There is nothing so easy to learn as

experience and nothing so hard to

apply…Josh Billings

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• Rather than launch their own businesses or
purchase a franchise, some entrepreneurs
opt for a more direct route to business
ownership: They buy an existing business.

• Each circumstance is unique, but the

process of evaluating a potential business
acquisition is not.

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• The process of investigating the details of a
company that is for sale to determine the
strengths, weaknesses, opportunities, and
threats facing it
• When considering purchasing a business, the
first rule is, “Do not rush into a deal.”
• Taking shortcuts when investigating a potential
business acquisition almost always leads to
nasty—and expensive—surprises. Prospective
buyers must be sure that they discover the
answers to the following fundamental questions:

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• Is the right type of business for sale in a market
in which you want to operate?
• What experience do you have in this particular
business and the industry in which it operates?
• What is the company’s potential for success?
• What changes will you have to make—and how
extensive will they be—to realize the business’s
full potential?
• What price and payment method are
reasonable for you and acceptable to the seller?
• Is the business financially sound?

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• Over the next decade , entrepreneurs looking to
buy existing businesses will have ample
opportunities to consider. Those who purchase an
existing business may reap the following benefits.

1. A Successful Existing Business May

Continue to Be Successful:
Purchasing a flourishing business at an
acceptable price increases the likelihood of
success. The previous management team already
has established a customer base , built supplier
relationships , and set up a business system.

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2. An Existing Business May Already
Have the Best Location:
When the location of the business is critical to its
success, it may be wise to purchase a business
that is already in the right place. Opening in a
second-choice location and hoping to draw
customers may prove fruitless.
3. Employees and Suppliers Are
Established:
An existing business already has experienced
employees who can help the new owner through
the transition phase. Experienced employees
enable a company to continue to earn money
while a new owner learns the business .
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 In addition, an existing business has an
established set of suppliers with a history of
business dealings. Those vendors can continue to
supply the business while the new owner
investigates the products and services of other
suppliers.
4. Equipment Is Installed and Productive
Capacity Is Known:
Acquiring and installing new equipment exerts a
tremendous strain on a fledgling company’s
financial resources. In an existing business, a
potential buyer can determine the condition of
the plant and equipment and its capacity before
buying.
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5. Inventory Is in Place and Trade Credit
Is Established:
The proper amount of inventory is essential to both
controlling costs and generating adequate sales
volume. If a business has too little inventory, it will
not have the quantity and variety of products it
needs to satisfy customer demand.
6. The New Business Owner Hits the
Ground Running:
Entrepreneurs who purchase existing businesses
avoid the time , costs , and energy required to
launch a new business. The day they take over an
ongoing business is the day their revenues begin.

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7. The New Owner Can Use the
Experience of the Previous Owner:
Even if the previous owner is not around after the
sale, the new owner will have access to all of the
business’s records to guide him or her until he or
she becomes adjust to the business and the local
market .
8. Easier Financing:
Attracting financing to purchase an existing
business often is easier than finding the money to
launch a company from scratch.

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 The Previous Owner May Have Created Ill
Will:
The due diligence process may reveals that
customers, suppliers, creditors, or employees
may have extremely negative feelings about a
company’s reputation because of the unethical
actions of its current owner. Ill will can permeate
a business for years.

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1. Employees Inherited with the
Business May Not Be Suitable:
Previous managers may have kept marginal
employees because they were close friends or
because they started with the company. A new
owner therefore may have to makes some very
unpoular termination decisions.
2. The Business Location May Have
Become Unsatisfactory:
What was once an ideal location may have
become obsolete as market and demographic
trends change. Large shopping malls, new
competitors, or highway re-routings can spell
disaster for small retail shops .

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3. Equipment and Facilities May Be
Obsolete or Inefficient:
Potential buyers some times neglect to have an
expert evaluate a company’s facilities and
equipment before they purchase it .
4. Change and Innovation Are Difficult to
Implement:
It is easier to plan for change than it is to
implement it. Methods, policies, and procedures
the previous owner used in a business may have
established precedents that a new owner finds
difficult to modify. Customers may resist changes
the new owner wants to make to the business.

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5. The Business May Be Over priced:
Each year, many people purchase businesses at
prices far in excess of their value, which can
impair the companies’ ability to earn a profit and
generate a positive cash flow.

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 Buying an existing business can be risky if
approached haphazardly. Studies show that more
than 50 percent of all business acquisitions fail to
meet the buyer’s expectations. To avoid costly
mistakes, an entrepreneur should follow a logical,
methodical approach:
i. Analyze your skills, abilities, and interests to
determine what kind(s) of businesses you should
consider.
ii. Prepare a list of potential candidates.
iii. Investigate those candidates and evaluate the best
one(s).
iv. Explore financing options.
v. Ensure a smooth transition.
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 The first step in buying a business is not searching out
potential acquisition candidates. Every entrepreneur
considering buying a business should begin by
conducting a self audit to determine the ideal
business for him or her. Following questions arise:
 What business activities do you enjoy most? Least?
Why?
 Which industries or markets offer the greatest
potential for growth?
 Which industries interest you most? Least? Why?
 What kind of business do you want to buy?
 How much risk are you willing to take?

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 Once you know what your goals are for acquiring a
business , you can begin your search. Donot limit
yourself to only those businesses that are advertised
as being “for sale.”
Hidden Market
Low-profile companies that might be for sale but are
not advertised as such.
How can you tap into this hidden market of potential
acquisitions ? Typical sources include the following:
 Business brokers
 Bankers
 Accountants
 Investment bankers

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 Finding the right company requires patience.
Although some buyers find a company after only
a few months of looking, the typical search takes
much longer, sometimes as much as two or three
years . The steps to investigate the candidates
are as under:
 What are the company’s strengths? Weaknesses?
 Is the company profitable? What is its overall
financial condition?
 What is its cash flow cycle? How much cash will
the company generate?
 Who are its major competitors?

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 Placing a value on an existing business
represents a major hurdle for many would- be
entrepreneurs .

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 Once the parties strike a deal , the challenge of
making a smooth transition immediately arises. No
matter how well planned the sale is, there are always
surprises. To avoid a bumpy transition , a business
buyer should do the following:
 Concentrate on communicating with employees.
Business sales are fraught with uncertainty and
anxiety, and employees need support.
 Be honest with employees. Avoid telling them only
what they want to hear.

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 Share with the employees your vision for the
business in the hope of generating a heightened
level of motivation and support.
 Listen to employees. They have first-hand
knowledge of the business and its strengths and
weaknesses and usually can offer valuable
suggestions for improving it.

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 Goodwill: The difference in the value of an
established business and one that has not yet
built a solid reputation for itself.

i. Balance Sheet Techniques: The balance sheet

technique is one of the most commonly used
methods of evaluating a business, although it is
not highly recommended because it
oversimplifies the valuation process . A method of
valuing a business based on the value of the
company’s net worth.
Net Worth = Assets - Liabilities

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ii. Adjusted Balance Sheet Technique: A method of
valuing a business based on the market value of the
company’s net worth.
Net worth= Total assets –Total liabilities

iii. Earnings Approach: A method of valuing a

business that recognizes that a buyer is purchasing
the future income (earning) potential of a business. In
other words, the earnings approach recognizes that
assets derive their real value from the income they
produce in the future. There are three variations of
the earnings approaches.

Variation 1: Excess Earnings Method: This

method combines the value of a business’s existing
assets (minus its liabilities) and an estimate of its
future earnings potential to determine its selling price.

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Variation 2 : Capitalized Earnings Approach:
A method of valuing a business that divides
estimated earnings by the rate of return the buyer
could earn on a similar-risk investment.

Variation 3: Discounted Future Earnings

Approach:
A method of valuing a business that forecasts a
company’s earnings several years into the future
and then discounts them back to their present value.

iv. Market Approach: A method of valuing a

business that uses the price/earnings (P/E) ratio of
similar, publicly held companies to determine value.

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 Although determining the value of a business for sale is
an important step in the process of buying a business,
it is not the final one. The buyer must sit down with the
seller to negotiate the actual selling price for the
business and, more important, the terms of the deal.
The buyer seeks to:
i. Get the business at the lowest possible price.

ii. Negotiate favorable payment terms, preferably over

time.
iii. Minimize the amount of cash paid up front.

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 The seller is looking to:
i. Get the highest price possible for the business.
ii. Separate all responsibility for the company’s liabilities.

iii. Maximize the cash he or she gets from the deal.

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