Chapter 7: Buying an Existing Business

Liens

a creditor's claim against an asset - the buyer must assume it and financially responsible

What is the purpose of the negotiation process?

establish a cooperative relationship based on honesty and trust for a mutual benefit - both understand each party's respective positions

Value vs. Price

value = what the business is actually worth price = what the buyer agrees to pay

Covenants not to compete

an agreement between a buyer and seller in which the seller agrees not to compete with the buyer within a specific time and geographic area

Contract Assignments

buyer must investigate the rights and obligations they would assume under existing contracts with suppliers, customers, employees and lessors

What are the potential's for a company's products or services? (Critical Area)

1. How current the company's product line is? 2. Potential for company's products or services 3. Customers' characteristics and composition 4. Competitors' characteristics and composition

Acquisition Process (5 steps)

1. Identify and Approach Candidate - qualifications 2. Sign a nondisclosure document - secrecy of both parties 3. sign letter of intent - reached an agreement and justify negotiation 4. Buyer's due diligence - SWOT 5. Draft purchase agreement - spells out parties' final deal

What are the disadvantages to buying an existing business (9)?

1. It's a loser 2. previous owner may have created ill will 3. "inherited" employees may be unsuitable 4. the location may have become unsatisfactory 5. equipment and facilities may be obsolete or inefficient 6. change and innovation can be difficult 7. Inventory may be outdated or obsolete 8. Accounts receivable may be worth less than face value 9. the business may be overpriced

What are the 5 legal aspects?

1. Liens 2. Bulk Transfer 3. Contract Assignments 4. Covenants not to compete 5. Ongoing legal liabilities

What is the Five Critical Areas for Analyzing an Existing Business?

1. Why does the owner want to sell? risk, illness, sue, competition, pressure 2. What is the physical condition of the business? evaluate assets 3. What is the potential for the company's products or services? 4. What legal aspects should be considered? 5. Is the business financially sound? business evaluation

What are the physical conditions of a business? (5)

1. accounts receivable 2. lease arrangements 3. business records - revenue, net income, operating budgets, cash flow 4. intangible assets - trademarks, patents, copyrights, services 5. location and appearance - stability

Steps in Acquiring a Business. (5)

1. analyze your skills, abilities and interests to determine what kind(s) of businesses you should consider 2. prepare a list of potential candidates 3. investigate those candidates and evaluate the best one(s) 4. explore financing options 5. ensure a smooth transition

What techniques are used to determine the value of a business? (3)

1. balance sheet technique 2. earnings approach 3. market approach

What do sellers seek? (6)

1. highest price 2. sever all responsibility for company's liabilities 3. avoid unreasonable contract terms that limit future opportunities 4. maximize cash they receive 5. minimize tax burden from sale 6. make sure the buyer will be able to make all future payments

What are the key questions to consider before buying a business (7)?

1. is it the right type of business? 2. what experience do you have? 3. what is the company's potential for success? 4. what changes will you have to make? 5. what price and payment method is reasonable? 6. will the company generate sufficient cash to pay for itself? 7. should you be starting a business and building it from the ground up rather than buying an existing one?

What are the advantages to buying an existing business (9)?

1. it may continue to be successful - due diligence 2. it may already have the best location 3. employees and suppliers are established 4. equipment is already installed 5. inventory is in place and trade credit is established 6. new owner's can "hit the ground running" 7. new owners can use the previous owner's experience 8. financing is easier to obtain 9. it's a bargain

What do buyers seek? (5)

1. lowest price 2. negotiate favorable payment terms 3. get assurances that they are buying a business they think they are getting 4. avoid putting the seller in a position to open a competing business 5. minimize amount of cash paid up front

Ongoing legal liabilities

1. physical premises - OSHA 2. product liability claim - liable for damages and injuries caused by products 3. labor relations - union contract

What are the 4 claims of bulk transfer?

1. seller must giver the buyer a signed, sworn list of existing creditors 2. buyer and seller must prepare a list of the property included in the sale 3. buyer must keep the list of creditors and property for 6 months 4. buyer must give written notice of the sale to each creditor at least 10 days before he or she takes possession of the goods or pays

Bulk Transfer

protects buyer from the claims unpaid creditors might have against assets

Goodwill

the difference in the value of an established business and one that has not yet built a solid reputation for itself - intangible assets that produce additional income *determine value of business

Due Dilligence

the process of investigating the details of a company that is for sale to determine SWOT facing it