HO CHI MINH CITY UNIVERSITY OF

FOREIGN LANGUAGES - INFORMATION TECHNOLOGY

FACULTY OF BUSINESS ADMINISTRATION

CHAPTER 5A:
BUYING A BUSINESS

LECTURER: VO VAN THANH TIN

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 CHAPTER 5A: BUYING A BUSINESS

2. Explain how to evaluate

a business that is for sale.

1. Describe the advantages and

3. Describe the methods
disadvantages of buying an ongoing
used in determining the
business compared with the other
price to pay for a business.
methods of small business ownership.

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 Team Member

Tuyết Nhi Khánh Vy Phú Thịnh Hoàng My Kỳ Anh

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 PURCHASING
AN EXISTING
BUSINESS.

TRẦN NGUYỄN TUYẾT NHI

 PURCHASING AN EXISTING BUSINESS

→Getting started with business activities

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 ADVANTAGES OF PURCHASING

1. Reduction of Risk 2. Reduction in Start-up time 3. Financing

4. Location 5. Established Marketing Structure 6.Cost

7. Existing Employees 8. More Opportunities to be creative 9. Reduced Number of

Competitors

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 DISADVANTAGES OF PURCHASING

1. Marginal Success Record 2. Physical Facilities 3. Personnel

4. Inventory 5. Financial Condition 6. Market and

Customers

7. Overvaluing 8. Paying Too Much for Goodwill

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 EVALUATING A BUSINESS FOR SALE

◈ When deciding to buy or sell a business, it is imperative that we evaluate the

business accurately through factors

◈ Potential buyers should consider several key areas of the business before making
a buying decision.

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 INDUSTRY ANALYSIC

Sales and profit trends of industry

• The level of competition, the number of competitors entering or leaving the
industry, and the nature of the competitors' strategies
• The state of the economy in the market sector and the impact of changes in the
economy on the industry
• Legal restrictions currently affecting business operations as well as pending
relevant legislation or political pressure
• Social concerns that may adversely affect the industry in the future

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 INDUSTRY ANALYSIC

The previous Owner

 Why do business owners sell businesses?
 Is the business owner famous and
respected in society? If so, does this
reputation contribute to the success of the
business? And when the business owner
leaves, will success continue to stick?
 Is the current owner willing to support
and share experiences and give advice
to the new owner?
 What will the former owner do after
selling the business?
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 INDUSTRY ANALYSIC

Validity of Financial Statements

Financial statements are also one of the important factors in deciding whether to buy
a business or not
• Verify information of financial statements
• Require audited financial statements
• Sellers present income tax receipts, sales receipts and any other financial records
available

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 Financial Performance of the Business

Assess the Financial Performance

of the Business:
◈ Income statements
◈ Balance sheets
◈ Cash flow statements

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 Financial Performance of the Business

Three commonly used indicators to reflect the core issue:

 Return on total assets (ROA): How much profit will the property investment generate before
interest and taxes?

 Return on sales (ROS): How much profit is earned from net sales in the period?

 Return on equity (ROE): How much profit an equity investment generates after income
taxes?

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 Financial Performance of the Business

◈ Consider trends in profits,

costs, revenue, and so forth.
=> Ideally, the business has been
experiencing growth in revenue
and profits.

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 Financial Performance of the Business

◈ The current owner is incompetent or lacks knowledge about the industry, and the purchaser
has the competence and knowledge to turn the business around.
◈ The industry is, or will shortly be, in a growth position that might improve the firm's
profitability or resale value.
◈ The major contributor to the firm's unprofitability is lack of capital leading to high interest
costs, and the purchaser has the needed capital to inject into the business.

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 CONDITION OF THE ASSETS

Several business assets may require thorough inspection and, for non-liquid
assets, possibly an appraisal by an independe appraiser.

Liquid Assets Building and Equipment Real Estate

Inventory Systems and Processes Goodwill

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 QUALITY OF PERSONNEL

 An important factor is personnel

reaction to the new owner after the
purchase.

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 QUALITY OF PERSONNEL

What is the staff turnover?

Peter Bryne, CEO of Edmonton-based Andersons Liquor, says he looks at the staff of all
the firms he is buying.
 Looking for talent
 Looking for managerial gaps

 Bryne has acquired 38 businesses, and sales

have grown by $40 million over the past eight years

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 EXTERNAL RELATIONSHIPS SUPPLIES AND CUSTOMERS

“Customer is god”

 Relationships Supplies And Customers is very important for every business

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 CONDITION OF THE ASSETS
FOR EXAMPLE

A company that has strong

Requests a customer list of
You are considering
any firm and then meets with
acquiring the company.
some of the customers
customer relations is an
indication of good
management and
employees.

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 DETERMINING THE PRICE OR VALUE OF BUSINESS

1. Market value
2. The earnings potential of the business as a basis for determining the
value
3. Asset value
4. Combination of asset value and earning potential

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 MARKET VALUE
Market value in valuation is the estimated exchange for an asset at the time of valuation between a willing seller
and a willing buyer..

Exchange
Expected Time Seller Buyer Public optional
amount

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 EARNINGS VALUE

1. What is “Earning Potential”?

2. Valuing a Business: Capitalization of Earnings
Method & Times Earing Method

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Earnings Value

1. EARNINGS POTENTIAL

In Business
- Reflects the largest possible profit
that a business can make.
- Refers to the potential gains from
dividend payments and capital
appreciation shareholders might
earn from holding a stock.
Individual
- Identify the amount of money that
an individual can earn from a
specific business transaction or
throughout his or her years as a
member of the work force

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 Earnings Value

Capitalization of Earnings Method DISADVANTAGES

 Extraordinary events can occur,

Calculating the capitalization of earnings helps investors determine
the potential risks and return of purchasing a company. compromising earnings and therefore
affecting the investment's valuation.

 Insufficient data for a start-up

valuation
Capitalization of Earnings Formula:

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Earnings Value

DISADVANTAGES
Time Earnings Method
 Revenue does not mean profit

 Example: A company may be

 This method used to determine the maximum value of a company.
experiencing 10% year-over-year
growth in revenue, yet the company
 Business owners might determine the value of the company to aid in
may be experiencing 25% year-over-
financial planning or in preparation for selling the business.
year growth in expenses.
 This method is influenced by a number of factors including the
macroeconomic environment, industry conditions, etc.

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 ASSET VALUE

◈ Book Value
◈ Replacement Value

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Asset Value

◈ BOOK VALUE

 The value of a business as determined by the balance sheet

 The book value is the basis for determining the amount of money each shareholder will receive

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Asset Value

◈ REPLACEMENT VALUE

 The amount required to replace an existing asset with an asset of equal or similar value at current
market prices
 For example:

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 COMBINATION METHODS

Analytical approach Historical

- Adjusted net worth
- Past earnings
- Future earnings

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Combination Methods

◈ ANALYTICAL APPROACH
 Adjusted net worth

Adjusted net worth = Market value of tangible assets – Liabilities + Goodwill

If the firm's assets are worth $220,000 with liabilities of $60,000, goodwill is $40,000
=> Adjusted net worth is: $220,000 - $60,000 + $40,000 = $200,000

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Combination Methods

◈ ANALYTICAL APPROACH

 Past earnings

To arrive at a value for past earnings, these earnings (net income) are capitalized by multiplying
earnings by a number usually between 5 to 10
If average past earnings are $40.000 and a capitalization rate of 8 is used, the earning value is
$320.000

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Combination Methods

◈ ANALYTICAL APPROACH

 Future earnings

A future earnings value is based on projections of future cash flows

If the business earns $40.000 today and the discount factor of 10% is applied, the future
earnings flow makes the business worth $400.000 today.

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Combination Methods

◈ ANALYTICAL APPROACH

In the above examples, if a 50% emphasis is used for assets and 25% for each of the
earnings factors is used, the combination value for this business would be:
($250.000 x 0.5) + ($320.000 x 0.25) + ($400.000 x 0.25) = $280.000

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 COMBINATION METHODS

Analytical approach Historical

The historical method used historical

experience in determining relevant
indicators of the components of the value
of a business

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THANK YOU
FOR
LISTENING