Buying an Existing Business

• Group 5's presentation is on buying an existing business.
• At the end of this learning experience, the learner will be able to:
• Understand the advantages and disadvantages of this
• List the steps involved in the right way to buy a business
• Describe the various methods used in valuing a business
• Discuss the process of negotiating the deal

Meaning of Buying

• Purchasing a running company instead of starting from scratch is buying an existing business
• Advantages include an established brand, customers, cash flow, and trained employees
• Reduces startup risks
• The purchase can be expensive with hidden challenges like debts
• Entrepreneurs can grow quickly, entering with a ready-made foundation

Advantages of Buying

• Buying a business with a recognized brand allows inheriting the market presence, customer trust, and reduces the time and effort needed to build brand awareness from scratch
• Obtaining a business provides immediate cash flow reducing the uncertainty of attracting new customers
• Inheriting a team familiar with operations offers continuity and can lead to smoother transitions, as employees are already skilled

More Pros of Buying

• Existing businesses often have long-standing supplier relationships, which can lead to favorable terms & reliable supply chains, ensuring operational efficiency
• Lenders & investors consider established businesses less risky compared to startups, making it easier to secure financing based on the company's proven track record

Disadvantages of Buying

• Purchasing a successful business often needs a substantial upfront financial commitment, including the purchase price, legal fees, & other associated costs
• Businesses may have existing debts, legal disputes, or operational inefficiencies, needing thorough due diligence to uncover and address these

More Cons of Buying

• Aligning the existing company's culture & operations with your vision can be difficult, as employees & customers may resist changes, leading to disruptions
• The business may rely on legacy systems or processes, which require significant modernization investments, impacting overall efficiency & competitiveness
• Existing commitments, contracts, or brand perceptions may constrain new strategies or business pivots, limiting innovation & growth opportunities

Steps to Buying

• Define goals and criteria, determining objectives, industry preferences, budget, and risk tolerance before searching
• Search businesses on online marketplaces (BizBuySell), using business brokers, networking, or outreach
• A business summary, financials, industry trends, and competitive landscape need assessment
• Decide on personal savings, SBA loans, banks, seller financing or investors to secure funding

Purchasing Agreement

• Work with the seller to settle terms, like price, transition support, and asset allocation such as inventory, equipment, and goodwill
• Sign the purchase agreement, transfer licenses and permits, and ensure legal requirements are met to finalize documents and close

Valuing a Business

• Calculating a business's valuation is done by subtracting liabilities from assets
• One of the straightforward valuation methods is calculating its book value using balance sheet information
  • It can be unreliable though due to simplicity
  • Book value starts by subtracting the company's liabilities from its assets to determine owners' equity
  • Exclude any intangible assets, with the final amount representing the value of tangible assets
• Another method is the Discounted cash flow analysis
• Estimating the value of a company or investment is based on a cash flow that is expected to generate in the future
• Discounted cash flow calculates future cash flows on the discount rate and time period

Company Evaluations

• A company’s value in publicly traded companies is one of the simplest market capitalization measures.
  • The value is calculated by multiplying the current share price by the total number of shares
  • Market capitalization only accounts for the value of equity
  • Most companies are financed by a combination of debt and equity
• Enterprise value is calculated by combining the value of a company's debt, and equity, then subtracting the cash amount not used to fund business operations

EBITDA

• Understanding how to arrive at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for each company makes it easier to explore ratios
  • Analysts don’t use a company’s raw net income profitability
  • It's often manipulated using accounting conventions, distorting the picture
• Perpetuity ratios form the growing perpetuity equation
  • The growing instrument pays out a certain amount of money each year that grows annually, like a retirement stipend that must match inflation
  • The equation enables finding today's value for that instrument

Negotiating Purchase Tips

• Negotiating a business purchase involved discussions regarding the price, payment terms, and transition plans, so is crucial and includes:
• Understanding the Seller Motivation
• Conducting Thorough Due Diligence
• Making an Initial Offer
• Structuring the Deal

Even More Negotiation

• Structuring the Deal Wisely
• Negotiating Price and Terms
• Drafting a Letter of Intent (LOI)
• Finalizing Legal Agreements
• Planning for Transition and Closing Deal

Valuing a Business Methods

• Asset-Based Valuation
  • Calculates the net asset value by subtracting liabilities from total assets
• Market Comparison Approach
  • Compares similar businesses, recently sold in the same industry and location
• Discounted Cash Flow (DCF) Analysis
  • Projects future cash flows and discounts them to present value using a chosen discount rate
• Seller’s Discretionary Earnings (SDE)
  • Adjusts net profit by adding back expenses, such as personal salaries and benefits, at the owner's discretion

Negotiating Deeper

• Negotiating the Deal requires the following:
• Understand the Seller’s Motivation
• Make a Fair Initial Offer
• Structure the Deal Wisely
• Leverage Due Diligence Findings
• Work with Professionals
• Draft a Purchase Agreement
• Plan for a Transition Period