Chapter 7

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GOOD IDEA OR BAD IDEA?

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 Buying an existing business can help reduce risk for the
entrepreneur
But, take your time!
Conduct a thorough analysis of the business and the
opportunity it presents
Important questions:
Does the business meet your lifestyle and financial
expectations?
Do you have the ability to operate the business
successfully?

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 Business may continue to be successful
Leverage the experience of the previous owner
Owning a business guarantees a job
The turnkey business
Superior location
Employees and suppliers in place
Equipment installed with known production capacity
Inventory in place
Trade credit established
Easier access to financing
High value

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Cash requirements
Business is losing money
Paying for “ill will”
Unsuitable employees
Unsatisfactory location
Obsolete or inefficient equipment and facilities
Customers may be loyal to previous owner
Change may be challenging to implement
Obsolete inventory
Value of accounts receivable
Business is overpriced

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Four steps to conduct an effective search for the
right business to buy:

1.Self-Inventory
Conducting a self-inventory beforehand will help
the entrepreneur develop a list of criteria that a
company must meet before it becomes a
purchase candidate

2.Develop a List of Criteria

Identify the characteristics of the “ideal business”
to focus on the viable candidates

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3. Potential Candidates
Begin the search using:
The Internet
Bankers
Accountants
Attorneys
Investment bankers
Trade associations
Contacting owners
Newspapers and trade journals
Networking

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4. Investigation
Research the customer base
Existing and potential customers
Competitor analysis
Direct competitors
Level of competition
Motivation of the seller
Real reason for selling
Review finances
At least three years of performance

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 Methods for Determining the Value of a Business
Assessing tangible assets is usually straightforward
Valuing intangible assets is difficult
Goodwill
No single best method for determining value
Consider using several
Deal must work for both parties

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 The deal stage includes:
Valuing the business
Formalizing the financing of the purchase
Negotiating details
Letter of intent
Due diligence

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► The first approach is determining a firm’s net
worth or stockholders’ equity (What a firm owns)
► The second approach is based on the future
benefits a firm’s owners may derive through net
profits (What a firm earns)
► The third approach is to divide the market price of
the firm’s common stock by the annual earnings
per share and multiply this number by the firm’s
average net income for the past five years (What
a firm will bring in the market)

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 The best method?
 There is no single best method
 The final price will be based on the valuation
used and the negotiating skills of both parties

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 To smooth the transition, a buyer should:
Concentrate on communicating with employees
Be honest with employees
Listen to employees
Devote time to selling the vision for the
company to key stakeholders
Consider asking the seller to serve as a
consultant until the transition is complete

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