Chapter 7 Buying an Existing Business
Part 1: Learning Objectives
1. Understand the advantages and disadvantages of buying an existing business.
2. Define the steps involved in the right way to buy a business.
3. Explain the process of evaluating an existing business.
4. Describe the various techniques for determining the value of a business.
5. Understand the seller's side of the buyout decision and how to structure the deal.
6. Understand how the negotiation process works and identify the factors that affect the negotiation process.
Part 2: Class Instruction
Some entrepreneurs choose to buy existing businesses rather than ...view middle of the document...
• Employees and suppliers are established.
• Equipment is installed and productive capacity is known.
• Inventory is in place and trade credit is established.
• The new business owner hits the ground running.
• The new owner can use the experience of the previous owner.
• Easier financing.
• It's a bargain (maybe?).
Disadvantages of buying an existing business include:
• It's a loser (maybe?).
• The previous owner may have created ill will.
• The business location may have become/is unsatisfactory.
• Equipment and facilities may be obsolete or inefficient.
• Change and innovation are difficult to implement.
• Inventory may be outdated or obsolete.
• Accounts receivable may be worth less than face value. Figure 7.1
• Changes may be difficult to implement.
• Inventory may be stale.
• Accounts payable may be worth more than face value.
• The business may be overpriced.
Steps in Acquiring a Business LO 2
More than half of business acquisitions fail to meet the buyers’ expectations. The correct way to evaluate a match is to:
• Analyze your skills, abilities.
• Develop a list of criteria
• Prepare a list of potential candidates.
• Investigate and evaluate candidate businesses and evaluate the best one.
• Explore financing options—the seller is a potential source.
• Negotiate a reasonable deal with the owner
• Ensure a smooth transition—communicate with employees, listen and ask questions.
Evaluating an Existing Business: The Due Diligence Process LO 3
A potential buyer should explore a business opportunity by examining five critical areas.
1. Motivation: Why does the owner want to sell?
There are many reasons business owners plan to sell their companies and knowing that motivation will be beneficial to the buyer.
2. Asset valuation: Assess the physical condition of the business:
• Accounts receivable
• Lease arrangements
• Business records
• Intangible assets
• Location and appearance
3. Market potential: What is the potential for the company's products or services?
• Product line status
• Potential for company’s products or services
• Customer characteristics and composition
• Competitor characteristics and composition
4. Legal issues: What legal aspects should you consider?
• Bulk transfers
• Contract assignments
• Covenants not to compete
• Ongoing legal liabilities
5. Financial condition: Is the business financially sound?
• Income statements and balance sheets for past 3-5 years
• Income tax returns for the past 3-5 years
• Owner's compensation (relatives,...