The Business Buyout

Question 1

Advantages of buying an existing business.

Answer 1

1. A successful existing business may have a better chance of continuing to be successfull.
2. There is an ongoing concern, which will save money, time and energy.
3. There are suppliers already in place, meaning that you don’t need to search for suppliers.

Question 2

Disadvantages of buying an existing business.

Answer 2

1. The disadvantage of operating in the shadow of the previous business owner.
2. The inherited employees of the business might not be suitable for the business.
3. The business may have a poor reputation or image.

Question 3

Methods of determine a business’s value.

Answer 3

1. Asset-based method.
2. Market-based method.
3. Earnings-based method.
4. Non-quantitive factors in valuing of the business.

Question 4

Explain Asset-based method.

Answer 4

A variation of this method is use the replacement value of the assets instead of the book value.

Question 5

Explain Market-based method.

Answer 5

This variation method relies on the financial market in order to estimate the business’s value.

Question 6

Explain earnings-based method.

Answer 6

Takes into consideration the potential income of the business.

Question 7

Non-quatitive factors in valuing a business.

Answer 7

• Competition
• contracts of employees

Question 8

Who can discover hidden markets and how?

Answer 8

1. Property agents - through networking, and building relationships with property owners, developers and other industry professionals.
2. Family and relatives - through networking within their social circles and through word-of-mouth by referrals.
3. Suppliers - by keeping an eye on market trends, and by staying informed about industry developments.

Question 9

What are the 7 steps of negotiation?

Answer 9

1. The identification and approach of a business for sale.
2. The signing of the non-disclosure agreement in order to ensure the secrecy of the parties negotiation.
3. The signing of the letter of intent by the buyer before a legal offer is made.
4. The buyer’s due diligence is investigated.
5. Drafting of the purchase agreement.
6. Closing of the deal by signing all the necessary documents.
7. Making a transition to being a successful business owner.

Question 10

Questions to be asked when evaluating a business.

Answer 10

1. Why is the business for sale?
2. Is the business profitable?
3. What are the skills and competencies needed for managing the business?
4. What is the history of the business?
5. What is the physical condition of the business?
6. What is the degree or scope of competition?
7. What is the existing or potential market size?
8. What are the legal aspects that must be considered? ( restraint of trade.)

Question 11

Traps to avoid when buying an existing business.

Answer 11

1. Greed
2. Unknown territory
3. Attraction to status and size.