BUYING A BUSINESS – EVALUATION & NEGOTIATION

7/31/2019 BUYING A BUSINESS EVALUATION & NEGOTIATION

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BUYING A BUSINESS

EVALUATION & NEGOTIATION

K. Senthil Velan, ISBR, Bangalore


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INTRODUCTION

Less work

Time and effort required

Right business Assessing and valuing a business

Obligations to existing stakeholders

Professional help


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Deciding on the Right Type of Business

Business lifestyle and aspirations

Expectations ROI

Commitment

Business opportunity commensurate with yourstrengths and capabilities

Type of business

Chosen industry

Location


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Sources for Identifying the Business

Newspapers

india.businessesforsale.com/indian/search/Businesses-for-sale, www.indiabusinesssale.com,

www.franchisebusiness.in Trade journals

Your own advertisement

Magazines specializing in buying and selling (Retailer,

SME, Estate world, The franchising world) Brokers

Business associates

Exhibitions and conferences
http://www.indiabusinesssale.com/http://www.indiabusinesssale.com/http://www.indiabusinesssale.com/http://www.indiabusinesssale.com/http://www.indiabusinesssale.com/


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Advantages in buying an existing business

Initial formalities and ground work not required

Easier to get finance Ready market for the product or service

Established customers

Certainty of income

Reputation Network of contacts

Business plan, marketing and financial plans already in place

Experienced employees

Problems identified and solved

Option to resell business


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Disadvantages of buying an existing

business

Large investment upfront Large expenses initially Uphill task if business neglected in recent

times Honoring existing contracts Flexibility and change Undisclosed information

Complex due diligence process Re negotiating credit terms Loyalty of customers Risk of seller establishing competing

business


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Basic preview - Financial

Current performance

Sales

Profit

Financial position

Assets

Cash flows

Debts

Expenses


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Basic preview Marketing , HR &other key areas

Existing customer base - CRM if any

Competition and market share

Major contracts & orders

Existing management

Existing employees terms & conditions

Reason for the business being sold

Supplier relationship

Dealer networks if any

Systems and technologies

Environmental issues

Litigations


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Verification & due diligence

Agreement on tentative price andterms with seller

Down payment

Investigation period

Help of Professional solicitors and

accountants Make a due diligence checklist


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Land rover jaguar sale

Rover group bought by BMW in 1994 Sold to Ford by BMW in 2000 Ford sold both Land rover and Jaguar to Tata

motors in 2008

Other bidders were were PE firm Alchemy Partners,JCB (excavator company), Mahindra and Mahindra Services of Goldman Sachs, Morgan stanley and

HSBC used Private Unlimited company

Automotive sector 13000 employees Head office Gaydon, United kingdom


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Previous ownership details

19481967 Rover Company

19671968 - Leyland MotorCorporation19681986 - British LeylandMotor corp19861988 - Rover group

19881994 - British Aerospace19942000 - BMW20002008 - Ford Motor

Company


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LBO Acquisition of company with significant debt PE, Managers of struggling companies Funded through mix of equity and debt Management is reshuffled Increase the profit and resell To sell back when market booming

Strong cash flows Cutting unnecessary cost Tax savings Eg: Richie rich a PE buys out G Limited for 120 crores, 20

crores financed by him and 100 crores borrowed, after 3years when markets and economy are booming sells it for

150 crores, pays back 100 crores with interest of 20 croresand retains the profit of 30 crores.

Tetley (UK) and Tata Tea Tata corus Grasim, Samruddhi, Ultra tech


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Due diligence & checklist

Organization details

Companys articles of association andmemorandum and amendments to it

Companys byelaws and amendments Minute books, and resolutions board,

shareholder, executive committee and othergoverning groups.

Agreements voting rights, warrants,convertible securities etc.,

Annual reports of 3 years or more

Companys leased and owned properties in all

locations


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FINANCIAL INFORMATION

Audited financial statement 3 years Un audited recent financial statement of recent

period Auditors letters and replies of the past 5 years

Companys credit report Projections, capital budget and strategic plans Schedule of contingent liabilities & indebtedness Description of depreciation and amortization

methods Schedule of inventory Schedule of accounts receivable Analysis of fixed and variable expenses Analysis of gross margins

Description of internal control procedures


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Schedule of Fixed assets andlocations

Leases of equipments

Sale and purchase of major assetsduring last 3 years

Schedule of companys businesslocations

Copies of all real estate deals, rentalagreements, mortgages, permits etc.


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INTELLECTUAL PROPERTY

Schedule of domestic patents and foreignpatents

Schedule of trademarks and trade names

Schedule of copyrights

Description of important technical knowhow

Copies of all consulting agreements,regarding inventions, licenses orassignments of intellectual property to andfrom the company

Schedule of claims or threatened claims


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EMPLOYEES & EMPLOYEEBENEFITS

List of employees with positions, current salaries, bonusespaid during last 3 years

All employment, consulting, nondisclosure, non solicitationor non competition agreements between the Company andany of its employees.

Resumes of Key employees Personnel handbook Schedule of employee benefits, holidays vacation and leave

policy Retirement plans and schemes Collective bargaining agreements

Labor disputes, grievance procedures Workers compensation claim history ESOP


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Environmental issues

Environmental audit report

Listing of hazardous substances usedin companys operations

Companys disposal method

Environmental permits and licenses

Environmental litigation orinvestigations


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Tax and Levies

Direct, Indirect taxes includingforeign income tax returns for thelast 3 years

State tax VAT returns

Tax settlement documents for past 3years

Profession tax filings

Audit reports

Other relevant levies for the nature


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VALUATION METHODS

ASSET BASED APPROACH

MARKET APPROACH

INCOME APPROACH


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Negotiating is an entrepreneursmost important skill

Negotiation strategy in place

Process maybe different for eachtype of business Educate yourself about the possible

pitfalls Leave out your ego outside Compromise and kindness are the

new rules of negotiation

NEGOTIATION


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Pointers

Listen before you speak

Embrace your fear

Avoid story telling

Study up

Reciprocity

When all seems lost gain something else

You are a professional already

Be empathetic to the others needs win winsituation

Right attitude

Right choice of words


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ROLE PLAY

A partnership firm consisting of 4partners wish to sell off their real estatefirm in an fast growing industrializedtown, near a major metro they have

made their money and most of them arein their sixties and want to retire. Theirfirm has been making an average profitof 4 crores per year. Most of their

projects are completed and there is onlyone project left unstarted. You arerequired to write a play and enact thesame demonstrating the various factorsinvolved in the process of buying anexisting business and negotiating skills

BUYING A BUSINESS – EVALUATION & NEGOTIATION

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