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Buying a Business Evaluating Existing Businesses Copyright © 2011 Nelson Education Ltd.13-1 chapter 1313 Prepared by Ron Knowles Algonquin College & Jennifer Rouse Barbeau Canadore College
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Chapter Overview Chapter 13 will: Investigate the advantages and pitfalls of buying a business Copyright © 2011 Nelson Education Ltd.13-2 chapter 1313
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Learning Opportunities Evaluate objectively businesses that are for sale. Understand the pros and cons of purchasing an ongoing business. Assess the market value of an ongoing business. Recognize when you need professional help. Decide whether it is better for you to buy an ongoing business or to begin from scratch. Copyright © 2011 Nelson Education Ltd.13-3 chapter 1313
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Why Purchase a Business? money Overwhelming reason is money, primarily the income stream. Other reasons may be: Hungry seller Fixtures and equipment Training and support Established customer base and supplier relationships Good location Knowledgeable employees Existing permits and licenses Existing suppliers & distributors Evidence of financial results Technology Copyright © 2011 Nelson Education Ltd.13-4
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Tips to Get You Started Determine which type of entrepreneur you are. Fall in love with the business not the deal. Stay true to your business values and vision. Make sure you purchase a business you know how to run. Look for a retiring entrepreneur who will stay on to help you. Above all, obtain legal & financial advice before you sign any contract. Copyright © 2011 Nelson Education Ltd.13-5
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How to Buy & How Not to Buy Analyze everything about a business, using every tool & business guru you can. Do not buy for emotional reasons. The best deals are seldom advertised. Consider running your own advertisement. Copyright © 2011 Nelson Education Ltd.13-6
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Get the Word Out Spread the word that you are a potential buyer. Contact everyone you can in your chosen industry. Ask people in your network to help you with your search. Advertise your needs in trade journals. Check out the Internet. Send letters of inquiry to potential sellers. Knock on doors. Check with business-opportunity brokers. Talk with firms that deal in mergers and acquisitions. Don’t rush. Copyright © 2011 Nelson Education Ltd.13-7
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Outside Investigate the Business from the Outside Does the business fit into the framework of your industry overview? Diagram the area. Take some photographs of the exterior. Ask around. Interview neighbours and the customers. Check out future competition. Check with local authorities. Know when you need outside help. Copyright © 2011 Nelson Education Ltd.13-8
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Get assistance from a business broker or financial advisor. If you use a broker, remember the broker represents the seller. Study the financial history. Compare what your money could do elsewhere. Evaluate the tangible assets. Talk to insiders. Get a non-competition covenant. Analyze the seller’s motives. Examine the asking price. Negotiate the value of good will. Learn whether bulk sales escrow is needed. Copyright © 2011 Nelson Education Ltd.13-9 Inside Investigate the Business from the Inside
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Before-You-Buy Checklist Look for red flags (see Box 13.4) How long do you plan to own this business? How old is this business? What is the life stage of the business? Has your accountant reviewed the books? Have you consulted a lawyer? How long will it take to recover your investment? What reasons does the owner give for selling? Will the owner let you see bank deposit records? Have you calculated utility costs? What does a review of tax records tell you? For more checklist items, see Box 13.5 Copyright © 2011 Nelson Education Ltd.13-10
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Prepare & Protect Yourself If you’re ready to buy: Prepare for negotiations Your goal is the lowest price with the best possible terms. Be prepared to negotiate the value of good will. If you’re asked to put down a deposit Deposit the money in an escrow account. Make your offer subject to the approval of a financial analysis of the business. Get professional help before you sign anything Copyright © 2011 Nelson Education Ltd.13-11
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Negotiating the Price What is the value of a business? What is a fair price? Valuing a business is not an exact science. The values of the of the seller and the buyer are arrived at from widely separated viewpoints. Professional help in setting a fair price is highly recommended. Three common methods are: Asset-based valuation Ability to pay valuation Earnings-assets valuation Copyright © 2011 Nelson Education Ltd.13-12
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The Contract contract Standard items of the contract include: A definition of what is being transferred. Details of any leases or liabilities. Method of payment. Price adjustments. Guarantees by the seller. The seller's obligations. How to deal with any losses or damages. Clauses restricting the seller from competing. A consideration of losses and damages. Copyright © 2011 Nelson Education Ltd.13-13
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Chapter 13 helps you investigate the advantages & pitfalls of: Buying a Business Copyright © 2011 Nelson Education Ltd.13-14 Business Plan Business Plan Building Block
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Why would you buy a business rather than start from scratch? What are the potential “icebergs” (unknowns or major risks) in buying a business? Establish the value of good will. Is the business worth this amount? What would be the cost involved in starting from scratch versus buying a business? Copyright © 2011 Nelson Education Ltd.13-15 Your Business Plan Checklist for Your Business Plan
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A Passionate Leap In this case study we learn from Mitch and Carolyn that passionate leaps require due diligence. Answer the Chapter 13 case study questions to learn: Did Mitch and Carolyn have a good reason for buying the Copy Centre Store? What inside and outside research questions should have Mitch and Carolyn asked before they purchased the business? What “red flags” were raised by Frank, the seller of the business? What was a fair purchase price of the Copy Centre Store? Copyright © 2011 Nelson Education Ltd.13-16 CaseStudy
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