STARTUPS AND BUYOUTS

CH. 4SMALL BUSINESS MANAGEMENT BY

LONGENECKER—11TH ED.

STARTING A BUSINESS FROM SCRATCH

A NEW PRODUCT OR SERVICE IDEAL LOCATION, ETC. AVOIDING OTHER’S MISTAKES

QUESTIONS

WHAT ARE SOME IDEAS? WHERE CAN I FIND NEW IDEAS? HOW DO I KNOW A GOOD THING? HOW DO I REFINE A GOOD THING? WHAT CAN I DO TO INCREASE MY

ODDS?

KINDS OF IDEAS

TYPE A—NEW MARKET TYPE B—NEW TECHNOLOGY TYPE C—NEW BENEFIT

WHERE DO YOU GET IDEAS?

PRIOR WORK EXPERIENCE PERSONAL INTERESTS AND

HOBBIES BY CHANCE DELIBERATE SEARCH

HOW DO YOU KNOW IF IT’S REALLY A GOOD IDEA? CLEARLY DEFINED MARKET NEED COMPETITIVE ADVANTAGE PROFIT POTENTIAL GOOD FIT—FEELS RIGHT NO FATAL FLAW (GOVT. OR SOCIAL

NEGATIVES)

Pros and Cons of Buying an Existing Business

CONS

• Existing problems

• Poor quality of currentemployees

• Poor business image

• Modernization required

• Purchase pr ice based oninaccurate data

• Poor business loca tion

PROS

• High chance of success

• Less planning

• Existing customers/supplie rs

• Necessary equipment

• Barga in price

• Exper ienced employees

• Existing business records

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WHERE DO YOU LOOK? TALK TO PEOPLE SUPPLIERS SALES REPS TRADE ASSOC. BANKERS REALTORS MATHCHMAKER

WHY IS THE OWNER REALLY SELLING? REASONS STATED MAY OR MAY

NOT BE THE REAL REASONS

BE WARY

REASONS

OLD AGE ILLNESS WANTS TO RELOCATE TAKES ANOTHER JOB BUS. NOT PROFITABLE FRANCHISE NOT RENEWED LACK OF POTENTIAL

THE MATH EXAMINE FINANCIAL STATEMENTS GO BACK AS FAR AS YOU CAN REALIZE MAY NOT BE WHAT IT

SEEMS—UNDER OR OVERSTATED

ASSET-BASED ESTIMATE THE VALUE OF THE

ASSETS MODIFIED BOOK VALUE—

ADJUSTING BOOK VALUE TO REFLECT DIFFERENCES BETWEEN HISTORICAL COST AND CURRENT VALUE OF THE ASSETS

ASSET CONT. REPLACEMENT VALUE—WHAT

WOULD IT COST TO REPLACE LIQUIDATION VALUE—HOW MUCH

WOULD YOU GET IF YOU LIQUIDATED THE ASSETS

MARKET-BASED RELIES ON FINANCIAL MARKETS IN

ESTIMATING VALUE—LOOKS AT THE ACTUAL MARKET PRICES OF FIRMS THAT ARE SIMILAR

PRICE-TO-EARNINGS RATIO=MARKET PRICE/AFTER-TAX EARNINGS

EARNING-BASED DETERMINED BY FUTURE RETURNS

– value based on ability to produce future profits

FIRM’S VALUE=NORMALIZED EARNINGS/CAPITALIZATION RATE

EARNINGS CONT. NORMALIZED EARNINGS—

EARNINGS THAT HAVE BEEN ADJUSTED FOR UNUSUAL ITEMS

CAPITALIZATION RATE– BASED ON THE LEVEL OF RISK INVOLVED IN THE BUSINESS AND THE EXPECTED GROWTH RATE OF FUTURE EARNINGS

CAP. RATE CONT

MORE RISKY – HIGHER THE CAP. RATE AND LOWER THE FIRM’S VALUE

LESS RISKY – LOWER THE CAP. RATE AND HIGHER THE FIRM’S VALUE

FIGURE 4-4 NOT JUST A SCIENCE, BUT AN ART

CASH FLOW-BASED COMPARING THE EXPECTED AND

REQUIRED RATES OF RETURN ON THE INVESTMENT

REQUIRED RATE OF RETURN=RISK-FREE RATE OF RETURN + RISK PREMIUM

NONQUANTITATIVE FACTORS COMPETITION MARKET FUTURE COMMUNITY DEVELOPMENT LEGAL COMMITMENTS UNION CONTRACTS BUILDINGS PRODUCT PRICES

INCREASING YOUR CHANCES TEAM EFFORT EXPERIENCE HAVE STARTED OTHER BUS. SERVICE OR MFG. –ALMOST HALF

HIGH TECH SHARE OWNERSHIP DON’T LIMIT TO LOCAL MARKETS