Presentation on theme: "BUYING AN EXISTING BUSINESS"— Presentation transcript:
1 BUYING AN EXISTING BUSINESS ENTREPRENEURSHIPBUYING AN EXISTING BUSINESS
2 BUYING AN EXISTING BUSINESS Some entrepreneurs choose to buy existing businesses rather than start their own. In a typical year, between 500,000 to one million businesses are bought and sold. Purchasing an established business can offer many advantages—if the entrepreneur knows what they are really buying and if the business is priced right.
3 Buying an Existing Business People buy businesses for different reasons. We can categorize buyers into four areas:Main street buyersCorporate refugeesSerial entrepreneursFinancial buyers
4 Buying an Existing Business A prospective owner must ask several key questions before buying an existing business.Is it the right type of business for the market?What experience do I bring to the venture?What is the success potential?What changes are needed—and how extensive are they—to realize the full potential of the value of the business?
5 Advantages of buying an existing business Advantages of buying an existing business include:A successful existing business may continue to be successful.An existing business may already have the best location.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?).
6 Disadvantages of buying an existing business 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and facilities may be obsolete or inefficient.Change and innovation are difficult to implement.Inventory may be outdated or obsolete.Accounts receivable may be worth less than face value.Changes may be difficult to implement.Inventory may be stale.Accounts payable may be worth more than face value.The business may be overpriced.
7 Steps in Acquiring a Business 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 criteriaPrepare 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 ownerEnsure a smooth transition—communicate with employees, listen and ask questions.
8 Evaluating an Existing Business: The Due Diligence Process 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.
9 Evaluating an Existing Business: The Due Diligence Process 2. Asset valuation: Assess the physical condition of the business:Accounts receivableLease arrangementsBusiness recordsIntangible assetsLocation and appearance3. Market potential: What is the potential for the company's products or services?Product line statusPotential for company’s products or servicesCustomer characteristics and compositionCompetitor characteristics and composition
10 Evaluating an Existing Business: The Due Diligence Process 4. Legal issues: What legal aspects should you consider?LiensBulk transfersContract assignmentsCovenants not to competeOngoing legal liabilities5. Financial condition: Is the business financially sound?Income statements and balance sheets for past 3-5 yearsIncome tax returns for the past 3-5 yearsOwner's compensation (relatives, skimming)Cash flow
11 The Acquisition Process The acquisition process involves seven key steps:Identify and approach the candidateSign the nondisclosure statementSign the letter of intent (LOI)Buyer’s due diligence investigationDraft the purchase agreementClose the final dealBegin the transition
12 Methods for Determining the Value of a Business Business valuation is partly an art and partly a science. Establishing a price for a privately held business may be difficult due to the nature of the business itself. Goodwill may be a key consideration
13 Methods for Determining the Value of a Business There are a few rules for establishing the value of a business:There is no single best method to determine a business's worth. The best way is to compute the value using different methods and choose the one that justifiably results in a realistic value.Both parties, buyer and seller, must be satisfied with the deal.Both the buyer and seller should have access to business records.Valuations should be based on facts, not fiction.Both parties should deal with one another honestly and in good faith.
14 Methods for Determining the Value of a Business Business valuation techniques include:The basic balance sheet methods offer two techniques:The balance sheet techniqueAdjusted balance sheet techniqueEarnings approach with three variations:Variation 1: Excess earnings methodVariation 2: Capitalized earnings approachVariation 3: Discounted future earnings approach
15 Understanding the Seller's Side A recent study found that 64 percent of closely held companies expect to sell their businesses within three years.Structuring the deal is one of the most important decisions a seller can make. Tax implications can be significant; therefore, a skilled tax planner can help.Exit strategy options include:Straight business saleSale of controlling interest or a variation called an earn-outForm a family limited partnershipSell a controlling interestEarn-outRestructure the companySell to an international buyerEstablish an employee stock ownership plan (ESOP)
16 Negotiating the DealFactors affecting the negotiation process involve:How strong is the seller's desire to sell?Is seller willing to finance part of purchase price?Must the seller close the deal quickly?What deal structure fits your needs?What are tax consequences for both parties?Is seller willing to stay on as a consultant?What general economic conditions exist in the industry?
17 Negotiating the DealBuyers have specific criteria they look for. They want to get the business at the most attractive price possible with favorable payment terms that minimize the amount of cash they pay up front.Seller are seeking the highest price possible with the most desirable terms to maximize the cash they receive and minimize their tax burden.The Five Ps of Negotiating include:PreparationPoisePersuasivenessPersistencePatience
18 ConclusionThere are distinct advantages and disadvantages of buying an existing business. Following the appropriate steps will improve the chances of success. The valuation of the business is a critical step to negotiate an arrangement that works for both parties.