The Rise of Entrepreneurship

Entrepreneurship is a buzzword nowadays. Entrepreneurship is about

doing business, creating profits, and adding workforce to an economy. A
business graduate has the choice to establish himself as a job creator or
a job seeker. Governments, educational institutions, financial institutions,
and NGOs support entrepreneurship through the availability of finance
and the development of incubation centers. Entrepreneurship has
emerged as a discipline over the years. Entrepreneurship is a practical
and experiential subject. Entrepreneurs are expected to be intelligent,
genius, and super-smart people. Starting an enterprise and then
establishing it as a successful business is not a coincidence, rather it is
engineered with the right business process, stable approach, and
decisions. Studying entrepreneurship enlightens fresh business
graduates with the theory, evolution, dimensions, and challenges of the
modern business world. Entrepreneurship is also helpful for in-action
businessmen to equip them with technical handling of business matters
i.e. marketing, financial and administrative management. A human being
who has got some talent as an artist, musician, or has got any other
business skills is a potential entrepreneur. A potential entrepreneur can
learn the art of doing business i.e. entrepreneurship from mentors
(academicians, industry experts, and tech entrepreneurs) who guide you
to make smart management, marketing, and strategic decisions.

The act of entrepreneurship is rooted in the enterprising nature of

mankind since pre-historic times. The enterprising nature of mankind
urges him to discover non-routine actions in a dynamic way i.e. creation
of new ventures and finding solutions to the existing problems and
challenges, faced by society at large. Initially, humans were hunter-
gatherers and used to live in form of isolated entities, known as tribes.
Their only adventure was to hunt for their food and shelter and then
survive against Mother Nature by confronting different weather
conditions. In this pursuit, humans’ enterprising nature ventured fire
lightening techniques, tool-making techniques, food hunting, and storing
methods. The enterprising nature of mankind further urged him to try
different methods to grow food that channelized different farming
methods. Farming at a large scale brought the big economic revolution,
also called as big green revolution to mankind at that time. The big green
revolution turned hunter-gatherer tribes into agricultural societies.
Humans were required to have rules, traditions, and governance to run
the emerging agricultural societies. Agricultural societies started to
produce surplus food which got being traded among the multiple tribes.
In that way, the concept of merchant entrepreneur emerged when
excess got traded. Mankind further developed the great Silk Road in
ancient times to develop trade relations between different continents of
the world.

The invention of the steam engine brought the industrial revolution by

fulfilling the transportation needs of traders among the farthest trade
destinations and markets. The industrial revolution gave birth to the era
of manufacturing, the establishment of big industrial units. In this way,
an era of craft production led the way to an era of mass production.
Railroads, iron factories, textile mills, mining, weapon industry, and all
the scientific inventions to date are the fruits of the industrial revolution.
The improvement in human living standards and increased traveling
needs gave rise to big units and a decline in small business units. The
United Kingdom government published the Bolton Report in 1971,
indicating 8 important functions of small firms, depicting their importance
to the economy. In the meanwhile, Small Business Administration
(SBA) from the United States of America enlightened the importance of
small firms and stressed the importance of their re-emergence. SBA
pointed out that due to new inventions, technological changes, new
industries and sub-contracting, demand for more services and variety,
individual customer requirements, employment opportunities,
privatization and tax benefits from the government are the main reasons
why small firms are important to establish an enduring economy. The
industrial revolution lead mankind towards a technological revolution,
also called as computer revolution. All these revolutions are not
accidental but in fact, credited to the human enterprising nature.

1946-First computer machine 1954-First commercial

computer 1981-Personal Computer revolution 1993-Search
Engine revolution  today-Social Media revolution/Artificial
intelligence/machine learning.

Entrepreneurship as an Academic Discipline

An academic discipline is a branch of knowledge, a particular area of

study, or a subject of study being taught in a college or university. Some
of the most known academic disciplines are philosophy, geography,
archeology, psychology, economics, history, mathematics, political
science, social science, computer science, management science, and
linguistics. Entrepreneurship is an interdisciplinary discipline in
business administration, sociology, psychology, culture, marketing,
finance, and geography. Economics is the mother discipline of
entrepreneurship. The term entrepreneur is rooted in the French
language in the 12th century. “Entrepreneur” means “to take between”
(the act of risk-taking between buyer and seller and creating a venture).
 Richard Cantillon, an Irish French economist from the 17th century
described the entrepreneur as a person who has an insight into a
business opportunity and takes the risk by knowing the cost of the
venture but the reward is unknown to him. “Entrepreneur is a person with
foresight and confidence to operate in a condition where the cost may be
known but rewards are uncertain”
 Jean Baptiste Say, a French businessman from the 18th century
broadly categorized an entrepreneur as a buyer and seller and also as
an innovative person. “The entrepreneur shifts economic resources out
of an area of lower and into an area of higher productivity and greater
yield”
 Joseph Schumpeter, an Austrian political economist from the 20th
century described entrepreneurship as a discipline. Schumpeter labeled
entrepreneurship as a process of creative destruction and directly linked
it with innovation. According to him, an entrepreneur with an innovation
and enterprise mindset extracts the resources from the conventional
mode, innovatively bundles these resources to create value,
take/manage risk and contribute to economic development. “The
entrepreneur is a person who is willing and able to convert a new idea or
invention into a successful innovation”
 William Jack Baumal, an American economist from the 20th century
categorized an entrepreneur as a business organizer and also as an
innovative person.
 David C. McClelland, a behaviorist from the 20th century described
entrepreneurs based on characteristics, attitudes, and skills.
 Peter Drucker, a management scientist from the 2oth century wrote the
book “Innovation and entrepreneurship: practice and principles”. Drucker
also linked entrepreneurship with innovation. He further described
that an entrepreneur comes with product innovation, production method
innovation, new market development, supply chain development, and a
new and better structure of an organization.
It is to particularly remember that word “entrepreneurship” is not
synonymous with small businesses or SMEs but large firms can
behave in an entrepreneurial way by foreseeing business opportunities,
taking risks, and doing innovation in products or processes within an
existing business setup. The evolution of entrepreneurship as a
discipline and its current status as an innovative business practice has
forced the establishment of business incubation centers.

Business Incubation Centers (BICs)

A business incubation center is a place that helps startup companies
to develop, grow and mature as an established business by providing
finance, office space, and mentoring services. A business incubation
center is considered a Launchpad for startups. The Higher Education
Commission (HEC) of Pakistan supports the incubation center
development programs in the degree awarding institutes in Pakistan.
There are many other national and international platforms that are
providing incubation services to young entrepreneurs. The Indus
Entrepreneur (TIE) is an international platform for entrepreneurs to get
benefited from its eminent incubation services https://tie.org/. Global
Entrepreneurship Monitor (GEM) is an information source that
publishes data and reports about entrepreneurship echo-system and
entrepreneurs. GEM reports discuss the importance of entrepreneurship
in national and international contexts
https://www.gemconsortium.org/

Entrepreneurship and Entrepreneur (Definitions)

The term entrepreneurship is defined by different experts as following.
 “Entrepreneurship is the capacity and willingness to develop,
organize and manage a business venture along with any of its risks to
make a profit. The entrepreneurial spirit is characterized by innovation
and risk-taking and is an essential part of a nation’s ability to succeed
in an ever-changing and increasingly competitive global marketplace”
(Businessdictionary.com)
 “Entrepreneurship is defined as a process by which individuals
pursue opportunities without regard to resources, they currently
controlled. Entrepreneurship is an art of turning an idea into a
business” (Barringer and Ireland)
 “Entrepreneurship is a dynamic process of creating incremental
wealth. The wealth is created by individuals who assume the major
risk in terms of equity, time and commitment to providing value for
some product or service” (Hisrich, peters, and shepherd)

The term entrepreneur is defined by different expert sources as follows.

 “Entrepreneurs is an individual who takes initiative to bundle
resources in innovative ways and is willing to take the risk to act”
(Hisrich, peters, and shepherd)
 “Entrepreneur is the one who creates a new business in the face of
uncertainty and risk to achieve profit and growth by identifying
significant opportunities and assembling the necessary resources to
capitalize on them” (Zimmerer and Scarborough)
 “Entrepreneur is someone who exercises initiative by organizing a
venture to take benefit of an opportunity and, as the decision-maker,
decides what, how and how much of a good or service will be
produced” (Businessdictionary.com)
The most common traits of entrepreneurs are that they have
enterprising nature, motivated and committed, create new ventures,
redefine value prepositions, and created jobs by opportunity hunting
and establishing business units. Some of the leading Pakistani
entrepreneurs are Aftab Iqbal (Tapal Tea), Adamjee Dawood
(Adamjee Group), Mian Muhammad Din (Super Asia), Dr. Amjad
Saqib (Akhuwat), Roshan Zafar (Kashf Foundation), Salim Ghauri
(NetSol), and Monis Rehman (Rozee. pk). Most famous international
entrepreneurs are Henry Ford (Ford Motors), Walt Disney (Disney)
Steve Jobs (Apple Inc.), Richard Branson (Virgin Group), Mark
Zuckerberg (Facebook), and Jack Ma (Alibaba.com).

Entrepreneurship and Economy

The economy is defined by various literature sources as follows.
“The state of a company or region in terms of the production and
consumption of goods and services and supply of money”
Three broad categories of the economy are factor-driven economy,
efficiency-driven, and innovation-driven economies. A factor-driven
economy has a subsistence agriculture background with an
extraction business with heavy reliance on unskilled labor and natural
resources. Pakistan is an example of a factor-driven economy. The
economy in an efficiency-driven phase becomes more competitive
with more efficient production processes and increase product quality.
India is an example of an efficiency-driven economy. The economy
is in the innovation-driven phase, businesses are more knowledge-
intensive, and the services sector expands. America and Japan are
examples of innovation-driven economies. (https://www.weforum.org/)
Entrepreneurship is at the heart of national advantage.
Entrepreneurship has a huge economic impact because it acts as
an innovation hub, creates jobs, adds to national income, and creates
social change through social innovation. Entrepreneurship also
partners the economic development by addressing environmental
challenges, social value creation, the commencement of regional
economic integrations i.e. SAARC, CPEC, and social value creation
i.e. donations for education and research and development.
Collectively entrepreneurs are the partners in the economic
development of regions and countries.
Entrepreneurial Ecosystem
Information is a great resource for entrepreneurs for basic and
strategic planning. Databases are important for entrepreneurship as
these databases carry statistics, trend analysis, cases, and reports
from national and international instances of entrepreneurship. The
Global Entrepreneurship and Development Institute (GEDI) is a
research organization that advances knowledge on the relationship
between entrepreneurship, economic development, and prosperity.
Global Entrepreneurship Index (GEI) is a flagship project by GEDI.
GEI measures ecosystems at a national and regional level. Annual
reports (International, regional and national cases) by GEI can be
reached at https://thegedi.org/global-entrepreneurship-and-
development-index/

Entrepreneurs: Antecedents and Myths

While studying entrepreneurship and entrepreneurs, it is very crucial
to know that why individuals become entrepreneur? The common
reasons to become an entrepreneur are explained here.
1. Creativity doesn’t fit the corporate environment. Most creative-
minded people choose the route to establish their entrepreneurial
venture due to knowledge spillover. The employer does not
recognize, accept and value one’s abilities and creative skills.
 2. They want a lifestyle that isn’t bound to nine to five.
Entrepreneurs are reluctant to adopt fixed office timing and follow
the same working routine.
3. Be their own boss. Entrepreneurs do not like to be directed or
controlled by further individuals when it comes to decision making,
planning, and execution within a business setting.
4. Entrepreneurs are active learners. Entrepreneurs are eager to
learn more and more and to learn quickly within a tight frame of
time. They do so by surfing the rising tides of a startup venture.
5. Entrepreneurs want to pursue their own ideas. The enterprise
mindset of entrepreneurs surges exceptional and enormous ideas
frequently. Entrepreneurs tend to get hold of these dynamic ideas
on their own.
6. Entrepreneurial ideas are unconventional and very innovative.
Innovation, novelty, and uniqueness are the basic qualities of
entrepreneurial ideas. A startup venture can absorb these
attributes.
7. Entrepreneurs assume that there are unlimited earning
possibilities. The entrepreneurial venture has got inbuilt ability to
offer unknown rewards against the risk being taken at the right
time.
8. We can change the world. Entrepreneurs are the change agents
due to their social innovation instinct.
9. Entrepreneurs are never retired from their work. Entrepreneurs
have posted their interests and insights into business ideas that
never get old. Development, prosperity, and continuous
improvement keep entrepreneurs afresh throughout their lives.
10. Entrepreneurs, necessarily do not require degrees. Starting
your venture does not need any formidable requirements such as
 a college degree or a diploma. Although an entrepreneur may
need to acquire formal training to improve business and relevant
skills as and where it is needed.
11. Entrepreneurship brings autonomy, freedom, and
responsibility. Entrepreneurs are driven through the internal
motivation of autonomy and freedom which meets the
entrepreneurial venture in its way to accomplish such psychology
of a human.
12. Entrepreneurship brings a sense of achievement.
Entrepreneurs accomplish and achieve through progressive
advancements attached to a business venture.

Common myths about entrepreneurship are.

1. Entrepreneurs are born and they cannot be made. This

discussion is most common among the folks. This is a debate of
nature vs nurture. Entrepreneurship is a combination of both nature
and nurture. Individuals are from different genetic backgrounds and
possess distinct individual characteristics. Furthermore, the external
environment influences the individuals’ behavior, career choice, and
entrepreneurial activity.
2. Entrepreneurs are very high-risk takers. Entrepreneurs are risk
managers as they take manageable moderate risk after cost and
benefit analysis of a particular decision or investment in a due
phase of time.
3. Entrepreneurs are primarily motivated by money. Financial
reward has never been a primary source of motivation for
entrepreneurs rather the entrepreneurs are motivated by the factors
of self-actualization and personal achievements.
4. Entrepreneurs are overwhelmed by their own ideas and do not
listen to the advices. Entrepreneurs are active learners and they
show deep interest in the expert noise from the industry and market.
5. Entrepreneurs are high tech wizards. This is not true to have
high-end technical skills and an IT background. Entrepreneurs with
mere basic business knowledge can effectively manage an
enterprise. Tech resources are the need of the hour and can be
included in your team when needed.
6. Entrepreneurs love the spotlight. Entrepreneurs’ storytelling and
status sharing attribute is a source of knowledge and inspiration for
the listener itself. Entrepreneurs have some other measures i.e.
business success and challenges met up, to quench their self
actualization needs.
7. Entrepreneurs must be inventors because they are innovators.
This is not true in all cases as this is not necessary and most of the
time not possible for you to be an innovator and inventor at the
same time. An entrepreneur may introduce an innovative idea i.e.
Wright brothers gave the idea to fly which was later commercialized
for the production of the passenger airplane (invention of the
Airplane).
8. You don’t need to earn degree if you want to be an
entrepreneur. This myth is challenged in a way that a degree or a
diploma is not the pre-requisite to establish a new venture, although
formal training or degree may fulfill the upgraded needs of doing
business.
9. If you don’t have money, you can’t be an entrepreneur.
Entrepreneurship is a pursuit of opportunity beyond the resources
you currently control or the finance you have in hand. You can
better attract investment by bagging a unique business proposition.
 10. Entrepreneurs are usually young, super genius and super
energetic: kind of a hero. Age does not matter here. Colonel
Harland Sanders, founder of KFC started his venture at the age of
65 and now it is the 2nd largest food chain in the world.

Potential Benefits of Being an Entrepreneur

1. You are in charge of your own destiny. An entrepreneur chooses his
own path to create a venture. He employs his own team and makes his
very own decisions. At the end of the day whatever he gets: profit or
loss, he is responsible for his own acts and rewards what he has input
in form of efforts and investment.
2. You can be an innovator. It is the case of knowledge spillover (as
discussed earlier) when you find lesser room to let your innovation
breath and finally your innovative and creative capability urges to take
your own root to develop a unique value proposition.
3. Entrepreneurship has no age limit. An entrepreneur during all its
business life span never gets retired. As a beginner he performs the
basics of business and learn incrementally. At some point of business
maturity of time he is likely to be a motivator and mentor for the young
entrepreneurs. His utility in the business world always gets alive.
4. Full responsibility as a source of motivation. An entrepreneur being
a business owner, is responsible for many entities involved within a
business i.e. investments, human resources and business
opportunities. This equation of up scaled responsibilities keeps an
entrepreneur motivated and affirm his role as a job creator in the
society.
5. You become contributor to the society. An entrepreneur impacts the
society in general and economy at large. He creates jobs and
streamlines the financials of many individuals attached to a business
 unit. An entrepreneur causes positive change in the society through
social innovation and business solution i.e. Akhuwat by Dr. Amjad
Saqib.
6. Power to pivot. At any point of time you can take autonomous
decisions regarding your business. The enterprise you are running is
pivoted to you for all the decisions to be made i.e. change in business
model, change in investment portfolio, and diversification etc.
7. Experience the personal growth joy. Most of the entrepreneurs
come from humble background and then turn up an exemplary
business success. You story, sometimes, is so enriched with instances
of grit, struggle and resilience that it becomes a source of inspiration
for young entrepreneurs.
8. You become an expert, a solution provider. Living an
entrepreneurial life lets you develop rigorous insights of the industry
processes and business tactics. Later you become a consulting
sources for many startups.
9. Resilience, recovery and learning process. Being an entrepreneur
you live a life full of remarkable experiences of resilience. In the
meanwhile, you learn to recover from pitfalls in business and finally it
becomes a learning journey.
10. Financial and personal reward, become a role model.
Entrepreneurship gives you huge personal reward in form of money
and accomplishments.
11. Schedule flexibility and freedom. Being a business
entrepreneur, it lets you escape from routine job timings: nine to five.
Entrepreneurship lets you freely schedule your daily routine tasks but it
also takes effort to burn midnight oils.
12. Work with the people you like. It is your choice to employ
resources and collaborate with the people, you declare feasible and
beneficial for your business and your own personality.
13. The chance to share your learning. Being the part of an
enterprise you learn from your team members and let other learn in the
same proportion.
14. The legacy to next generation. Business ideas, business models
and social innovations are transferred to the next generations of
entrepreneur i.e. family businesses etc.
Potential Drawbacks of Being an Entrepreneur

Though, there are countless benefits of being an entrepreneur but the

drawbacks should not be ignored. There is no fixed income. Sometimes
it is high due to higher sales/services and sometimes low. There is
always risk of failure and in case of loss entire investment can go in vain.
Unlike normal job hours entrepreneurs might have longer working hours
depending on the nature of business. For the businesses with less
startup finances quality of life suffers somehow until the business gets
established. Stress level is ultimately high. Because everything is own
responsibility so can’t blame anyone. Family pressure, market trends
and other factors may lead to discouragement. Entrepreneurs are not
just limited to enjoying benefits but they might have to do several tasks
at a time including financial analysis, physical efforts and many other.
Due to uncertain income, sometimes there is risk for family expenses
and social life. Debt becomes difficult and a burden until the business
gets established. Meeting the deadlines is difficult. Even after properly
set plans and procedures it is not sure to be successful in business as
consumers and market has its own trends.

Source of Motivation to Become an Entrepreneur

Economy and economic indicators can lead to several new

entrepreneurial ideas. These indicators can be: purchasing power,
inflation or deflation, loan rates, price competition, industry growth rate,
tax rebates and global ties. This can be understood with a simple
example i.e. Due to ongoing projects of CPEC in Gwadar, people all
over the country and in fact globally are pre planning to invest in
Gwadar. Demographic factors also play an important role. Minorities
have their own needs and festivals. A number of population falls under
25 years of age. They have their own needs and wants. They need to
earn as well so it’s better to be job creator instead of job seekers. In
urban areas, there are a lot of working couples and have specific
requirements in their daily life routines. Women entrepreneurs are
increasing day by day due to increase in social media and several other
factors. Unplanned urbanization might create a lot of problems as well as
opportunities for potential entrepreneurs. There are many part time
entrepreneurs who have started some business along with their jobs.
Universities are offering degrees in entrepreneurship which is ultimately
a motivator for youngsters to start their own ventures. Universities have
developed incubation centers. Even if you are not graduates, but have
business ideas, universities support and facilitate that. Most online
business these days offer services. There is overall shift to service
economy which leads to several new ideas. Technological
advancements lead to several new ideas. For example, in Japan there
is a large number of old age people and youngsters are not available to
take care of them so they have developed robotic nurses. Feeling of
achievement that you have done something for betterment of people is
itself a drive towards new ideas. E-commerce and World Wide Web.
becomes a source somehow. This is age of internet and social media.
Many businesses these days run only on social media.

How to become an entrepreneur?

Most of the people think that there is only one way to become
entrepreneur i.e. creating your own business from scratch. Some also
think that if you are having unique business idea only then you can be
an entrepreneur. Another misconception is that if you have joined a
family business only then you are called an entrepreneur. Only sole
proprietorship is called entrepreneurship is also a myth. It is not
appropriate to say that if you are an engineer, doctor, or chemist then
you cannot be an entrepreneur, or you have to start business in your
relevant field only. If you are from any profession you can start your
business. Sometimes when graduates during their studies think of
starting their own ventures, they dropout and try their luck in business.
This is called academic spinout. When students get to have some
business idea through some teacher or some videos they watch and
they then go for starting their own business it is called inside out
approach. When somebody who is working somewhere or doing a job
thought of some business idea, they then went to an incubation center of
any university which supports and facilitates them for their venture is
called outside-in approach. There are multiple ways to become an
entrepreneur which are:

 Establishing new venture

 Buying an existing business
 Family entrepreneurship
 Franchising
Establishing New Venture
1. Creating a new venture means: start-up. It means starting the
business from scratch.
2. It requires more time, risk and finance.
3. The fate of start-up is uncertain.
4. Usually the size is small and frustration increases when there is risk
of failure.
5. Incubation centers are made to facilitate new ventures especially if
they face challenges and problems. Through incubation centers and
other facilitation centers people gather from different areas of industry
thus it helps in network development.
Issues and challenges in new venture creation
1. Legal and administrative issues might arise and through network you
know where to approach.
2. Initially it is assumed to have market knowledge but because they
have not gone into market, they don’t have much knowledge about
actual market dynamics.
3. Sometimes it is difficult to have skilled labor which is suitable for
your venture.
4. Initially startups have limited finance.
5. It is mostly because of risk involved, people tend to invest less.
6. Product/ service design issues may also arise.

Stages of New Venture Creation

Information seeking is one of the most critical parts. One must seek
information if currently unaware. Cultural and market awareness is a
must. There must be strong intention to start a business and must have
strong determination. Idea for a product or a service must be clear. Must
have knowledge about competition and price. Supplier info and every
other possible information required for startup must be gained. Must
have knowledge about the expected challenges. After start up, steps
must be taken for growth and expansion. After business is established
networks are developed which help in growth. You might have to go for
certain trainings to grow. Several certified trainings are available for this
purpose.
Key Points to Consider
1. Entrepreneurs must consider all the economic factors before
starting new venture.
2. What was the basic drive or intention to be entrepreneur must be kept
in mind.
3. There can be some worrisome issues for new venture. Potential
entrepreneurs must foresee these issues.
4. One must have a proper business plan for smooth running of
business. Some questions like: Which resources are most difficult to
obtain? And what are the ways to obtain. What hurdles or issues can
be faced in this regard? Must be considered before starting the
business.
5. As discussed earlier seeking market information is very much
important to start and run the business smoothly.
6. In addition to market information investor related information is also
important.
7. Factors regarding product development or product development plan
must be clear.
8. Competitors’ information along with level of competition must be
gathered beforehand.
9. Entrepreneurship myopia is a concept which states that, sometimes
new entrepreneurs read stories of successful entrepreneurs and
deoverlook the struggle of them which frustrates these new or
potential entrepreneurs if they don’t reach the similar point of
success.

Buying an existing business

We have discussed in detail about starting a new venture. Now, for

buying an existing business some important things must be kept in mind.
1. Must have knowledge about the business one intends to buy.
2. Relevant industry experience would also be a plus.
3. One must research about all the possibilities regarding potential of
expansion or at least maintenance at current level.
4. Knowledge about current customers of the business and related
market trends must also be kept in mind before buying an existing
business.
5. There might be certain practices regarding payment methods.
Whether cash payment required or credit terms must be initially
analyzed and worked out.
6. Liabilities and receivables must also be kept in mind. If you are to
enter new business, is it related to your existing business? Would it
be profitable to diversify?
7. Business model sustainability issues must also be considered.
8. Is the brand image good so that you can buy? Must consider
goodwill.
Advantages of buying an existing business

1. Successful existing business may continue to be successful.

2. It might already have best location which can benefit the buyer.
3. Employees and suppliers are already established and working
smoothly.
4. Fixed expenses e.g. equipment's are already installed especially
when buying a manufacturing unit.
5. Productive quality is already known because already production is
going on.
6. Inventory is already in place and might have knowledge about
inventory in hand and required things.
7. Experience of previous owner might be useful because this is an
opportunity for network development as well.
8. Save the time, energy and cost of establishing new venture.
 9. Customers and market are already developed which can save
from a lot of hassle.

Disadvantages of buying an existing business

1. In documents the business might be showing profits and

receivables but in actual it’s not that profitable.
2. The business model might be faulty. It might not have proper
supply chain or delivery system.
3. The location could be unsatisfactory. Location at some faraway
place might be a source of increase in expenses.
4. Competitors might have purchased updated equipment.
5. Outdated inventory might also be increase in cost.
6. After a certain time, it might be observed that there are many
liabilities which can be a source of bankruptcy.
7. Financial assessment might conclude that you have bought an
overpriced business. These include assessments can be done
using several techniques including balance sheet, adjusted
balance sheet, receivables and payables, capitalized earnings
approach.
8. There have been many examples in which due to negative brand
image reputation of buyer collapsed.
9. Sometimes crucial information or documentation might be missing.
10. In some cases, business secrets are already known to previous
owner.
11. Existing employees may leave which usually happens.
12. In case of partnership, the partners may create problems.
Finding Out Why the Business Is For Sale

1. Business might be running well but due to old age or illness he

wants to sell.
2. Owner might be shifting to different section of the country or
probably moving to some other country and due to nature of the
business he can’t move the business.
3. Sometimes it might happen that you are running your own
business but you get another different but good option from other
company.
4. The business might be no more profitable.
5. Contract with major franchisors might have ended and business is
not profitable with local brand name so he wants to sell.
6. Owner might have foreseen that the business is not going to grow
in future and might face loss so he can sell.

Examining the Financial Data

When somebody buys an existing business, it is somehow evaluated on

the basis of financial statements they show you. So, the following
guidelines must be kept in mind.

1. Review financial statements and tax returns for the past five years.
These statements show the performance of the business over the
years.
2. Recognize that financial data can be misleading. These can be
misleading in the following heads.
I. Assets overvalued
II. Expenses overstated/understated
III. Income underreported
IV. Unrecorded debts
3. Adjust asset valuations to reflect the true state of the business

Investigating and Evaluating Available Businesses

When one has decided to buy existing business he/she must evaluate
the same and keep following things in mind:
1. While evaluating about an existing business, hasty decisions
should not be made. The careful evaluation of the business
opportunity should be made.
2. Professional services might be required. These can be
i. Accountants especially chartered accountants because
they are experts in business valuation so it is better to attain
their services. They can accurately validate the information.
ii. There might be several legal agreements with entities so it
would be better to attain services of attorneys.
iii. There may be domain experts relevant to the specific type/
field of business.
3. Evaluation Methods
i. Asset-Based Valuation Approach. Assets’ value/price is
determined. This approach is mostly buyer friendly but
sellers usually do not agree with this approach because
sometimes it is not suitable for assets of a running business.
ii. Market-Based Valuation Approach. Looks at similar
businesses sold recently and price is determined
accordingly. Main issue is that in our country, there is hardly
any platform where we can find such data. So
implementation of this method is a bit difficult.
 iii. Earnings-Based Valuation Approach. Future earnings
capacity is analyzed and price is determined accordingly.
More the future earning capacity, higher the prices.
iv. Cash Flow-Based Valuation Approach. On the basis of
past cash flows, future cash flows are projected and price is
determined. As it is a complex procedure, professional help
of accountants might be required in this.

Determinants of a Firm’s Capitalization Rate

Capitalization rate here is considered as rate at which business reinvest

its earnings. Value of a business is usually determined at its
capitalization rate. A Business that has to reinvest most of its earnings is
considered a risky business and is less valuable as compared to a
business that has to reinvest just a percentage of earning. Capitalization
rate is determined on the basis of risk and projected growth. If there is
high risk means capitalization rate is high so the value of the firm will be
low. If the risk is low with low capitalization rate, firm’s value will be
higher. If projected growth will be high, it means firm has low
capitalization rate and its value will be high. With low projected growth,
there would be high capitalization rate and firm value will be low.

Factors to Consider in Valuing a Business

There are some Non quantitative Factors to Consider in Valuing a

Business.

1. If the business has more competition means more pressure and

you can have to compromise on price and other factors in future.
2. If there is more customer base and potential of the business, it can
be profitable to buy that.
 3. If community can have positive changes with the business, it would
be a better decision to buy that.
4. Odd legal commitments e.g. improper rental agreements and
supply chain agreements might create trouble.
5. If there is employee or trade unions, agreements with those must
also be checked.
6. Situation of the building must also be checked. Poor condition of
which might require major investments.
7. Product prices can you set must also be kept in mind.

Negotiating and Closing the Deal

After evaluation and valuation of the business, we are towards the last
step i.e. negotiating and closing the deal.
Terms of Purchase
While deciding about buying an already established business following
things must be kept in mind.
1. Assets purchase or total entity. It must be considered whether you
are buying whole business or its assets. If you are buying assets only,
you might not be owner of the name of the business
2. Indemnification clause. This clause suggests that after a particular
time if it is found out that due to some error at seller’s end buyer faces
any loss, seller has to bear that loss. This clause in the agreement is
a guarantee for the buyer. Any misleading or hidden fact revealed
after a time would be a penalty on the seller.
3. Payment in full or partial payments over time. Experts recommend
when you buy any business must not pay in full. 30 to 40% must be
paid in advance and rest must be in 3 to 4 installments. Payment
span must also be more than a year.
4. Closing the sale. Any lawyer or agency or firm can act as that third
party to close the sale process and they must check all the
documents including, Bill of sale, tax certifications and Payment-to-
seller agreements and guarantees.