Buying an Existing Buying an Existing BusinessBusiness
There is nothing so easy to There is nothing so easy to learn as experience and learn as experience and
nothing so hard to applynothing so hard to apply…Josh …Josh BillingsBillings
AdvantagesAdvantages May continue to be May continue to be
successfulsuccessful Best locationBest location Employees and Employees and
suppliers establishedsuppliers established Equipment installedEquipment installed Inventory in placeInventory in place Hit the ground Hit the ground
runningrunning Use previous Use previous
experienceexperience Easier financingEasier financing
DisadvantagesDisadvantages A loserA loser Created ill willCreated ill will Employees not suitableEmployees not suitable Equipment obsolete or Equipment obsolete or
inefficientinefficient Change and innovation Change and innovation
difficultdifficult Inventory outdated or Inventory outdated or
obsoleteobsolete Accounts receivable Accounts receivable
worth lessworth less OverpricedOverpriced
Steps in Acquiring a Steps in Acquiring a BusinessBusiness
Analyze your skills, Analyze your skills, abilities, and interestsabilities, and interests
Prepare a list of Prepare a list of potential candidatespotential candidates
Investigate and evaluateInvestigate and evaluate Explore financing Explore financing
optionsoptions Ensure smooth Ensure smooth
transitiontransition
Due Diligence ProcessDue Diligence Process
The process of The process of investigating the details investigating the details of a company that is for of a company that is for sale to determine the sale to determine the strengths, weaknesses, strengths, weaknesses, opportunities, and opportunities, and threats facing itthreats facing it
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 be What legal aspects should be
considered?considered? Is the business financially sound?Is the business financially sound?
Physical ConditionsPhysical Conditions BuildingBuilding InventoryInventory Accounts receivableAccounts receivable Lease arrangementsLease arrangements Business recordsBusiness records Intangible assetsIntangible assets Location and Location and
appearanceappearance
Potential of ProductsPotential of Products Customer characteristics and Customer characteristics and
composition-composition-who, why, how who, why, how often, loyalty, new customers, often, loyalty, new customers, well-defined, growing?well-defined, growing?
Competitor analysisCompetitor analysis-number and -number and intensity, saturation point intensity, saturation point reached, reason for survival, reached, reason for survival, sales comparison, uniqueness?sales comparison, uniqueness?
Legal AspectsLegal Aspects
LiensLiens Bulk TransfersBulk Transfers Contract Contract
assignmentsassignments Covenants not Covenants not
to compete to compete Ongoing legal Ongoing legal
liabilitiesliabilities
Financial SoundnessFinancial Soundness Income statements and Income statements and
balance sheetsbalance sheets (3-5 years) (3-5 years) Income tax returnsIncome tax returns (3-5 (3-5
years)years) Owner’s compensationOwner’s compensation (and (and
relatives)relatives) Cash flowCash flow
Methods for Determining Methods for Determining the Value of a Businessthe Value of a Business
Balance Sheet techniqueBalance Sheet technique Adjusted Balance Sheet techniqueAdjusted Balance Sheet technique Excess Earnings MethodExcess Earnings Method Capitalized Earnings ApproachCapitalized Earnings Approach Discounted Future Earnings Discounted Future Earnings
approachapproach Market approach Market approach
Understanding the Seller’s Understanding the Seller’s SideSide
Picking the Picking the right buyerright buyer
Structuring the Structuring the dealdeal
Exit strategiesExit strategies Negotiating the Negotiating the
dealdeal
Exit StrategiesExit Strategies Straight business saleStraight business sale Sale with agreement Sale with agreement
from the founder to stay from the founder to stay onon
Form a limited Form a limited partnershippartnership
Sell a controlling interestSell a controlling interest Restructure the companyRestructure the company Sell to an international Sell to an international
buyerbuyer Use a 2-step saleUse a 2-step sale Establish an ESOPEstablish an ESOP
Factors Affecting Factors Affecting NegotiationsNegotiations
How strong is the desire to sell?How strong is the desire to sell? Is the seller willing to finance part of the Is 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 to him/her?Which ones re most important to him/her? Is it urgent that the seller close the deal quickly?Is it urgent that the seller close the deal quickly? What deal structure best suits your needs?What deal structure best suits your needs? What are the tax consequences?What are the tax consequences? Will the seller sign a restrictive covenant?Will the seller sign a restrictive covenant? Is he willing to stay on?Is he willing to stay on? What general economic conditions exist?What general economic conditions exist?
NegotiationsNegotiations
PreparePrepare Remember the difference between Remember the difference between
a position and an interesta position and an interest Develop the right mindsetDevelop the right mindset Always leave yourself an escape Always leave yourself an escape
hatchhatch Keep your emotions in checkKeep your emotions in check Sometimes it’s best to remain Sometimes it’s best to remain
silent silent