Chapter 3Finding Opportunity in an Existing Business Entrepreneurship and Small Business Management... Recognize joining a family business as an entrepreneurial pathway... Quicker,
Trang 1Chapter 3
Finding Opportunity in an Existing Business
Entrepreneurship and Small
Business Management
Trang 2Ch 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.
Trang 3Ch 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.
Trang 4 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?
Trang 5 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 Buying
an Existing Business
Trang 6 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
Trang 7 Start with background data from owner
issues
bankers, suppliers, employees, customers
Evaluating a Business for Sale
Trang 8Three 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
Trang 9Standards 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
Trang 10 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 Use
in Earnings Valuation
Trang 11 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
Trang 12Negotiating and Closing the Deal
counsel.
only or “whole business.”
Trang 13Joining 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.