Professional Documents
Culture Documents
Buying an Existing
Business
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Advantages of Buying an Existing Business
A successful existing business may continue to be
successful
Business owner hits the ground running (saves time, cost and
energy)
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Disadvantages of Buying an Existing
Business
Previous owner may have created ill will (socially negative
company)
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Disadvantages of Buying an Existing
Business
Change and innovation are difficult to implement
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STEPS IN AQUIRING A BUSINESS
1. Analyze your skills, abilities and interests
How much time, energy and money can you put into the
business?
What business skills and experience do you have?
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Investigate Candidate Businesses
What are the company strengths and weaknesses (SWOT
analysis)
Is the company profitable? What is the overall financial
condition?
What is the cash flow cycle? How much cash will the
company generate?
Who are the major competitors?
How large is the customer base? Is it growing or shrinking?
Are the current employees suitable? Will they stay?
What is the physical condition of the business, equipment
and the inventory?
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Explore financing options
Putting a price on an existing business is hard (good will – hava parası)
Seller will be likely to provide financing options- eg. Down payment with
installements
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Evaluating an Existing Business – The Due
Diligence Process
1. Why does the owner want to sell?
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Why does the owner want to sell?
Every prospective business buyer should investigate
the real reason the business owner wants to sell!
Most common reason for selling is boredom and
burnout!
Might sell because a new powerful competitor will
enter the market soon
Businesses do not last forever. The owner might have
seen that the end is near.
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Condition of the Business
What is the physical condition of the business?
Accounts receivable
Lease arrangements
Business records (can be a valuable source into the business in detail)
Intangible assets (does the sale include any intangibles?)
Location and appearance (check for its suitability several years in
the future – any new buildings planned)
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Products and Services
What is the potential for the company’s product or
services
Competitor analysis (Which ones have survived and why? How are
their sales volumes? How well are they orginzied? What are their reputations?
Strengths and weaknesses? What competitive edge do they have?)
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Legal Aspects
There are several traps and pitfalls when legal aspects are in
question. These are;
Liens: a creditor’s claim against an asset. (To avoid it, buyers usually include a
clause in the agreement that anything not shown on the balance sheet is the responsibility of the
seller)
Bulk Transfer: protects the buyer of a business’s assets from the
claims unpaid creditors might have against these assets. (if the seller
owes money to creditors and does not pay with the money acquired from the sale of the business,
then the creditors will be able to sell the assets of the business and get their money)
Due-on-sale clause: loan 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.
Restrictive Covenant: an agreement between a buyer and a seller
in which the seller agrees not to compete with the buyer within a
specific time period and geographic area. 17
Financial soundness of the Business
Income statement and balance sheet for the past 3-5
years
Income tax returns for the past 3-5 years
Owners compensation
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Determining the value of a Business
1-) Balance Sheet Technique: a method of valuing a
Business based on the value of the company’s net worth
(net worth = total assets – total liabilities)
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Determining the value of a Business
2-) Earnings Approach: a method of valuing a business
that recognizes that a buyer is purchasing the future
income (earnings) potential of a business.
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Determining the value of a Business
3-) Market Approach: a method of valuing a business
that uses the price/earnings ratio if similar, publicly held
companies to determine value.
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Understanding the Seller’s Side
Structuring the deal – minimize legal costs
Exit strategy options;
a) Straight business sale
b) Form a family limited partnership (transfer to children)
c) Sell a controlling interest (still make money but no control – a little like
retirement)
d) Restructure the company (form a new business and and make a leveraged
buyout with an investor)
e) Sell to an international buyer (chance for foreign competitors to move in)
f) Use a two step sale (buys between 20-70% at the start and gets the rest in the
specified time period)
g) Establish an employee stock ownership plan (ESOP)
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Negotiating the Deal
Get the highest price possible
Sever all responsibility for the company’s liabilities
Avoid unreasonable contract terms
Maximize the cash gotten from the deal
Minimize the tax burden
Make sure the buyer will be able to make all the future
payments
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THANK YOU
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