How to Select Entrepreneur Business Opportunities - Business Take Over

As we have discussed about how you can start your immediate entrepreneurship in an earlier topic: How to Select Entrepreneur Business Opportunities - Franchise, you may also consider a business take over.

 

How to Select a Business to Take Over As an Entrepreneur Business?

 

There are many advantages in selecting business take over opportunity as an entrepreneur business. However, there are some issues and points you should consider, such as:

  • Why is the owner selling the business? Check his background. Is the business not doing well, or does the owner want to retire or is unable to cope with the pressure of running a business?

  • What is the asking price? What is the basis for valuation of the business? Are you paying for goodwill? Do some calculation and inspect the books and accounts. Inspect the premises, fittings, fixtures and stocks. Are there any contingent liabilities?

  • Check licenses and other regulatory requirements; Check leases and current and future contracts.

  • Check for responsibilities or obligations to employees.

  • What are the terms and conditions of the sale, in particular, payment terms and warranties? Is there a need for a restraint of trade clause?

A common misconception among aspirant entrepreneurs is that one should not take over a business that is not doing well. Actually, it is a good proposition because you will be paying a much lower price for it. However, you must make sure that you can resolve or overcome the reason the business is losing money. Perhaps the business failed due to the owner's personal shortcomings or the strategies that he adopted?
 

Valuing a Business for Takeover

 

Everything appears fine. You are interested in selecting business take over opportunity as an entrepreneur business. Now comes the important question: How much should you pay for it?
 

There are two methods of evaluating the business. If the business is losing money, just buy over the fixed assets and stocks rather than taking it over as a going concern, especially if there are debtors and creditors to deal with.
 

Determine the market value of the fixed assets and stocks. Discount it by an appropriate amount (say, around 25%) as you are going to buy them lock, stock and barrel.
 

If the business is making money, you will normally have to pay a premium for it. Determine its average annual net earnings or profits over the last few years (make sure the figures given to you are genuine) and multiply it by an appropriate price-earnings ratio (PER), a figure that indicates roughly how many years it would take for you to recover what you pay for the business.


For example, let's say the business is making an average annual net profit of $30,000 and you expect to recover your investment in four years. Then, a fair price to pay for the business would be $120,000 ($30,000 x4). However, if you are willing to wait for only three years to get your money back, then you should be paying only $90,000 ($30,000 x 3).

 

So, what PER should you use? It depends on the business and you. For small businesses, the figure is usually between 2 and 5; use a lower figure for trading or service businesses, and a higher one for those in manufacturing or which have considerable fixed assets.

 

There are more immediate entrepreneurship models. You may read them in:

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