Chapter 7

The Purchase Alternative: How Do I Buy or Buy

Into an Existing Business?

Copyright © 2012 Pearson Canada Inc.

 Chapter 7 Learning Objectives
1. Identify advantages of buying an existing
business
2. Discuss risks of buying an existing business
3. Explain the use of a business assessment
checklist
4. Describe the process of buying into a
business
5. Describe the process of breaking off a
business

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 2

 Chapter 7 Learning Objectives cont’d.
6. Explain the difference between purchasing
shares or assets
7. Identify major provisions in a purchase
agreement
8. Define ratio analysis
9. Apply return on investment to pricing a
business
10. Distinguish between asset and income
methods of business valuation

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 3

 Chapter 7 Learning Objectives cont’d.

11. Identify asset method techniques

12. Identify income method techniques
13. Define cash skimming
14. Outline a method for negotiating the price
of a business
15. Prepare alternative components of the
business plan related to buying a business

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 4

 Is Buying a Business Right for Me?
 The decision to buy
 vs. starting a new business
 vs. buying a franchise
 Circumstances / Opportunities
 Retirement or death
 ESOP
 Management buyout

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 5

 Employee Share Ownership Program
 employee stock ownership plan (ESOP or
employee share ownership program)
 Allows employees to purchase shares in the
company where they work as part of their
retirement packages. Shares may be held
within pension plans or registered retirement
savings plans (RRSPs), with the associated tax
benefits. In some cases, provincial tax credits
are also available.

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 6

 Management Buyout

A group of employees, led by a management

team, arranges to purchase a controlling
interest in a company. Some merchant bankers
and venture capital funds specialize in funding
this type of purchase.

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 7

 Salon and Esthetic Studios Now Available in
Mississauga
Description
Pro beauty suites has turn key fully furnished salon and esthetic suites available for any
hairstylist or esthetician looking to start their own business.

We are located at 298 Enfield place directly across the road from Square 1 in the Sussex building
in the Mississauga City center.
$300 weekly plus HST (all utilities including wifi and laundry are included).
No extra fees or commissons.
24 hour access-7 days a week.
Free underground parking for clients.
All beauty and health professionals welcome.
For more information or to book a tour, call or text 905-515-5562
___________________
Probeautysuites
Probeautysuites is a Canadian owned and operated business serving the professional salon
industry since 2014.

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 8

 Salon and Esthetic Studios Now Available in
Mississauga

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 9

Busy Nails Salon
NK Nails & Spa is a nice small nails salon which has 4 spa pedicure chairs, 4 manicure tables, and
one waxing room. It is located in Georgetown, Ontario with very good reputation and many loyal
clients.
Aesthetics/Beauty
Halton Hills, ON
$25,000 CAD
Halton Hills, ON Aesthetics/Beauty Business For Sale Details
Independent
Legal Body:
Sole Proprietor
Established In:
2014
Gross Revenue:
$ 150,000
Annual Earnings:
$ 90,000
Land/Building Included:
No
Rent/Lease Amount:Financing Available:
No
Buyer does not need to have experience owning & operating a business or franchise.
Buyer needs specific industry experience.
*DISCLAIMER: BuyAndSellABusiness.com
Copyright © 2012 Pearson Canada Inc. assumes no responsibility for the accuracy of any
Chapter 7 - 10
Annual Return On Equity Calculator
Annual Earnings:

$90,000

Liquid Cash Invested:

0
Borrowed Amount:

0
Interest on Borrowed Amount:

0
%
Copyright © 2012 Pearson Canada Inc. Chapter 7 - 11
CALCULATE
 Turnkey Medical Spa
Established in 2005 from a home-based space, the business quickly took off to enter a
professional venue now into its 16th year. Specializing in cosmetic personal care such as
permanent hair removal, medical-grade facial peels, and skin care, skin correction, and
much more. This successful business has been thriving due to high levels of integrity,
dependability, reliability, and attention and care for customers that is unmatched. An
astounding reputation with turnkey practises in place make this perfect for someone
looking to get into the industry. Opportunity for growth and increased revenue from
service expansion and social media marketing. Word of mouth referrals from the clinic's
many loyal clients bring people of all ages through the door. Seller is looking to retire
and wants to pass the business into good hands. This one isn't going to last long! Listing
ID: 3393
Aesthetics/Beauty
n/a, ON
$145,000 CAD
n/a, ON Aesthetics/Beauty Business For Sale Details

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 12

 Merits of Buying
 Methods and procedures
 Defined markets
 Established customers
 Established suppliers
 Trained employees
 Goodwill

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 13

 GOODWILL

Goodwill
The amount paid for a business in excess of
the value of its assets. The value given to a
business’s ability to make profit because of its
intangible assets, such as having an established
customer base.

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 14

 Risks of Buying
 Overvalued assets
 Redundant assets
 Assets owned by a business that are not necessary for it
to produce profit at current or projected levels
 Lease problems
 Loss of key employees
 Location / site changes
 Image
 Contract transferability

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 15

 What’s Involved in Buying a Business?

 Assessing the business

 Minimizing risk
 Checklist
 Reason for selling

 NOTE: Checklist PDF available on portal

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 16

 What’s Involved in Buying a Business? cont’d.

 Buying in
 vs. taking over
 Partnership agreement
 Breaking off a piece of a firm
 Core business
 Outsourcing
 Mission statement

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 17

 Buying into a Company vs Taking over
a Company
 buying into a company
 Purchasing less than 50 percent ownership
of a company.
 taking over a company
 Purchasing more than 50 percent ownership
of a company.

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 18

 Core Business

The particular products and services and

market segments that produce the majority of
a company’s profit.

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 19

 Outsource

Find suppliers outside of a company to

provide certain products or services that the
company formerly produced internally.

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 20

 What’s Involved in Buying a Business? cont’d.

 Intermediaries
 Business brokers
 Real estate brokers
 Listing agents

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 21

 What Should the Purchase Agreement Include?

 Buying what?
 Shares
 Assets
 Liens
 Warranties

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 22

 Lien and Warranty
 lien
 The right of a creditor to take over a
particular asset if a particular debt has not
been paid as agreed.
 warranty
 The legal promise that an asset will be
delivered in the condition described in a
contract.

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 23

 What Should the Purchase Agreement Include? cont’d.

 Payment options
 Non-competition
 Disclosure
 Continuing assistance

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 24

 How Much Should I Pay?
 Valuation concepts
 Ratio analysis
 Profitability
 Liquidity

 Efficiency

 Debt management

 Cash management

 Rate of return
 Present value

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 25

 How Much Should I Pay?
Valuation Concepts
 Ratio analysis
 Profitability
 Liquidity
 Efficiency
 Debt management
 Cash management
 Rate of return
 Present value
Copyright © 2012 Pearson Canada Inc.
Profitability
Return on Equity= Net Profit
Owners’ Equity
Liquidity
Current Ratio= Current Assets
Current Liabilities
Management Efficiency
Return on Assets= Net Profit
Total Assets
Gross Margin= Gross Profit
Sales
Debt Management
Debt to Equity= Total Liabilities
Owners’ Equity
Cash Management
Avg Collection Period = Accounts Receivable
Average Sales per Day
Chapter 7 - 26
 Valuation Methods
 Asset methods
 Liquidation value (failing business)
 Book value (assets minus liabilities or Equity)
 Adjusted book value (adjust for fair market
value)
 Replacement value (compare to new start-up)

Going Concern
An operating business that is expected
to continue operating into the
foreseeable future

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 27

 Valuation Methods cont’d.
 Income methods
 Capitalized earnings
 Capitalized cash flow
 Discounted cash flow
 Rules of thumb
 Price multipliers
Rule of thumb pricing
Using a ratio showing a relationship between the
average price of a business in a particular field and
some other factor such as profit to calculate the
price for a specific company

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 28

 Weighted Average Business Value
A-BRAND SPRAY TAN EQUIPMENT DISTRIBUTION WEIGHTED AVERAGE BUSINESS VALUE

Valuation Technique Business Value X Weighting = Weighted Value

Asset Methods Liquidation Value $ 52,757 1 $ 52,757
Book Value $ 159,100 5 $ 795,000
Adjusted Book Value $ 173,727 7 $ 1,216,089
Replacement Value $ 209,010 4 $ 836,040
Earnings Methods Capitalized Earning $ 200,000 5 $ 1,000,000
Capitalized Cash Flow $ 280,000 6 $ 1,680,000
Discounted Cash Flow $ 184,145 10 $ 1,841,450
Earnings Multiplier $ 198,000 8 $ 1,584,000
Totals 46 $ 9,005,836
Weighted Average Business Value $ 195,779.04

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 29

 Price Determinations
 Multiple valuations
 Weighted averaging
 Negotiation
 Setting a range Skimming Cash
The illegal removal of unreported
 Asking price cash from a business in order to
 Tactics avoid paying tax on that income

 Dangers
 Cash skimming
 Business potential

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 30

 The Business Plan Alternative Module:
Business Purchase

 Company history
 Assessment of the opportunity
 What is being purchased?
 Intermediaries
 Financial analysis
 Business value
 Negotiation plan

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 31

 Chapter 7 Summary
 Is buying a business right for me?
 What’s involved in buying the business?
 What should the purchase agreement
include?
 How much should I pay?

Copyright © 2012 Pearson Canada Inc. Chapter 7 - 32