1. Chapter 3 Finding Opportunity in an Existing Business
Entrepreneurship and Small Business Management
Chapter 3
Finding Opportunity in an Existing Business

2. Ch. 3 Performance Objectives
Understand the potential benefits of buying a going concern.
Identify potential drawbacks of purchasing a business.
Learn how to identify and evaluate purchasing opportunities.

3. Ch. 3 Performance Objectives (continued)
Learn how to determine the value of a business.
Learn how to negotiate and close the deal.
Recognize joining a family business as an entrepreneurial pathway.

4. Why Buy an Existing Business?
Quicker, easier start-up
Employees bring knowledge/relationships
Seller may help with transition
Reduced risk due to established business structure and customer base
Cost may be less to buy than to start a similar company

5. Potential Pitfalls of Buying an Existing Business
Higher initial investment
Known and hidden problems
Not a good “fit” with personality, lifestyle, or work-environment requirements
Existing customers may not remain customers after business is bought

6. Finding Available Businesses
Direct inquiry/networking (employer, customers, competitors, friends, family)
Solicitation by direct mail/advertising
Internet research
Business brokers who buy and sell businesses for a fee

7. Evaluating a Business for Sale
Start with background data from owner
Scan Internet for press coverage and legal issues
Ask outside parties for information: bankers, suppliers, employees, customers
Examine internal and financial documents
Identify real reason owner is selling
Be alert for conflicting information

8. Three Methods to Determine Business Value
Asset valuation—analyzes the underlying value of the firm’s assets
Earnings valuation—based on a stream of earnings multiplied by the capitalization factor or by the Price/Earnings ratio
Cash flow valuation—uses projected future cash flows and time value of money

9. Standards for Asset Valuation
Book value—reported in firm’s records
Adjusted book value—considers actual market value versus the stated book value
Liquidation value—net cash potentially obtainable from the quick sale of assets
Replacement value—cost of newly purchasing the assets

10. Determining Variables to Use in Earnings Valuation
Type of earnings
Historical earnings
Future earnings under current ownership
Future earnings under new ownership
Measure of earnings
Earnings before or after tax?
EBIT or operating income?

11. Non-Financial Factors Affecting the Offer Price
Market space
Competitive environment
Firm’s legal and regulatory status
Pending physical or labor changes
Need for investment in plant, property, and/or equipment
Value of customer “goodwill”

12. Negotiating and Closing the Deal
Secure qualified legal and financial counsel.
Establish what is being purchased: assets only or “whole business.”
Determine the terms of the sale.
Consider buying the business over time.
Hold a formal closing to complete all legal documents.

13. Joining a Family Business
Two or more members of same family managing and/or working in the business
May provide opportunities to:
Foster entrepreneurial talent
Build on a solid foundation for future success
Turn around a floundering business
Important to communicate clearly about roles, compensation, ownership, etc.