Success existing businesses often continue to be successful. Superior location Employees and suppliers are in place. Installed equipment with known production capacity Inventory in place
Trade credit is established The turnkey business The new owner can use the experience of the previous owner Easier access to financing High value
Existing Business Is A Smart Investment - Buying An Existing Business Pdf title=Why Buying An Existing Business Is A Smart Investment style=width:100%;text-align:center; onerror=this.onerror=null;this.src='https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcRMC9TF-0UrvCylYGZFDjs13UWS2bBDbG2r8oPCizyl9q5h93O_bm7f_szMbw_BQeuJ1TU&usqp=CAU'; />
Cash requirements The business is losing money. Paying for ill will Employees inherited with the business may not be suitable. Unsatisfactory location
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Obsolete or inefficient equipment and facilities The challenge of implementing change Obsolete inventory Worthless accounts receivable may be worth less than face value. The business may be overpriced.
Conduct a self-inventory, objectively analyzing skills, abilities, and personal interests to determine the type(s) of business that offer the best fit. Develop a list of the criteria that define the “ideal business” for you. Prepare a list of potential candidates that meet your criteria.
Thoroughly investigate the potential acquisition targets that meet your criteria. This due diligence process involves practical steps, such as analyzing financial statements and making certain that the facilities are structurally sound. The goal is to minimize the pitfalls and problems that arise when buying any business.
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Explore various financing options for buying the business. Negotiate a reasonable deal with the existing owner. Ensure a smooth transition of ownership.
The process of reviewing, investigating, and analyzing the relevant details about the top acquisition candidates to determine which one best meets a buyer’s purchase criteria.
Motivation. Why does the owner want to sell? Asset valuation. What is the physical condition of the business? Market potential. What is the potential for the company’s products or services? Legal issues. What legal aspects of the business represent known or hidden risks?
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Due-on-sale clause: a local 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.
Covenant not to compete (restrictive covenant or non- compete agreement): an agreement between a buyer and seller in which the seller agrees not to compete with the buyer within a specific time and geographic area.
17 Financial Condition Income statements and balance sheets for the past three to five years Income tax returns for the past three to five years Owner’s compensation (and that of relatives) Cash flow
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Adjusted Balance Sheet Technique A method of valuing a business on the basis of the market value of the company’s net worth (net worth = total assets – total liabilities)
Balance Sheet Technique A method of valuing a business on the basis of the value of the company’s net worth (net worth = total assets – total liabilities)
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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To make this website work, we log user data and share it with processors. To use this website, you must agree to our Privacy Policy, including cookie policy.Some entrepreneurs choose to buy existing businesses rather than start their own. In a typical year, between 500, 000 to one million businesses are bought and sold. Purchasing an established business can offer many advantages—if the entrepreneur knows what they are really buying and if the business is priced right.
People buy businesses for different reasons. We can categorize buyers into four areas: Main street buyers Corporate refugees Serial entrepreneurs Financial buyers
A prospective owner must ask several key questions before buying an existing business. Is it the right type of business for the market? What experience do I bring to the venture? What is the success potential? What changes are needed—and how extensive are they—to realize the full potential of the value of the business?
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Advantages of buying an existing business include: A successful existing business may continue to be successful. An existing business may already have the best location. Employees and suppliers are established. Equipment is installed and productive capacity is known. Inventory is in place and trade credit is established. The new business owner hits the ground running. The new owner can use the experience of the previous owner. Easier financing. It's a bargain (maybe?).
Disadvantages of buying an existing business include: It's a loser (maybe?). The previous owner may have created ill will. The business location may have become/is unsatisfactory. Equipment and facilities may be obsolete or inefficient. Change and innovation are difficult to implement. Inventory may be outdated or obsolete. Accounts receivable may be worth less than face value. Changes may be difficult to implement. Inventory may be stale. Accounts payable may be worth more than face value. The business may be overpriced.
More than half of business acquisitions fail to meet the buyers’ expectations. The correct way to evaluate a match is to: Analyze your skills, abilities. Develop a list of criteria Prepare a list of potential candidates. Investigate and evaluate candidate businesses and evaluate the best one. Explore financing options—the seller is a potential source. Negotiate a reasonable deal with the owner Ensure a smooth transition—communicate with employees, listen and ask questions.
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A potential buyer should explore a business opportunity by examining five critical areas. 1. Motivation: Why does the owner want to sell? There are many reasons business owners plan to sell their companies and knowing that motivation will be beneficial to the buyer.
2. Asset valuation: Assess the physical condition of the business: Accounts receivable Lease arrangements Business records Intangible assets Location and appearance 3. Market potential: What is the potential for the company's products or services? Product line status Potential for company’s products or services Customer characteristics and composition Competitor characteristics and composition
4. Legal issues: What legal aspects should you consider? Liens Bulk transfers Contract assignments Covenants not to compete Ongoing legal liabilities 5. Financial condition: Is the business financially sound? Income statements and balance sheets for past 3-5 years Income tax returns for the past 3-5 years Owner's compensation (relatives, skimming) Cash flow
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The acquisition process involves seven key steps: Identify and approach the candidate Sign the nondisclosure statement Sign the letter of intent (LOI) Buyer’s due diligence investigation Draft the purchase agreement Close the final deal Begin the transition
Business valuation is partly an art and partly a science. Establishing a price for a privately held business may be difficult due to the nature of the business itself. Goodwill may be a key consideration
There are a few rules for establishing the value of a business: There is no single best method to determine a business's worth. The best way is to compute the value using different methods and choose the one that justifiably results in a realistic value. Both parties, buyer and seller, must be satisfied with the deal. Both the buyer and seller should have access to business records. Valuations should be based on facts, not fiction. Both parties should deal with one another honestly and in good faith.
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Business valuation techniques include: The basic balance sheet methods offer two techniques: The balance sheet technique Adjusted balance sheet technique Earnings approach with three variations: Variation 1: Excess earnings method Variation 2: Capitalized earnings approach Variation 3: Discounted future earnings approach
A recent study found that 64 percent of closely held companies expect to sell their businesses within three years. Structuring the deal is one of the most important decisions a seller can make. Tax implications can be significant; therefore, a skilled tax planner can help. Exit strategy options include: Straight business sale Sale of controlling interest or a variation called an earn-out Form a family limited partnership Sell a controlling interest Earn-out Restructure the company Sell to an international buyer Establish an employee stock ownership plan (ESOP)
16 Negotiating the Deal Factors affecting the negotiation process involve: How strong is the seller's desire to sell? Is seller willing to finance part of purchase price? Must the seller close the deal quickly? What deal structure fits your needs? What are tax consequences for both parties? Is seller willing to stay on as a consultant? What general economic conditions exist in the industry?
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17 Negotiating the Deal Buyers have specific criteria they look for. They want to get the business at the most attractive price possible with favorable payment terms that minimize the amount of cash they pay up front. Seller are seeking the highest price possible with the most desirable terms to maximize the cash they receive and minimize their tax burden. The Five Ps of Negotiating include: Preparation Poise Persuasiveness Persistence Patience
18 Conclusion There are distinct advantages and disadvantages of buying an existing business. Following the appropriate steps will improve the chances of success. The valuation of the business is a critical step to negotiate an arrangement that works for both parties.
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