chapter 5 buying an existing business 5-1 copyright ©2012 pearson education, inc. publishing as...

Chapter 5 Buying an Existing BusinessChapter 5 Buying an Existing Business 5-5-11Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice ©2012 Pearson Education, Inc. publishing as Prentice

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Buying an Existing Business


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Buying a BusinessBuying a Business

Average business acquisition Average business acquisition requires 19 months from starting requires 19 months from starting the search to closing the deal the search to closing the deal

Important questions:Important questions: Does the business meet your Does the business meet your

lifestyle and financial expectations?lifestyle and financial expectations? Do you have the ability to operate Do you have the ability to operate

the business successfully? the business successfully?


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AdvantagesAdvantages Business may continue to be Business may continue to be

successfulsuccessful Leverage the experience of the Leverage the experience of the

previous ownerprevious owner ““Turn key” businessTurn key” business Superior locationSuperior location Employees and suppliers in placeEmployees and suppliers in place


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Advantages:Advantages: Equipment installed Equipment installed Inventory in place Inventory in place Trade credit establishedTrade credit established Easier access to financingEasier access to financing High valueHigh value


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Disadvantages:Disadvantages: Cash requirementsCash requirements Business is losing moneyBusiness is losing money Paying for “ill will”Paying for “ill will” Unsuitable employees Unsuitable employees Unsatisfactory location Unsatisfactory location


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Disadvantages:Disadvantages: Obsolete equipment and facilitiesObsolete equipment and facilities Change and innovation challengesChange and innovation challenges Obsolete inventoryObsolete inventory Value of accounts receivableValue of accounts receivable


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DisadvantagesDisadvantages Obsolete equipment and facilitiesObsolete equipment and facilities Change and innovation challengesChange and innovation challenges Obsolete inventoryObsolete inventory Value of accounts receivableValue of accounts receivable Business may be overpricedBusiness may be overpriced


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How to Buy a BusinessHow to Buy a Business

Analyze your skills, abilities, Analyze your skills, abilities, and interestsand interests

Develop a list of criteriaDevelop a list of criteria Prepare a list of potential Prepare a list of potential

candidates candidates Remember the hidden market of Remember the hidden market of

companies that may be for sale companies that may be for sale but are not listed as “for sale”but are not listed as “for sale”

Rays Market


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How to Buy a BusinessHow to Buy a Business

Investigate and evaluate Investigate and evaluate candidate businesses candidate businesses and select the best oneand select the best one

Negotiate the dealNegotiate the deal Explore financing optionsExplore financing options Ensure a smooth Ensure a smooth

transitiontransition

Ray’s Market

Chapter 5 Buying an Existing BusinessChapter 5 Buying an Existing Business 5-5-1010Copyright Copyright ©2012 Pearson Education, Inc. publishing as Prentice ©2012 Pearson Education, Inc. publishing as Prentice HallHall

Five Critical Areas for Five Critical Areas for Analyzing an Existing Analyzing an Existing Business (continued)Business (continued)

5.5. Is the business financially sound?Is the business financially sound? Income statements and balance sheets Income statements and balance sheets

for the past three to five yearsfor the past three to five years Income tax returns for the past three to Income tax returns for the past three to

five yearsfive years Owner’s Compensation (and that of Owner’s Compensation (and that of

relatives)relatives) Cash FlowCash Flow


Determining the Value of a Determining the Value of a BusinessBusiness

Balance Sheet Technique Balance Sheet Technique Variation: Adjusted Balance Sheet Variation: Adjusted Balance Sheet

TechniqueTechnique Earnings ApproachEarnings Approach

Variation 1: Excess Earnings ApproachVariation 1: Excess Earnings Approach Variation 2: Capitalized Earnings ApproachVariation 2: Capitalized Earnings Approach Variation 3: Discounted Future Earnings Variation 3: Discounted Future Earnings

ApproachApproach Market ApproachMarket Approach


The Art of the DealThe Art of the Deal

Establish the proper mindsetEstablish the proper mindset Understand the rules of successful Understand the rules of successful

negotiationsnegotiations Develop a negotiating strategyDevelop a negotiating strategy Be creativeBe creative Keep emotions in checkKeep emotions in check Be patientBe patient Don’t become a victim Don’t become a victim

The Five Ps of NegotiatingThe Five Ps of Negotiating

Preparation - Examine the needsof both parties and all of the

relevant external factors affectingthe negotiation before you sit

down to talk

Poise - Remain calm during thenegotiation. Never raise your voice

or lose your temper, even if the situation gets difficult or emotional.It’s better to walk away and calm down than to blow up and blow

the deal

Persuasiveness - Know whatyour most important positions are,articulate them, and offer support

for your position

Persistence - Don’t give in at thefirst sign of resistance to your

position, especially if it is an issue that ranks high in your list of priorities

Patience - Don’t be in sucha hurry to close the deal that

you end up giving up much of what you hoped to get. Impatience is

a major weakness in a negotiation


Exit StrategiesExit Strategies

Straight business saleStraight business sale Sell controlling interestSell controlling interest Restructure the companyRestructure the company Use a two-step saleUse a two-step sale Family limited partnership (FLP)Family limited partnership (FLP) Establish an employee stock Establish an employee stock

ownership plan (ESOP) ownership plan (ESOP) International buyerInternational buyer

chapter 5 buying an existing business 5-1 copyright ©2012 pearson education, inc. publishing as...

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