BUYING A BUSINESS EVALUATION & NEGOTIATION

K. Senthil Velan, ISBR, Bangalore

INTRODUCTION
Less work Time and effort required Right business Assessing and valuing a business Obligations to existing stakeholders Professional help

Deciding on the Right Type of Business

Business lifestyle and aspirations Expectations ROI Commitment Business opportunity commensurate with your strengths and capabilities Type of business Chosen industry Location

Sources for Identifying the Business

Newspapers india.businessesforsale.com/indian/search/Businesse s-for-sale, www.indiabusinesssale.com, www.franchisebusiness.in Trade journals Your own advertisement Magazines specializing in buying and selling (Retailer, SME, Estate world, The franchising world) Brokers Business associates Exhibitions and conferences

Advantages in buying an existing business

Initial formalities and ground work not required Easier to get finance Ready market for the product or service Established customers Certainty of income Reputation Network of contacts Business plan, marketing and financial plans already in place Experienced employees Problems identified and solved Option to resell business

Disadvantages of buying an existing business

Large investment upfront Large expenses initially Uphill task if business neglected in recent times Honoring existing contracts Flexibility and change Undisclosed information Complex due diligence process Re negotiating credit terms Loyalty of customers Risk of seller establishing competing business

Basic preview - Financial

Current performance
Sales Profit

Financial position
Assets Cash flows Debts Expenses

Basic preview Marketing , HR & other key areas

Existing customer base - CRM if any Competition and market share Major contracts & orders Existing management Existing employees terms & conditions Reason for the business being sold Supplier relationship Dealer networks if any Systems and technologies Environmental issues Litigations

Verification & due diligence

Agreement on tentative price and terms with seller Down payment Investigation period Help of Professional solicitors and accountants Make a due diligence checklist

Land rover jaguar sale

Rover group bought by BMW in 1994 Sold to Ford by BMW in 2000 Ford sold both Land rover and Jaguar to Tata motors in 2008 Other bidders were were PE firm Alchemy Partners, JCB (excavator company), Mahindra and Mahindra Services of Goldman Sachs, Morgan stanley and HSBC used Private Unlimited company Automotive sector 13000 employees Head office Gaydon, United kingdom

Previous ownership details

19481967 Rover Company 19671968 - Leyland Motor Corporation 19681986 - British Leyland Motor corp 19861988 - Rover group 19881994 - British Aerospace 19942000 - BMW 20002008 - Ford Motor Company

LBO
Acquisition of company with significant debt PE, Managers of struggling companies Funded through mix of equity and debt Management is reshuffled Increase the profit and resell To sell back when market booming Strong cash flows Cutting unnecessary cost Tax savings Eg: Richie rich a PE buys out G Limited for 120 crores, 20 crores financed by him and 100 crores borrowed, after 3 years when markets and economy are booming sells it for 150 crores, pays back 100 crores with interest of 20 crores and retains the profit of 30 crores. Tetley (UK) and Tata Tea Tata corus Grasim, Samruddhi, Ultra tech

Due diligence & checklist

Organization details
Companys articles of association and memorandum and amendments to it Companys byelaws and amendments Minute books, and resolutions board, shareholder, executive committee and other governing groups. Agreements voting rights, warrants, convertible securities etc., Annual reports of 3 years or more Companys leased and owned properties in all locations

FINANCIAL INFORMATION
Audited financial statement 3 years Un audited recent financial statement of recent period Auditors letters and replies of the past 5 years Companys credit report Projections, capital budget and strategic plans Schedule of contingent liabilities & indebtedness Description of depreciation and amortization methods Schedule of inventory Schedule of accounts receivable Analysis of fixed and variable expenses Analysis of gross margins Description of internal control procedures

 Schedule of Fixed assets and locations Leases of equipments Sale and purchase of major assets during last 3 years Schedule of companys business locations Copies of all real estate deals, rental agreements, mortgages, permits etc.

INTELLECTUAL PROPERTY
Schedule of domestic patents and foreign patents Schedule of trademarks and trade names Schedule of copyrights Description of important technical know how Copies of all consulting agreements, regarding inventions, licenses or assignments of intellectual property to and from the company Schedule of claims or threatened claims

EMPLOYEES & EMPLOYEE BENEFITS

List of employees with positions, current salaries, bonuses paid during last 3 years All employment, consulting, nondisclosure, non solicitation or non competition agreements between the Company and any of its employees. Resumes of Key employees Personnel handbook Schedule of employee benefits, holidays vacation and leave policy Retirement plans and schemes Collective bargaining agreements Labor disputes, grievance procedures Workers compensation claim history ESOP

Environmental issues
Environmental audit report Listing of hazardous substances used in companys operations Companys disposal method Environmental permits and licenses Environmental litigation or investigations

Tax and Levies

Direct, Indirect taxes including foreign income tax returns for the last 3 years State tax VAT returns Tax settlement documents for past 3 years Profession tax filings Audit reports Other relevant levies for the nature

VALUATION METHODS
ASSET BASED APPROACH MARKET APPROACH INCOME APPROACH

NEGOTIATION

Negotiating is an entrepreneurs most important skill Negotiation strategy in place Process maybe different for each type of business Educate yourself about the possible pitfalls Leave out your ego outside Compromise and kindness are the new rules of negotiation

Pointers
Listen before you speak Embrace your fear Avoid story telling Study up Reciprocity When all seems lost gain something else You are a professional already Be empathetic to the others needs win win situation Right attitude Right choice of words

ROLE PLAY
A partnership firm consisting of 4 partners wish to sell off their real estate firm in an fast growing industrialized town, near a major metro they have made their money and most of them are in their sixties and want to retire. Their firm has been making an average profit of 4 crores per year. Most of their projects are completed and there is only one project left unstarted. You are required to write a play and enact the same demonstrating the various factors involved in the process of buying an existing business and negotiating skills.