Transcript CHAPTER 4 Forms of Business Ownership and Franchising

MAN 470 – Berk TUNCALI
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Things to consider;
 Each year more than 500,000 businesses are bought
and sold in the US
 Due diligence is just as time consuming as a business
plan for a start up business
Is this a good way? What do you think?
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Advantages of Buying an Existing
Business
 A successful existing business may continue to be
successful
 May already have the best location (Location, location
location)
 Employees and suppliers are established
 Equipment is installed and productive capacity is
known
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Advantages of Buying an Existing
Business
 Inventory is in place and trade credit is established
 Business owner hits the ground running (saves time, cost
and energy)
 New owner can use the experience of the previous owner
 Easier financing (usually easier since there is something to
show for the investment – not just a business plan)
 It’s a bargain (may need to sell in a rush)
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Disadvantages of Buying an Existing
Business
 Previous owner may have created ill will (socially negative
company)
 It’s a loser (never profited)
 Employees inherited with the business may not be suitable
 The business location may have become unsatisfactory
 Equipment and facilities may be obsolete or inefficient
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Disadvantages of Buying an Existing
Business
 Change and innovation are difficult to implement
 Inventory may be outdated or obsolete
 Accounts receivable may be worth less than face
value
 Business may be overpriced
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STEPS IN AQUIRING A BUSINESS
1.
Analyze your skills, abilities and interests
2. Prepare a list of potential candidates
3. Investigate those candidates
4. Explore financing options
5. Ensure smooth transition
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Analyze your skills, abilities and
interests
 What business activities do you enjoy most? Why?
 Which markets offer the greatest potential for growth?
 What do you expect to get out of the business?
 How much time, energy and money can you put into the
business?
 What business skills and experience do you have?
 How much risk are you willing to take?
 What size company do you want to buy?
 Is there are particular geographic location you desire?
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Prepare a list of potential
candidates
 Bankers (ask them – they might now companies who are in fınancial
trouble and looking to exit.)
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Accountants
Investment bankers
Suppliers/distributors/customers
Networking – social and business contacts
Newspapers , internet and trade journals listing
businesses for sale
 Knocking on the doors of businesses even if they are
not advertised as being for sale
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 Hidden Market: Low profile companies that might be
for sale but are not advertised as such.
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Investigate Candidate Businesses
 What are the company strengths and weaknesses (SWOT
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analysis)
Is the company profitable? What is the overall financial
condition?
What is the cash flow cycle? How much cash will the
company generate?
Who are the major competitors?
How large is the customer base? Is it growing or shrinking?
Are the current employees suitable? Will they stay?
What is the physical condition of the business, equipment
and the inventory?
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Explore financing options
 Putting a price on an existing business is hard (good will – hava
parası)
 Seller will be likely to provide financing options- eg. Down
payment with installements
Ensure smooth transition
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There are always surprises
Concentrate on communicating with employees
Be honest with employees
Listen to employees
Consider asking the seller to provide a limited consultation
period
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Evaluating an Existing Business –
The Due Diligence Process
1.
Why does the owner want to sell?
2. What is the physical condition of the business
3. What is the potential for the company’s products or
services?
4. What legal aspects should you consider?
5. Is the business financially sound?
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Why does the owner want to sell?
 Every prospective business buyer should investigate
the real reason the business owner wants to sell!
 Most common reason for selling is boredom and
burnout!
 Might sell because a new powerful competitor will
enter the market soon
 Businesses do not last forever. The owner might have
seen that the end is near.
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Condition of the Business
 What is the physical condition of the business?
 Accounts receivable
 Lease arrangements
 Business records (can be a valuable source into the business in detail)
 Intangible assets (does the sale include any intangibles?)
 Location and appearance (check for its suitability several years in
the future – any new buildings planned)
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Products and Services
 What is the potential for the company’s product or
services
 Customer characteristics (Who are the customers? Why do they
buy? What are their needs, how often they buy? How loyal are they?)
 Competitor analysis (Which ones have survived and why? How are
their sales volumes? How well are they orginzied? What are their reputations?
Strengths and weaknesses? What competitive edge do they have?)
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Legal Aspects
There are several traps and pitfalls when legal aspects are in
question. These are;
 Liens: a creditor’s claim against an asset. (To avoid it, buyers usually
include a clause in the agreement that anything not shown on the balance sheet is the
responsibility of the seller)
 Bulk Transfer: protects the buyer of a business’s assets from
the claims unpaid creditors might have against these assets.
(if the seller owes money to creditors and does not pay with the money acquired from the
sale of the business, then then the creditors will be able to sell the assets of the business
and get their money)
 Due-on-sale clause: loan contract provision that prohibits a
seller from assigning a loan arrangement to the buyer.
Instead, the buyer is required to finance the remaining loan
balance at prevailing interest rates.
 Restrictive Covenant: an agreement between a buyer and a
seller in which the seller agrees not to compete with the
buyer within a specific time period and geographic area.
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Financial soundness of the
Business
 Income statement and balance sheet for the past 3-5
years
 Income tax returns for the past 3-5 years
 Owners compensation
Skimming: Taking money from sales without reporting
it as income.
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Determining the value of a
Business
1-) Balance Sheet Technique: a method of valuing a
Business based on the value of the company’s net worth
(net worth = total assets – total liabilities)
a) Adjusted Balance Sheet Technique: a method of
valuing a business based on the market value of the
company’s net worth (net worth = total assets – total
liabilities)
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Determining the value of a
Business
2-) Earnings Approach: a method of valuing a business
that recognizes that a buyer is purchasing the future
income (earnings) potential of a business.
a)
Excess Earnings Approach: combines the values of businesses
existing assets and an estimate of its future earnings potential.
b)
Capitalized Earnings Approach: a method of valuing a business
that divides estimated earnings by the rate of return the buyer could
earn on a similar risk investment. (oppurtunity cost alternative)
c)
Discounted Future Earnings Approach: a method of valuing a
business that forecasts a company’s earnings several years into the
future and then discounts them back to their present value. (time
value of money – Dollar today is better than a Dollar tomorrow)
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Determining the value of a
Business
3-) Market Approach: a method of valuing a business
that uses the price/earnings ratio if similar, publicly held
companies to determine value.
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Understanding the Seller’s Side
 Structuring the deal – minimize legal costs
 Exit strategy options;
a) Straight business sale
b) Form a family limited partnership (transfer to children)
c) Sell a controlling interest (still make money but no control – a
little like retirement)
d) Restructure the company (form a new business and and make a
leveraged buyout with an investor)
e) Sell to an international buyer (chance for foreign competitors
to move in)
Use a two step sale (buys between 20-70% at the start and gets the rest
in the specified time period)
g) Establish an employee stock ownership plan (ESOP)
f)
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Negotiating the Deal
 Get the highest price possible
 Sever all responsibility for the company’s liabilities
 Avoid unreasonable contract terms
 Maximize the cash gotten from the deal
 Minimize the tax burden
 Make sure the buyer will be able to make all the future
payments
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THANK YOU
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