Chapter 4: Buyouts vs. Starting New
Chapter 4: Buyouts vs. Starting New MGT 241 - 1
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MGT 241 - 1
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This 4 page Class Notes was uploaded by Jackline Kingori on Wednesday October 7, 2015. The Class Notes belongs to MGT 241 - 1 at Ball State University taught by Robert D Mathews (P) in Fall 2015. Since its upload, it has received 13 views. For similar materials see The Entrepreneurial Experience in Business, management at Ball State University.
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Date Created: 10/07/15
Buyouts vs Starting New Chapter 4 Small Business EntryPaths to Entrepreneurship Five Paths to Business Ownership llllll You may start a new business startup You may buy an existing business You may franchise a business You may inherit a business You may be hired to be the professional manager of a small business Survival Rate of Startup Businesses see slide Starting a New Business Advantages D D D D Begin with a clean slate Use the most uptodate technologies Provide new unique products or services Can be kept small deliberately to limit the magnitude of possible losses Starting a New Business Disadvantages D llllll No initial Recognition Require mni cant time Very dif cult to nance Cannot easily gain revolving credit May not have experienced manams and workers Buying an Existing Business Advantages D llllllllll Established customers Business process are already in place Often requires less cash outlay Better chance of success It is sometimes possible to purchase at a very good price Mentorship opportunities Established base and reputation place in the market Buying an Existing Business Disadvantages D D Finding a successful business for sale that is appr0priate for you Employee problems D Might be a test problem Resistance to change Reputation hard to overcome D Facilities and equipment may be obsolete D Lack of identity D Skeletons in the closet surprises Steps to Follow When Acquiring a Business 1 Conduct extensive interviews of the business 2 Study the nancial reports and other records of the business 3 Make a personal examination of the side or sites of the business 4 Interview employees customers suppliers and key community members of the business 5 Develop a detailed business plan for the acquisition 6 Negotiate an appropriate price for the business based upon the business plan projections 7 Obtain suf cient capital to purchase and operate the business Due Diligence Due Diligence Process of investigating a business to determine its value Caveat Emptor Latin let the buyer beware Purposes of Due Diligence 1 You are attempting to nd any wrongdoing 1 fraud 2 misrepresentations of the sellers and 3 missing information 2 You are trying to nd any inef ciencies unnoticed opportunities waste and mismanagement this may also provide opportunity Purchasing Key Questions WHY are selling What is the current physical condition of the business What is the current condition of the business in terms of revenues customers and performance overall nancial picture What is the condition of the inventory What is the condition of the company s other assets Equipment Records Past Contract Goodwill Vendor Relationships What is the employee situation How many key personnel will remain What type of competition does the business face Quality Quantity Are you willing to sign a covenant not to compete What else do you require Can I see your tax returns Can I talk to key customers and employees What is going on in your market Why should I buy Purchasing Key Considerations Don t trust the owner family or close friends Assume NOTHING to be true Find key people in the community you can trust Don t give too much Look for aws and use those to your advantage be extremely picky scrutiny IMPORTANT Make sure you identify either major strengths or ways to improve the business Develop a relationship with the owner prior to considering buying reaching an agreement Do things YOUR way but prepare for the changes Be prepared for high employee turnover Do your own extensive market research talk to a variety of people and nd ways to get their opinion on the business List advantages disadvantages of starting new or purchasing existing Purchasing Determining the Price First throw emotion out the window Be picky many times there are hidden problems with inventory equipment amp other assets Assessing the Price Discounted cash ows Book value Net realizable value Replacement value Liquidation value Performancebased Purchasing Determining the Value of the Business D D D Comparable Sales Financial Ratios Earnings multiple Industry Heuristics Purchasing Structuring the Deal 4 ways to buy Buy out seller39s interest Buy in Real question is WHY Buy key assets Takeover Professional Manager of Small Business of Small Business D A professional managg of a small business is one who has the experience and skills to use a systematic approach to analyzing and solving business problems