Lane's Business Purchase Decision Question 1 example essay topic

Situation 1: Marty Lane's business purchase decision Question 1: How would you suggest that Lane find out if he would be happy in this business? Response: Lane hasn't investigated this business that he wants to buy. Without detailed knowledge of the business, Lane is putting himself into an uncertain trap of confusion, and possibly throwing away money. Doing so is enough to make anybody involved to become unhappy. Lane has not taken into consideration that even this small simple business involves large efforts and dedication to the management of the business. This business does not simply involve driving and delivering bread.

To keep the "one man" business running, it involves managing inventory, accounting, taking orders, managing facilities, and keeping / creating customer relationships. Lane simply expects to maintain the delivery vehicle, collect money, and deliver bread. Lane would be doing more work in this business than taking orders for a greeting card company over the phone. He would probably be burdened with the chores involved in owning this business. Lane hasn't thought of his accounting issues either. Accounting needs to be done.

Financial records need to be kept to effectively run the business. Without filing with the IRS, he can get into a lot of trouble, making him unhappy. The "money" that comes in will probably not be "cash in the pocket" (which Lane expects), instead, it may be in the form of checks since he is receiving it from other companies. Lane should also consider that the business requires him to focus on the management more than on his wife. Since he wishes to spend more time with his wife, he will be unhappy to find out that it's not much of a possibility.

Lane should really research the deal, and find out if he would be happy, and if the business is really worth the price. Lane should make sure that he has the skills, abilities, and interests to match the business. Resource (s): Norman M. Scarborough, Thomas W. Zimmerer "Effective Small Business Management" Prentice-Hall, inc. 2000, 1996: 134-168. Question 2: Which valuation methods could Lane use to value the business? Response: In order to determine the value of the business, Lane could evaluate more by gathering and examining information about the business.

He can do this through an earnings approach, which involves investigating the current accounting records and projecting estimated financial conditions for the future of the business. Lane could also have an expert examine the business through official accounting records, and investigate the ethical standing of the business (customer relations, environmental issues, etc. ). This will help valuate the Good will of the business. Lane could also do market research, which includes investigating the competition. He could find out when current customers' buying contracts end.

If these contracts end soon, he should ask the customers if the plan to renew their buying contracts. This will give Lane an idea of the value of the customer base. Lane should also investigate the quality of the company's fixed assets and inventory. This includes any of the company's vehicles, any parts of the building (s), any fixtures, the land, and the product that the company sells. After collecting a good amount of information about the current value of the business, Lane can use the capitalized earnings approach to forecast what this business's health will be like when he owns it. After these things are properly evaluated, Lane will have a good amount of information about the business.

If Lane still can't figure out what the collected information about the business means, then he can have his broker determine the value using the information collected. 2000, 1996: 134-168,723-754. Internet Resource (s): VentureLine "My Business Analyst" URL: web Question 3: Is Lane relying too much on non-quantitative factors? Response: Lane is relying far too much on non-quantitative factors. He hasn't researched the business the way he should have in order to get a reasonable idea of the value.

It seems that Lane is just diving into the deal. It's a good way to waste money. No matter how good the business looks at a glance, it may have very undesirable value on the inside. Quantitative factors involve "logical thinking".

Lane must do research on the business from many aspects, and properly evaluate the business. Without doing so, he is blindly purchasing what his opinion made an image of, and ultimately relying too heavily on the non-quantitative factors. (When a criminal is evaluated in a non-quantitative way, all that may show is an innocent citizen, but logical evaluation will expose the inner truth about the person.) An important step of buying a business is to evaluate the inner truth using methods including quantitative factors. Lane has not investigated the ethical, physical, and financial parts of the business. He just took the seller's word for it. 2000, 1996: 134-168.

Resource (s): Vincent Ryan Ruggiero "Becoming a Critical Thinker" Fourth Edition Houghton Mifflin 2001: 107-129,131-135. Situation 2: Sam Kline's Business Opportunity Question 1: Which valuation technique do you think Kline should use to value the business? Response: Kline seems to have a good opportunity in this deal. It seems like a good small business, but Kline should evaluate the business for what it's worth, and for how it will continue to perform. This business, indeed, may be worth a lot of money. On the other hand, the market for buckets may change dramatically at some time.

The sales may drop dramatically, or the sales may skyrocket, or the sales may stay the same at fifty percent profits. The best matching valuation technique for this business would be the Capitalized earnings approach. Since this is a "buy the wood, build it, and sell it" (manufacturing) business, Kline should calculate risk involved in this operation. This business' financial future is unpredictable because costs of raw materials and revenues of selling in the bucket business may change unpredictably. Internet Resource (s): VentureLine "My Business Analyst" URL: web Question 2: What accounting information should Kline consider? What adjustments might be required?

Response: Kline should consider what the financial condition of the company is right now. He should consider that if the profits continue to increase, even at the consistent fifty percent, and the business makes a certain amount of money, it may have to convert to a "corporation" of some kind, which means returning to the corporate life (Kline wants to retire from corporate life). Kline will need to review the company's balance sheet. The balance sheet lists the value of all of the company's assets like land, vehicles, buildings, fixtures, cash, accounts receivable, inventory, and supplies. Of course, Kline will have to recalculate the assets by subtracting the loss of value from depreciation.

The balance sheet also lists the liabilities of the business, including accounts payable, mortgage payable, notes payable, and of course, his salary. With this information, Kline can calculate the true value of the company's equity. The calculation is simply the value of the assets (adjusted to account for depreciation, doubtful accounts receivable, etc. ), less the liabilities. Internet Resource (s): VentureLine "My Business Analyst" URL: web Question 3: What qualitative information should Kline evaluate?

Response: The market for wooden buckets may not always be the same. Kline should investigate the market for the wooden bucket business, as it is possible that the demand may not be as large for wooden buckets next week, or some time soon. On the other hand, demand may get so high, that Kline will be burdened with the responsibility to convert into a corporation to keep up with the growing pace. Kline should look at the competition in this market. If the competition is not deadly to this simple business, then it is not a problem, and nothing will threaten the survival of it. As part of his research, Kline should evaluate the product itself.

From the raw materials to the end result. Is the wood of good quality? Is the quality of the other components good? Is finished product strong and useable to its full potential?

If the answers are yes, then the quality is not a problem for the company. Some quality features of a bucket may include: the ability to hold water, a free swinging handle for easy carrying, and long life and durability. A good company has good will. If the business has good will (good reputation, decent moral image, good customer relations, quality product reputation), then it is a reputable, good quality business.

2000, 1996: 134-168. Situation 3: Stuart Mize's Business Purchase Question 1: Why Should Mize buy the company instead of starting his own firm? Response: Mize should buy this business for a few good reasons. For one thing, The land and buildings are already included. The previous owner has already gone through the trouble of finding and setting up on the land so Mize doesn't have to. The business also comes with an existing reputation.

People know a business that has been dealing with an area for a while. People know that it exists, they know where to find it, and they know what it sells, and how good the quality is. Another good reason to buy an existing business is that it already has a customer base. People have been using the business for a while, and they will continue to do so. An existing business also comes with it's own suppliers, equipment, leases, and cash flow.

It's already set up and operating. It's just like a "just add a manager and owner" package. With all of the initial planning, initial risk taking, and start-up already done for him, Mize could continue running the already set up business without going through the painstaking, complicated task of "starting up" a new one. Mize would be able to focus all of his attention on the operation and control the company smoothly. 2000, 1996: 134-168 Question 2: What are the pros and cons for Mize of buying this particular business? Response: Aside from a high purchase price, and the obligation to study and learn how to operate this business, actually buying it has some pros and cons.

Mize can benefit highly from buying this existing business, as explained in the response to question one. The existing business is already set up. When purchasing an existing business, it comes with all the goodies. The existing business comes with land, buildings, fixtures, existing reputation, customer base, suppliers, equipment, leases, and cash flow. Sometimes it even comes with good will, meaning the company has done something good and morally respectable (like donating products to people with low income), earning more respect and some exposure to more people through publicity (free advertisement through word of mouth, newspapers, news media, magazines, etc. ).

There are, however some reasons why purchasing this existing business may not be a good idea. The existing business may have problems that greatly affect the value and future operation of it. The market for this company's product may be deteriorating, and the demand may just be a trend, meaning that the success of the business won't last long. The company's products may also be obsolete, or close to being obsolete. If a new competitor comes along, they will have more opportunity to offer the latest product because they have plenty of room for the new inventory and have nothing old to get rid of. Another problem might include a loss of key customers that support the company with their frequent purchases.

The business may also have other problems like lease problems (insufficient payments on leased property and loans), or legal problems (liability lawsuits, fraud, or tax payment problems). The company may also be in a poor location that is difficult to reach, or there may actually be a competitor planning to establish a business near this one. Maybe the financial condition of the company is doing poorly, and there is little capital in the business, or maybe the company has just created bad will, causing employees and / or managers and / or owners to conflict, preventing the business from running efficiently. Mize should investigate this business, because knowing the pros and cons of buying it can help him make a good decision. Question 3: Do you think that Mize made a mistake in moving the business to his home town? Response: Mize may have made a mistake in moving his business to his home town.

By doing so, he has defeated some of the major reasons for buying an existing business. When the business was moved several hundred miles away from it previous location, all of the customers were lost. The business possibly lost some valuable land and buildings by moving. The company now has to re-establish a connection with suppliers, re-establish the operations, and hire new employees (if they are used in this business). Since the business has lost its customers, the customer base must be re-built, and the cash flows will be dropping until the business recovers from the interruption.

If there is a dramatically larger market for the motorcycle trailers, and less restrictions on operation, and less liability problems in the new location in Mize's home town, then the move was a good choice, and can be very beneficial. 2000, 1996: 134-168. cited in text.