1. Chapter Six Taking Over an Existing Business

2. Chapter Focus Compare the advantages and disadvantages of buying an existing business. Propose ways of locating a suitable business for sale. Determine why a business would be sold. Identify ways to measure the condition of a business. Differentiate tangible and nontangible assets and assess the value of each. Calculate the price to pay for a business. Describe what makes a family business different from other types of business.

3. The Advantages and the Disadvantages of Buying a Business ADVANTAGES 1. Image difficult to change 2. Employees may be ones whom you would not choose 3. Business may not have operated the way you like and could be difficult to change 4. Possible obsolete inventory and equipment 5. The business’s location may be undesirable - or a good location may be about to become not so good 6. Potential liability for past business contacts 7. Financing costs could drain your cash flow and threaten the business’s survival Table 6-1 DISADVANTAGES 1. Customers familiar with location 2. Planning can be based on known historical data 3. Established customer base at present location 4. Supplier relationships already in place 5. Inventory and equipment in place 6. Experienced employees 7. Possible owner financing

4. What Do You Look For in a Business? How long has the business existed? –Who founded it? –How many owners has it had? –Why have others sold out? What is the profit record? –Is profit increasing or decreasing? –What are the true reasons for the increase or decrease? What is the condition of the inventory? –Are the goods new or obsolete? page 157

5. What Do You Look For in a Business? (2 of 5) Is the equipment in good condition? –Who owns it? –Are there liens against any of it? –How does it compare with competitors’ equipment? How long does the lease run? –Is it a satisfactory lease? –What are its conditions? –Can it be renewed? page 157

6. Are there dependable sources of supply? –Are any franchises or other special arrangements expiring soon? What about present and future competition? –Are new competitors or substitute materials or methods visible on the horizon? What is the condition of the area around the business? –Are traffic routes or parking regulations likely to change? What Do You Look For in a Business? (3 of 5) page 157

7. Does the present owner have family, religious, social, or political connections that have been important to the success of the business? Why does the present owner want to sell? –Where will he or she go? –What is he or she going to do? –What do people (customers, suppliers, local citizens) think of the present owner and of the business? Are personnel satisfactory? –Are key people willing to remain? What Do You Look For in a Business? (4 of 5) page 158

8. How does this business, it its present condition, compare with one that you could start and develop yourself in a reasonable amount of time? What Do You Look For in a Business? (5 of 5) page 158

9. What Should You Pay? Value of Tangible Assets Value of Intangible Assets Profit Potential Purchase Price + + Fig. 6-1

10. Tangible Assets The inventory –timely, fresh, and well balanced The equipment –current, usable machines and equipment page 163

11. Intangible Assets Goodwill –enables a business to earn a profit in excess of the normal rate of return earned by other businesses of the same kind Leases and Other Contracts –a lease on a favorable location is a valuable business asset Patents, Copyrights, and Trademarks –intellectual property can be a valuable intangible asset page 163

12. Calculating the Purchase Price of an Existing Business Table 6-2 1. Adjusted value of tangible net worth 2. Earning power at 15% 3. Reasonable salary for owner or manager 4. Average annual net earning before subtracting owner’s salary 5. Extra earning power of business (line 4 - lines 2 and 3) 6. Value of intangibles, using four-year profit figure for moderately well- established firm (4 x line 5) 7. Offering price (line 1 + line 6) $224,000 40,000 $264,000 $33,600 40,000 $73,600 83,600 $10,000

13. Family Business Perspectives Ownership FamilyManage- ment Fig. 6-2

14. Succession Model of Family Business Fig. 6-3 1. Obtains Acceptance Perceived to believe and behave according to the culture of the business. 1. Obtains Acceptance Perceived to believe and behave according to the culture of the business. 2. Earns Credibility Perceived to have the ability and intention to deliver valued results. 2. Earns Credibility Perceived to have the ability and intention to deliver valued results. 3. Achieves Legitimacy Achieves a position of power by gaining the confidence of self and others to make significant contributions. 3. Achieves Legitimacy Achieves a position of power by gaining the confidence of self and others to make significant contributions. 4. Becomes Successful Successor Performs strategic tasks and assumes leadership, replacing older generation. 4. Becomes Successful Successor Performs strategic tasks and assumes leadership, replacing older generation.

15. General Family Business Policies (1 of 2) When hiring family members, they must meet the same criteria as nonfamily employees. In performance reviews, family members must meet the same standards as nonfamily employees. Family members should be supervised by nonfamily employees when possible. If family members are under age 30, they are only eligible for “temporary” employment (less than one year). page 172a

16. General Family Business Policies (2 of 2) No family members may stay in an entry-level position permanently. All positions will be compensated at fair market value. For family members to seek permanent employment, they must have at least five years’ experience outside the company. Family members must prove their worth to another employer to be useful here. page 172b