1. Buying a Business Evaluating Existing Businesses Copyright © 2011 Nelson Education Ltd.13-1 chapter 1313 Prepared by Ron Knowles Algonquin College & Jennifer Rouse Barbeau Canadore College

2. Chapter Overview Chapter 13 will:   Investigate the advantages and pitfalls of buying a business Copyright © 2011 Nelson Education Ltd.13-2 chapter 1313

3. Learning Opportunities  Evaluate objectively businesses that are for sale.  Understand the pros and cons of purchasing an ongoing business.  Assess the market value of an ongoing business.  Recognize when you need professional help.  Decide whether it is better for you to buy an ongoing business or to begin from scratch. Copyright © 2011 Nelson Education Ltd.13-3 chapter 1313

4. Why Purchase a Business? money Overwhelming reason is money, primarily the income stream. Other reasons may be:  Hungry seller  Fixtures and equipment  Training and support  Established customer base and supplier relationships  Good location  Knowledgeable employees  Existing permits and licenses  Existing suppliers & distributors  Evidence of financial results  Technology Copyright © 2011 Nelson Education Ltd.13-4

5. Tips to Get You Started   Determine which type of entrepreneur you are.   Fall in love with the business not the deal.   Stay true to your business values and vision.   Make sure you purchase a business you know how to run.   Look for a retiring entrepreneur who will stay on to help you. Above all, obtain legal & financial advice before you sign any contract. Copyright © 2011 Nelson Education Ltd.13-5

6. How to Buy & How Not to Buy   Analyze everything about a business, using every tool & business guru you can.   Do not buy for emotional reasons.   The best deals are seldom advertised.   Consider running your own advertisement. Copyright © 2011 Nelson Education Ltd.13-6

7. Get the Word Out   Spread the word that you are a potential buyer.   Contact everyone you can in your chosen industry.   Ask people in your network to help you with your search.   Advertise your needs in trade journals.   Check out the Internet.   Send letters of inquiry to potential sellers.   Knock on doors.   Check with business-opportunity brokers.   Talk with firms that deal in mergers and acquisitions.  Don’t rush. Copyright © 2011 Nelson Education Ltd.13-7

8. Outside Investigate the Business from the Outside  Does the business fit into the framework of your industry overview?  Diagram the area.  Take some photographs of the exterior.  Ask around. Interview neighbours and the customers.  Check out future competition.  Check with local authorities.  Know when you need outside help. Copyright © 2011 Nelson Education Ltd.13-8

9.  Get assistance from a business broker or financial advisor. If you use a broker, remember the broker represents the seller.  Study the financial history.  Compare what your money could do elsewhere.  Evaluate the tangible assets.  Talk to insiders.  Get a non-competition covenant.  Analyze the seller’s motives.  Examine the asking price.  Negotiate the value of good will.  Learn whether bulk sales escrow is needed. Copyright © 2011 Nelson Education Ltd.13-9 Inside Investigate the Business from the Inside

10. Before-You-Buy Checklist   Look for red flags (see Box 13.4)   How long do you plan to own this business?   How old is this business?   What is the life stage of the business?   Has your accountant reviewed the books?   Have you consulted a lawyer?   How long will it take to recover your investment?   What reasons does the owner give for selling?   Will the owner let you see bank deposit records?   Have you calculated utility costs?   What does a review of tax records tell you? For more checklist items, see Box 13.5 Copyright © 2011 Nelson Education Ltd.13-10

11. Prepare & Protect Yourself If you’re ready to buy: Prepare for negotiations  Your goal is the lowest price with the best possible terms.  Be prepared to negotiate the value of good will. If you’re asked to put down a deposit  Deposit the money in an escrow account.  Make your offer subject to the approval of a financial analysis of the business. Get professional help before you sign anything Copyright © 2011 Nelson Education Ltd.13-11

12. Negotiating the Price   What is the value of a business? What is a fair price?   Valuing a business is not an exact science.   The values of the of the seller and the buyer are arrived at from widely separated viewpoints.   Professional help in setting a fair price is highly recommended. Three common methods are:  Asset-based valuation  Ability to pay valuation  Earnings-assets valuation Copyright © 2011 Nelson Education Ltd.13-12

13. The Contract contract Standard items of the contract include:  A definition of what is being transferred.  Details of any leases or liabilities.  Method of payment.  Price adjustments.  Guarantees by the seller.  The seller's obligations.  How to deal with any losses or damages.  Clauses restricting the seller from competing.  A consideration of losses and damages. Copyright © 2011 Nelson Education Ltd.13-13

14. Chapter 13 helps you investigate the advantages & pitfalls of:  Buying a Business Copyright © 2011 Nelson Education Ltd.13-14 Business Plan Business Plan Building Block

15.   Why would you buy a business rather than start from scratch?   What are the potential “icebergs” (unknowns or major risks) in buying a business?   Establish the value of good will. Is the business worth this amount?   What would be the cost involved in starting from scratch versus buying a business? Copyright © 2011 Nelson Education Ltd.13-15 Your Business Plan Checklist for Your Business Plan

16. A Passionate Leap In this case study we learn from Mitch and Carolyn that passionate leaps require due diligence. Answer the Chapter 13 case study questions to learn:  Did Mitch and Carolyn have a good reason for buying the Copy Centre Store?  What inside and outside research questions should have Mitch and Carolyn asked before they purchased the business?  What “red flags” were raised by Frank, the seller of the business?  What was a fair purchase price of the Copy Centre Store? Copyright © 2011 Nelson Education Ltd.13-16 CaseStudy