1. Buying an Existing Business
Chapter 7

2. The Advantages of Buying an Existing Business
Success existing businesses often continue to be successful.
Superior location
Employees and suppliers are in place.
Installed equipment with known production capacity
Inventory in place

3. The Advantages of Buying an Existing Business (p.2)
Trade credit is established
The turnkey business
The new owner can use the experience of the previous owner
Easier access to financing
High value

4. Disadvantages of Buying an Existing Business
Cash requirements
The business is losing money.
Paying for ill will
Employees inherited with the business may not be suitable.
Unsatisfactory location

5. Disadvantages of Buying an Existing Business (p.2)
Obsolete or inefficient equipment and facilities
The challenge of implementing change
Obsolete inventory
Worthless accounts receivable may be worth less than face value.
The business may be overpriced.

6. The Steps in Acquiring a Business (7 steps)
Conduct a self-inventory, objectively analyzing skills, abilities, and personal interests to determine the type(s) of business that offer the best fit.
Develop a list of the criteria that define the “ideal business” for you.
Prepare a list of potential candidates that meet your criteria.

7. The Steps in Acquiring a Business (7 steps)
Thoroughly investigate the potential acquisition targets that meet your criteria. This due diligence process involves practical steps, such as analyzing financial statements and making certain that the facilities are structurally sound. The goal is to minimize the pitfalls and problems that arise when buying any business.

8. The Steps in Acquiring a Business (7 steps)
Explore various financing options for buying the business.
Negotiate a reasonable deal with the existing owner.
Ensure a smooth transition of ownership.

9. Evaluating an Existing Business: The Due Diligence Process
The process of reviewing, investigating, and analyzing the relevant details about the top acquisition candidates to determine which one best meets a buyer’s purchase criteria.

10. Evaluating an Existing Business: The Due Diligence Process
Motivation. Why does the owner want to sell?
Asset valuation. What is the physical condition of the business?
Market potential. What is the potential for the company’s products or services?
Legal issues. What legal aspects of the business represent known or hidden risks?

11. Asset Valuation Accounts receivable Lease arrangements
Business records
Intangible assets
Location and appearance

12. Market Potential Customer characteristics and composition
Competitor analysis

13. Liens
Lien: a creditor’s claim against an asset
Legal Issues (p.1)

14. Legal Issues (p.2) Contract assignments
Due-on-sale clause: a local contract provision that prohibits a seller from assigning a loan arrangement to the buyer. Instead, the buyer is required to finance the remaining loan balance at prevailing interest rates.

15. Legal Issues (p.3) Covenants not to compete
Covenant not to compete (restrictive covenant or non- compete agreement): an agreement between a buyer and seller in which the seller agrees not to compete with the buyer within a specific time and geographic area.

16. Legal Issues (p.4) Ongoing Legal Liabilities, such as:
Physical premises
Product liability claims
Labor relations

17. Financial Condition
Income statements and balance sheets for the past three to five years
Income tax returns for the past three to five years
Owner’s compensation (and that of relatives)
Cash flow

18. Valuing a Business - 3 methods
Adjusted Balance Sheet Technique
A method of valuing a business on the basis of the market value of the company’s net worth (net worth = total assets – total liabilities)

19. Valuing a Business - 3 methods
Balance Sheet Technique
A method of valuing a business on the basis of the value of the company’s net worth (net worth = total assets – total liabilities)

20. Valuing a Business - 3 methods
Earnings Approach
A method of valuing a business that recognizes that a buyer is purchasing the future income (earnings) potential of a business.