Chapter 4: Buying an Existing Business

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1 Chapter 4: Buying an Existing Business 1

2 Learning Objectives To understand that buying an existing business has several important advantages over starting one, including less risk, less time and effort, and the possibility of getting a bargain To appreciate that finding a business to buy should not be confined to the standard channels where businesses for sale are advertised To comprehend the method for determining the value of the business and understand that it requires taking into account both the assets the company has and the earnings it is likely to achieve in the future To see that in order to negotiate effectively, the entrepreneur must gather as much information about the company and industry as possible 2

3 Advantages of Buying a Business Less risk Less time and effort required Possibility of buying at a bargain price 3

4 Reasons for Bargain Prices The I know what it cost approach The I know what I have to take out approach The I know what similar firms cost approach 4

5 Business Brokers Agents contracted by company owner to arrange the company s sale May provide advantages to the company s seller 5

6 Disadvantages of Buying a Business Business environment may be poor Industry and market size may be declining Internal problems One-Person businesses 6

7 Businesses on the Market Classified ads Business brokers 7

8 Businesses Not on the Market Contact Bankers Lawyers Accountants Entrepreneurs in the same industry 8

9 Determining the Price of a Business Price The amount for which the owner of a business is willing to sell Value The worth of the business as determined by the market 9

10 Determining the Price of a Business (cont.) Book value Amount shown on company s financial statements Cost minus depreciation 10

11 Determining the Price of a Business (cont.) Replacement value What it would cost to purchase them Uses current prices 11

12 Determining the Price of a Business (cont.) Liquidation value Price that would be offered if the item were sold in a quick sale or auction 12

13 Determining the Price of a Business (cont.) Appraised value Price as determined by an industry expert Considers the supply and demand for the item 13

14 Tangible Assets A firm s material possessions Land, building, equipment, inventory, etc. 14

15 Intangible Assets Elements of value that are not physical objects Goodwill, established processes, industry relationships 15

16 Discounted Cash Flow Method Determining the present value of money to be earned in the future Money earned in the future is worth less than the same amount in hand today 16

17 Sources of Power in Negotiations Information Pressure from others Timing Alternatives 17

18 Buying a Business and the Business Plan Include a History of the business Past financial statements Legal issues 18

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