Entrepreneurship and small business management chapter 03
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Entrepreneurship and
Small Business
Management
Chapter 3
Finding Opportunity in an Existing
Business
Ch. 3 Performance
Objectives
Understand the potential benefits of buying a going concern.
Identify potential drawbacks of purchasing a business.
Learn how to identify and evaluate purchasing opportunities.
Entrepreneurship and Small Business
Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Ch. 3 Performance
Objectives
(continued)
Learn how to determine the value of a business.
Learn how to negotiate and close the deal.
Recognize joining a family business as an entrepreneurial pathway.
Entrepreneurship and Small Business
Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Why Buy an Existing
Business?
Quicker, easier start-up
Employees bring
knowledge/relationships
Seller may help with transition
Reduced risk due to established business structure and customer base
Cost may be less to buy than to start a similar company
Entrepreneurship and Small Business
Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Potential Pitfalls of Buying
an Existing Business
Higher initial investment
Known and hidden problems
Not a good “fit” with personality, lifestyle, or work-environment
requirements
Existing customers may not remain customers after business is bought
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Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Finding Available
Businesses
Direct inquiry/networking (employer, customers, competitors, friends, family)
Solicitation by direct mail/advertising
Internet research
Business brokers who buy and sell businesses for a fee
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Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Evaluating a Business for
Sale
Start with background data from owner
Scan Internet for press coverage and legal
issues
Ask outside parties for information:
bankers, suppliers, employees, customers
Examine internal and financial documents
Identify real reason owner is selling
Be alert for conflicting information
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Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Three Methods to
Determine Business Value
Asset valuation—analyzes the
underlying value of the firm’s assets
Earnings valuation—based on a stream
of earnings multiplied by the capitalization
factor or by the Price/Earnings ratio
Cash flow valuation—uses projected
future cash flows and time value of money
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Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Standards for Asset
Valuation
Book value—reported in firm’s records
Adjusted book value—considers actual
market value versus the stated book value
Liquidation value—net cash potentially
obtainable from the quick sale of assets
Replacement value—cost of newly
purchasing the assets
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Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Determining Variables to Use
in Earnings Valuation
Type of earnings
Historical earnings
Future earnings under current
ownership
Future earnings under new ownership
Measure of earnings
Earnings before or after tax?
EBIT or operating income?
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Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Non-Financial Factors
Affecting the Offer Price
Market space
Competitive environment
Firm’s legal and regulatory status
Pending physical or labor changes
Need for investment in plant, property, and/or equipment
Value of customer “goodwill”
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Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Negotiating and Closing the
Deal
Secure qualified legal and financial
counsel.
Establish what is being purchased:
assets only or “whole business.”
Determine the terms of the sale.
Consider buying the business over time.
Hold a formal closing to complete all
legal documents.
Entrepreneurship and Small Business
Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
Joining a Family Business
Two or more members of same family
managing and/or working in the business
May provide opportunities to:
Foster entrepreneurial talent
Build on a solid foundation for future success
Turn around a floundering business
Important to communicate clearly about
roles, compensation, ownership, etc.
Entrepreneurship and Small Business
Management, 1/e
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© 2012 Pearson Education, Upper Saddle River, NJ
07458.
