Chapter 7

Copyright 2008 Prentice Hall Publishing 1Chapter 7: Buying a Business

Buying an Existing BusinessChapter 7

Buying an Existing BusinessChapter 7

For Sale


Key Questions to Key Questions to Consider Consider BeforeBefore Buying a Buying a

BusinessBusiness Is the right type of business for sale in Is the right type of business for sale in

the market in which you want to operate?the market in which you want to operate? What experience do you have in this What experience do you have in this

particular business and the industry in particular business and the industry in which it operates? How critical is which it operates? How critical is experience in the business to your experience in the business to your ultimate success?ultimate success?

What is the company’s potential for What is the company’s potential for success?success?

What changes will you have to make – and What changes will you have to make – and how extensive will they have to be – to how extensive will they have to be – to realize the business’s full potential?realize the business’s full potential?


Key Questions to Key Questions to Consider Consider BeforeBefore Buying a Buying a

BusinessBusiness What price and payment method are What price and payment method are

reasonable for you and acceptable to the reasonable for you and acceptable to the seller?seller?

Will the company generate sufficient cash Will the company generate sufficient cash to pay for itself and leave you with a to pay for itself and leave you with a suitable rate of return on your suitable rate of return on your investment?investment?

Should you be starting a business and Should you be starting a business and building it from the ground up rather than building it from the ground up rather than buying an existing one?buying an existing one?


Advantages of Buying a Advantages of Buying a BusinessBusiness

It may continue to be successfulIt may continue to be successful It may already have the best It may already have the best

locationlocation Employees and suppliers are Employees and suppliers are

establishedestablished Equipment is already installedEquipment is already installed Inventory is in place and trade Inventory is in place and trade

credit is establishedcredit is established


Advantages of Buying a Advantages of Buying a BusinessBusiness

You can “hit the ground You can “hit the ground running”running”

You can use the previous You can use the previous owner’s experienceowner’s experience

Easier financingEasier financing It’s a bargainIt’s a bargain

(Continued(Continued))


Disadvantages of Buying a Disadvantages of Buying a BusinessBusiness

““It’s a loser”It’s a loser” Previous owner may have created ill Previous owner may have created ill

willwill ““Inherited” employees may be Inherited” employees may be

unsuitableunsuitable Location may have become Location may have become

unsatisfactoryunsatisfactory Equipment may be obsolete or Equipment may be obsolete or

inefficientinefficient


Disadvantages of Buying Disadvantages of Buying a Businessa Business

(Continued)(Continued)

Change and innovation can Change and innovation can be difficult to implementbe difficult to implement

Inventory may be staleInventory may be stale Accounts receivable may be Accounts receivable may be

worth less than face valueworth less than face value

Valuing Accounts Valuing Accounts ReceivableReceivable

Age of Accounts

(days)

Amount

Probability of Collection

Value

0-3031-6061-90

91-120121-150

151+

Total

$40,000$25,000$14,000$10,000$7,000$5,000

$101,000

.95

.88

.70

.40

.25

.10

$38,000$22,000$9,800$4,000$1,750$500

$76,050


Disadvantages of Buying Disadvantages of Buying a Businessa Business

(Continued)(Continued)

Changes can be difficult to Changes can be difficult to implementimplement

Inventory may be staleInventory may be stale Accounts receivable may be worth Accounts receivable may be worth

less than face valueless than face value It may be overpricedIt may be overpriced


Acquiring a BusinessAcquiring a Business

More than 50 percent of all More than 50 percent of all business acquisitions fail to meet business acquisitions fail to meet buyers’ expectations. buyers’ expectations.

The right way:The right way: Analyze your skills, abilities, and Analyze your skills, abilities, and

interest.interest. Prepare a list of potential Prepare a list of potential

candidates.candidates. Remember the “hidden market.”Remember the “hidden market.”

Kwik-Mart


Acquiring a BusinessAcquiring a Business Investigate and evaluate candidate Investigate and evaluate candidate

businesses and select the best one.businesses and select the best one. Explore financing options.Explore financing options.

Potential source: the seller.Potential source: the seller. Ensure a smooth transition.Ensure a smooth transition.

Communicate with employees.Communicate with employees. Be honest.Be honest. Listen.Listen. Consider asking the seller to serve as a Consider asking the seller to serve as a

consultant through the transition.consultant through the transition.

Kwik-Mart


Five Critical Areas for Five Critical Areas for AnalyzingAnalyzing

an Existing Businessan Existing Business Why does the owner want to sell.... the Why does the owner want to sell.... the realreal reason? reason?

What is the physical condition of the What is the physical condition of the business?business?

What is the potential for the company's What is the potential for the company's products or services?products or services? Customer characteristics and Customer characteristics and

compositioncomposition Competitor analysisCompetitor analysis

What legal aspects must I consider?What legal aspects must I consider? Is the business financially sound?Is the business financially sound?


The Legal Aspects of The Legal Aspects of Buying a BusinessBuying a Business

Contract assignmentContract assignment - buyer’s - buyer’s ability to assume rights under ability to assume rights under seller’s existing contracts.seller’s existing contracts.

LienLien - creditors’ claims against - creditors’ claims against an asset.an asset.

Bulk transferBulk transfer - protects - protects business buyer from the claims business buyer from the claims unpaid creditors might have unpaid creditors might have against a company’s assets.against a company’s assets.


The Legal Aspects of The Legal Aspects of Buying a BusinessBuying a Business

Restrictive covenantRestrictive covenant (covenant not (covenant not to compete) - contract in which a to compete) - contract in which a business seller agrees not to business seller agrees not to compete with the buyer within a compete with the buyer within a specific time and geographic area.specific time and geographic area.

Ongoing legal liabilitiesOngoing legal liabilities - physical - physical premises, product liability, and premises, product liability, and labor relations.labor relations.


Determining the Value of a Determining the Value of a BusinessBusiness

Balance Sheet Technique Balance Sheet Technique Variation: Adjusted Balance Sheet Variation: Adjusted Balance Sheet

TechniqueTechnique Earnings ApproachEarnings Approach

Variation 1: Excess Earnings ApproachVariation 1: Excess Earnings Approach Variation 2: Capitalized Earnings Variation 2: Capitalized Earnings

ApproachApproach Variation 3: Discounted Future Variation 3: Discounted Future

Earnings ApproachEarnings Approach Market ApproachMarket Approach


Understanding the Understanding the Seller’s SideSeller’s Side

Study: 64 percent of owners of closely Study: 64 percent of owners of closely held companies within three years. held companies within three years.

Exit Strategies: Exit Strategies: Straight business saleStraight business sale Business sale with an agreement from Business sale with an agreement from

the founder to stay onthe founder to stay on Form a family limited partnershipForm a family limited partnership Sell a controlling interestSell a controlling interest Restructure the companyRestructure the company


Understanding the Understanding the Seller’s SideSeller’s SideExit Strategies: Exit Strategies:

Straight business saleStraight business sale Business sale with an agreement Business sale with an agreement

from the founder to stay onfrom the founder to stay on Form a family limited partnershipForm a family limited partnership Sell a controlling interestSell a controlling interest Restructure the companyRestructure the company Sell to an international buyerSell to an international buyer Use a two-step saleUse a two-step sale Establish an ESOPEstablish an ESOP

The Five Ps of Negotiating.The Five Ps of Negotiating.

Preparation - Examine the needsof both parties and all of the

relevant external factors affectingthe negotiation before you sit

down to talk.

Poise - Remain calm during thenegotiation. Never raise your voice

or lose your temper, even if the situation gets difficult or emotional.It’s better to walk away and calm down than to blow up and blow

the deal.

Persuasiveness - Know whatyour most important positions are,articulate them, and offer support

for your position.

Persistence - Don’t give in at thefirst sign of resistance to your

position, especially if it is an issue that ranks high in your list of priorities.

Patience - Don’t be in sucha hurry to close the deal that

you end up giving up much of what you hoped to get. Impatience is

a major weakness in a negotiation.

Chapter 7

Business

Transcript of Chapter 7