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How To Sell An Existing Business

How To Sell An Existing Business – This “deco” border was drawn on Slide Master using PowerPoint’s rectangle and line tools. By selecting all elements (using Select All from the Edit menu), deselecting unwanted elements such as titles (by holding the Shift key and clicking on the unwanted elements), a smaller version was placed on the Master Notes. Paste as Picture from the Edit menu to put a border on the Master Notes. When pasted as an image, we used the resizing handles (with a change to maintain scale) to reduce it to the size you see. Be sure to clear this word processing box before using this template for your own presentation. Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

Buying a Business The average business acquisition takes 19 months from the start of the search to closing the deal Key questions: Does the business meet your lifestyle and financial expectations? Do you have the ability to run a successful business? Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

How To Sell An Existing Business

How To Sell An Existing Business

Advantages of Buying a Business Can keep the business running successfully Leverages the previous owner’s experience Turn Key Business Excellent location Employees and suppliers Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

As Business Market Opens Back Up, Some Owners Eager To Make A Change

Buying Business Benefits: Installed Trade Credit instead of Installed Equipment Inventory Easier Access to Financing

Disadvantages of Buying a Business: Cash Requirements The Business is Losing Money Paying for “Wants” Unqualified Employees Unsatisfactory Location Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

Disadvantages of Buying a Business: Obsolete Equipment and Facilities Replacement and Innovation Challenges Obsolete Inventory Value Accounts Receivable Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

Age of Accounts (Days) Probability of Collection Value 0-30 31-60 61-90 91-120 151+ Total $40,000 $25,000 $14,000 $10,000 $7,000 $5,000 900 $. 88 .70 .40 .25 .10 $38,000 $22,000 $9,800 $4,000 $1,750 $500 $76,050 Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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Disadvantages of buying a business Obsolete equipment and facilities Replacement and innovation challenges Obsolete inventory Value of accounts receivable The business may be overvalued

How to Buy a Business Analyze Your Skills, Abilities, and Interests Develop a List of Criteria Create a List of Potential Candidates Be aware of the hidden market of companies that may be for sale but not listed as “For Sales” Ray Market Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

How to Buy a Business Screening and Evaluating Candidate Businesses and Choosing the Best One Negotiate the Deal Explore Financing Options Ensure a Smooth Transition Ray’s Marketplace Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

How To Sell An Existing Business

Why does the owner want to sell… the real reason? What is the physical condition of the business and its assets? What is the market potential for the company’s products or services? Customer characteristics and structure Competitor analysis What legal aspects should I consider? Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

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Lien – Transfer of creditor claims on bulk assets – Protects the buyer of the business from unpaid creditor claims on the company’s assets Copyright ©2009 Pearson Education, Inc. Published as Prentice Hall

Bulk transfer The seller must provide the buyer with a sworn list of creditors The buyer and seller must prepare a list of assets included in the sale The buyer must keep a list of creditors and assets for six months The buyer must give notice of the sale to each creditor at least ten days before taking possession of the goods or for them Money (whichever comes first) Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

Liens – Transfer of creditor’s claims on assets in bulk – Protects the buyer of the business from unpaid creditor’s claims on the company’s assets Assignment of Contract – Buyer’s ability to assume rights under existing vendor contracts Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

Covenant not to compete (restrictive covenant) – an agreement in which the seller of a business agrees not to compete with the buyer for a certain time and geographic area Ongoing legal obligations – physical premises, product liability and labor relations Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

Franchise Re Sales And Existing Business Re Sales

Why does the owner want to sell… the real reason? What is the physical condition of the business and its assets? What is the market potential for the company’s products or services? Customer characteristics and structure Competitor analysis What legal aspects should I consider? 5. Is the business financially sound? Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall

Balance Sheet Techniques Technical Variations: Adjusted Balance Sheet Techniques Profit Approach Variation 1: Excess Profit Approach Variation 2: Capital Gains Approach Variation 3: Market Approach Discounted Future Earnings Copyright ©2009 Pearson Education, Inc.

“Book Value” of Net Cost = Total Assets – Total Liabilities = $278, $114, 325 = $164, 665 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

How To Sell An Existing Business

“Book Value” of Net Worth = Total Assets – Total Liabilities = $278, $114, 325 = $164, 665 Variation: Adjusted Balance Sheet Technique: Adjusted Net Worth = $264, $114, 325 = $150, Inc . Copyright © $150, $150. Publishing as Prentice Hall

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Earnings Approach Variation 1: Excess Earnings Method Step 1: Calculate Tangible Adjusted Net Worth: Adjusted Net Worth = $264, $114, 325 = $150, 313 Copyright © 2009 Pearson Education, Inc. Publishing for hire as P

Earnings Approach Variation 1: Excess Earnings Method Step 1: Calculate Adjusted Tangible Net Worth: Adjusted Net Worth = $264, $114, 325 = $150, 313 Step 2: Calculate the Opportunity Cost of Investment: Investment $150 , $350, $355 % , 000 Total $62, 578 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Earnings Approach Variation 1: Excess Earnings Method Step 1: Calculate Adjusted Tangible Net Worth: Adjusted Net Worth = $264, $114, 325 = $150, 313 Step 2: Calculate the Opportunity Cost of Investment: Investment $150 , $350, $350, $350, % Total Salary $62,578 Step 3: Project Income for Next Year: $74,000 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

(continued) Step 4: Excess Earnings (EEP): EEP = Estimated Net Earnings – Total Opportunity Costs = $74,578 = $11,422 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

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(Continued) Step 4: Excess Earnings (EEP): EEP = Estimated Net Income – Total Opportunity Cost = $74, ,578 = $11, 422 Step 5: Estimate the Value of Intangibles (“Goodwill”) : Intangible = Additional Profit. x “Years of Earnings” Figure* = 11, 422 x = $34, 299 * Years of Earnings Figure 1 through 7; For a typical venture business, it is 3 or 4 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

(Continued) Step 6: Determine Business Value: Value = Net Tangible Value + Intangible Value = $150, ,299 = $184, 612 Estimated Business Value = $184, 612 Copyright © 2009 Pearson Education, Inc. Prentice Hall

Variation 2: Capital Gain Method: Net Profit (after deducting the owner’s salary) Value = Rate of Return* * The rate of return reflects what can be earned on an investment of equal risk Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

How To Sell An Existing Business

Variation 2: Capital Gain Method: Net Profit (after deducting the owner’s salary) Value = Rate of Return* * Rate of Return represents what can be earned on an equal risk investment % Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

Buy An Existing Business

Variant 3: Discounted Future Earnings Method: Step 1: Future Earnings of a Five-Year Project: 3 Estimates: Pessimistic Most Optimistic Calculate the weighted average of earnings: Pessimistic + (4 x Likely) + Optimistic 6 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

(continued) Step 1: Profit of the project five years into the future: Year Pess ML Opt Weighted Average 1 2 3 4 5 $65,000 $74,000 $82,000 $88,000 $74,000 $90,000 $100,000 $100,50 $92,000,000 $101,000 $112,000 $120,000 $122,000 $75,500 $89,167 $99,000 $107,333 $111,667 Copyright © 2010 Pish

(Continued) Step 2: Discount future earnings at an appropriate present value rate Weighted average: 1 Present value factor = (1 +k) t Where… k = rate of return on risky investment equal t = period (years) – 1, 2, 3 …n) Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall

(continued) Step 2: Discount Future Earnings at an Appropriate Weighted Average Present Value Rate: Weighted Average Year x PV Factor = Present Value 1 2 3 4 5 $75, 500 $89, 167 $99, 000 $107, 333 $111,860. 4096 .3277 $60, 400 $57, 067 $50, 688 $43, 964 $36, 593 Total $248, 712 Copyright © 2009 Pearson Education, Inc. As a publication hall

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(Continued) Step 3: Estimate the earnings stream five years ahead: Weighted Average Earnings in Year 1 5 x = Rate of Return

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