1 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Chapter 4: Buying an Existing Business

2 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Learning Objectives To understand that buying an existing business has several important advantages over starting one, including less risk, less time and effort, and the possibility of getting a bargain To appreciate that finding a business to buy should not be confined to the standard channels where businesses for sale are advertised To comprehend the method for determining the value of the business and understand that it requires taking into account both the assets the company has and the earnings it is likely to achieve in the future To see that in order to negotiate effectively, the entrepreneur must gather as much information about the company and industry as possible

3 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Advantages of Buying a Business Less risk Less time and effort required Possibility of buying at a bargain price

4 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Reasons for Bargain Prices The “I know what it cost” approach The “I know what I have to take out” approach The “I know what similar firms cost” approach

5 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Business Brokers Agents contracted by company owner to arrange the company’s sale May provide advantages to the company’s seller

6 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Disadvantages of Buying a Business Business environment may be poor Industry and market size may be declining Internal problems “One-Person” businesses

7 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Businesses on the Market Classified ads Business brokers

8 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Businesses Not on the Market Contact Bankers Lawyers Accountants Entrepreneurs in the same industry

9 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Determining the Price of a Business Price The amount for which the owner of a business is willing to sell Value The worth of the business as determined by the market

10 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Determining the Price of a Business (cont.) Book value Amount shown on company’s financial statements Cost minus depreciation

11 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Determining the Price of a Business (cont.) Replacement value What it would cost to purchase them Uses current prices

12 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Determining the Price of a Business (cont.) Liquidation value Price that would be offered if the item were sold in a quick sale or auction

13 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Determining the Price of a Business (cont.) Appraised value Price as determined by an industry expert Considers the supply and demand for the item

14 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Tangible Assets A firm’s material possessions Land, building, equipment, inventory, etc.

15 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Intangible Assets Elements of value that are not physical objects Goodwill, established processes, industry relationships

16 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Discounted Cash Flow Method Determining the present value of money to be earned in the future Money earned in the future is worth less than the same amount in hand today

17 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Sources of Power in Negotiations Information Pressure from others Timing Alternatives

18 ENTREPRENEURSHIP, 4/e By Lambing and Kuehl PRENTICE HALL ©2007 by Pearson Education, Inc. Upper Saddle River, NJ Buying a Business and the Business Plan Include a History of the business Past financial statements Legal issues