1. Chapter 5 Buying an Existing Business 5-1 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Buying an Existing Business

2. Chapter 5 Buying an Existing Business 5-2 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Buying a Business Average business acquisition requires 19 months from starting the search to closing the deal Average business acquisition requires 19 months from starting the search to closing the deal Important questions: Important questions:  Does the business meet your lifestyle and financial expectations?  Do you have the ability to operate the business successfully?

3. Chapter 5 Buying an Existing Business 5-3 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Buying a Business Advantages Advantages  Business may continue to be successful  Leverage the experience of the previous owner  “Turn key” business  Superior location  Employees and suppliers in place

4. Chapter 5 Buying an Existing Business 5-4 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Buying a Business Advantages: Advantages:  Equipment installed  Inventory in place  Trade credit established  Easier access to financing  High value

5. Chapter 5 Buying an Existing Business 5-5 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Buying a Business Disadvantages: Disadvantages:  Cash requirements  Business is losing money  Paying for “ill will”  Unsuitable employees  Unsatisfactory location

6. Chapter 5 Buying an Existing Business 5-6 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Buying a Business Disadvantages: Disadvantages:  Obsolete equipment and facilities  Change and innovation challenges  Obsolete inventory  Value of accounts receivable

7. Chapter 5 Buying an Existing Business 5-7 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Buying a Business Disadvantages Disadvantages  Obsolete equipment and facilities  Change and innovation challenges  Obsolete inventory  Value of accounts receivable  Business may be overpriced

8. Chapter 5 Buying an Existing Business 5-8 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall How to Buy a Business Analyze your skills, abilities, and interests Analyze your skills, abilities, and interests Develop a list of criteria Develop a list of criteria Prepare a list of potential candidates Prepare a list of potential candidates  Remember the hidden market of companies that may be for sale but are not listed as “for sale” Rays Market

9. Chapter 5 Buying an Existing Business 5-9 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall How to Buy a Business Investigate and evaluate candidate businesses and select the best one Investigate and evaluate candidate businesses and select the best one Negotiate the deal Negotiate the deal Explore financing options Explore financing options Ensure a smooth transition Ensure a smooth transition Ray’s Market

10. Chapter 5 Buying an Existing Business 5-10 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Five Critical Areas for Analyzing an Existing Business (continued) 5. Is the business financially sound?  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

11. Chapter 5 Buying an Existing Business 5-11 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Determining the Value of a Business Balance Sheet Technique Balance Sheet Technique  Variation: Adjusted Balance Sheet Technique Earnings Approach Earnings Approach  Variation 1: Excess Earnings Approach  Variation 2: Capitalized Earnings Approach  Variation 3: Discounted Future Earnings Approach Market Approach Market Approach

12. Chapter 5 Buying an Existing Business 5-12 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall The Art of the Deal Establish the proper mindset Establish the proper mindset Understand the rules of successful negotiations Understand the rules of successful negotiations Develop a negotiating strategy Develop a negotiating strategy Be creative Be creative Keep emotions in check Keep emotions in check Be patient Be patient Don’t become a victim Don’t become a victim

13. The Five Ps of Negotiating Preparation - Examine the needs of both parties and all of the relevant external factors affecting the negotiation before you sit down to talk Poise - Remain calm during the negotiation. Never raise your voice or lose your temper, even if the situation gets difficult or emotional. It’s better to walk away and calm down than to blow up and blow the deal Persuasiveness - Know what your most important positions are, articulate them, and offer support for your position Persistence - Don’t give in at the first sign of resistance to your position, especially if it is an issue that ranks high in your list of priorities Patience - Don’t be in such a hurry to close the deal that you end up giving up much of what you hoped to get. Impatience is a major weakness in a negotiation

14. Chapter 5 Buying an Existing Business 5-14 Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Exit Strategies Straight business sale Straight business sale Sell controlling interest Sell controlling interest Restructure the company Restructure the company Use a two-step sale Use a two-step sale Family limited partnership (FLP) Family limited partnership (FLP) Establish an employee stock ownership plan (ESOP) Establish an employee stock ownership plan (ESOP) International buyer International buyer