Holmes Institute HC1010: Purchase Decision Analysis Report

This report, prepared for the Holmes Institute's HC1010 Accounting for Business course, analyzes a purchase decision scenario. It examines various forms of business organization, with a focus on the suitability of sole proprietorship for the buyer, Tim. The report explores financing options available to Tim, considering his financial constraints and the need for external funding. It also outlines the necessary information required for making an informed purchase decision, including the analysis of financial statements, ratios, and trends. Furthermore, the report highlights the essential skills and knowledge required to manage a business, emphasizing the importance of understanding financial reports, managing costs, and making data-driven decisions. The report concludes by summarizing the key findings and recommendations for Tim's purchase decision.

Running head: PURCHASE DECISION
Purchase Decision
Name of the Student:
Name of the University:
Author Note:

1PURCHASE DECISION
Executive Summary:
Financial statements are used by the different types of users to make informed
decision about a company or a business. The financial report of different business
organization is different and is used either to give a loan or to invest or to purchase a
business. Thus in this report Tim a prospering aspirant is willing to purchase a
business, different forms of business organization are assessed as to which is
suitable for the above business. The financing options available for Tim are analysed
and also the necessary requirements to make an informed decision to purchase the
business are discussed along with the skills and knowledge required to maintain the
business.

2PURCHASE DECISION
Table of Contents
Introduction:..................................................................................................................3
Discussion:...................................................................................................................3
Forms of Business Organization:..............................................................................3
Financing Option to the Business:............................................................................3
Condition to raise finance:........................................................................................4
Information about Business:.....................................................................................4
Skills and Knowledge:...............................................................................................4
Conclusion:...................................................................................................................5
References:..................................................................................................................6

3PURCHASE DECISION
Introduction:
The purchasing of a company requires the buyer to assess the type of
organizational structure. As based on the organizational structure the various
financing option are available to the buyer. The various financing option are looked
into for their cost and benefit. These are different for various organization types. The
financial information of the company which the buyer can analyse from the
accounting books of the company. The information which cannot be derived from the
accounting books can be requested by the buyer to the seller. Thus the various
aspects of research and investigation along with planning for the purchase of the
company is the aim of this report.
Discussion:
Forms of Business Organization:
There are various types of business organization which are popular in
Australia, like the Trust, Partnership, Company and Sole proprietorship. The
Company form of organization is not a proper choice of organization for Tim as the
business which he is planning to buy is not so successful. Trust is a form of
organization which is also expensive to form and requires several legal complication.
However Tim can individually form a trust but it would be unfeasible. (Goss 2015)
The two options which seem to be appropriate for Tim to start business is the
partnership and the sole proprietorship business. As the business is not so profitable
and Tim is lacking in finances, these two types of business organization is
appropriate for him. However to start the business in partnership, Tim would require
a partner which he does not have, so sole proprietor business is suitable for Tim.
(Curto 2018)
Advantages Disadvantages
Simple and very easily can be
formed.
The liability of the business
extends to the owner of the
business.
No stringent taxation rules apply. Due to lack in collaterals, financing
becomes an issue.
The profits earned are only taken by
the owner.
The business can be wound on the
death of the owner.
The business can maintain a privacy
of its activities.
The identity of the owner and the
business is the same in the court
of law.

4PURCHASE DECISION
Financing Option to the Business:
Financing option for a business is different for types of organization. A
company can raise funds easily and efficiently than other form of business
organization. The company can raise through debt financing or equity financing. The
debt financing is also segmented in different forms like issuing bonds or taking loans
from the financial institutions. This type of financing is also available to the Trust but
the cost of financing rises.
Partnership and Sole proprietorship can raise funds either by funding
themselves or by taking loans. In case of Tim he is in the lack of funds and thus he
has to take loan from the financial institution or by borrowing some funds from
friends or family. Since the business which Tim is buying is not performing well, he
will have problems in financing from financial institution also Tim does not have
sufficient collateral to take a loan. Thus even if Tim is able to take a loan it will be at
a very high interest rate. Thus the option available for Tim is to take loan from family
and friends for the purchase of the business.
Thus the choice of selecting business organization affects the availability and
the cost of funds for the owner of the business (Cheng 2015)
Condition to raise finance:
Tim when doing business in the sole proprietorship structure can raise finance
by investing his own money into the business. However due to lack of savings this is
not possible for Tim. Tim can raise a loan from the bank, but he has to provide a
sufficient collateral to do the same. Even if the collateral is not there, he can raise a
loan depending on its personal credit quality as the owner and the business are
same. Tim would require to provide a brief of the financials of the company along
with his own credit history to the banks for the loan. The cost of the finance would
depend on the quality of financials as well as the period for which the loan is taken
by the company.
Tim can also raise funds from his family or friends through some informal
arrangement. In exchange for the finance Tim can offer to sell some of his equity
stake in the company (Ashar and Susilo 2016)
Information about Business:
The information which is required by Tim for the purchase of the business
would be available in the accounting books of the business. He should check the
income statement of the business for the past few years. Apart from that he should
check the balance sheet and the cash flow statement of the business. If the business
has its financials audited he should check the audited reports of the auditor.
Apart from checking the report of financials, the financial ratio of the business
has to be calculated for checking the relevant health and the quality of the financial
statements of the company. The common size statement of the business can be
formed to see the various trend of the business. Tim can also ask for informal
information like the list of suppliers and competitors of the business to make an
informed decision to purchase the company (Laudon and Traver 2016)

5PURCHASE DECISION
Skills and Knowledge:
The basic knowledge of forming and understanding the various report of
financials is required by Tim to manage the business. He should have an
understanding about the revenue and expenses and be aware of the cash
conversion cycle of the business. He should have the skill to reduce the variable cost
of the business to increase the profitability (Quinlan, Babin, Carr and Griffin 2019).
Conclusion:
In the above report the types of organization of business are analysed and the
best option available for Tim which is sole proprietorship is advised. The various
types of financing sources available for Tim and the necessary condition to acquire
and its impact is analysed. The purchasing decision of the business requires
checking all the legal as well as financial reports of the company. The knowledge in
accounting which is very basic and required by every business owner is the requisite
which Tim requires to manage the business.

6PURCHASE DECISION
References:
Ashar, K. and Susilo, S., 2016. Study of Institution Model of Micro Finance to Raise
Children Opportunities of Poor Families for Having Higher Education: Perception and
Effort of Poor Households. International Journal of Social and Local Economic
Governance, 2(1), pp.32-39.
Bratianu, C. and Vatamanescu, E.M., 2017. Students’ perception on developing
conceptual generic skills for business: a knowledge-based approach. VINE Journal
of Information and Knowledge Management Systems, 47(4), pp.490-505.
Cheng, S., 2015. Potential lending discrimination? Insights from small business
financing and new venture survival. Journal of Small Business Management, 53(4),
pp.905-923.
Curto, J.C., 2018, April. Exploring Legal Terminology: Types of Business
Organization in the United States. In Ideas (Vol. 3, No. 3).
Goss, D., 2015. Small Business and Society (Routledge Revivals). Routledge.
Laudon, K.C. and Traver, C.G., 2016. E-commerce: business, technology, society.
Quinlan, C., Babin, B., Carr, J. and Griffin, M., 2019. Business research methods.
South Western Cengage.
Stanton, A.D.A. and Stanton, W.W., 2016. SKILLS EMPLOYERS SEEK IN
ANALYTICS-FOCUSED HIRES: IMPLICATIONS FOR BUSINESS SCHOOLS.
In Allied Academies International Internet Conference (p. 78).