alecto Minerals Acquires Nubian Gold,
Ethiopia
Advantages
A successful firm can provide immediate returns
Existing firm comes with an advantage of good location, working
staff, established supply of raw materials, distribution network
installed machineries and inventories etc.
Advice can be sought from previous owners on the strength and
weaknesses of the firm
Low cost of organization when it is specially compared to starting a
new venture.
Disadvantages
Ill reputation of previous owner may be faced if the previous
entrepreneur is not well established or don’t posses a good will.
Poor staff, obsolete machineries and layout can trouble entrepreneur.
Buyout costs are usually high.
C. Purchasing a License/Franchise
Franchise: It is the right and license to sell a product or service and possibly the
entire business system developed by another company in return of a royalty and
conformity to a standard operating procedure. It is an intellectual property which is
sold in return of royalty.
Franchisor: is usually the manufacturer or sole distributor of a trademarked
product or service who has a considerable experience in that business. Eg owners of
Kodak, Pepsi, etc
Franchisee: is an individual entrepreneur who purchases the franchise in return for
royalty and conformance to standard operation and who in the process gets the
opportunity to enter an established entrepreneur.
Types of Franchising
a) Trade name franchising: franchisee gets only the right to use trade name of
franchiser.
b) Product distribution franchising: Right to use name as well as selected products of
franchiser.
c) Pure/Comprehending franchising: Right to use entire business of the franchiser.
Advantages for franchiser
Expanding the existing business network at low investment or limited capital
Company growth with minimum risk without expanding the HR and other
facilities
Regular income from royalty (5%)
Advantages for franchisee
o Gets advantage already established brand name
o Easy to establish business using well developed system
o Initial financial assistance
o Opportunity to marketing training and counseling
o Greater chance of success
Disadvantages to the Franchiser
Absolute control cannot be exercised
Physical separation
Disadvantages to the Franchisee
Sharing profits in terms of royalty is mandatory
Strict adherence to standard operating procedures or limited freedom
Restriction on buying other’s product
D) MERGERS
• Merger is combining two or more business enterprise or companies into a
single entity .
• Usually occur between firms of somewhat similar size and are usually
friendly.
• The resulting firm is likely to have a name derived from its composite firms.
Eg., merging of “Allied” Corporations and “Signal Companies to form
“Allied Signal”.
• In the pure sense of the term, a merger happens when two firms agree to go
forward as a single new company rather than remain separately owned and
operated.
• Mergers can be; Horizontal merger: A merger involving competitive firms in
the same market. Vertical merger: A merger in which a firm joins with its
supplier. Conglomerate merger: A merger involving firms selling goods in
unrelated markets.
