11

SMALL BUSINESS MANAGEMENT

Chapter FiveChapter Five

Buying a BusinessBuying a Business

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Purchasing an Existing Business

Advantages of PurchasingAdvantages of Purchasing– Reduction of RiskReduction of Risk– Reduction of Time and Setup ExpensesReduction of Time and Setup Expenses– Reduction of CompetitionReduction of Competition– Capitalization of Business StrengthCapitalization of Business Strength– Possible Assistance from Previous OwnerPossible Assistance from Previous Owner– Easier PlanningEasier Planning

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Purchasing an Existing Business

Disadvantages of PurchasingDisadvantages of Purchasing– Physical FacilitiesPhysical Facilities– PersonnelPersonnel– InventoryInventory– Accounts ReceivableAccounts Receivable– Financial ConditionFinancial Condition– MarketMarket– Deciding on the PriceDeciding on the Price

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Sources of Businesses for Sale

Classified AdsClassified Ads Government DepartmentsGovernment Departments Trade JournalsTrade Journals Real Estate BrokersReal Estate Brokers Other ProfessionalsOther Professionals Word of MouthWord of Mouth

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Evaluating a Business For Sale

Industry AnalysisIndustry Analysis– Sales and Profit Trends in the IndustrySales and Profit Trends in the Industry

The Previous OwnerThe Previous Owner Financial Condition of the BusinessFinancial Condition of the Business

– Validity of the Financial StatementsValidity of the Financial Statements– Evaluation of the Financial StatementsEvaluation of the Financial Statements

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Evaluating a Business For Sale

Condition of the AssetsCondition of the Assets– Liquid Assets (Cash and Investments)Liquid Assets (Cash and Investments)– Accounts ReceivableAccounts Receivable– InventoryInventory– Building and EquipmentBuilding and Equipment– Real EstateReal Estate– GoodwillGoodwill

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Evaluating a Business For Sale

Quality of PersonnelQuality of Personnel External Relationships of the BusinessExternal Relationships of the Business Conditions of the RecordsConditions of the Records

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Determining the Price or Value of a Business

Market ValueMarket Value Asset valueAsset value

– Book ValueBook Value

– Replacement ValueReplacement Value Earnings ValueEarnings Value

– Capitalization of Earnings MethodCapitalization of Earnings Method

– Times Earnings MethodTimes Earnings Method Combination MethodCombination Method

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The Purchase Transaction

CoverageCoverage– purchase price, including principal and interest amountspurchase price, including principal and interest amounts

– Payment dates - when and to whomPayment dates - when and to whom

– Detailed list of assets included in the purchaseDetailed list of assets included in the purchase

– Conditions of the Purchase - nonfinancial requirementsConditions of the Purchase - nonfinancial requirements

– Provisions for noncompliance with conditions and Provisions for noncompliance with conditions and penalties for breachespenalties for breaches

– Collateral or security pledgedCollateral or security pledged

Negotiating the DealNegotiating the Deal

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Appendix A

Checklist of Considerations in Purchasing a Checklist of Considerations in Purchasing a BusinessBusiness– The IndustryThe Industry

– The Previous OwnerThe Previous Owner

– Financial Conditions of the BusinessFinancial Conditions of the Business

– Condition of AssetsCondition of Assets

– Quality of PersonnelQuality of Personnel

– Conditions of External RelationshipsConditions of External Relationships

– Conditions of RecordsConditions of Records

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Concept Checks

1. What are the potential advantages and 1. What are the potential advantages and disadvantages of owning a small business?disadvantages of owning a small business?

2. What are the common sources of 2. What are the common sources of determining which businesses are for sale?determining which businesses are for sale?

3. In addition to experience what key areas 3. In addition to experience what key areas should be investigated in an industry should be investigated in an industry analysis?analysis?

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Concept Checks 4. Why is it important to investigate the 4. Why is it important to investigate the

background of the previous owner?background of the previous owner? 5. What parts of the business should be 5. What parts of the business should be

analysed to determine the financial analysed to determine the financial condition of the business?condition of the business?

6. Under what conditions would it be 6. Under what conditions would it be advantageous to purchase a business even advantageous to purchase a business even though it isn’t financially sound?though it isn’t financially sound?

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Concept Checks

7. What nonfinancial aspects of the business 7. What nonfinancial aspects of the business should be evaluated ?should be evaluated ?

8. What methods are available in 8. What methods are available in determining a price for a business which is determining a price for a business which is for sale?for sale?

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Concept Checks

9. What steps are involved in determining 9. What steps are involved in determining the selling price using the combination the selling price using the combination method?method?

10. What areas should be included in the 10. What areas should be included in the purchase agreement?purchase agreement?