Buying an existing business

1. Buying an ExistingBuying an Existing
BusinessBusiness
There is nothing so easy to learnThere is nothing so easy to learn
as experience and nothing soas experience and nothing so
hard to applyhard to apply…Josh Billings…Josh Billings

2. AdvantagesAdvantages
 May continue to beMay continue to be
successfulsuccessful
 Best locationBest location
 Employees andEmployees and
supplierssuppliers
establishedestablished
 Equipment installedEquipment installed
 Inventory in placeInventory in place
 Hit the groundHit the ground
runningrunning
 Use previousUse previous
experienceexperience
 Easier financingEasier financing

3. DisadvantagesDisadvantages
 A loserA loser
 Created ill willCreated ill will
 Employees not suitableEmployees not suitable
 Equipment obsolete orEquipment obsolete or
inefficientinefficient
 Change and innovationChange and innovation
difficultdifficult
 Inventory outdated orInventory outdated or
obsoleteobsolete
 Accounts receivableAccounts receivable
worth lessworth less
 OverpricedOverpriced

4. Steps in Acquiring a BusinessSteps in Acquiring a Business
 Analyze your skills,Analyze your skills,
abilities, and interestsabilities, and interests
 Prepare a list ofPrepare a list of
potential candidatespotential candidates
 Investigate and evaluateInvestigate and evaluate
 Explore financingExplore financing
optionsoptions
 Ensure smooth transitionEnsure smooth transition

5. Due Diligence ProcessDue Diligence Process
The process ofThe process of
investigating the details ofinvestigating the details of
a company that is for salea company that is for sale
to determine theto determine the
strengths, weaknesses,strengths, weaknesses,
opportunities, and threatsopportunities, and threats
facing itfacing it

6. 5 Critical Questions5 Critical Questions
 Why does the owner want to sell?Why does the owner want to sell?
 What is the physical condition?What is the physical condition?
 What is the potential?What is the potential?
 What legal aspects should beWhat legal aspects should be
considered?considered?
 Is the business financially sound?Is the business financially sound?

7. Physical ConditionsPhysical Conditions
 BuildingBuilding
 InventoryInventory
 Accounts receivableAccounts receivable
 Lease arrangementsLease arrangements
 Business recordsBusiness records
 Intangible assetsIntangible assets
 Location andLocation and
appearanceappearance

8. Potential of ProductsPotential of Products
 Customer characteristics andCustomer characteristics and
composition-composition-who, why, howwho, why, how
often, loyalty, new customers,often, loyalty, new customers,
well-defined, growing?well-defined, growing?
 Competitor analysisCompetitor analysis -number-number
and intensity, saturation pointand intensity, saturation point
reached, reason for survival,reached, reason for survival,
sales comparison, uniqueness?sales comparison, uniqueness?

9. Legal AspectsLegal Aspects
 LiensLiens
 Bulk TransfersBulk Transfers
 ContractContract
assignmentsassignments
 Covenants notCovenants not
to competeto compete
 Ongoing legalOngoing legal
liabilitiesliabilities

10. Financial SoundnessFinancial Soundness
 Income statements and balanceIncome statements and balance
sheetssheets (3-5 years)(3-5 years)
 Income tax returnsIncome tax returns (3-5 years)(3-5 years)
 Owner’s compensationOwner’s compensation (and(and
relatives)relatives)
 Cash flowCash flow

11. Methods for Determining theMethods for Determining the
Value of a BusinessValue of a Business
 Balance Sheet techniqueBalance Sheet technique
 Adjusted Balance SheetAdjusted Balance Sheet
techniquetechnique
 Excess Earnings MethodExcess Earnings Method
 Capitalized Earnings ApproachCapitalized Earnings Approach
 Discounted Future EarningsDiscounted Future Earnings
approachapproach
 Market approachMarket approach

12. Understanding the Seller’sUnderstanding the Seller’s
SideSide
 Picking the rightPicking the right
buyerbuyer
 Structuring theStructuring the
dealdeal
 Exit strategiesExit strategies
 Negotiating theNegotiating the
dealdeal

13. Exit StrategiesExit Strategies
 Straight business saleStraight business sale
 Sale with agreement fromSale with agreement from
the founder to stay onthe founder to stay on
 Form a limitedForm a limited
partnershippartnership
 Sell a controlling interestSell a controlling interest
 Restructure the companyRestructure the company
 Sell to an internationalSell to an international
buyerbuyer
 Use a 2-step saleUse a 2-step sale
 Establish an ESOPEstablish an ESOP

14. Factors AffectingFactors Affecting
NegotiationsNegotiations
 How strong is the desire to sell?How strong is the desire to sell?
 Is the seller willing to finance part of theIs the seller willing to finance part of the
purchase price?purchase price?
 What terms does the buyer suggest?What terms does the buyer suggest?
 Which ones re most important toWhich ones re most important to
him/her?him/her?
 Is it urgent that the seller close the dealIs it urgent that the seller close the deal
quickly?quickly?
 What deal structure best suits yourWhat deal structure best suits your
needs?needs?
 What are the tax consequences?What are the tax consequences?
 Will the seller sign a restrictiveWill the seller sign a restrictive
covenant?covenant?

15. NegotiationsNegotiations
 PreparePrepare
 Remember the difference between aRemember the difference between a
position and an interestposition and an interest
 Develop the right mindsetDevelop the right mindset
 Always leave yourself an escapeAlways leave yourself an escape
hatchhatch
 Keep your emotions in checkKeep your emotions in check