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Buying an Existing Business There is nothing so easy to learn as experience and nothing so hard to apply…Josh Billings.

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Presentation on theme: "Buying an Existing Business There is nothing so easy to learn as experience and nothing so hard to apply…Josh Billings."— Presentation transcript:

1 Buying an Existing Business There is nothing so easy to learn as experience and nothing so hard to apply…Josh Billings

2 Advantages May continue to be successful May continue to be successful Best location Best location Employees and suppliers established Employees and suppliers established Equipment installed Equipment installed Inventory in place Inventory in place Hit the ground running Hit the ground running Use previous experience Use previous experience Easier financing Easier financing

3 Disadvantages A loser A loser Created ill will Created ill will Employees not suitable Employees not suitable Equipment obsolete or inefficient Equipment obsolete or inefficient Change and innovation difficult Change and innovation difficult Inventory outdated or obsolete Inventory outdated or obsolete Accounts receivable worth less Accounts receivable worth less Overpriced Overpriced

4 Steps in Acquiring a Business Analyze your skills, abilities, and interests Analyze your skills, abilities, and interests Prepare a list of potential candidates Prepare a list of potential candidates Investigate and evaluate Investigate and evaluate Explore financing options Explore financing options Ensure smooth transition Ensure smooth transition

5 Due Diligence Process The process of investigating the details of a company that is for sale to determine the strengths, weaknesses, opportunities, and threats facing it

6 5 Critical Questions Why does the owner want to sell? Why does the owner want to sell? What is the physical condition? What is the physical condition? What is the potential? What is the potential? What legal aspects should be considered? What legal aspects should be considered? Is the business financially sound? Is the business financially sound?

7 Physical Conditions Building Building Inventory Inventory Accounts receivable Accounts receivable Lease arrangements Lease arrangements Business records Business records Intangible assets Intangible assets Location and appearance Location and appearance

8 Potential of Products Customer characteristics and composition-who, why, how often, loyalty, new customers, well-defined, growing? Customer characteristics and composition-who, why, how often, loyalty, new customers, well-defined, growing? Competitor analysis-number and intensity, saturation point reached, reason for survival, sales comparison, uniqueness? Competitor analysis-number and intensity, saturation point reached, reason for survival, sales comparison, uniqueness?

9 Legal Aspects Liens Liens Bulk Transfers Bulk Transfers Contract assignments Contract assignments Covenants not to compete Covenants not to compete Ongoing legal liabilities Ongoing legal liabilities

10 Financial Soundness Income statements and balance sheets (3-5 years) Income statements and balance sheets (3-5 years) Income tax returns (3-5 years) Income tax returns (3-5 years) Owner’s compensation (and relatives) Owner’s compensation (and relatives) Cash flow Cash flow

11 Methods for Determining the Value of a Business Balance Sheet technique Balance Sheet technique Adjusted Balance Sheet technique Adjusted Balance Sheet technique Excess Earnings Method Excess Earnings Method Capitalized Earnings Approach Capitalized Earnings Approach Discounted Future Earnings approach Discounted Future Earnings approach Market approach Market approach

12 Understanding the Seller’s Side Picking the right buyer Picking the right buyer Structuring the deal Structuring the deal Exit strategies Exit strategies Negotiating the deal Negotiating the deal

13 Exit Strategies Straight business sale Straight business sale Sale with agreement from the founder to stay on Sale with agreement from the founder to stay on Form a limited partnership Form a limited partnership Sell a controlling interest Sell a controlling interest Restructure the company Restructure the company Sell to an international buyer Sell to an international buyer Use a 2-step sale Use a 2-step sale Establish an ESOP Establish an ESOP

14 Factors Affecting Negotiations How strong is the desire to sell? How strong is the desire to sell? Is the seller willing to finance part of the purchase price? Is the seller willing to finance part of the purchase price? What terms does the buyer suggest? What terms does the buyer suggest? Which ones re most important to him/her? Which ones re most important to him/her? Is it urgent that the seller close the deal quickly? Is it urgent that the seller close the deal quickly? What deal structure best suits your needs? What deal structure best suits your needs? What are the tax consequences? What are the tax consequences? Will the seller sign a restrictive covenant? Will the seller sign a restrictive covenant? Is he willing to stay on? Is he willing to stay on? What general economic conditions exist? What general economic conditions exist?

15 Negotiations Prepare Prepare Remember the difference between a position and an interest Remember the difference between a position and an interest Develop the right mindset Develop the right mindset Always leave yourself an escape hatch Always leave yourself an escape hatch Keep your emotions in check Keep your emotions in check Sometimes it’s best to remain silent Sometimes it’s best to remain silent


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