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Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
Buying An Buying An
Existing BusinessExisting Business
Buying An Buying An
Existing BusinessExisting Business
CHAPTER CHAPTER 77
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 2Ch. 7: Buying an Existing Business
Key Questions to Consider Key Questions to Consider BeforeBefore Buying a Business Buying a Business
Is the right type of business for sale in the Is the right type of business for sale in the market in which you want to operate?market in which you want to operate?
What experience do you have in this What experience do you have in this particular business and the industry in which particular business and the industry in which it operates? How critical is experience in the it operates? How critical is experience in the business to your ultimate success?business to your ultimate success?
What is the company’s potential for success?What is the company’s potential for success? What changes will you have to make – and What changes will you have to make – and
how extensive will they have to be – to realize how extensive will they have to be – to realize the business’s full potential?the business’s full potential?
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 3Ch. 7: Buying an Existing Business
Key Questions to Consider Key Questions to Consider BeforeBefore Buying a Business Buying a Business
What price and payment method are What price and payment method are reasonable for you and acceptable to the reasonable for you and acceptable to the seller?seller?
Will the company generate sufficient cash to Will the company generate sufficient cash to pay for itself and leave you with a suitable pay for itself and leave you with a suitable rate of return on your investment?rate of return on your investment?
Should you be starting a business and Should you be starting a business and building it from the ground up rather than building it from the ground up rather than buying an existing one? buying an existing one?
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 4Ch. 6: Franchising and the Entrepreneur
FIGURE 7.1 Types of Business BuyersSource: Darren Dahl, “Meet the Buyers,” Inc., April 2008, pp. 98-99.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 5Ch. 7: Buying an Existing Business
Advantages of Advantages of Buying a BusinessBuying a Business
It may continue to be successfulIt may continue to be successful It may already have the best locationIt may already have the best location Employees and suppliers are Employees and suppliers are
establishedestablished Equipment is already installedEquipment is already installed Inventory is in place and trade credit Inventory is in place and trade credit
is establishedis established
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 6Ch. 7: Buying an Existing Business
Advantages of Advantages of Buying a BusinessBuying a Business
New owners can “hit the ground New owners can “hit the ground running”running”
New owners can use the previous New owners can use the previous owner’s experienceowner’s experience
Financing is easier to obtainFinancing is easier to obtain It’s a bargain!It’s a bargain!
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 7Ch. 7: Buying an Existing Business
Disadvantages of Disadvantages of Buying a BusinessBuying a Business
It’s a “loser”It’s a “loser” Previous owner may have created ill willPrevious owner may have created ill will ““Inherited” employees may be Inherited” employees may be
unsuitableunsuitable The location may have The location may have
become unsatisfactorybecome unsatisfactory Equipment and facilities Equipment and facilities
may be obsolete or inefficientmay be obsolete or inefficient
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 8Ch. 7: Buying an Existing Business
Disadvantages of Disadvantages of Buying a BusinessBuying a Business
Change and innovation can be Change and innovation can be difficult to implementdifficult to implement
Inventory may be Inventory may be outdated or obsoleteoutdated or obsolete
Accounts receivable may Accounts receivable may be worth less than face valuebe worth less than face value
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallCh. 7: Buying an Existing Business
Valuing Accounts ReceivableValuing Accounts Receivable
Age of Accounts
(days)
Amount
Collection Probability
Value
0-3031-6061-9091-120121-150151+
Total
$40,000$25,000$14,000$10,000$7,000$5,000
$101,000
.95%88%70%40%25%10%
$38,000$22,000$9,800$4,000$1,750
$500
$76,050
7 - 9
Table 7.1
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 10Ch. 7: Buying an Existing Business
Disadvantages of Disadvantages of Buying a BusinessBuying a Business
Changes can be difficult to implementChanges can be difficult to implement Inventory may be staleInventory may be stale Accounts receivable may be worth Accounts receivable may be worth
less than face value less than face value The business may The business may
be overpricedbe overpriced
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 11Ch. 7: Buying an Existing Business
Acquiring a BusinessAcquiring a Business
Study: 50 to 75% of all business sales Study: 50 to 75% of all business sales that are initiated fall through.that are initiated fall through.
The The rightright way: way: Analyze your skills, abilities, and Analyze your skills, abilities, and
interests.interests. Prepare a list of potential candidates.Prepare a list of potential candidates. Investigate and evaluate candidate Investigate and evaluate candidate
businesses and select the best one.businesses and select the best one.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 12Ch. 7: Buying an Existing Business
Acquiring a BusinessAcquiring a Business
Explore financing options.Explore financing options. Potential source: the sellerPotential source: the seller
Ensure a smooth transition.Ensure a smooth transition. Communicate with employeesCommunicate with employees Be honestBe honest ListenListen Consider asking the seller to Consider asking the seller to
serve as a consultant through serve as a consultant through the transitionthe transition
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 13Ch. 7: Buying an Existing Business
Critical Areas for Critical Areas for Analyzing an Existing BusinessAnalyzing an Existing Business
1.1. Why does the owner want to sell ... Why does the owner want to sell ... what is the what is the realreal reason? reason?
2.2. What is the physical condition of the What is the physical condition of the business?business?
Accounts receivableAccounts receivable Lease arrangementsLease arrangements Business recordsBusiness records Intangible assetsIntangible assets Location and appearanceLocation and appearance
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 14Ch. 7: Buying an Existing Business
Critical Areas for Critical Areas for Analyzing an Existing BusinessAnalyzing an Existing Business
3.3. What is the potential for the company's What is the potential for the company's products or services?products or services? Product line statusProduct line status Potential for company’s products or Potential for company’s products or
servicesservices Customer characteristics and compositionCustomer characteristics and composition Competitor characteristics and compositionCompetitor characteristics and composition
4.4. What legal aspects must I consider?What legal aspects must I consider?
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 15Ch. 7: Buying an Existing Business
The Legal Aspects of The Legal Aspects of Buying a BusinessBuying a Business
Lien - creditors’ claims against an asset.Lien - creditors’ claims against an asset.
Bulk transfer - protects business buyer Bulk transfer - protects business buyer from the claims unpaid from the claims unpaid creditors might have creditors might have against a company’s assets.against a company’s assets.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 16Ch. 7: Buying an Existing Business
Bulk TransferBulk Transfer Seller must give the buyer a sworn list of Seller must give the buyer a sworn list of
creditors.creditors. Buyer and seller must prepare a list of Buyer and seller must prepare a list of
the property included in the sale.the property included in the sale. Buyer must keep the list of creditors and Buyer must keep the list of creditors and
property for six months.property for six months. Buyer must give written notice of the sale Buyer must give written notice of the sale
to each creditor at least ten days before to each creditor at least ten days before he takes possession of the goods or pays he takes possession of the goods or pays for them (whichever is first).for them (whichever is first).
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 17Ch. 7: Buying an Existing Business
The Legal Aspects of The Legal Aspects of Buying a BusinessBuying a Business
Lien - creditors’ claims against an Lien - creditors’ claims against an asset.asset.
Bulk Transfer - protects business buyer Bulk Transfer - protects business buyer from the claims unpaid creditors might from the claims unpaid creditors might have against a company’s assets.have against a company’s assets.
Contract Assignment - buyer’s ability Contract Assignment - buyer’s ability to assume rights under seller’s existing to assume rights under seller’s existing contracts. contracts.
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 18Ch. 7: Buying an Existing Business
The Legal Aspects of The Legal Aspects of Buying a BusinessBuying a Business
Covenant not to compete (restrictive Covenant not to compete (restrictive covenant or noncompete agreement) covenant or noncompete agreement) contract in which a business seller agrees contract in which a business seller agrees not to compete with the buyer within a not to compete with the buyer within a specific time and geographic area.specific time and geographic area.
Ongoing legal liabilities - physical Ongoing legal liabilities - physical premises, product liability lawsuits, and premises, product liability lawsuits, and labor relations issues.labor relations issues.
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 19Ch. 7: Buying an Existing Business
Critical Areas for Critical Areas for Analyzing an Existing BusinessAnalyzing an Existing Business
3.3. What is the potential for the company's What is the potential for the company's products or services?products or services? Product line statusProduct line status Potential for company’s products or Potential for company’s products or
servicesservices Customer characteristics and compositionCustomer characteristics and composition Competitor characteristics and compositionCompetitor characteristics and composition
4.4. What legal aspects must I consider?What legal aspects must I consider?
5.5. Is the business financially sound?Is the business financially sound?
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallCh. 7: Buying an Existing Business
The Acquisition ProcessThe Acquisition Process
Negotiations
1. Identify & 1. Identify & approach approach candidate candidate
2. Sign the 2. Sign the nondisclosure nondisclosure statementstatement
3. Sign 3. Sign letter of letter of intentintent
4. 4. Buyer’s due Buyer’s due diligence diligence investigationinvestigation
5. Draft the 5. Draft the purchase purchase agreementagreement
6. Close the 6. Close the final dealfinal deal
7. Begin the 7. Begin the transitiontransition
1. Approach the candidate. If a business is advertised for sale, the proper approach is through the channel defined in the ad.Sometimes, buyers will contact business brokers to help them locate potential target companies.If you have targeted a company inthe “hidden market,” an introduction from a banker,accountant, or lawyer often is thebest approach. During this phase,the seller checks out the buyer’s qualifications, and the buyer beginsto judge the quality of the company.2. Sign a nondisclosure document. If the buyer and the seller are satisfiedwith the results of their preliminaryresearch, they are ready to beginserious negotiations. Throughout thenegotiation process, the seller expectsthe buyer to maintain strict
confidentiality of all of the records,documents, and information he or shereceives during the investigation andnegotiation process. The nondisclosure document is a legally binding contract that ensures the secrecy of the parties’ negotiations.3. Sign a letter of intent. Before a buyer makes a legal offer to buy the company, the buyer typically will ask the seller to sign a letter of intent. The letter of intent is a non-binding document that says that the buyer and the seller have reached a sufficient “meeting of the minds” to justify the time and expense of negotiating a final agreement. The letter should state clearly that it is non-binding, giving either party the right to walk away from the deal. It should also contain a clause calling for “good faith negotiations” between the parties. A typical letter of intent addresses terms such as price, payment terms, categories of assets to be sold, and a deadline for closing the final deal.
4. Buyer’s Due Diligence. While negotiations are continuing, the buyeris busy studying the business and evaluating its strengths and weaknesses.In short, the buyer must “do his or her homework” to make sure that the business is a good value. 5. Draft the purchase Agreement.The purchase agreement spells out the parties’ final deal! It sets forth all of the details of the agreement and is the final product of the negotiation process.6. Close the final deal. Once the parties have drafted the purchase agreement, all that remains to making the deal “official” is the closing. Both buyer and seller sign the necessary documents to make the sale final. The buyer delivers the required money, and the seller turns the company over to the buyer.7. Begin the Transition. For the buyer, the real challenge now begins: Making the transition to a successful business owner!
FIGURE 7.2Sources: Adapted from Buying and Selling: A Company Handbook, Price Waterhouse,( New York: 1993) pp.38-42;Charles F. Claeys, “The Intent to Buy,” Small Business Reports, May 1994, pp.44-47.
7 - 20
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 21Ch. 7: Buying an Existing Business
Determining the Determining the Value of a BusinessValue of a Business
GoodwillGoodwillThe difference in the value of The difference in the value of an established business and an established business and one that has not yet built a one that has not yet built a solid reputation for itself. solid reputation for itself.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 22Ch. 7: Buying an Existing Business
Determining the Determining the Value of a BusinessValue of a Business
Balance Sheet Technique Balance Sheet Technique Variation: Adjusted Balance Sheet Variation: Adjusted Balance Sheet
TechniqueTechnique Earnings ApproachEarnings Approach
Variation 1: Excess Earnings ApproachVariation 1: Excess Earnings Approach Variation 2: Capitalized Earnings ApproachVariation 2: Capitalized Earnings Approach Variation 3: Discounted Future Earnings Variation 3: Discounted Future Earnings
ApproachApproach Market ApproachMarket Approach
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 23Ch. 7: Buying an Existing Business
Balance Sheet TechniquesBalance Sheet Techniques
““Book Value" of Net Worth = Total Assets - Total Book Value" of Net Worth = Total Assets - Total LiabilitiesLiabilities
= $266,091 - $114,325= $266,091 - $114,325
= $151,766= $151,766
Variation: Adjusted Balance Sheet Technique:Variation: Adjusted Balance Sheet Technique:
Adjusted Net Worth = $274,638 - $114,325Adjusted Net Worth = $274,638 - $114,325
= = $160,313$160,313
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 24Ch. 7: Buying an Existing Business
Earnings ApproachesEarnings Approaches
Variation 1: Excess Earnings MethodVariation 1: Excess Earnings Method
Step 1Step 1: Compute adjusted tangible net worth:: Compute adjusted tangible net worth:Adjusted Net Worth = $274,638 - $114,325 = Adjusted Net Worth = $274,638 - $114,325 = $160,313$160,313
Step 2Step 2: Calculate opportunity costs of investing:: Calculate opportunity costs of investing: Investment $160,313 x 25% = Investment $160,313 x 25% = $40,078$40,078 Salary Salary $25,000$25,000
Total Total $65,078 $65,078
Step 3Step 3: Project earnings for next year:: Project earnings for next year: $74,000$74,000
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 25Ch. 7: Buying an Existing Business
Excess Earnings MethodExcess Earnings Method
Step 4Step 4: Compute extra earning power (EEP):: Compute extra earning power (EEP):
EEP = Projected Net Earnings - Total Opportunity CostsEEP = Projected Net Earnings - Total Opportunity Costs = $74,000 - 65,078 = $8,922= $74,000 - 65,078 = $8,922
Step 5Step 5: Estimate the value of the intangibles : Estimate the value of the intangibles (“goodwill”):(“goodwill”):
Intangibles = Extra Earning Power x “Years of Profit” Intangibles = Extra Earning Power x “Years of Profit” Figure*Figure*
= $8,922 x 3 = $26,766= $8,922 x 3 = $26,766
* * Years of Profit Figure ranges from 1 to 7; for a normal risk Years of Profit Figure ranges from 1 to 7; for a normal risk business, the range is 3 to 4.business, the range is 3 to 4.
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 26Ch. 7: Buying an Existing Business
Excess Earnings MethodExcess Earnings Method
Step 6Step 6: Determine the value of the business:: Determine the value of the business:
Value = Tangible Net Worth + Value of Value = Tangible Net Worth + Value of IntangiblesIntangibles
= $160,313 + 26,766 = = $160,313 + 26,766 = $187,079$187,079
Estimated Value of the Business = $187,079Estimated Value of the Business = $187,079
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 27Ch. 7: Buying an Existing Business
Earnings ApproachesEarnings Approaches
Variation 2: Capitalized Earnings MethodVariation 2: Capitalized Earnings Method
Value = Value = Net Earnings (Net Earnings (AfterAfter Deducting Owner's Salary) Deducting Owner's Salary)
Rate of Return*Rate of Return*
Value = Value = $74,000 - $25,000$74,000 - $25,000 = = $196,000$196,000 25%25%
* Rate of return reflects what buyer could earn on a similar-* Rate of return reflects what buyer could earn on a similar-risk investmentrisk investment..
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 28Ch. 7: Buying an Existing Business
Earnings ApproachesEarnings Approaches
Variation 3: Discounted Future Earnings Variation 3: Discounted Future Earnings MethodMethod
Compute a Compute a weighted averageweighted average of the of the earnings:earnings:
Step 1Step 1: Project earnings five years into the : Project earnings five years into the future:future:
Pessimistic + (4 x Most Likely) + Pessimistic + (4 x Most Likely) + OptimisticOptimistic 66
3 Forecasts: Pessimistic Most Likely Optimistic
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 29Ch. 7: Buying an Existing Business
Discounted Future Discounted Future Earnings MethodEarnings Method
Step 1Step 1: Project earnings five years into the : Project earnings five years into the future:future:
Year Year Pessimistic Most Likely OptimisticPessimistic Most Likely Optimistic Weighted Weighted AverageAverage
$65,00$65,0000
$74,00$74,0000
$82,00$82,0000
$88,00$88,0000
$88,00$88,0000
$74,0$74,00000
$90,0$90,00000
$100,0$100,00000
$109,0$109,00000
$115,0$115,00000
$92,0$92,00000
$101,0$101,00000
$112,0$112,00000
$120,0$120,00000
$122,0$122,00000
$75,5$75,50000
$89,1$89,16767
$99,0$99,00000
$107,3$107,33333
$111,6$111,66767
11
22
33
44
55
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 30Ch. 7: Buying an Existing Business
Discounted Future Discounted Future Earnings MethodEarnings Method
Step 2Step 2: Discount weighted average of future earnings at : Discount weighted average of future earnings at the appropriate present value rate:the appropriate present value rate:
Present Value Factor = Present Value Factor = (1 +k) (1 +k) tt
Where:Where:
k = Rate of return on a similar risk investment.k = Rate of return on a similar risk investment.
t t = Time period (Year - 1, 2, 3...n).= Time period (Year - 1, 2, 3...n).
11
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 31Ch. 7: Buying an Existing Business
Discounted Future Discounted Future Earnings MethodEarnings Method
Year Weighted Average x PV Factor = Present Value Year Weighted Average x PV Factor = Present Value
11
22
33
44
55
.8000.8000
.6400.6400
.5120.5120
.4096.4096
.3277.3277
$75,500$75,500
$89,167$89,167
$99,000$99,000
$107,333$107,333
$111,667$111,667
Step 2Step 2: Discount weighted average of future : Discount weighted average of future earnings at the appropriate present value earnings at the appropriate present value rate:rate:
$60,400$60,400
$57,067$57,067
$50,688$50,688
$43,964$43,964
$36,593$36,593
Total Total $248,712$248,712
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 32Ch. 7: Buying an Existing Business
Discounted Future Discounted Future Earnings MethodEarnings Method
Step 3Step 3: Estimate the earnings stream beyond five years:: Estimate the earnings stream beyond five years:
Weighted Average Earnings in Year 5 x Weighted Average Earnings in Year 5 x 1 1 Rate of Return Rate of Return
= $111,667 x = $111,667 x 1 1 25% 25%
Step 4Step 4: Discount this estimate using the present value : Discount this estimate using the present value factor factor for year 6: for year 6:
$446,668 x .2622 = $117,116$446,668 x .2622 = $117,116
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 33Ch. 7: Buying an Existing Business
Discounted Future Discounted Future Earnings MethodEarnings Method
Step 5Step 5: Compute the value of the business:: Compute the value of the business:
= $248,712 + $117,116 = = $248,712 + $117,116 = $365,828$365,828
Estimated Value of Business = $365,828Estimated Value of Business = $365,828
Value Value ==
Discounted Discounted earnings in earnings in years 1 years 1 through 5through 5
++ Discounted Discounted
earnings in earnings in years 6 years 6 through ?through ?
(continued)(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 34Ch. 7: Buying an Existing Business
Market ApproachMarket ApproachStep 1Step 1: Compute the average Price-Earnings (P-E) Ratio : Compute the average Price-Earnings (P-E) Ratio
for as many similar businesses as possible:for as many similar businesses as possible:
Estimated Value = 3.975 x $74,000 = $294,150Estimated Value = 3.975 x $74,000 = $294,150
Company P-E RatioCompany P-E Ratio 113.3 3.3
22 3.83.8 Average P-E Ratio = Average P-E Ratio = 3.9753.975
33 4.74.744 4.14.1
Step 2:Step 2: Multiply the average P-E Ratio by next Multiply the average P-E Ratio by next year's year's forecasted earnings: forecasted earnings:
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 35Ch. 7: Buying an Existing Business
Understanding the Seller’s SideUnderstanding the Seller’s Side
Study: 64% of owners of closely-held Study: 64% of owners of closely-held companies expect to sell their companies expect to sell their businesses within three years. businesses within three years.
Exit Strategies: Exit Strategies: Straight business saleStraight business sale Business sale with an agreement from the Business sale with an agreement from the
founder to stay onfounder to stay on Form a family limited partnershipForm a family limited partnership Sell a controlling interestSell a controlling interest Restructure the companyRestructure the company
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 36Ch. 7: Buying an Existing Business
FIGURE 7.5 Restructuring a Business for Sale
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 37Ch. 7: Buying an Existing Business
Understanding the Seller’s SideUnderstanding the Seller’s Side
Exit Strategies: Exit Strategies: Straight business saleStraight business sale Business sale with an agreement from Business sale with an agreement from
the founder to stay onthe founder to stay on Form a family limited partnershipForm a family limited partnership Sell a controlling interestSell a controlling interest Restructure the companyRestructure the company Sell to an international buyerSell to an international buyer Use a two-step saleUse a two-step sale Establish an ESOPEstablish an ESOP
(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 38Ch. 7: Buying an Existing Business
A Typical Employee Stock A Typical Employee Stock Ownership Plan (ESOP)Ownership Plan (ESOP)
CorporationShareholders
CorporationShareholders
ESOP TrustESOP Trust
FinancialInstitution
FinancialInstitution
Shares ofShares ofCompanyCompany
StockStock
Stock asStock ascollateralcollateral
BorrowedBorrowedFundsFunds
Funds to Funds to Purchase Purchase
StockStock
Tax-Tax-Deductible Deductible
ContributionsContributionsLoan Loan
PaymentsPayments
FIGURE 7.6 Source: Corey Rosen, “Sharing Ownership with Employees,” Small Business Reports, December 1990, p.63.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 39Ch. 7: Buying an Existing Business
Negotiating the DealNegotiating the Deal
Buyers seek to:Buyers seek to: Get the business at the lowest cost.Get the business at the lowest cost. Negotiate favorable payment terms.Negotiate favorable payment terms. Get assurances that they are buying the Get assurances that they are buying the
business they are getting.business they are getting. Avoid putting the seller in a position to Avoid putting the seller in a position to
open a competing business.open a competing business. Minimize the amount of cash paid up Minimize the amount of cash paid up
front. front.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 40Ch. 7: Buying an Existing Business
Negotiating the DealNegotiating the Deal
Sellers seek to:Sellers seek to: Get the highest price possibleGet the highest price possible Sever all responsibility for company Sever all responsibility for company
liabilitiesliabilities Maximize the cash they receive Maximize the cash they receive Minimize the tax burden from the saleMinimize the tax burden from the sale Make sure the buyer will be able to Make sure the buyer will be able to
make all future paymentsmake all future payments
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallCh. 7: Buying an Existing Business
The Five Ps of NegotiatingThe Five Ps of Negotiating
Preparation - Examine the needsof both parties and all of the relevant external factors affectingthe negotiation before you sit down to talk.
Poise - Remain calm during thenegotiation. Never raise your
voiceor lose your temper, even if the
situation gets difficult or emotional. It’s better to
walk away and calm down than to blow
up and blow the deal.
Persuasiveness - Know whatyour most important positions are, articulate them, and offer support for your position.
Persistence - Don’t give in at the first sign of resistance to your position, especially if it is
an issue that ranks high in your list of priorities.
Patience – Don’t be in such
a hurry to close the deal thatyou end up giving up much of what
you hoped to get. Impatience isa major weakness in
a negotiation.
7 - 41
In addition to the text
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 42Ch. 7: Buying an Existing Business
ConclusionConclusion
When buying an existing business:When buying an existing business: Assess the advantages and Assess the advantages and
disadvantages disadvantages Follow the steps to improve your Follow the steps to improve your
chances of successchances of success Determine the value of the businessDetermine the value of the business Appreciate the seller’s sideAppreciate the seller’s side Negotiate wiselyNegotiate wisely
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 7 - 43Ch. 7: Buying an Existing Business
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of
the publisher. Printed in the United States of America.