978-0134741086 Chapter 7 Part 2

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3. What techniques for estimating the value of these businesses would be most

useful to a prospective buyer of these companies? Are the owners’ asking price

reasonable? (LO 5) (AACSB: Application of knowledge)

7X, while comparable businesses go for a multiple of 5.4X.

Part 4: Chapter Discussion Questions

7-1. What advantages can an entrepreneur who buys a business gain over one who

starts a business “from scratch”? (LO 1) (AACSB: Reflective thinking)

The advantages of buying an existing business may include:

 A Successful Existing Business May Continue to Be Successful: Buying a

thriving business increases the likelihood of success building upon an

 Employees and Suppliers are in Place: Experienced employees enable a

company to continue to earn money while a new owner learns the business.

Existing vendors can continue to supply the business while the new owner

investigates the products and services of others.

 Equipment Is Installed and Productive Capacity Is Known: The buyer does

amount of inventory can be costly. If there is too little inventory, customer

demand cannot be satisfied. If too much is available, excessive capital is tied

up, costs are increased, and profits decrease. There is a tremendous advantage

if previous owners have established a balance in inventory. In addition, a

proven track record gives the new owner leverage in negotiating credit

Chapter 7, Page 117

 A Turnkey Business: the buyer gets a business that is already generating cash

and perhaps profits as well.

 Experience of Previous Owner: If the previous owner is around, the new

owner can benefit from his/her expertise. Even if the owner is not present,

business records can guide the new owner.

 Easier Access to Financing: Many existing businesses already have

relationships with lenders. Many sellers help to finance the sale of their

7-2. How would you go about determining the value of the assets of a business if you

were unfamiliar with them? (LO 1) (AACSB: Reflective thinking)

When evaluating an existing business, a potential buyer should assemble a team of

7-3. Why do so many entrepreneurs run into trouble when they buy an existing

business? (LO 2) (AACSB: Reflective thinking)

7-4. Outline the stages involved in buying a business. (LO 2) (AACSB: Reflective

thinking)

To avoid costly mistakes, an entrepreneur should follow a logical, methodical approach

7-5. What topics does the due diligence process address? (LO 4) (AACSB:

Reflective thinking)

Chapter 7, Page 118

Due diligence involves studying, reviewing, and verifying all of the relevant information

concerning an acquisition. There are four areas that are covered as part of the due

diligence process: the seller’s motivation, asset valuation, legal issues (involved with the

business that is being acquired), and the financial condition of the business.

7-6. Briefly outline the process of valuing a business using the adjusted earnings, the

capitalized earnings, and the discounted future earnings approaches. (LO 5)

(AACSB: Reflective thinking)

In the adjusted earnings method, the starting point is the business’s EBITDA or earnings

7-7. What determines the bargaining zone between a business seller and a buyer?

(LO 6) (AACSB: Reflective thinking)

7-8. Explain the buyer’s position in a typical negotiation for a business. (LO 6)

(AACSB: Reflective thinking)

7-9. Explain the seller’s position in a typical negotiation for a business. (LO 6)

(AACSB: Reflective thinking)

In a typical negotiation, the seller’s goals are the following:

Chapter 7, Page 119

 Minimize the tax burden from the sale

 Make sure the buyer will make all future payments.

7-10. What steps should a buyer take to ensure a smooth transition after closing the

deal to buy a business? (LO 7) (AACSB: Reflective thinking)

To ensure a smooth transition after closing the deal, the buyer should do the following:

7-11. One entrepreneur who recently purchased a business advises buyers to expect

some surprises in the deal no matter how well prepared they may be. He says that

every potential buyer must build some “wiggle room” into their plans to buy a

company. What steps can a buyer take to ensure that he has sufficient “wiggle

room”? (LO 7) (AACSB: Analytical Thinking)

Part 5: Case Studies

The following text case may be used for lecture and assignments for topics presented in

this chapter.

Case 9: Seabreeze Property Services

Part 6: Online Videos and Podcasts

 Buying a Business 1:42 minutes

http://www.youtube.com/watch?v=G6TRqfDcCUM&NR=1

 Buying a Business – Bill Bartmann 5:31 minutes

http://www.youtube.com/watch?v=j5Pz3Aweof4&NR=1