Buying an Existing Business

1. Buying an Existing Business There is nothing so easy to learn as experience and nothing so hard to apply…Josh Billings

2. Advantages • May continue to be successful • Best location • Employees and suppliers established • Equipment installed • Inventory in place • Hit the ground running • Use previous experience • Easier financing

3. Disadvantages • A loser • Created ill will • Employees not suitable • Equipment obsolete or inefficient • Change and innovation difficult • Inventory outdated or obsolete • Accounts receivable worth less • Overpriced

4. Steps in Acquiring a Business • Analyze your skills, abilities, and interests • Prepare a list of potential candidates • Investigate and evaluate • Explore financing options • Ensure smooth transition

5. Due Diligence Process The process of investigating the details of a company that is for sale to determine the strengths, weaknesses, opportunities, and threats facing it

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

7. Physical Conditions • Building • Inventory • Accounts receivable • Lease arrangements • Business records • Intangible assets • Location and appearance

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

9. Legal Aspects • Liens • Bulk Transfers • Contract assignments • Covenants not to compete • Ongoing legal liabilities

10. Financial Soundness • Income statements and balance sheets (3-5 years) • Income tax returns (3-5 years) • Owner’s compensation (and relatives) • Cash flow

11. Methods for Determining the Value of a Business • Balance Sheet technique • Adjusted Balance Sheet technique • Excess Earnings Method • Capitalized Earnings Approach • Discounted Future Earnings approach • Market approach

12. Understanding the Seller’s Side • Picking the right buyer • Structuring the deal • Exit strategies • Negotiating the deal

13. Exit Strategies • Straight business sale • Sale with agreement from the founder to stay on • Form a limited partnership • Sell a controlling interest • Restructure the company • Sell to an international buyer • Use a 2-step sale • Establish an ESOP

14. Factors Affecting Negotiations • How strong is the desire to sell? • Is the seller willing to finance part of the purchase price? • What terms does the buyer suggest? • Which ones re most important to him/her? • Is it urgent that the seller close the deal quickly? • What deal structure best suits your needs? • What are the tax consequences? • Will the seller sign a restrictive covenant? • Is he willing to stay on? • What general economic conditions exist?

15. Negotiations • Prepare • Remember the difference between a position and an interest • Develop the right mindset • Always leave yourself an escape hatch • Keep your emotions in check • Sometimes it’s best to remain silent