PowerPoint Presentation by
Patricia Peel, University of Guelph-Humber
Chapter 13 13-1
After studying this chapter, you should be able to:
1. List some reasons for buying an existing business.
2. Summarize four basic approaches for determining a fair
value for a business.
3. Describe the factors that make a family business unique.
4. Identify the management practices that enable a family
business to function effectively.
5. Describe the process of managerial succession in a
6. Analyze the major issues involved in the transfer of
ownership to succeeding generations.
Chapter 13 13-2
Reasons for Buying an
1. To reduce some of the uncertainties and
unknowns that must be faced in starting a
business from the ground up.
2. To acquire a business with ongoing operations
and established relationships.
3. To obtain an established business at a price
below what it would cost to start a new
Chapter 13 13-3
Finding an Existing Business to Buy
• Relying on Professionals
Other experienced business owners
Chapter 13 13-4
Pros and Cons of Buying an
• Pros • Cons
High chance of success Existing problems
Less planning Poor quality of current
Existing customers/ employees
suppliers Poor business image
Necessary equipment Modernization required
Bargain price Purchase price based on
Experienced employees inaccurate data
Existing business records Poor business location
Chapter 13 13-5
Finding Out Why the Business
Is For Sale
• Owner’s reasons for selling the business
Old age or illness
Desire to relocate in a different section of the country
Opportunity to start another business
Decision to accept a position with another company
Unprofitability of the business
Discontinuance of an exclusive sales franchise
Maturation of the industry and lack of growth potential
Chapter 13 13-6
Examining the Financial Data
1. Review financial statements and tax returns for
the past five years.
2. Recognize that financial data can be misleading.
Chapter 13 13-7
Income Statement as
Adjusted by Prospective Buyer
Chapter 13 13-8
Valuation of the Business
• Asset-Based Valuation
Estimates the value of the firm’s assets; does not reflect
the value of the firm as a going concern.
• Market-Based Valuation
Considers the sale prices of comparable firms; difficulty
is in finding comparable firms.
• Cash-Flow-Based Valuation
Compares the expected and required rates of return on the
amount of capital to be invested in the business.
Chapter 13 13-9
• Modified Book Value Technique
Historical value of firm’s assets is adjusted to reflect
current market values.
• Replacement Value Technique
Value of firm’s assets is adjusted to reflect current costs
to replace the assets.
• Liquidation Value Technique
Value of firm’s assets is adjusted
to reflect their value if the firm
ceased operations and disposed
of the assets.
Chapter 13 13-10
• Earnings Multiple (Value-to-Earnings) Ratio
Determine normalized earnings, and
Divide this amount by a capitalization rate.
Normalized earnings are earnings that have been
adjusted for any usual items such as fire damage.
Firm’s Value =
Chapter 13 13-11
Determinants of a Firm’s Capitalization
High Low Firm Value
High Firm Value
High Low High Firm Value
Projected Capitalization Rate
Low Low Firm Value
Chapter 13 13-12
Cash Flow-Based Valuation
1. Estimate the future cash flows that can be
expected by the investor.
2. Decide on the investor’s required rate of return.
Chapter 13 13-13
• The difference between the required rate of return
on a given investment and the risk-free rate of
• Required rate of return =
Risk free rate of return + Risk Premium
• Table 13-1 lists suggested risk premium categories
Chapter 13 13-14
Nonquantitative Factors in
Valuing a Business
• Future Community
• Legal Commitments
• Union Contracts
• Product Prices
Chapter 13 13-15
Negotiating and Closing the Deal
• Terms of Purchase
Assets purchase or total entity
Payment in full or partial payments over time
• Closing the sale
Best handled by a third party
• Bill of sale
• Tax certifications
• Payment-to-seller agreements
Chapter 13 13-16
What Is a Family Business?
• Family Business
A company in whose ownership and/or functioning two
or more members of the same family are directly
A firm whose ownership passes from one generation of a
family to another
Logan Family Hardware
Chapter 13 13-17
Family and Business Overlap
• Family Concerns • Business Concerns
Care and nurturing of Production and distribution of
goods and/or services
Need for professional
Employment and management
advancement in the firm Effective and efficient
Loyalty to the family operation of the firm
Chapter 13 13-18
The Overlap of Family
and Business Concerns
Chapter 13 13-19
Special Features of Family Firm
• Family concerns
• Business concerns
Chapter 13 13-20
The Culture of a Family Business
• Organizational Culture
Patterns of behaviours and beliefs
that characterized a particular
• Cultural Configuration
The total culture of a family firm,
consisting of the firm’s business,
family, and governance patterns
Chapter 13 13-21
Founder’s Imprint on Culture
• The distinctive values that motivate and guide an
entrepreneur in the founding of a firm may help to
create a competitive advantage for the new firm.
For example, the founder could have a special way of
delivering customer service.
The founder’s core values and business ethics will
likely permeate the growing organization.
Chapter 13 13-22
The Need for Good Management
• A family firm must be able to rely on
competence of its professional and managerial
• Favouritism in personnel decisions must be
• Plans for succession, steps in professional
development, and intentions regarding changes
in ownership must be discussed openly.
Chapter 13 13-23
Nonfamily Employees in a
• The issue for a parent is to decide if an outsider
will be promoted over a family member
• The potential for promotion for an outsider could
be limited, and they may experience a sense of
unfairness and frustration.
Chapter 13 13-24
Nonfamily Employees in a
• Nonfamily Employees in a Family Firm
• Competition with family members for advancement
• Getting caught in the crossfire and politics of family
competition within the firm
• Identify family-only reserved positions in advance.
• Treat both family and nonfamily employees fairly in matters
of reward and promotion.
Chapter 13 13-25
• An organized group of family members who
gather periodically to discuss family-related
• Function as the organization and strategic
planning arm of a family
• Family members discuss values and policies and
directions for the future
Chapter 13 13-26
• Canadian Association of Family Enterprise
(CAFE) is a national not-for-profit association
dedicated to research, education, and assistance
for family businesses.
• CAFE has local chapters in most Canadian cities
Chapter 13 13-27
The Process of Leadership Succession
• Available Family Talent
• Guiding and supporting the work
and development of a new or less-
experienced organization member.
Allowing only qualified competent
family members to assume leadership
roles in the firm increases the value of
the firm for all who have an ownership
interest in it.
Chapter 13 13-28
Stage I Stage II Stage III
Pre-Business Introductory Introductory
Child becomes aware of Child is exposed to Functional
Child works as part-time
facets of firm and/or business jargon,
industry. Orientation of employees, and the
becomes more difficult.
child by family member business
Includes education and
is informal. environment.
work for other firms.
Entry of Successor
Stage IV Stage V
A Model of
Potential successor begins
Potential successor assumes
Succession in a
work as full-time employee.
. Includes all nonmanagerial
managerial position. Includes
all management positions prior
positions. . to becoming president.
Transfer of Leadership
Stage VI Stage VII Source: Adapted from Justin
G. Longenecker and John E.
Early Succession Mature Succession Schoen, “Management
Successor assumes presidency. Successor becomes defacto Succession in the Family
Includes period in which the head of company.
successor becomes dejure head Business,” Journal of Small
of company. Business Management, Vol.
16 (July 1978), pp. 1–6.
Chapter 13 13-29
Transfer of Ownership
• The final step in conveyance of power from
parent to child is distribution of ownership of
the family business.
• In distributing their estate, parent-owners
typically wish to treat all their children fairly,
both those involved in the business and those
on the outside.
Chapter 13 13-30
Conditions Favouring Successful
Leadership Succession in a Family Firm
• A sound, profitable business
• Stable, healthy family relationships
• Advance planning for leadership succession
• Positive family leadership and a team-oriented management
• Presentation of career opportunities without pressure
• Open communication on family business issues
Chapter 13 13-31