The Internet marketplace has seen accelerated growth with rapidly evolving e-commerce technology. The availability of several low cost marketing and advertising resources like the social and professional networking sites has no doubt changed the way we live, interact and shop. It has therefore opened up more opportunities for doing business on the Internet.
The low-cost, high impact e-commerce opportunities has seen several new entrants to the Internet marketplace; some of which have only an Internet presence without the brick and mortar store. Like any other business strategy, there is an upside and a downside to this. This article is focused on the exclusively online seller of tangible products.
The greatest incentive to do business entirely online is no doubt the much reduced cost when compared to running a physical storefront. These savings can be realized in several operations of the business.
Firstly, operating a sales outlet online requires comparatively minimal startup time and investment. This is especially crucial for the small business owner. Continuous improvement and reduced cost of required technology amplifies this advantage.
Secondly, the Internet offers realistic effective low-budget marketing techniques. Using the web to market products offers a twenty-our hour daily worldwide reach at a nominal price tag. Online marketing techniques (like pay per click, affiliate marketing, and the age old word of mouth referral which has been given a technological boost through Internet networking sites) all offer cost effective marketing. Simply being on the Internet though, does not guarantee sales. The business must articulate its marketing strategies and techniques, as well as deploy these strategies properly.
Other areas of cost saving are in inventory management, overhead and employee cost. Effective deployment of technology to supply chain management (the management and movement of goods from vendor to customer), can see inventory holding cost reduced dramatically in some instances the seller does not need to have physical inventory of an item to sell it. He simply acts as a retail storefront for a producer or wholesaler and simply gets the goods shipped directly from the producer or wholesale to the end user when it is ordered.
On the flip side, the very advantage of low barrier to entry brings many more players into the field, quickly creating stiff competition and reduced profit margin, since the business model can easily be duplicated. A small business which is exclusively online must articulate its long term strategy for survival over the competition.
The exclusively online business will be limited in the product offering because the very nature of certain products makes them unsuited for Internet sales. The perishable nature of food typically excludes it from online trade. The online sale of pet food was unsuccessful largely due to the bulky nature of the product making shipping cost prohibitively high. An online business would need to eliminate low margin items in deciding its product offering.
Because the online store is open round the clock, offering customer service becomes a challenge, since customers usually equate quality customer service with personal interaction. The absence of this rightly or wrongly leaves a wrong impression on the customers mind.
Another challenge for the online store is the cost of shipping especially on bulky items. Internet shoppers are basically bargain shoppers, and so would prefer the 'store pick up' option in saving on shipping cost. This is an option not provided by the exclusively online store. The 'store pickup' gets even more attractive because it eliminates the difficulty and expense of making a return.
For the most part, experience has shown that many client prospects still view the Internet primarily as a place for research rather than purchase. Herein lies the major drawback for the Internet only seller. In order to increase its sales, in 2007 DELL, which hitherto was primarily a direct marketer harnessing amongst other resources the power of the Internet, decided to partner with 'brick and mortar' stores. This became necessary because, research showed that a number of shoppers would do initial investigation on the Internet and then go into a physical store to make a purchase. This is a business model that IKEA USA has also used to its great benefit. In the USA, IKEA typically has very few shops in any locality. Most clients make their choice online, and then go into the store for pickup.
The Internet no doubt provides a real possibilities, especially for the small business to attain a market reach that up until now would have been impossible. But like every opportunity it posses challenges that can only be overcome through having a proper business strategy.
Wednesday, September 1, 2010
Business Purchase Options
In its simplest terms a business can be purchased in two basic ways: asset purchase and stock purchase. Whatever form of purchase is used there are numerous way of financing the transaction.
Stock purchase refers to the purchase of the entire entity, which most often involves a corporation's stock or other means of ownership (e.g. LLC units for a limited liability company.) The buyer in effect steps into the shoes of the seller, and the operation of the business continues in an uninterrupted manner. Unless specifically agreed to, the seller has no continuing interest in, or obligation with respect to, the assets, liabilities or operations of the business.
A stock purchase basically means you are investing and buying everything the seller owns including stocks, assets, and liabilities, the right to sell products as well as the intangible assets (logo, patents or client list, domain names, copyrights, licenses, distribution agreements, secret processes and formulas, informational databases, software systems and core technology).
In an asset purchase on the other hand, the seller retains ownership of the shares of the business. Only assets and liabilities which are specifically identified in the purchase agreement are transferred to the buyer. All of the other assets and liabilities remain with the existing business. The buyer must either create a new entity or use another existing entity for the transaction.
The preferable method is a matter of the facts of the specific transaction. But some of the highlights for both parties are enumerated below.
The Seller
In a stock purchase, the seller has no continuing interest in, or obligation with respect to, the assets, liabilities or operations of the business. This may be preferred because it allows the seller to completely step away from the business.
Another benefit could come from taxes. The seller realizes a gain or loss on the transaction based on sales price and initial worth of stock. The gain is taxed at the lower capital gains tax rate and the loss may in certain circumstances (S.IRC Section 1244) be deductible against ordinary income.
The Buyer
A major attraction of the asset purchase is that buyer can pick and choose which liabilities they want purchase.
If the business has a significant number of actual or potential liabilities, which are difficult to value, then asset purchase is a great way to buy the business. A stock purchase though may prove beneficial where the business is doing well and owner is selling possibly due to retirement. The buyer assumes good performing assets and liabilities and the goodwill of the business. The opposite would be true if the business were poorly managed. Additionally in asset purchase tax benefits would usually accrue to buyer. These may take the form of larger tax depreciation due to write up of assets.
In conclusion, in order to reap the benefits of purchasing an existing business, due diligence in researching the venture is of utmost importance.
Sources
http://www.bizquest.com/resource/basic_deal_structures__stock_purchase_vs_asset_p-23.html
http://www.brighthub.com/office/entrepreneurs/articles/38681.aspx
Stock purchase refers to the purchase of the entire entity, which most often involves a corporation's stock or other means of ownership (e.g. LLC units for a limited liability company.) The buyer in effect steps into the shoes of the seller, and the operation of the business continues in an uninterrupted manner. Unless specifically agreed to, the seller has no continuing interest in, or obligation with respect to, the assets, liabilities or operations of the business.
A stock purchase basically means you are investing and buying everything the seller owns including stocks, assets, and liabilities, the right to sell products as well as the intangible assets (logo, patents or client list, domain names, copyrights, licenses, distribution agreements, secret processes and formulas, informational databases, software systems and core technology).
In an asset purchase on the other hand, the seller retains ownership of the shares of the business. Only assets and liabilities which are specifically identified in the purchase agreement are transferred to the buyer. All of the other assets and liabilities remain with the existing business. The buyer must either create a new entity or use another existing entity for the transaction.
The preferable method is a matter of the facts of the specific transaction. But some of the highlights for both parties are enumerated below.
The Seller
In a stock purchase, the seller has no continuing interest in, or obligation with respect to, the assets, liabilities or operations of the business. This may be preferred because it allows the seller to completely step away from the business.
Another benefit could come from taxes. The seller realizes a gain or loss on the transaction based on sales price and initial worth of stock. The gain is taxed at the lower capital gains tax rate and the loss may in certain circumstances (S.IRC Section 1244) be deductible against ordinary income.
The Buyer
A major attraction of the asset purchase is that buyer can pick and choose which liabilities they want purchase.
If the business has a significant number of actual or potential liabilities, which are difficult to value, then asset purchase is a great way to buy the business. A stock purchase though may prove beneficial where the business is doing well and owner is selling possibly due to retirement. The buyer assumes good performing assets and liabilities and the goodwill of the business. The opposite would be true if the business were poorly managed. Additionally in asset purchase tax benefits would usually accrue to buyer. These may take the form of larger tax depreciation due to write up of assets.
In conclusion, in order to reap the benefits of purchasing an existing business, due diligence in researching the venture is of utmost importance.
Sources
http://www.bizquest.com/resource/basic_deal_structures__stock_purchase_vs_asset_p-23.html
http://www.brighthub.com/office/entrepreneurs/articles/38681.aspx
Advantages and disadvantages of buying a business as opposed to starting one from scratch.
The pros and cons of buying a business as opposed to starting one from the scratch depends very much on the state of the business being purchased. At the back of our minds should be the fact that, depending on the condition of the business, every advantage could actually constitute a disadvantage.
We will touch on some of the most important points.
Advantages
The business is already running, therefore the lengthy process of researching the business and other startup activities and costs are avoided. Hopefully too there are already in place a business plan, marketing plan, suppliers, customers, equipment, inventory, receivables, systems, operation manuals and experienced staff. The new owner can then focus on building and expanding the business.
It should ordinarily be easier to obtain financing as the business will already have a proven record to show feasibility of the business idea and actual financial records over a period of time as opposed to projections. These are prime requirements of certain financiers for advancing credit
A market for the product or service will also have already been demonstrated. The venture would have established clients and thus have an existing, steady stream of income which the new owner can capitalize and expand upon. A new business’ first positive cash flow, in contrast, will usually be expected on an uncertain future date.
Disadvantages
The new buyer may be oblivious of the problems of the business as the previous owner might not have made full disclosure in order to boost thesales price. One such problem being that the business may have poor receivables improperly valued at purchase that turns out to be non-collectible. This fact can be mitigated by proper due diligence prior to purchase.
Inheriting a poor reputation, systems, products or services could pose problems in several ways. The new owner has to correct his in order to make the business profitable. Of the four a poor reputation is probably the most difficult to correct.
The business may also require a considerable investment of capital over and above the purchase price which may have already been inflated.
Where the success of the business depended very much on the input and skills of the former owner rather than its business systems, that will affect performance negatively. Particularly in service businesses, clients may leave and market share lost.
The new owner may need to honor or renegotiate any outstanding contracts of the previous owner, which may not have been favorable to the business.
Existing staff may not like the new boss, especially if employment contracts will be renegotiated, and a new direction charted for the business. This may disrupt industrial relations and productivity.
We will touch on some of the most important points.
Advantages
The business is already running, therefore the lengthy process of researching the business and other startup activities and costs are avoided. Hopefully too there are already in place a business plan, marketing plan, suppliers, customers, equipment, inventory, receivables, systems, operation manuals and experienced staff. The new owner can then focus on building and expanding the business.
It should ordinarily be easier to obtain financing as the business will already have a proven record to show feasibility of the business idea and actual financial records over a period of time as opposed to projections. These are prime requirements of certain financiers for advancing credit
A market for the product or service will also have already been demonstrated. The venture would have established clients and thus have an existing, steady stream of income which the new owner can capitalize and expand upon. A new business’ first positive cash flow, in contrast, will usually be expected on an uncertain future date.
Disadvantages
The new buyer may be oblivious of the problems of the business as the previous owner might not have made full disclosure in order to boost thesales price. One such problem being that the business may have poor receivables improperly valued at purchase that turns out to be non-collectible. This fact can be mitigated by proper due diligence prior to purchase.
Inheriting a poor reputation, systems, products or services could pose problems in several ways. The new owner has to correct his in order to make the business profitable. Of the four a poor reputation is probably the most difficult to correct.
The business may also require a considerable investment of capital over and above the purchase price which may have already been inflated.
Where the success of the business depended very much on the input and skills of the former owner rather than its business systems, that will affect performance negatively. Particularly in service businesses, clients may leave and market share lost.
The new owner may need to honor or renegotiate any outstanding contracts of the previous owner, which may not have been favorable to the business.
Existing staff may not like the new boss, especially if employment contracts will be renegotiated, and a new direction charted for the business. This may disrupt industrial relations and productivity.
Goodwill - Can it be transferred?
Goodwill is an intangible but saleable asset, just like reputation or location of a business, it is an asset that engenders the expectation of continued customer or client patronage if the business is sold to a potential buyer. It represents a competitive advantage and typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations, high employee morale, service quality and any patents or proprietary technology. In simple terms goodwill is any advantage that enables a business to earn better profits than its competitors. It does not refer to the tangible assets of the business.
A business venture over time endears itself to its customers either by the quality of its products and or service or by the product or service delivery experience. For this reason the customers (now converts or believers) return to patronize the enterprise over and over again and even become its ambassador and advocate, recommending its product or services others . When given a choice of product or service provider, converts choose a particular business they have come to know, like and trust over the competition; thus goodwill has been created.
In recognition of the concept of goodwill and its ability to translate into increased earnings, different valuation models have been developed to account for it, just as any other asset would be accounted for on the books of the company.
The valuation of goodwill poses a challenge because goodwill is an intangible asset derived from other assets of the business. Its existence depends upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of.
We shall not go into the technical details of goodwill valuation and recognition as per accounting rules. Suffice it to say here that in accounting, goodwill is the excess of the amount paid over the Net Asset Value of an acquired business. (Net Asset is the total value of a company's assets less the total value of its liabilities.) It is shown in the balance sheet of the acquiring company.
The pertinent question then is: can goodwill be transferred? In answering this question it is important that we divide goodwill into its component parts -business and personal goodwill.
Business or commercial goodwill or practice goodwill for service companies, relates to a company's ability to generate earnings based on its assets and operational procedures (like brand recognition, systems, staff, operating procedures, client base, market share, location and so forth). On the other hand, personal or professional goodwill is directly associated with the owner or a certain individual in the organization. It derives from their reputation, skills, abilities, contacts, personal and or professional success, respect and trust.
Obviously in regard to sale of business and a change of ownership, business goodwill is more easily transferred and therefore of more worth than personal goodwill. Personal goodwill may in some rare cases be transferred through client introductions and so on, but in most instances it resides with the individual and technically cannot be transferred.
A good example comes to mind. A thriving medical practice had the majority of its clientele predominantly from a certain demographic, to which the retiring owner belonged. It was purchased by a new owner who worked with the previous owner for a long period. The firm quickly lost many of its clients. The new owner conducted a third party survey to investigate why clients chose to leave. None of them chose 'professional incompetence' or 'not happy with the service' as their reason to leave. So it was down to the personal relationship they had with the previous owner.
Because business goodwill is intrinsic to the organization itself, it is easily transferable. Personal goodwill on the other hand really belongs to an individual and not the organization, technically it is not transferable. I guess this is true of the age long saying 'you cannot give (transfer) what you do not have.'
Sources
http://www.michaelgoldman.com/professional_practices.htm
http://www.dolmanbateman.com.au/835/business-goodwill/
personal and commercial goodwill.
http://www.smbtn.com/smallbusinessdictionary/
http://www.answers.com/topic/goodwill
A business venture over time endears itself to its customers either by the quality of its products and or service or by the product or service delivery experience. For this reason the customers (now converts or believers) return to patronize the enterprise over and over again and even become its ambassador and advocate, recommending its product or services others . When given a choice of product or service provider, converts choose a particular business they have come to know, like and trust over the competition; thus goodwill has been created.
In recognition of the concept of goodwill and its ability to translate into increased earnings, different valuation models have been developed to account for it, just as any other asset would be accounted for on the books of the company.
The valuation of goodwill poses a challenge because goodwill is an intangible asset derived from other assets of the business. Its existence depends upon proof that the business generates and is likely to continue to generate earnings from the use of the identifiable assets, locations, people, efficiencies, systems, processes and techniques of.
We shall not go into the technical details of goodwill valuation and recognition as per accounting rules. Suffice it to say here that in accounting, goodwill is the excess of the amount paid over the Net Asset Value of an acquired business. (Net Asset is the total value of a company's assets less the total value of its liabilities.) It is shown in the balance sheet of the acquiring company.
The pertinent question then is: can goodwill be transferred? In answering this question it is important that we divide goodwill into its component parts -business and personal goodwill.
Business or commercial goodwill or practice goodwill for service companies, relates to a company's ability to generate earnings based on its assets and operational procedures (like brand recognition, systems, staff, operating procedures, client base, market share, location and so forth). On the other hand, personal or professional goodwill is directly associated with the owner or a certain individual in the organization. It derives from their reputation, skills, abilities, contacts, personal and or professional success, respect and trust.
Obviously in regard to sale of business and a change of ownership, business goodwill is more easily transferred and therefore of more worth than personal goodwill. Personal goodwill may in some rare cases be transferred through client introductions and so on, but in most instances it resides with the individual and technically cannot be transferred.
A good example comes to mind. A thriving medical practice had the majority of its clientele predominantly from a certain demographic, to which the retiring owner belonged. It was purchased by a new owner who worked with the previous owner for a long period. The firm quickly lost many of its clients. The new owner conducted a third party survey to investigate why clients chose to leave. None of them chose 'professional incompetence' or 'not happy with the service' as their reason to leave. So it was down to the personal relationship they had with the previous owner.
Because business goodwill is intrinsic to the organization itself, it is easily transferable. Personal goodwill on the other hand really belongs to an individual and not the organization, technically it is not transferable. I guess this is true of the age long saying 'you cannot give (transfer) what you do not have.'
Sources
http://www.michaelgoldman.com/professional_practices.htm
http://www.dolmanbateman.com.au/835/business-goodwill/
personal and commercial goodwill.
http://www.smbtn.com/smallbusinessdictionary/
http://www.answers.com/topic/goodwill
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