SMALL BUSINESS MANAGEMENT

1
SMALL BUSINESS MANAGEMENT

• Chapter Five
• Buying a Business

2
Purchasing an Existing Business

• Advantages 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

3
Purchasing an Existing Business

• Disadvantages of Purchasing
• Physical Facilities
• Personnel
• Inventory
• Accounts Receivable
• Financial Condition
• Market
• Deciding on the Price

4
Sources of Businesses for Sale

• Classified Ads
• Government Departments
• Trade Journals
• Real Estate Brokers
• Other Professionals
• Word of Mouth

5
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

6
Evaluating a Business For Sale

• Condition of the Assets
• Liquid Assets (Cash and Investments)
• Accounts Receivable
• Inventory
• Building and Equipment
• Real Estate
• Goodwill

7
Evaluating a Business For Sale

• Quality of Personnel
• External Relationships of the Business
• Conditions of the Records

8
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

9
The Purchase Transaction

• Coverage
• 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

10
Appendix A

• Checklist of Considerations in Purchasing a
  Business
• 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 isnt
  financially sound?

13
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?

14
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?