Buying an Existing Buying an Existing BusinessBusiness

There is nothing so easy to There is nothing so easy to learn as experience and learn as experience and

nothing so hard to applynothing so hard to apply…Josh …Josh BillingsBillings

AdvantagesAdvantages May continue to be May continue to be

successfulsuccessful Best locationBest location Employees and Employees and

suppliers establishedsuppliers established Equipment installedEquipment installed Inventory in placeInventory in place Hit the ground Hit the ground

runningrunning Use previous Use previous

experienceexperience Easier financingEasier financing

DisadvantagesDisadvantages A loserA loser Created ill willCreated ill will Employees not suitableEmployees not suitable Equipment obsolete or Equipment obsolete or

inefficientinefficient Change and innovation Change and innovation

difficultdifficult Inventory outdated or Inventory outdated or

obsoleteobsolete Accounts receivable Accounts receivable

worth lessworth less OverpricedOverpriced

Steps in Acquiring a Steps in Acquiring a BusinessBusiness

Analyze your skills, Analyze your skills, abilities, and interestsabilities, and interests

Prepare a list of Prepare a list of potential candidatespotential candidates

Investigate and evaluateInvestigate and evaluate Explore financing Explore financing

optionsoptions Ensure smooth Ensure smooth

transitiontransition

Due Diligence ProcessDue Diligence Process

The process of The process of investigating the details investigating the details of a company that is for of a company that is for sale to determine the sale to determine the strengths, weaknesses, strengths, weaknesses, opportunities, and opportunities, and threats facing itthreats facing it

5 Critical Questions5 Critical Questions

Why does the owner want to sell?Why does the owner want to sell? What is the physical condition?What is the physical condition? What is the potential?What is the potential? What legal aspects should be What legal aspects should be

considered?considered? Is the business financially sound?Is the business financially sound?

Physical ConditionsPhysical Conditions BuildingBuilding InventoryInventory Accounts receivableAccounts receivable Lease arrangementsLease arrangements Business recordsBusiness records Intangible assetsIntangible assets Location and Location and

appearanceappearance

Potential of ProductsPotential of Products Customer characteristics and Customer characteristics and

composition-composition-who, why, how who, why, how often, loyalty, new customers, often, loyalty, new customers, well-defined, growing?well-defined, growing?

Competitor analysisCompetitor analysis-number and -number and intensity, saturation point intensity, saturation point reached, reason for survival, reached, reason for survival, sales comparison, uniqueness?sales comparison, uniqueness?

Legal AspectsLegal Aspects

LiensLiens Bulk TransfersBulk Transfers Contract Contract

assignmentsassignments Covenants not Covenants not

to compete to compete Ongoing legal Ongoing legal

liabilitiesliabilities

Financial SoundnessFinancial Soundness Income statements and Income statements and

balance sheetsbalance sheets (3-5 years) (3-5 years) Income tax returnsIncome tax returns (3-5 (3-5

years)years) Owner’s compensationOwner’s compensation (and (and

relatives)relatives) Cash flowCash flow

Methods for Determining Methods for Determining the Value of a Businessthe Value of a Business

Balance Sheet techniqueBalance Sheet technique Adjusted Balance Sheet techniqueAdjusted Balance Sheet technique Excess Earnings MethodExcess Earnings Method Capitalized Earnings ApproachCapitalized Earnings Approach Discounted Future Earnings Discounted Future Earnings

approachapproach Market approach Market approach

Understanding the Seller’s Understanding the Seller’s SideSide

Picking the Picking the right buyerright buyer

Structuring the Structuring the dealdeal

Exit strategiesExit strategies Negotiating the Negotiating the

dealdeal

Exit StrategiesExit Strategies Straight business saleStraight business sale Sale with agreement Sale with agreement

from the founder to stay from the founder to stay onon

Form a limited Form a limited partnershippartnership

Sell a controlling interestSell a controlling interest Restructure the companyRestructure the company Sell to an international Sell to an international

buyerbuyer Use a 2-step saleUse a 2-step sale Establish an ESOPEstablish an ESOP

Factors Affecting Factors Affecting NegotiationsNegotiations

How strong is the desire to sell?How strong is the desire to sell? Is the seller willing to finance part of the Is the seller willing to finance part of the

purchase price?purchase price? What terms does the buyer suggest?What terms does the buyer suggest? Which ones re most important to him/her?Which ones re most important to him/her? Is it urgent that the seller close the deal quickly?Is it urgent that the seller close the deal quickly? What deal structure best suits your needs?What deal structure best suits your needs? What are the tax consequences?What are the tax consequences? Will the seller sign a restrictive covenant?Will the seller sign a restrictive covenant? Is he willing to stay on?Is he willing to stay on? What general economic conditions exist?What general economic conditions exist?

NegotiationsNegotiations

PreparePrepare Remember the difference between Remember the difference between

a position and an interesta position and an interest Develop the right mindsetDevelop the right mindset Always leave yourself an escape Always leave yourself an escape

hatchhatch Keep your emotions in checkKeep your emotions in check Sometimes it’s best to remain Sometimes it’s best to remain

silent silent