chapter 3 finding opportunity in an existing business entrepreneurship and small business management

Chapter 3Finding Opportunity in an Existing

Business

Entrepreneurship and Small Business Management

© 2012 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.2

Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin

Ch. 3 Performance Objectives Understand the potential benefits

of buying a going concern.

Identify potential drawbacks of purchasing a business.

Learn how to identify and evaluate purchasing opportunities.




Ch. 3 Performance Objectives(continued)

Learn how to determine the value of a business.

Learn how to negotiate and close the deal.

Recognize joining a family business as an entrepreneurial pathway.




Quicker, easier start-up Employees bring

knowledge/relationships Seller may help with transition

Reduced risk due to established business structure and customer base

Cost may be less to buy than to start a similar company

Why Buy an Existing Business?




Higher initial investment Known and hidden problems Not a good “fit” with personality,

lifestyle, or work-environment requirements

Existing customers may not remain customers after business is bought

Potential Pitfalls of Buyingan Existing Business




Direct inquiry/networking (employer, customers, competitors, friends, family)

Solicitation by direct mail/advertising

Internet research

Business brokers who buy and sell businesses for a fee

Finding Available Businesses




Start with background data from owner Scan Internet for press coverage and

legal issues Ask outside parties for information:

bankers, suppliers, employees, customers Examine internal and financial documents Identify real reason owner is selling Be alert for conflicting information

Evaluating a Business for Sale




Three Methods to Determine Business Value

Asset valuation—analyzes the underlying value of the firm’s assets

Earnings valuation—based on a stream of earnings multiplied by the capitalization factor or by the Price/Earnings ratio

Cash flow valuation—uses projected future cash flows and time value of money




Standards for Asset Valuation

Book value—reported in firm’s records

Adjusted book value—considers actual market value versus the stated book value

Liquidation value—net cash potentially obtainable from the quick sale of assets

Replacement value—cost of newly purchasing the assets




Type of earnings Historical earnings Future earnings under current

ownership Future earnings under new ownership

Measure of earnings Earnings before or after tax? EBIT or operating income?

Determining Variables to Usein Earnings Valuation




Market space Competitive environment Firm’s legal and regulatory status Pending physical or labor changes Need for investment in plant,

property, and/or equipment Value of customer “goodwill”

Non-Financial Factors Affecting the Offer Price




Negotiating and Closing the Deal

Secure qualified legal and financial counsel.

Establish what is being purchased: assets only or “whole business.”

Determine the terms of the sale. Consider buying the business over

time. Hold a formal closing to complete all

legal documents.




Joining a Family Business Two or more members of same family

managing and/or working in the business May provide opportunities to:

Foster entrepreneurial talent Build on a solid foundation for future success Turn around a floundering business

Important to communicate clearly about roles, compensation, ownership, etc.

chapter 3 finding opportunity in an existing business entrepreneurship and small business management

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