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11.1 Why are Businesses Bought and Sold?
A major reason why businesses are bought is that parties interested in beginning or expanding business activity often prefer acquiring an existing business rather than starting a new one. Existing businesses are “up and running,” and have in place a product or service line, a work force, customers, suppliers, the necessary physical resources, and various intangibles—technology and “know-how,” systems and procedures, location, reputation, and the like.
From a seller’s perspective, business owners need to have an exit strategyA means of extracting value from business owners’ investments of time and resources in the business., a means of extracting value from their investments of time and resources in the business. A sale may be occasioned by the death or intended retirement of the owner, or by a desire to “cash out” the investment at a time when its value is perceived to be high. Or, an owner may wish to expand the business by taking on new partners, selling a portion of ownership to new parties. Sometimes this is done to reward and retain key personnel by offering them an ownership interest in the business.
Even when no transfer of ownership is involved, a business valuationDetermines the estimated market value of a business entity. may be done when seeking major new financing. A valuation provides the prospective lender with an indication of the safety of a loan secured by the business.