Presentation on theme: "Buying an Existing Business"— 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 Best location Employees and suppliers establishedEquipment installedInventory in placeHit the ground runningUse previous experienceEasier financing
3 Disadvantages A loser Created ill will Employees not suitable Equipment obsolete or inefficientChange and innovation difficultInventory outdated or obsoleteAccounts receivable worth lessOverpriced
4 Steps in Acquiring a Business Analyze your skills, abilities, and interestsPrepare a list of potential candidatesInvestigate and evaluateExplore financing optionsEnsure smooth transition
5 Due Diligence ProcessThe 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? What is the physical condition?What is the potential?What legal aspects should be considered?Is the business financially sound?
7 Physical Conditions Building Inventory Accounts receivable Lease arrangementsBusiness recordsIntangible assetsLocation and appearance
8 Potential of ProductsCustomer 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?
9 Legal Aspects Liens Bulk Transfers Contract assignments Covenants not to competeOngoing legal liabilities
10 Financial Soundness Income statements and balance sheets (3-5 years) Income tax returns (3-5 years)Owner’s compensation (and relatives)Cash flow
11 Methods for Determining the Value of a Business Balance Sheet techniqueAdjusted Balance Sheet techniqueExcess Earnings MethodCapitalized Earnings ApproachDiscounted Future Earnings approachMarket approach
12 Understanding the Seller’s Side Picking the right buyerStructuring the dealExit strategiesNegotiating the deal
13 Exit Strategies Straight business sale Sale with agreement from the founder to stay onForm a limited partnershipSell a controlling interestRestructure the companySell to an international buyerUse a 2-step saleEstablish an ESOP
14 Factors Affecting Negotiations How strong is the desire to sell?Is the seller willing to finance part of the purchase price?What terms does the buyer suggest?Which ones re most important to him/her?Is it urgent that the seller close the deal quickly?What deal structure best suits your needs?What are the tax consequences?Will the seller sign a restrictive covenant?Is he willing to stay on?What general economic conditions exist?
15 NegotiationsPrepareRemember the difference between a position and an interestDevelop the right mindsetAlways leave yourself an escape hatchKeep your emotions in checkSometimes it’s best to remain silent