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STARTUPS AND BUYOUTS

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STARTUPS AND BUYOUTS

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STARTUPS AND BUYOUTS

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  1. STARTUPS AND BUYOUTS CH. 4 SMALL BUSINESS MANAGEMENT BY LONGENECKER—11TH ED.

  2. STARTING A BUSINESS FROM SCRATCH • A NEW PRODUCT OR SERVICE • IDEAL LOCATION, ETC. • AVOIDING OTHER’S MISTAKES

  3. QUESTIONS • WHAT ARE SOME IDEAS? • WHERE CAN I FIND NEW IDEAS? • HOW DO I KNOW A GOOD THING? • HOW DO I REFINE A GOOD THING? • WHAT CAN I DO TO INCREASE MY ODDS?

  4. KINDS OF IDEAS • TYPE A—NEW MARKET • TYPE B—NEW TECHNOLOGY • TYPE C—NEW BENEFIT

  5. WHERE DO YOU GET IDEAS? • PRIOR WORK EXPERIENCE • PERSONAL INTERESTS AND HOBBIES • BY CHANCE • DELIBERATE SEARCH

  6. HOW DO YOU KNOW IF IT’S REALLY A GOOD IDEA? • CLEARLY DEFINED MARKET NEED • COMPETITIVE ADVANTAGE • PROFIT POTENTIAL • GOOD FIT—FEELS RIGHT • NO FATAL FLAW (GOVT. OR SOCIAL NEGATIVES)

  7. Pros and Cons of Buying an Existing Business

  8. WHERE DO YOU LOOK? • TALK TO PEOPLE • SUPPLIERS • SALES REPS • TRADE ASSOC. • BANKERS • REALTORS • MATHCHMAKER

  9. WHY IS THE OWNER REALLY SELLING? • REASONS STATED MAY OR MAY NOT BE THE REAL REASONS • BE WARY

  10. REASONS • OLD AGE • ILLNESS • WANTS TO RELOCATE • TAKES ANOTHER JOB • BUS. NOT PROFITABLE • FRANCHISE NOT RENEWED • LACK OF POTENTIAL

  11. THE MATH • EXAMINE FINANCIAL STATEMENTS • GO BACK AS FAR AS YOU CAN • REALIZE MAY NOT BE WHAT IT SEEMS—UNDER OR OVERSTATED

  12. ASSET-BASED • ESTIMATE THE VALUE OF THE ASSETS • MODIFIED BOOK VALUE—ADJUSTING BOOK VALUE TO REFLECT DIFFERENCES BETWEEN HISTORICAL COST AND CURRENT VALUE OF THE ASSETS

  13. ASSET CONT. • REPLACEMENT VALUE—WHAT WOULD IT COST TO REPLACE • LIQUIDATION VALUE—HOW MUCH WOULD YOU GET IF YOU LIQUIDATED THE ASSETS

  14. MARKET-BASED • RELIES ON FINANCIAL MARKETS IN ESTIMATING VALUE—LOOKS AT THE ACTUAL MARKET PRICES OF FIRMS THAT ARE SIMILAR • PRICE-TO-EARNINGS RATIO=MARKET PRICE/AFTER-TAX EARNINGS

  15. EARNING-BASED • DETERMINED BY FUTURE RETURNS – value based on ability to produce future profits • FIRM’S VALUE=NORMALIZED EARNINGS/CAPITALIZATION RATE

  16. EARNINGS CONT. • NORMALIZED EARNINGS—EARNINGS THAT HAVE BEEN ADJUSTED FOR UNUSUAL ITEMS • CAPITALIZATION RATE– BASED ON THE LEVEL OF RISK INVOLVED IN THE BUSINESS AND THE EXPECTED GROWTH RATE OF FUTURE EARNINGS

  17. CAP. RATE CONT • MORE RISKY – HIGHER THE CAP. RATE AND LOWER THE FIRM’S VALUE • LESS RISKY – LOWER THE CAP. RATE AND HIGHER THE FIRM’S VALUE • FIGURE 4-4 • NOT JUST A SCIENCE, BUT AN ART

  18. CASH FLOW-BASED • COMPARING THE EXPECTED AND REQUIRED RATES OF RETURN ON THE INVESTMENT • REQUIRED RATE OF RETURN=RISK-FREE RATE OF RETURN + RISK PREMIUM

  19. NONQUANTITATIVE FACTORS • COMPETITION • MARKET • FUTURE COMMUNITY DEVELOPMENT • LEGAL COMMITMENTS • UNION CONTRACTS • BUILDINGS • PRODUCT PRICES

  20. INCREASING YOUR CHANCES • TEAM EFFORT • EXPERIENCE • HAVE STARTED OTHER BUS. • SERVICE OR MFG. –ALMOST HALF HIGH TECH • SHARE OWNERSHIP • DON’T LIMIT TO LOCAL MARKETS