Podcast
Questions and Answers
What distinguishes the concepts of price and value in a business negotiation?
What distinguishes the concepts of price and value in a business negotiation?
- Price is determined by computational methods, whereas value is set by the market. (correct)
- Value is purely based on the seller's financial needs, while price reflects market conditions.
- Price is what the seller demands while value is what the buyer agrees to pay.
- Price and value are synonymous and used interchangeably in business transactions.
Which of the following represents a source of power for a buyer during negotiations?
Which of the following represents a source of power for a buyer during negotiations?
- The timing of the buyer's offer. (correct)
- The size of the seller's company.
- The seller's desperation for a quick sale. (correct)
- The buyer's secure financial position.
What is a potential trap to avoid when buying an existing business?
What is a potential trap to avoid when buying an existing business?
- Underestimating hidden operational costs. (correct)
- Focusing solely on the initial purchase price.
- Assessing the size and status of the business. (correct)
- Being overly patient during negotiations.
Which of the following is NOT a legal consideration when buying a business?
Which of the following is NOT a legal consideration when buying a business?
Which financial analysis technique is essential for evaluating a business's worth?
Which financial analysis technique is essential for evaluating a business's worth?
Which aspect does the asset-based method of business valuation primarily assess?
Which aspect does the asset-based method of business valuation primarily assess?
What does the earnings-based approach focus on when valuing a business?
What does the earnings-based approach focus on when valuing a business?
In business valuation, what does the discounted future earnings approach account for?
In business valuation, what does the discounted future earnings approach account for?
Which method combines existing assets with an estimate of future earnings for business valuation?
Which method combines existing assets with an estimate of future earnings for business valuation?
When determining a business's value, which legal factor might be critical?
When determining a business's value, which legal factor might be critical?
Which valuation method relies on the prices of similar businesses in the financial markets?
Which valuation method relies on the prices of similar businesses in the financial markets?
What is a potential drawback of using the capitalised earnings approach?
What is a potential drawback of using the capitalised earnings approach?
What should be primarily considered when assessing the legal aspects of a business?
What should be primarily considered when assessing the legal aspects of a business?
What is a characteristic of businesses found in the hidden market?
What is a characteristic of businesses found in the hidden market?
Which of the following is NOT a suggested question to evaluate a business for purchase?
Which of the following is NOT a suggested question to evaluate a business for purchase?
What common problem might a buyer face when purchasing a business that was never profitable?
What common problem might a buyer face when purchasing a business that was never profitable?
What is a significant factor a buyer should consider regarding employees when acquiring a business?
What is a significant factor a buyer should consider regarding employees when acquiring a business?
Which of the following could be a reason for a business to be operating under a poor reputation?
Which of the following could be a reason for a business to be operating under a poor reputation?
When searching for a suitable business to buy, which source is typically not included?
When searching for a suitable business to buy, which source is typically not included?
Which issue might arise from outdated equipment or inventory when buying a business?
Which issue might arise from outdated equipment or inventory when buying a business?
Why might a business be considered overpriced?
Why might a business be considered overpriced?
Flashcards
Asset-based method
Asset-based method
Business valuation method that determines value by subtracting liabilities from total assets.
Market-based method
Market-based method
Valuing a business based on recent sales of similar businesses.
Earnings-based approach
Earnings-based approach
Business valuation method that assesses the revenue potential.
Excess earnings method
Excess earnings method
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Capitalized earnings approach
Capitalized earnings approach
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Discounted future earnings approach
Discounted future earnings approach
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Non-quantitative factors
Non-quantitative factors
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Business valuation
Business valuation
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Disadvantages of buying a business
Disadvantages of buying a business
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Hidden Market
Hidden Market
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Business for Sale
Business for Sale
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Creative Accounting
Creative Accounting
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Evaluating Available Businesses
Evaluating Available Businesses
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Profitability
Profitability
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Business Location
Business Location
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Business Source
Business Source
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Price vs. Value in Business Sales
Price vs. Value in Business Sales
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Buyer Power in Negotiations
Buyer Power in Negotiations
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Seller Power in Negotiations
Seller Power in Negotiations
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Common Business Buying Traps
Common Business Buying Traps
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Legal Circumference
Legal Circumference
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Study Notes
Chapter 12: The Business Buyout
- Learning Outcomes (LO):
- LO1: Evaluate buying an existing business (advantages and disadvantages)
- LO2: Conduct a self-audit for finding a business.
- LO3: Identify places to find businesses for sale.
- LO4: Evaluate available businesses before purchase.
- LO5: Apply valuation methods.
- LO6: Identify critical negotiation issues for final purchase price.
- LO7: Understand traps to avoid during purchase.
12.1 Introduction
- Buying an existing business (buyout) is an alternative to starting from scratch.
- Buyouts involve transferring ownership to a new individual, group, or entity.
- Buyouts can involve existing businesses or franchises.
12.2 Evaluating the Option of Buying an Existing Business
12.2.1 Advantages
- Going Concern: The business is already functioning.
- Easier Financing: Easier to secure funding for an operating business compared to a new start-up.
- Higher Success Probability: Existing businesses with a strong track record have a better chance of continued success.
- Established Location: A business with a desirable location gives an advantage.
- Experienced Employees: Existing employees provide continuity and reliability.
- Established Suppliers: Established supplier relationships save time and effort.
- Existing Inventory and Equipment: Available inventory and equipment reduce startup costs.
- Potential Bargain Price: An established business might be available at a lower price.
12.2.2 Disadvantages
- Hidden Problems: Businesses might have concealed financial problems.
- Low Sales Volume: Inadequate sales volume could be a concern.
- Poor Reputation: A negative reputation of the business could hinder success.
- Unsuitable Employees: Inherited employees might not align with the buyer's needs.
- Obsolete Equipment: Equipment, facilities, and inventory could be outdated.
- Overpriced Valuation: The business might be overvalued.
- Previous Owner Influence: Potential difficulties from dealing with the previous owner.
12.3 Finding a Business to Buy
12.3.1 The Search Process
- Businesses on the Market: Businesses actively listed for sale (advertised in newspapers or through brokers).
- Businesses Not on the Market: Some hidden gems can be found from various sources (property agents, financial institutions, business brokers, accountants, and auditors).
12.4 Evaluating Available Businesses
- Important considerations for evaluating businesses:
- Reasons for selling
- Profitability
- Necessary skills and competencies
- Business history, reputation
- Physical condition (facilities, assets)
- Competition
- Market size (existing and potential)
- Legal factors (e.g., contracts, liabilities)
12.5 Methods for Determining the Value of a Business
- Several methods can assess business value.
- Asset-based method (or balance sheet method): Total assets minus liabilities.
- Market-based method: Analyzing comparable sales of similar businesses in the marketplace.
- Price-to-earnings ratio = Market price/After-tax earnings
- Earnings-based approaches (use income statements):
- Excess earnings method: Combines asset value and projected future earnings to determine business value and goodwill.
- Capitalized earnings approach: Estimates future earnings and uses it alongside factors like interest rates to evaluate value.
- Discounted future earnings: Assumes future earnings are worth less than present value.
- Non-quantitative factors:
- Competition, market share, future community developments, legal commitments, employee contracts
12.6 The Negotiation Process
12.6.1 Stages of Negotiation
- Preparation: Clarifying objectives
- Discussion: Engaging the other side, sharing information, exploring options.
- Bargaining: Real face-to-face negotiations to reach a mutual win-win outcome.
- Conclude: Reaching a legally binding agreement.
- Execute: Implementing the agreed-upon terms.
12.6.2 Price vs Value
- Value determined in marketplace by willingness to pay (by the buyer).
- Sellers use computational methods to determine a price.
- Price is different from value.
12.6.3 Sources of Power
- Information (Complete and Reliable information is critical for the buyer)
- Timing (Desperate sellers are often a favorable situation for the buyer)
- Pressure (Multiple owners or partners can potentially complicate the process)
12.7 Traps to Avoid When Buying an Existing Business
- Legal Circumstance
- Attraction to status and size
- Unknown territory
- Opportunity cost
- Underestimation of other costs
- Greed
- Anxiousness and Impatience
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Description
Explore the intricacies of purchasing an existing business through Chapter 12. This quiz guides you in assessing the advantages, conducting self-audits, and applying valuation methods essential for a successful buyout. Understand negotiation tactics and common pitfalls to navigate in the business acquisition process.
