1. Buying An Existing Business
For Sale
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2. After going through this chapter, you will be able to:
1- Understand (A) the advantages and (B) the disadvantages of buying an existing business. 2- Define the steps involved in the right way to buy a business. 3- Describe the various techniques for determining the value of a business. 4-Understand the seller’s side of the buyout decision and how to structure the deal. 5-Understand how the negotiation process works and identify the factors that affect it.

3. Key Questions to Consider Before Buying a Business
Prospective buyers must be sure that they discover the answers to the following fundamental questions:
Is the right type of business for sale in the market in which you want to operate?
What experience do you have in this particular business and the industry in which it operates?
How critical is experience in the business to your ultimate success?
What price and payment method are reasonable for you and acceptable to the seller?

4. Key Questions to Consider Before Buying a Business (continued)
Should you start the business and build it from the ground up rather than buy an existing one?
What is the company’s potential for success?
What changes will you have to make – and how extensive will they have to be – to realize the business’s full potential?
Will the company generate sufficient cash flow to pay for itself and leave you with a suitable return on your investment?

5. What Are the Advantages and Disadvantages of Buying an Existing Business?
If you want to start your own business, the number of choices available are almost infinite: starting from zero, buying a franchise, partnering. If you don't have previous business experience, however, it may make sense to consider buying an existing business, which can put you ahead of the competition by throwing you directly into the business world. Before you make the final decision, though, here are some of the pros and cons of previously established businesses and how to deal with them.

6. The Advantages of Buying an Existing Business
It gives you the advantage of an established customer base. People will already know the place, so the costs of advertising will be less. You will also avoid the uncertain initial period, where attracting customers to the business can turn into a full-time job in itself.
A business plan and marketing method should already be in place.
A market for the product or service will have already been demonstrated

7. The Advantages of Buying an Existing Business
An Existing Business May Already Have the Best Location
When the location of the business is critical to its success (as is often the case in retailing), it may be wise to purchase a business that is already in the right place.
Employees and Suppliers Are Established
An existing business already has experienced employees who can help the new owner through the transition phase. Experienced employees enable a company to continue to earn money while a new owner learns the business.

8. A Successful Existing Business May Continue to Be Successful
The previous management team already has established a customer base, built supplier relationships, and set up a business system. The customer base inherited in a business purchase can carry an entrepreneur while he studies how the business has become successful and how to build on that success.

9. Equipment Is Installed and Productive Capacity Is Known
In an existing business, a potential buyer can determine the condition of the plant and equipment and its capacity before buying. The previous owner may have established an efficient production operation through trial and error, although the new owner may need to make modifications to improve it.
Inventory Is in Place and Trade Credit Is Established
The proper amount of inventory is essential to both controlling costs and generating adequate sales volume. If a business has too little inventory, it will not have the quantity and variety of products it needs to satisfy customer demand. However, if a business has too much inventory, it is tying up excessive capital unnecessarily, thereby increasing costs and reducing profitability. In addition, previous owners have established trade credit relationships with vendors that can benefit the new owner.

10. The New Business Owner Hits the Ground Running
Entrepreneurs who purchase existing businesses avoid the time, costs, and energy required to launch a new business.
Entrepreneurs who buy existing successful businesses do not have to invest a lifetime building a company to enjoy its success.

11. The New Owner Can Use the Experience of the Previous Owner The new owner can trace the impact on costs and revenues of the major decisions that the previous owner made and can learn from his mistakes and profit from his achievements. In many cases, the previous owner spends time with the new owner during the transition period, giving the new manager the opportunity to learn about the policies and procedures in place and the reasons for them. After all, most owners who sell out want to see the buyer succeed in carrying on their businesses.

12. Easier Financing
Attracting financing to purchase an existing business often is easier than finding the money to launch a company from scratch. Many existing businesses already have established relationships with lenders, which may open the door to financing through traditional sources such as banks.

13. It’s a Bargain
Some existing businesses may be real bargains. The current owners may need to sell on short notice, which may lead them to sell the business at a low price.. The more specialized a business is, the greater the likelihood is that a buyer can find a bargain. If special skill or training is required to operate a business, the number of potential buyers will be significantly smaller. If the seller wants a substantial down payment or the entire selling price in cash, few buyers may qualify; however, those who do may be able to negotiate a good deal.

14. Disadvantages of Buying an Existing Business
You will inherit all problems that run with the business. If the previous owner had trouble attracting new customers, paying the lease, or running new campaigns, you will have to deal with everything to set things right before you can even start to think about moving forward. If the business has a history of disappointing customers, you may also have a hard time convincing people that things will change under your direction.

15. Disadvantages of Buying an Existing Business
It’s a “Loser”
A business may be for sale because it is struggling and the owner wants out. In these situations, a prospective buyer must be wary. Business owners sometimes attempt to disguise the facts and employ creative accounting techniques to make the company’s financial picture appear much brighter than it really is. Few business sellers honestly state “It’s losing money” as the reason for putting their companies up for sale... If an analysis of a company shows that it is poorly managed or suffering from neglect, a new owner may be able to turn it around.

16. The Previous Owner May Have Created Ill Will
Just as ethical, socially responsible business dealings create goodwill for a company, improper business behavior creates ill will. Customers, suppliers, creditors, or employees may have extremely negative feelings about a company’s reputation because of the unethical actions of its current owner.
Employees Inherited with the Business May Not Be Suitable
Previous managers may have kept marginal employees because they were close friends or because they started with the company. A new owner, therefore, may have to make some very unpopular termination decisions. For this reason, employees often do not welcome a new owner because they feel threatened by change. Some employees may not be able to adapt to the new owner’s management style, and a culture clash may result. If it reveals that existing employees are a significant cause of the problems a business faces, the new owner will have no choice but to terminate them and make new hires..

17. The Business Location May Have Become Unsatisfactory
Prospective buyers should always evaluate the existing market in the area surrounding an existing business as well as its potential for expansion. Buyers must remember that they are buying the future of a business, not merely its past. A location in decline may never recover. If business success is closely linked to a good location, acquiring a business in a declining area or where demographic trends are moving downward is not a good idea.

18. Equipment and Facilities May Be Obsolete or Inefficient
Potential buyers sometimes neglect to have an expert evaluate a company’s facilities and equipment before they purchase it. Only later do they discover that the equipment is obsolete and inefficient and that the business may suffer losses from excessively high operating costs.
Change and Innovation Are Difficult to Implement
It is easier to plan for change than it is to implement it. Methods, policies, and procedures the previous owner used in a business may have established precedents that a new owner finds difficult to modify.

19. Inventory May Be Outdated or Obsolete Inventory is valuable only if it is salable.
Smart buyers know better than to trust the inventory valuation on a firm’s balance sheet.
A prospective buyer must judge inventory by its market value.

20. The Business May Be Overpriced
Each year, many people purchase businesses at
prices far in excess of their value, which can impair the companies’ ability to earn a profit and generate a positive cash flow. If a buyer accurately values a business’s accounts receivable, inventories, and other assets, he or she will be in a better position to negotiate a price that will allow the business to be profitable..

21. Five Critical Areas for Analyzing an Existing Business
Why does the owner want to sell.... the real reason?
What is the physical condition of the business?
What is the potential for the company's products or services?
Customer characteristics and composition.
Competitor analysis.
What legal aspects must I consider?
Is the business financially sound?

22. The Steps in Acquiring a Business
The steps involved in the right way to buy a business are :
Analyze your skills, abilities, and interest.
Prepare a list of potential candidates (Remember the “hidden market.”)
Investigate and evaluate candidate businesses and select the best one.
Explore financing options.
Ensure a smooth transition.
Kwik-Mart

23. Analyze Your Skills, Abilities, and Interests
The primary focus is to identify the type of business you will be happiest and most successful owning. Consider, for example, the following questions:
What business activities do you enjoy most? Least? Why?
Which industries or markets offer the greatest potential for growth?
Which industries interest you most? Least? Why?
What kind of business do you want to buy?
What kinds of businesses do you want to avoid?
What do you expect to get out of the business?
How much time, energy, and money can you put into the business?
What business skills and experience do you have? What skills and experience do you lack?
How easily can you transfer your skills and experience to other types of businesses?
In what kinds of businesses would that transfer be easiest?
How much risk are you willing to take?

24. Prepare a List of Potential Candidates
Once you know what your goals are for acquiring a business, you can begin your search. Do not limit yourself to only those businesses that are advertised as being “for sale.” In fact, the hidden market of companies that might be for sale but are not advertised as such is one of the richest sources of top-quality businesses. Many businesses that can be purchased are not publicly advertised but are available either through the owners or through business brokers and other professionals. Although they maintain a low profile, these hidden businesses represent some of the most attractive purchase targets a prospective buyer may find.

25. Investigate and Evaluate Candidate Businesses and Evaluate the Best One
Finding the right company requires patience. Although some buyers find a company after only a few months of looking, the typical search takes much longer, sometimes as much as two or three years. Once you have a list of prospective candidates, it is time to do your homework. The next step is to investigate the candidates in more detail:
What are the company’s strengths? Weaknesses?
Is the company profitable? What is its overall financial condition?
What is its cash flow cycle? How much cash will the company generate?
Who are its major competitors?
How large is the customer base? Is it growing or shrinking?
Are the current employees suitable? Will they stay?
What is the physical condition of the business, its equipment, and its inventory?
What new skills must you learn to be able to manage this business successfully?

26. Explore Financing Options
The next challenging task in closing a successful deal is financing the purchase. Although financing the purchase of an existing business usually is easier than financing a new one, some traditional lenders shy away from deals involving the purchase of an existing business. Those that are willing to finance business purchases normally lend only a portion of the value of the assets, and buyers often find themselves searching for alternative sources of funds.

27. Ensure a Smooth Transition
Once the parties strike a deal, the challenge of making a smooth transition immediately
arises. No matter how well planned the sale is, there are always surprises. For instance,
the new owner may have ideas for changing the business—sometimes radically—that
cause a great deal of stress and anxiety among employees and the previous owner.
To avoid a bumpy transition, a business buyer should do the following:
Concentrate on communicating with employees. Business sales are fraught with
uncertainty and anxiety, and employees need reassurance.
Be honest with employees. Avoid telling them only what they want to hear. Share
with the employees your vision for the business in the hope of generating a heightened
level of motivation and support.
Listen to employees. They have first-hand knowledge of the business and its strengths
and weaknesses and usually can offer valuable suggestions for improving it.
Consider asking the seller to serve as a consultant until the transition is complete. The
previous owner can be a valuable resource, especially to an inexperienced buyer

28. The Legal Aspects of Buying a Business
Lien – creditors’ claims against an asset.
Bulk transfer – protects business buyer from the claims unpaid creditors might have against a company’s assets.
Contract assignment – buyer’s ability to assume rights under seller’s existing contracts.

29. The Legal Aspects of Buying a Business (continued)
Restrictive covenant – contract in which a business seller agrees not to compete with the buyer within a specific time and geographic area.
Ongoing legal liabilities – physical premises, product liability, and labor relations.

30. Figure 5.1 The Acquisition Process
1. Identify
and approach
candidate
2. Sign
nondisclosure
statement
3. Sign
letter of
intent
4. Buyer’s
due diligence
investigation
5. Draft the
purchase
agreement
6. Close
the final
deal
7. Begin the
transition
Negotiations
1. Approach the candidate. If a
business is advertised for sale, the
proper approach is through the
channel defined in the ad.
Sometimes, buyers will contact
business brokers to help them
locate potential target companies.
If you have targeted a company in
the “hidden market,” an
introduction from a banker,
accountant, or lawyer often is the
best approach. During this phase,
the seller checks out the buyer’s
qualifications, and the buyer begins
to judge the quality of the company.
2. Sign a nondisclosure document. If
the buyer and the seller are satisfied
with the results of their preliminary
research, they are ready to begin
serious negotiations. Throughout the
negotiation process, the seller expects
the buyer to maintain strict
confidentiality of all of the records,
documents, and information he
receives during the investigation and
negotiation process. The nondisclosure
document is a legally binding contract that
ensures the secrecy of the parties’
negotiations.
3. Sign a letter of intent. Before a buyer
makes a legal offer to buy the company,
he typically will ask the seller to sign a
letter of intent. The letter of intent is a
non-binding document that says that the
buyer and the seller have reached a
sufficient “meeting of the minds” to
justify the time and expense of negotiating
a final agreement. The letter should state
clearly that it is non-binding, giving either
party the right to walk away from the deal.
It should also contain a clause calling for
“good faith negotiations” between the
parties. A typical letter of intent addresses
terms such as price, payment terms,
categories of assets to be sold, and a deadline
for closing the final deal.
4. Buyer’s Due Diligence. While
negotiations are continuing, the buyer
is busy studying the business and
evaluating its strengths and weaknesses.
In short, the buyer must “do his homework”
to make sure that the business is a good
value.
5. Draft the Purchase Agreement. The
purchase agreement spells out the parties’
final deal! It sets forth all of of the details of
the agreement and is the final product of the
negotiation process.
6. Close the final deal. Once the parties have
drafted the purchase agreement, all that
remains to making the deal “official” is the
closing. Both buyer and seller sign the
necessary documents to make the sale final.
The buyer delivers the required money, and
the seller turns the company over to the
buyer.
7. Begin the Transition. For the buyer, the real
challenge now begins: Making the transition
to a successful business owner!
Sources: Adapted from Buying and Selling: A Company Handbook, Price Waterhouse,( New York: 1993) pp.38-42;Charles F. Claeys, “The Intent to Buy,” Small Business Reports, May 1994, pp

31. situation gets difficult or emotional.
The Five P’s of Negotiating
Preparation - Examine the needs
of both parties and all of the
relevant external factors affecting
the negotiation before you sit
down to talk.
Poise - Remain calm during the
negotiation. 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.
Patience - Don’t be in such
a 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.
Persuasiveness - Know what
your most important positions are,
articulate them, and offer support
for your position.
Persistence - Don’t give in at the
first sign of resistance to your
position, especially if it is an issue
that ranks high in your list of priorities.

32. Determining the Value of a Business
Balance Sheet Technique
Variation: Adjusted Balance Sheet Technique
Earnings Approach
Variation 1: Excess Earnings Approach
Variation 2: Capitalized Earnings Approach
Variation 3: Discounted Future Earnings Approach
Market Approach

33. Question #1: "When Did the Owner Decide to Sell the Business?"
In some ways, buying an existing business is like buying a used car. If you've ever bought a used car, you probably asked the dealer why the previous owner sold the car in the first place. And then the car dealer probably told you that the previous owner was a little old lady who only drove it church and was recently placed in a nursing home.
Business buyers have a similar curiosity about the owner's decision to sell. Owners usually respond with an answer from the seller's playbook. Variations of "I'm ready to retire," "It's time to do something else," and "It's time to give someone else a chance" lead the pack.
Yet much of the time, the reason behind the owner's decision to sell is less important than when the owner decided to put the business on the market.
Ideally, the answer buyers should look for is that the listing didn't arise suddenly, but came as the result of a well-thought out, multi-year plan conceived by the owner as a means of achieving his personal and business goals. If that's true, the owner should be able to provide the buyer with a copy of the plan upon request.
But if the owner's decision to list the business happened quickly, that could be a red flag that the business is in trouble, that there are economic threats on the horizon, or that the owner hasn't taken the time to properly prepare due diligence materials.

34. Question #4: "What Would the Seller Do to Increase Sales and Profits"
More than anything else, buyers need to create opportunities to inject a dose of reality into the buying decision. Presumably, the person who is most qualified to offer a realistic perspective about the business and its future growth prospects is its owner. Yet sellers often prefer to paint a rosy portrait of the company rather than simply telling it like it is.
One of the ways a buyer can break through a reluctant seller's defenses is to invite the owner to make suggestions about how to increase capacity, market share and profitability. With the right approach, a buyer's appeal to owner expertise can change the seller's posture from defensive to collaborative.

35. Buying an existing business is a big decision
Buying an existing business is a big decision. It is critical that, as a prospective buyer, you spend time investigating the business prior to making the decision to purchase. Obtaining information about the business can help you make a well-informed decision. You must be prepared to carefully assess all business records and risks while searching for any "skeletons in the closet."
The following is a checklist of information to gather about the business. This checklist serves as a guide in investigating the business. Throughout the process, consider your goals, objectives, and strategic plans for the business. Analyze your financial expectations and time constraints to confirm that you can make the business succeed. Keep in mind that a good investment for one person may not be a good choice for someone else.
Much of the information in the checklist can be obtained by interviewing the seller and asking questions. Other information can be learned by obtaining important business documents such as financial statements, tax returns, leases, etc. You can also gain information through observations or by talking with employees (if given permission by the seller).
Keep in mind that communication between the prospective buyer and the seller is important. The seller provides invaluable experience and knowledge that the prospective buyer needs in order to make a decision about purchasing the business. The seller also has a great deal of knowledge that would be beneficial after transfer of ownership. However, be mindful of the seller's point-of-view when gathering information. The seller likely has invested much time, energy, and money in the business. A tactful approach to the investigation process can be advantageous during the negotiation phase.

36. Obtaining Financing for a Business Purchase
Before spending time investigating a business for a potential purchase, first gain an understanding about the realities of obtaining financing. Review the following ASBTDC articles:
Obtaining Small Business Financing
Can I Qualify for a Business Loan
Keep in mind that it is unlikely you'll be able to obtain 100% financing to purchase a business. Lenders typically require buyers to contribute their own cash equity towards the business purchase. The general rule-of-thumb is that lenders like to see at least 20% to 30% of the project in the form of owner's equity (buyer's cash). If the business purchase price contains substantial "goodwill," the expected equity contribution may be greater.
Those seeking financing to purchase a business should develop a loan proposal. Much of the information you gather about the business will be required by a lender and should be contained in your loan proposal. In addition, you will also have to compile information for your loan proposal including financial projections, collateral information, and personal financial information. Another issue to consider is whether or not the business will provide enough income to make loan payments and provide return to the owner. Loan repayment ability is extremely important to a potential lender. To learn about all of the information that should be in a loan proposal, review ASBTDC information about developing a loan proposal:

37. A Checklist of Information to Gather
Financial Information
A prospective buyer should request access to business financial records. This financial information is key to understanding past profitability of the business as well as projected future success. If the seller cannot provide adequate information, the buyer must make the decision to either terminate efforts or move forward at his/her own risk. If bank financing is involved, the lender will require adequate financial information.
Obtain the proposed selling price and determine what is included in the sale. How much of the selling price is allocated towards real estate, goodwill, equipment, inventory, etc.? What is the actual market value of those assets?
Determine the type of sale. Will it be an asset or stock purchase?
Establish whether or not the buyer will assume any business obligations or debts such as unpaid balances of accounts payable. If so, obtain all current loan terms, documents, etc.
Acquire business balance sheets and income statements (for at least three year-end statements and interim for current year), and federal business tax returns (at least the past three years). Confirm that all past taxes (state and federal) originating from the business are paid.
Determine whether additional working capital will be needed to conduct business operations after the sale.

38. Business and Operational Information
Obtain business history. What kind of reputation does the business have? How long has this business been established? Include the development/progress of the business and ownership structure.
Determine whether upgrades are required as well as identify needed changes to business operations. Are any leasehold improvements, equipment purchases, or general updates to the business necessary? What would be the costs of these updates?
Obtain a copy of the franchise agreement, if applicable. Will another franchise fee or a transfer fee have to be paid?
Obtain a copy of the proposed buy/sell agreement (unsigned) or information in writing about the proposed terms of the buy/sell transaction.
Request an explanation of seller's reason for selling the business.
Investigate any business leases for equipment, property, etc. Are leases transferable?
Investigate zoning laws to ensure compliance.
Determine whether or not the buyer will be able to continue utilizing the firm's intellectual property such as business name, patents, trademarks, trade secrets, product names, and any other proprietary information.
Research any licenses that may be required to maintain business operations. What are the costs?
Determine whether or not the seller will offer a non-compete agreement after transfer of ownership.
Investigate whether there are any customer product warranties issued by the company that may be future obligations.

39. InformManagement/Personnel ation
Learn about staffing requirements and key employees. Analyze the roles and salaries of all employees in the business. Will you keep existing employees and/or key management during the transition? Do you have the experience and expertise to manage this new acquisition?
Obtain a copy of existing employee contracts and benefit packages, if applicable.
Determine the likelihood that existing employees will stay with the business after the transfer of ownership.
Establish whether or not the seller is willing to stay on for a period of time after ownership transfers in order to provide knowledge and support

40. Market and Industry Information
Identify the products/services the firm provides. What is the current pricing system? Do you plan to alter the product/service mix? Are existing inventories and supplies included with the sale? What level of inventory will be in the business at the time of transfer? Does inventory consist of high quality saleable inventory or predominantly old inventory that will be difficult to sell?
Acquire a list of competitors, suppliers, and clients/customers, if possible. Can you retain customers and sustain revenues? Will existing vendors offer the new owner the same terms as the current owner? Will you forge new relationships with different suppliers or continue with current operations?
Determine the market area of the business and method of distribution. Fully understand the business's customer geography and target market. How large is the current customer base? Is there an opportunity to grow the customer base?
Research the industry. Is this industry growing? What are its strengths and weaknesses? Are their any emerging opportunities or threats? Gather information on current demand, seasonality, buying patterns, etc. Consider changes in the business environment which would affect operations and profit potential. The seller may have access to industry journals and information. In addition, outside industry research will likely be necessary

41. The interested buyers checklist
Documents involved when you buy a business
Before you sign the contract:
seller has to provide contract of sale, copy of lease, section 52 statement
prepare proposed assignment of lease
obtain title search
obtain search of business name or company name. 
When you sign the contract:
seller has to provide signed contract
return signed copy of contract to seller
pay preliminary or full deposit and seller to supply receipt for deposit.
Immediately after settlement:
lodge applications for transfer of registration of business name
transfer all necessary permits, licences, registrations and certificates

42. How to Buy a Business
Starting from scratch isn't the only way to get started. Buying an existing business can help you hit the ground running. Here's what you need to know to find a great deal.

43. When most people think of starting a business, they think of beginning from scratch--developing your own ideas and building the company from the ground up. But starting from scratch presents some distinct disadvantages, including the difficulty of building a customer base, marketing the new business, hiring employees and establishing cash flow...all without a track record or reputation to go on.

44. Buying an Existing Business In most cases, buying an existing business is less risky than starting from scratch. When you buy a business, you take over an operation that's already generating cash flow and profits. You have an established customer base, reputation and employees who are familiar with all aspects of the business. And you don't have to reinvent the wheel--setting up new procedures, systems and policies--since a successful formula for running the business has already been put in place.
On the downside, buying a business is often more costly than starting from scratch. However, it's easier to get financing to buy an existing business than to start a new one. Bankers and investors generally feel more comfortable dealing with a business that already has a proven track record. In addition, buying a business may give you valuable legal rights, such as patents or copyrights, which can prove very profitable. Of course, there's no such thing as a sure thing--and buying an existing business is no exception. If you're not careful, you could get stuck with obsolete inventory, uncooperative employees or outdated distribution methods. To make sure you get the best deal when buying an existing business, be sure to follow these steps.