The rest of Chapter 4 packet notes

Question 1

• A bargain price
• A quick start

Answer 1

Acquisition of onging operations and relationships

Question 2

• High chance of success
• Less planning
• Existing customers/suppliers
• Necessary equipment
• Bargain price
• Experienced employees
• Existing business records

Answer 2

Pros- Buying an Existing Business

Question 3

• Existing problems
• Poor quality of current employees
• Poor business image
• Modernization required
• Purchase price based on inaccurate data
• Poor business location

Answer 3

Cons- Buying an Existing Business

Question 4

• Due diligence
• Matchmakers
• Relying on professionals

Answer 4

Finding a Business to Buy

Question 5

The exercise of prudence, such as would be expected of a reasonable person, in the careful evaluation of a business opportunity.

Answer 5

Due Diligence

Question 6

Specialized brokers that bring together buyers and sellers.

Answer 6

Matchmakers (Business Brokers)

Question 7

• Accountants
• Attorneys
• Other experienced business owners

Answer 7

Relying on Professionals

Question 8

• Owner’s reasons for selling
• Beware of sellers who may have “cooked the books” to make the business more attractive

Answer 8

Finding Out Why a Business is for Sale

Question 9

• Old age or illness
• Desire to relocate in a different section of the country
• Decision to accept a position with another company
• Unprofitabiltiy of the business
• Loss of an exclusive sales franchise
• Maturing of the industry and lack of growth potential

Answer 9

Owner’s Reasons for Selling

Question 10

• Examining the financial data
• Review financial statements and tax returns for the past 5 years
• Recognize that financial data can be misleading
• Adjust assets valuations to reflect the true state of the business

Answer 10

Beware of Sellers who may have “Cooked the Books” to Make the Business More Attractive

Question 11

• Assets overvalued
• Expenses overstated/understated
• Income under reported
• Unrecorded debts

Answer 11

Misleading Financial Data

Question 12

• Asset-based valuation
• Market-comparable valuation
• Cash-flow based valuation

Answer 12

Valuing the Business

Question 13

Estimates the value of the firm’s assets; does not reflect the value of the firm as a going concern.

Answer 13

Asset-Based Valuation

Question 14

Considers the sale prices of comparable firms; difficulty is in finding comparable firms.

Answer 14

Market-Comparable Valuation

Question 15

Compares the expected and required rates of return on the amount of capital to be invested in the business.

Answer 15

Cash-Flow Based Valuation

Question 16

• Competition
• Market
• Future community development
• Legal commitments
• Union contracts
• Buildings
• Product prices

Answer 16

Nonquantifiable Factors in Valuing a Business

Question 17

• Terms of purchase
• Closing the sale

Answer 17

Negotiating and Closing the Deal

Question 18

• Assets purchase or total entity
• Indemnification clause
• Payment in full or partial payements over time

Answer 18

Terms of Purchase

Question 19

A contractual clause that requires one party to assume the financial consequences of another party’s legal liabilities.

Answer 19

Indemnification Clause

Question 20

• Best handled by a third party
  
  • bill of sale
  • tax certifications
  • payment-to-seller agreements and guarantees

Answer 20

Closing the Sale