Entrepreneurship and Small Business

Management

Lecture 9
Buying an existing business
 The scope for buying an existing business
 Purchase options-the options for buying a business
depend on:
 The sellers- who range from individuals to large
corporations
 The status of the business-which may vary from a
successful to a failed enterprise or franchise
 The buyer-who may either purchase the business outright
or opt to become a partner in the business with existing
managers and shareholders
Types and motives of sellers
Small firms
Owner managers have a variety of reasons for selling
their businesses including:
Recognition of lack of success and low probability of
success in the future
Problems not related to the business which force its sale
including health, marital break-up etc
Other business activities which make a sale desirable
Desire for a career change out of small business
Contd.
 Larger firm
 Financial targets set by the parent company are not consistently not
met by the small business unit
 The parent company adopts a new strategy, which means that the
small business unit no longer contributes to meeting group
objectives
 The parent company needs to raise money for other activities
because of financial difficulties or for other reasons
 The parent company is itself taken over and the new owners do not
see the small unit as contributing to their overall strategy, or they
may wish to sell parts of the acquisition to help fund the purchase
 Legislation may force a large company to sell some parts of its
business
Contd.
 Forced sales
 The forced sale of a business and its assets takes
different forms dependent on the legal status of the
failed company
 Liquidation-this is the legal process of closing down a
bankrupt company and the sale of its assets to pay off as
many debts as possible
 Receivership-allows more possibilities to acquire the
ongoing business of a company in trouble, unlike a
liquidator , a receiver can keep a business trading if it is
considered in the best interest of the creditors
 Company administration – Insolvency Act
Small business buyers
 Outright purchase –buying an ongoing business as a
means of market entry

 Buy-in-into an existing business means that one becomes a

new partner or shareholder with those that already exist

 Buy-out-refers to the purchase of a business ,or a

significant part of it, by its existing management.

 Buy-in management buy-out (BIMBO) is a variation to

buy-out, it combines outside and inside management in the
purchase of a company
Assets for sale
 The assets of a business for sale, whether it is a sole trader ,
partnership or limited company ,will be the focus of
attention of any prospective buyer
 Tangible assets
 Freehold property
 Leasehold property
◦ Transferability-most leases are not automatically transferable
◦ Term of the lease-most commercial properties are held on
shorter terms than residential properties
◦ Repairs and dilapidations-many commercial leases are on a
full repairing basis
◦ Rent and provision for reviews-where the rent due on a
property is considered to be below market levels , then this
will add to the value of a lease
Contd.
 Furniture, fixtures and fittings
 Buying an existing business implies that any
premises from which it operates will be fitted out and
furnished
 A freehold or leasehold property, when taken on from
new ,is usually a bare shell, adaptable to the use of the
incoming tenant
 When a business is to be sold fixtures and fittings are
an asset whose value depends on their extent,
condition and appropriateness
Contd.
 Machinery , equipment and vehicles
 The machinery and equipment necessary to perform
the functions of a business will invariably be acquired
with it.
 Type and extent will obviously depend on the business
and could include
◦ Manufacturing plant- printing presses, automated
packaging machinery
◦ Commercial equipment
◦ Office equipment
◦ Vehicles- delivery vans, fork-lift trucks
Contd.
 Alternatives for evaluating these types of assets all have
flaws:
 Written down book value-this will tend to be arbitrary
depending on the depreciation policies of the business
 Market value-could be a pessimistic figure as these assets
tend to be worthless when sold individually and not as part
of an ongoing business
 Replacement value-is a useful measure to appreciate what it
might cost to start up an equivalent new business, but it will
not take the age and useful life of the equipment
 Original cost- useful measure to have in valuing these fixed
assets but will not take account of inflation in new prices,
nor devaluation of an asset through age
Stock and work in progress
Stock and work in progress
Raw materials stock
Work-in-progress
Finished stock
Debtors- companies or people who still owe money to
a business for sale, as with stock, debtors will be
valued on the date of transfer of the business to
represent an up-to date figure.
Intangible assets and goodwill
Image and reputation
Employees
Intellectual property
Patents
Copyright
Trademarks
Design right
Customers
Goodwill
Liabilities to be avoided

Trade creditors
Bank and other borrowings
Tax, VAT,PAYE and National insurance contributions
Lease and hire purchase agreements
Guarantees or mortgages on assets
For and against buying an existing
business
For
 Overcomes barriers to
market entry
 Buying immediate
turnover and income
 Buying market share
 Existing assets of property
, equipment and staff
 Goodwill with existing
customers
 Existing track record
 Insider knowledge
Against
Buying possible
liabilities with assets
Uncertainty over
records
Risk in tangible assets
Historical problems in
the business
Not all my own work
Planning a new venture: buying an existing
venture

Consider type of business you consider buying

Obtain information on suitable businesses for sale
Evaluate the advantages and disadvantages of the
specific business(es)
Decide if this is the appropriate route to market entry
for you and your business opportunity
Exercise
Compared to a start-up or franchise, what are:
i) the advantages of buying an existing business, and
ii) the disadvantages?

------Thank you ---------