CHAPTER FIVE
Buying an Existing Business
Learning
Objectives
Upon completion of this
chapter, you will be able to:
1 Understand the advantages
and disadvantages of buying
an existing business.
2 List the steps involved in the
right way to buy a business.
3 Describe the various
methods used in valuing a
business.
4 Discuss the process of
negotiating the deal.
Although our intellect always longs for clarity and certainty, our
nature often finds uncertainty fascinating.
—Karl von Clausewitz
A pessimist sees the difficulty in every opportunity: an optimist
sees the opportunity in every difficulty.
—Winston Churchill
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SECTION 2 • BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS
The entrepreneurial experience always involves risk. One way to minimize the risk of
entrepreneurship is to purchase an existing business rather than to create a new venture. Buying
an existing business requires a great deal of analysis and evaluation to ensure that what the entrepreneur is purchasing meets his or her needs and expectations. Exercising patience and taking the necessary time to research a business before buying it are essential to getting a good
deal. Research conducted by Stanford’s Center for Entrepreneurial Studies reports that the average business purchase takes 19 months from the start of the search to the closing of the deal.1
In too many cases, the excitement of being able to implement a “fast entry” into the market
causes an entrepreneur to rush into a deal and make unnecessary mistakes in judgment.
Before buying any business, an entrepreneur must conduct a thorough analysis of the business and the opportunity that it presents. According to Russell Brown, author of Strategies for
Successfully Buying or Selling a Business, “You have access to the company’s earnings history,
which gives you a good idea of what the business will make and an existing business has a proven
track record; most established organizations...