MAN 470 – Berk TMAN 470 – Berk TUNCALIUNCALI1

Things to consider;

Each year more than 500,000 businesses are bought and sold in the US

Due diligence is just as time consuming as a business plan for a start up business

Is this a good way? What do you think?

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Advantages of Buying an Existing BusinessA successful existing business may continue

to be successful

May already have the best location (Location, location location)

Employees and suppliers are established

Equipment is installed and productive capacity is known

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Advantages of Buying an Existing BusinessInventory is in place and trade credit is established

Business owner hits the ground running (saves time, cost and energy)

New owner can use the experience of the previous owner

Easier financing (usually easier since there is something to show for the investment – not just a business plan)

It’s a bargain (may need to sell in a rush)4

Disadvantages of Buying an Existing BusinessPrevious owner may have created ill will (socially

negative company)

It’s a loser (never profited)

Employees inherited with the business may not be suitable

The business location may have become unsatisfactory

Equipment and facilities may be obsolete or inefficient

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Disadvantages of Buying an Existing BusinessChange and innovation are difficult to

implement

Inventory may be outdated or obsolete

Accounts receivable may be worth less than face value

Business may be overpriced6

STEPS IN AQUIRING A BUSINESS

1. Analyze your skills, abilities and interests

2. Prepare a list of potential candidates

3. Investigate those candidates

4. Explore financing options

5. Ensure smooth transition7

Analyze your skills, abilities and interestsWhat business activities do you enjoy most? Why?

Which markets offer the greatest potential for

growth?

What do you expect to get out of the business?

How much time, energy and money can you put into

the business?

What business skills and experience do you have?

How much risk are you willing to take?

What size company do you want to buy?

Is there are particular geographic location you desire?

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Prepare a list of potential candidates

Bankers (ask them – they might now companies who are in fınancial trouble and looking to exit.)

Accountants Investment bankersSuppliers/distributors/customersNetworking – social and business contactsNewspapers , internet and trade journals

listing businesses for saleKnocking on the doors of businesses even if

they are not advertised as being for sale

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Hidden Market: Low profile companies that might be for sale but are not advertised as such.

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Investigate Candidate BusinessesWhat 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

Ensure smooth transition

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

There are always surprisesConcentrate on communicating with employeesBe honest with employeesListen to employeesConsider asking the seller to provide a limited

consultation period

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Evaluating an Existing Business – The Due Diligence Process1. Why does the owner want to sell?

2. What is the physical condition of the business

3. What is the potential for the company’s

products or services?

4. What legal aspects should you consider?

5. Is the business financially sound?

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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 BusinessWhat is the physical condition of the

business? Accounts receivableLease arrangementsBusiness 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 ServicesWhat is the potential for the company’s

product or services

Customer characteristics (Who are the customers? Why do they buy? What are their needs, how often they buy? How loyal are they?)

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 AspectsThere 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 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.

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Financial soundness of the BusinessIncome statement and balance sheet for the

past 3-5 yearsIncome tax returns for the past 3-5 yearsOwners compensation

Skimming: Taking money from sales without reporting

it as income.

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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)

a) Adjusted Balance Sheet Technique: a method of valuing a business based on the market value of the company’s net worth (net worth = total assets – total liabilities)

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Determining the value of a Business2-) Earnings Approach: a method of valuing a business that recognizes that a buyer is purchasing the future income (earnings) potential of a business.

a) Excess Earnings Approach: combines the values of businesses existing assets and an estimate of its future earnings potential.

b) Capitalized Earnings Approach: a method of valuing a business that divides estimated earnings by the rate of return the buyer could earn on a similar risk investment. (oppurtunity cost alternative)

c) Discounted Future Earnings Approach: a method of valuing a business that forecasts a company’s earnings several years into the future and then discounts them back to their present value. (time value of money – Dollar today is better than a Dollar tomorrow)

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Determining the value of a Business3-) 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 SideStructuring the deal – minimize legal costsExit strategy options;a)Straight business saleb)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 DealGet the highest price possibleSever all responsibility for the company’s

liabilitiesAvoid unreasonable contract termsMaximize the cash gotten from the dealMinimize the tax burdenMake sure the buyer will be able to make all

the future payments

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THANK YOU

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