The rest of Chapter 4 packet notes Flashcards Preview

Management > The rest of Chapter 4 packet notes > Flashcards

Flashcards in The rest of Chapter 4 packet notes Deck (20):

  • A bargain price
  • A quick start

Acquisition of onging operations and relationships


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

Pros- Buying an Existing Business


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

Cons- Buying an Existing Business


  • Due diligence
  • Matchmakers
  • Relying on professionals

Finding a Business to Buy


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

Due Diligence


Specialized brokers that bring together buyers and sellers.

Matchmakers (Business Brokers)


  • Accountants
  • Attorneys
  • Other experienced business owners

Relying on Professionals


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

Finding Out Why a Business is for Sale


  • 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

Owner's Reasons for Selling


  • 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

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


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

Misleading Financial Data


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

Valuing the Business


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

Asset-Based Valuation


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

Market-Comparable Valuation


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

Cash-Flow Based Valuation


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

Nonquantifiable Factors in Valuing a Business


  • Terms of purchase
  • Closing the sale

Negotiating and Closing the Deal


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

Terms of Purchase


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

Indemnification Clause


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

Closing the Sale