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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.
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