SMALL BUSINESS
MANAGEMENT
Chapter Five
Buying a Business
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Purchasing an Existing
Business
 Advantages
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of Purchasing
Reduction of Risk
Reduction of Time and Setup Expenses
Reduction of Competition
Capitalization of Business Strength
Possible Assistance from Previous Owner
Easier Planning
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Purchasing an Existing
Business
 Disadvantages
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of Purchasing
Physical Facilities
Personnel
Inventory
Accounts Receivable
Financial Condition
Market
Deciding on the Price
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Sources of Businesses for Sale
 Classified Ads
 Government
Departments
 Trade Journals
 Real Estate Brokers
 Other Professionals
 Word of Mouth
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Evaluating a Business For Sale
 Industry Analysis
– Sales and Profit Trends in the Industry
 The
Previous Owner
 Financial Condition of the Business
– Validity of the Financial Statements
– Evaluation of the Financial Statements
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Evaluating a Business For Sale
 Condition
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of the Assets
Liquid Assets (Cash and Investments)
Accounts Receivable
Inventory
Building and Equipment
Real Estate
Goodwill
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Evaluating a Business For Sale
 Quality
of Personnel
 External Relationships of the Business
 Conditions of the Records
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Determining the Price or Value of
a Business
 Market
Value
 Asset value
– Book Value
– Replacement Value
 Earnings Value
– Capitalization of Earnings Method
– Times Earnings Method
 Combination
Method
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The Purchase Transaction
 Coverage
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purchase price, including principal and interest amounts
Payment dates - when and to whom
Detailed list of assets included in the purchase
Conditions of the Purchase - nonfinancial requirements
Provisions for noncompliance with conditions and
penalties for breaches
– Collateral or security pledged
 Negotiating
the Deal
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Appendix A
 Checklist
of Considerations in Purchasing a
Business
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The Industry
The Previous Owner
Financial Conditions of the Business
Condition of Assets
Quality of Personnel
Conditions of External Relationships
Conditions of Records
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Concept Checks
 1.
What are the potential advantages and
disadvantages of owning a small business?
 2. What are the common sources of
determining which businesses are for sale?
 3. In addition to experience what key areas
should be investigated in an industry
analysis?
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Concept Checks
 4.
Why is it important to investigate the
background of the previous owner?
 5. What parts of the business should be
analysed to determine the financial
condition of the business?
 6. Under what conditions would it be
advantageous to purchase a business even
though it isn’t financially sound?
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Concept Checks
 7.
What nonfinancial aspects of the business
should be evaluated ?
 8. What methods are available in
determining a price for a business which is
for sale?
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Concept Checks
 9.
What steps are involved in determining
the selling price using the combination
method?
 10. What areas should be included in the
purchase agreement?
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