A TERM PAPER

ON
THE MEASURES YOU WOULD NEED TO TAKE
IN MANAGING RISKS; AS AN
ENTREPRENEUR PURCHASING AN EXISTING
COMPANY.
PRESENTED
BY

IDEGWU DAN JUDE F.C.

COMPUTER SCIENCE DEPARTMENT
ND TWO (2)
KINGS POLYTECHNIC UBIAJA

COURSE: INTRODUCTION TO

ENTREPRENEURSHIP

COURSE INSTRUCTOR: OBOH LINUS

DATE: FRIDAY, JANUARY 30, 2015.
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INTRODUCTION
To some economists, the entrepreneur is one who is willing to bear the risk of
a new venture if there is a significant chance for profit. Others emphasize the
entrepreneurs role as an innovator who markets his innovation. Still other
economists say that entrepreneurs develop new goods or processes that the
market demands and are not currently being supplied.
The entrepreneur generally decides on the product, gathers the facilities,
and brings together the labour force, capital, and production materials. If the
business succeeds, the entrepreneur reaps the reward of profits; if it fails,
he/she takes the loss. In the different definitions of entrepreneurship, there is
agreement that entrepreneurship is talking about a kind of behavior that
includes

Initiative thinking;
The organizing and reorganizing of social and economic mechanisms to
turn resources and situations to practically productive and profitable
accounts; and
The acceptance of risk or failure.

For the person who actually starts his or her own business, the experience is
filled with enthusiasm, frustration, anxiety and hard work. There is a high
failure rate due to such things as poor sales, intense competition, lack of
capital, or lack of managerial ability. The financial and emotional risk can also
be very high. What, then, causes a person to make this difficult decision?
Even more so, what then could propel one to make the probably
more difficult decision to buy an existing business from an owner
who may have decided to sell his or her business for health,
government policy-related, or financial challenges such as
undisclosed indebtedness or some overbearingly large liability
suits?

1.0 BUYING A NEW BUSINESS

For some entrepreneurs, buying an existing business represents less of a risk
than starting a new business from scratch. While the opportunity may be less
risky in some aspects, you must perform due diligence to ensure that you are
fully aware of the terms of the purchase.
If you have decided to buy an existing business, you will want to be sure you
are making the right choice in your new venture. Only you can determine the
right business for your needs; however, the following topics can help guide
you make the best decision.
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1.1 THE STEPS TO STARTING

There are many different types of businesses to buy. Take these steps to
narrow down the list of potential businesses you may want to purchase.
1. Identify Your Interests. If you have absolutely no idea what business
you want to invest in, first eliminate businesses that are of no interest to you.
2. Consider Your Talents. Being honest about your skills and experience
can help you eliminate unrealistic business ventures.
3. List Conditions for Your Business. Consider if a business has a
condition that is unfavorable to you, such as location and time commitment.
4. Quantify Your Investment. Finding profitable businesses for sale at
reasonable prices can be difficult. Ask yourself why this business is for sale
in the first place.

1.2 ADVANTAGES TO CHOOSING AN EXISTING BUSINESS

There are many favorable aspects to buying an existing business such as
drastic reduction in startup costs. You may be able to jump start your cash
flow immediately because of existing inventory and receivables.

1.3
DISADVANTAGES
BUSINESS

TO

CHOOSING

AN

EXISTING

There are also some downsides to buying an existing business. Purchasing

cost may be much higher than the cost of starting a new business because of
the initial business concept, customer base, brand and other fundamental
work that has already been done. Also, be aware of hidden problems
associated with the business like debts the business is owed that you may
not be able to collect.

1.4 DOING DUE DILIGENCE

As you become a business owner, there are items that need to be addressed
before entering into any business agreements or transactions.
Obtain all Licenses and Permits: Most businesses need licenses and
permits to operate. The type of license or permit you need depends on your
industry and the state in which the business is located. Use SBAs licenses
and permits finder tool to get a listing of federal, state and local permits and
licenses you will need to run your business.
Zoning Requirements:
Zoning requirements may affect the type of
business that you are intending to operate in a particular area. Visit the Basic
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Zoning Laws for more information about zoning and to ensure your business
is abiding by all laws in your area.
Environmental Concerns: If you are acquiring real property along with the
business, it is important to check the environmental regulations in the area.
Visit EPAs Small Business Gateway for more information.

1.5 DETERMINING THE VALUE OF A BUSINESS

There are a number of different methods to determine a fair and equitable
price for the sale of the business. Here are a few:
Capitalized Earning Approach: This method refers to the return on the
investment that is expected by an investor.
Excess Earning Method: Similar to the capitalized earning method, except
that it separates return on assets from other earnings.
Cash Flow Method: This method is typically used when attempting to
determine how much of a loan the cash flow of the business will support. The
adjusted cash flow is used as a benchmark to measure the firm's ability to
service debt.
Tangible Assets (Balance Sheet) Method: This method values the
business by the tangible assets.
Value of Specific Intangible Assets Method: This method compares
buying a wanted intangible asset versus creating it.

1.6 DOING RESEARCH FOR PURCHASING A BUSINESS

Once you have found a business that you would like to buy, it is important to
conduct a thorough, objective investigation. The following list includes
important information you want to include when researching the business
you want to buy.
Letter of Intent: The letter of intent should spell out the proposed price,
the terms of the purchase and the conditions for the sale of the business.
Confidentiality Agreement: A confidentiality agreement indicates that
you will not use the information about the seller's business for any purpose
other than making the decision to buy it.
Contracts and Leases: If the business has a current lease for the location,
be aware that you may have to work with the landlord to assume any
existing lease on the business premises or negotiate a new lease.
Financial Statements:
Examine the financial statements from the
business for at least the past three to five years. Also make sure that an
audit letter accompanies the statements from a reputable CPA firm. You
should not accept a simple financial review by the business itself.
Tax Returns: Review the business's tax returns from the past 3 to 5 years.
This will help you determine the profitability of the business as well as any
outstanding tax liability.
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Important Documents: Numerous documents should be checked during

your investigation. Examples include property documents, customer lists,
sales records, advertising materials, employee and manager information,
their contracts and contacts.
Professional Help: A qualified attorney should be enlisted to help review
the legal and organizational documents of the business you are planning to
purchase. Also, an accountant can help with thorough evaluation of the
financial condition of the business.

1.7 SALES AGREEMENT FOR BUYING A BUSINESS

The sales agreement is the key document to finalize the purchase of the
business. This agreement defines everything that you intend to purchase
including business assets, customer lists, intellectual property and goodwill.
If you do not have a lawyer to help you draft the terms of the sale, you
should at least have one review the agreement before you sign it.

1.8 CHECKLIST FOR CLOSING ON A BUSINESS

The closing is the final step in the process of buying a business. Keep in mind
that you should have legal counsel available to review all documentation
necessary for the transfer of the business.
The following items should be addressed in a closing:

Adjusted Purchase Price. This will include prorated items such as

rent, utilities, and inventory up to the time of closing.
Review Required Documents. These documents should include a
corporate resolution approving the sale, evidence that the corporation
is in good standing, or any tax releases that may have been promised
by the seller. Check with your local Department of Corporations or
Secretary of State for more information.
Signing Promissory Note. In some cases, the seller will have back
financing, so have an attorney review any note documentation.
Security Agreements. A security agreement lists the assets that will
be used for security as a promise for payment of the loan.
UCC Financing Statements. Uniform Commercial Code documents
are recorded with the Secretary of State in the state you will be
purchasing your business.
Lease: If you agree to take over the lease, make sure that you have
the landlord's concurrence. If you are negotiating a new lease with the
landlord instead of assuming the existing lease, make sure both parties
are in agreement of the terms of the new lease.
Vehicles: If the purchase of the business includes vehicles, you may
have to complete transfer documents for the vehicles. Check with your
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local Department of Motor Vehicles to determine the correct procedure

and necessary forms.
Bill of Sale: The bill of sale proves the sale of the business. It also
explicitly transfers ownership of tangible business assets not
specifically transferred on their own.
Patents, Trademarks and Copyrights: If there are any patents,
trademarks and/or copyrights associated with the business, you may
need to complete the necessary forms as part of the transaction.
Franchise: You may need to complete franchise documents if the
business is a franchise. See the Consumer Guide to Buying a Franchise
for more information.
Closing or Settlement Sheet: The closing or settlement sheet will
list all financial aspects of the transaction. Everything listed on the
settlement should have been negotiated prior to the closing.
Covenant Not to Compete: It is a good idea to have the seller sign
an agreement to not compete against the business. This will help
prevent any interference from the previous owner.
Consultation/Employment Agreement: If the seller is agreeing to
remain on for a specified amount of time, this documentation is
necessary for legal purposes.
Complete IRS Form.
Asset Acquisition Statement: This document will indicate how the
purchase was allocated and the amount of assets, which are important
for your tax return.
Bulk Sale Laws: Make sure that you comply with bulk sale laws,
which govern the sale of business inventory.

Indeed, all businesses face the threat of losses that may never occur. Worry
about these possibilities does more than make life less pleasant; it may stop
a business from engaging in certain activities and otherwise alter how it
conducts its operations. Proper risk management enables a business to
handle its exposures to accidental losses in the most economic and effective
way.
Risk management also enables a business to handle better its ordinary
business risks and can thus pursue more aggressively and effectively, its
regular activities.
Organizations of all sorts have recognized the increasing importance of
sound risk management. As life has become more complicated, more
interrelated and more uncertain, new loss exposures have been created; and
the severity of many older pressures increased. In most large firms and many
smaller ones, top management has assigned primary responsibility for risk
management to a specialized department, because of the following
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observed benefits
management:

of

deliberate

and

carefully

tailored

risk

Risk management may make the overriding difference between

survival and failure. Some loses, such as large liability suits or the
destruction of a firms manufacturing facilities may so cripple a firm that
without proper advance preparation for such events, the firm must close
its doors. Even if risk management did not contribute to the economic
health of a business in any other way, this one benefit would make it a
critical function of purposeful business management.

Again, for the obvious fact that profits can be improved by reducing
expenses, as well as increasing incomes, risk management can contribute
directly to business profits (or in the case of non-profit organizations or
public agencies, to operating efficiency).

Furthermore, by no meager means nor mediocre measure, the peace

of mind made possible by sound management of pure risk may in itself
constitute a valuable non-economic asset. This is because such peaceful
mindedness, with spirited calmness and calculated confidence
over anticipated outcomes in the business, like nothing else,
greatly improves the physical and mental health of the management and
owner.

Finally, because the risk management plan will also help others, such as
employees, who will be affected by losses to the firm, risk management
can also help to satisfy the firms sense of social responsibility, desire for
good public image or both!

CONCLUSION
From the foregoing, it is more obvious that risk is not what should be feared
in a business, but what is important is that the tools used in handling risk
should be properly understood. This is called Risk Management!
And this it is, that will help the entrepreneur to handle better the ordinary
business risks such as accidental losses which are usually associated to the
business.
And it should also be understood that the factors that affect risk are the
demographic characteristics, personality traits and environmental conditions
that determine a persons reaction to risk.

The person in this case, being the entrepreneur, on whom everything rises
and falls; as the onus for the survival, success, or failure of the business
principally rests on his shoulders. So they had better be broad and bold!
It is also advised that the resources used in a business are used to meet
optimal productivity; as failure to adhere to that, will increase risk in any
business.