Buying an Existing
Business
There is nothing so easy to learn
as experience and nothing so hard
to apply…Josh Billings
Advantages
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May continue to be
successful
Best location
Employees and
suppliers established
Equipment installed
Inventory in place
Hit the ground
running
Use previous
experience
Easier financing
Disadvantages
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A loser
Created ill will
Employees not suitable
Equipment obsolete or
inefficient
Change and innovation
difficult
Inventory outdated or
obsolete
Accounts receivable
worth less
Overpriced
Steps in Acquiring a Business
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Analyze your skills,
abilities, and interests
Prepare a list of potential
candidates
Investigate and evaluate
Explore financing options
Ensure smooth transition
Due Diligence Process
The process of investigating
the details of a company
that is for sale to determine
the strengths, weaknesses,
opportunities, and threats
facing it
5 Critical Questions
Why does the owner want to sell?
 What is the physical condition?
 What is the potential?
 What legal aspects should be
considered?
 Is the business financially sound?
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Physical Conditions
Building
 Inventory
 Accounts receivable
 Lease arrangements
 Business records
 Intangible assets
 Location and
appearance
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Potential of Products
Customer characteristics and
composition-who, why, how
often, loyalty, new customers,
well-defined, growing?
 Competitor analysis-number and
intensity, saturation point
reached, reason for survival,
sales comparison, uniqueness?
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Legal Aspects
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Liens
Bulk Transfers
Contract
assignments
Covenants not to
compete
Ongoing legal
liabilities
Financial Soundness
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Income statements and balance
sheets (3-5 years)
Income tax returns (3-5 years)
Owner’s compensation (and
relatives)
Cash flow
Methods for Determining the
Value of a Business
Balance Sheet technique
 Adjusted Balance Sheet technique
 Excess Earnings Method
 Capitalized Earnings Approach
 Discounted Future Earnings
approach
 Market approach
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Understanding the Seller’s Side
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Picking the right
buyer
Structuring the
deal
Exit strategies
Negotiating the
deal
Exit Strategies
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Straight business sale
Sale with agreement from
the founder to stay on
Form a limited partnership
Sell a controlling interest
Restructure the company
Sell to an international
buyer
Use a 2-step sale
Establish an ESOP
Factors Affecting Negotiations
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How strong is the desire to sell?
Is the seller willing to finance part of the
purchase price?
What terms does the buyer suggest?
Which ones re most important to him/her?
Is it urgent that the seller close the deal
quickly?
What deal structure best suits your needs?
What are the tax consequences?
Will the seller sign a restrictive covenant?
Is he willing to stay on?
What general economic conditions exist?
Negotiations
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Prepare
Remember the difference between a
position and an interest
Develop the right mindset
Always leave yourself an escape hatch
Keep your emotions in check
Sometimes it’s best to remain silent