Entrepreneurship and Small Business Management Chapter Finding Opportunity in an Existing Business Ch 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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Ch 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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Why Buy an Existing Business?  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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Potential Pitfalls of Buying 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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Finding Available Businesses  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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Evaluating a Business for Sale       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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Determining Variables to Use in Earnings Valuation  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? Entrepreneurship and Small Business Management, 1/e 10 © 2012 Pearson Education, Upper Saddle River, NJ 07458 Non-Financial Factors Affecting the Offer Price  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” Entrepreneurship and Small Business Management, 1/e 11 © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e 12 © 2012 Pearson Education, Upper Saddle River, NJ 07458 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 Entrepreneurship and Small Business Management, 1/e 13 © 2012 Pearson Education, Upper Saddle River, NJ 07458  ... research  Business brokers who buy and sell businesses for a fee Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Evaluating a Business. .. business  Learn how to negotiate and close the deal  Recognize joining a family business as an entrepreneurial pathway Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education,... projected future cash flows and time value of money Entrepreneurship and Small Business Management, 1/e © 2012 Pearson Education, Upper Saddle River, NJ 07458 Standards for Asset Valuation 