1 SMALL BUSINESS MANAGEMENT Chapter Five Buying a Business

2 Purchasing an Existing Business u Advantages of Purchasing –Reduction of Risk –Reduction of Time and Setup Expenses –Reduction of Competition –Capitalization of Business Strength –Possible Assistance from Previous Owner –Easier Planning

3 Purchasing an Existing Business u Disadvantages of Purchasing –Physical Facilities –Personnel –Inventory –Accounts Receivable –Financial Condition –Market –Deciding on the Price

4 Sources of Businesses for Sale u Classified Ads u Government Departments u Trade Journals u Real Estate Brokers u Other Professionals u Word of Mouth

5 Evaluating a Business For Sale u Industry Analysis –Sales and Profit Trends in the Industry u The Previous Owner u Financial Condition of the Business –Validity of the Financial Statements –Evaluation of the Financial Statements

6 Evaluating a Business For Sale u Condition of the Assets –Liquid Assets (Cash and Investments) –Accounts Receivable –Inventory –Building and Equipment –Real Estate –Goodwill

7 Evaluating a Business For Sale u Quality of Personnel u External Relationships of the Business u Conditions of the Records

8 Determining the Price or Value of a Business u Market Value u Asset value –Book Value –Replacement Value u Earnings Value –Capitalization of Earnings Method –Times Earnings Method u Combination Method

9 The Purchase Transaction u Coverage –purchase price, including principal and interest amounts –Payment dates - when and to whom –Detailed list of assets included in the purchase –Conditions of the Purchase - nonfinancial requirements –Provisions for noncompliance with conditions and penalties for breaches –Collateral or security pledged u Negotiating the Deal

10 Appendix A u Checklist of Considerations in Purchasing a Business –The Industry –The Previous Owner –Financial Conditions of the Business –Condition of Assets –Quality of Personnel –Conditions of External Relationships –Conditions of Records

11 Concept Checks u 1. What are the potential advantages and disadvantages of owning a small business? u 2. What are the common sources of determining which businesses are for sale? u 3. In addition to experience what key areas should be investigated in an industry analysis?

12 Concept Checks u 4. Why is it important to investigate the background of the previous owner? u 5. What parts of the business should be analysed to determine the financial condition of the business? u 6. Under what conditions would it be advantageous to purchase a business even though it isn’t financially sound?

13 Concept Checks u 7. What nonfinancial aspects of the business should be evaluated ? u 8. What methods are available in determining a price for a business which is for sale?

14 Concept Checks u 9. What steps are involved in determining the selling price using the combination method? u 10. What areas should be included in the purchase agreement?