The industry of small and medium-sized businesses makes up a majority of the workforce in Canada. These operations are often owned and operated by passionate individuals who have spent significant amounts of time and money building them up. While starting from the ground up is one way to go about business ownership, another is to buy a business.
Many factors influence this unique process. In our experience at Sunbelt, no two deals tend to fall the same way. Being realistic and putting in the work before sealing the deal can make all the difference along the way. Our free eBook, Insider Tips on Buying a Business, can help provide you with higher-level knowledge in addition to this article.
While you envision the final result of this journey as the owner of a business, the first steps you need to make are the ones that involve how to purchase that company. This post will explore all you need to know to make the first and subsequent moves, including details you might have yet to consider and mistakes to avoid.
- Key Takeaways
- 13 Steps To Buying a Business
- Other Factors to Consider When Buying a Business
- Common Mistakes When Buying a Business
- Final Remarks
Table of Contents
- Key Takeaways
- 13 Steps to Buying a Business
- 1. Determine What Type of Business You Want to Buy
- 2. Set Realistic Financial Goals
- 3. Consider the Location
- 4. Start Searching for Businesses for Sale
- 5. Talk to a Broker
- 6. Do Your Due Diligence and Research the Business for Sale
- 7. Consider Your Entry Strategy
- 8. Get a Business Valuation
- 9. Consider How You’d Like to Purchase the Business
- 10. Submit a Letter of Intent
- 11. Secure Funding for the Purchase
- 12. Negotiate the Price of the Business
- 13. Finalize the Deal
- Other Factors to Consider When Buying a Business
- Common Mistakes When Buying a Business
- Final Remarks
Before we explore the key details required to buy a business and other considerations that come along with it, here are some themes explored throughout this post:
- Being passionate about a business and having a robust skillset to run one are incredibly important before considering purchasing a business.
- Advice from professionals such as your lawyer, accountant, and business broker is invaluable and ensures this process goes smoothly.
- There are numerous moving pieces to consider when buying a business. It’s essential to consider all angles and prepare for a significant change.
13 Steps to Buying a Business
Not all potential buyers will follow these steps in order, but they will undoubtedly have to work through each to finalize their purchase. When going through this process, it is best to rely on the invaluable advice of professionals to help ensure a smooth transition.
Your knowledge of the industry you are buying into might be vast, but the undertaking of business buying could still elude you. The advice you receive from a strong team can help you make the best decisions every step of the way.
1. Determine What Type of Business You Want to Buy
Indeed, some have a better affinity for specific industries than others. You likely have a robust skillset that may lend itself to a product-based business rather than a service-based one. In either case, you’ll need to consider the operations and the impact the business will have on your lifestyle.
Are you willing to give up your evenings and weekends to invest time into the enterprise? Is the industry particularly competitive, requiring you to develop a marketing strategy that you are unfamiliar with? Is the skillset required to run this company successfully even slightly out of your wheelhouse?
In addition to the above questions to ask yourself, you’ll also want to review the stage the company is in.
Entering At The Right Stage
Many companies usually go through four stages: entrepreneur, supervisory, managed, and enterprise organization. Each reduces the workload on the owner slightly, freeing up their time to commit to other aspects of their life. You’ll need to determine the stage you are comfortable entering and where you hope to bring the business over time.
There can be a natural worry of stress and pressure, not to mention the potential for a limited skillset when buying a business. Understanding your wants, needs, and abilities before taking the plunge can ensure you are prepared for the subsequent phases but also allows you to have proper expectations.
2. Set Realistic Financial Goals
Financials and budget balancing are the responsibility of a business owner. As a potential buyer, you’ll need to identify strategies that will work both now and in the future. This may require more effort initially but will dissipate over time as your implementations settle.
Leverage the advice of professionals, including accountants, lawyers, financial advisers, insurance agents, HR specialists, marketing specialists, and business coaches. These individuals can help you establish goals that align with your financial strategy. Ensure the businesses you are looking at have seen success, have an established customer base and immediate cash flow, and employ well-trained staff. These factors can ensure steady financial success while also making it easier to implement any goals you might have.
3. Consider the Location
Buying a business close to home is not always possible or a necessity. You may consider one in a convenient location where you travel to often or somewhere you plan to move to in the future. If either scenario is the case, an important detail to consider is accessibility, such that you can get to it easily should you need to in the event of an emergency or monthly meeting.
If the business is growing, review if there is room for expansion within the existing building. Does the exterior look match your vision, or would you consider relocating? In addition, is the space owned or rented? Should it be leased, you’ll want to know the terms to ensure it is a good fit. You’ll also want to compare other locations of similar businesses to get an accurate depiction of affordability should you choose to move it.
4. Start Searching for Businesses for Sale
Passion is the common thread that drives many business owners. Quite frankly, if you don’t feel connected to a business, there’s a good chance it won’t be the right fit. With that said, it’s important to look at various companies to open your perspective to what’s out there.
The more information you can gather, the more informed decisions you’ll make. Start looking in the city or town you are interested in buying in, or review industries where your expertise would be best used. You might have friends who are in business that are looking to sell, or through your network, become aware of a company you have always had your eye on. This step can include a broad scope since you are simply looking for opportunities rather than submitting a letter of intent.
5. Talk to a Broker
Business deals are detail-oriented affairs. While you can go through the process alone, anyone who has bought or sold their enterprise will tell you a broker eliminates guesswork, cuts through red tape, and gives you someone in your corner throughout the process.
After you’ve done the work to decide on a few initial concerns about buying a business, consider bringing your information to a broker. From there, they can set you on a path that might have taken months to reach on your own. What’s more, a broker has access to businesses for sale that might not be commercially advertised and could be great options for you.
6. Do Your Due Diligence and Research the Business for Sale
Once you’ve spoken to a broker, they’ll take the information you’ve provided and put together some potential buying options for you. These packages will include relevant information to help you make an informed decision. However, it is you who is buying the business, so you’ll need to review the available data and compare it to your expectations and needs.
While your broker can vet these companies, you are the deciding factor should a deal go through. Observe the business, read the reports, do a little more market research, and gather what you can from meetings and discussions with the current owner. It’s as much about the details available on paper as the feeling you get speaking to the owner and exploring what you could bring to this business.
7. Consider Your Entry Strategy
Once you’ve chosen a business you want to pursue ownership of, you’ll need to formulate an entry strategy to let the seller know you are interested. This is another crucial stage where your broker can come in and inform you what would be best to do next. They might know the owner or the owner’s broker, but even if they don’t, they have extensive knowledge and experience to formulate offers and negotiate terms.
Your broker can ensure you avoid showing all your cards too soon or going in with a purchase offer that won’t entice the seller. Your input matters, and together, you and your broker can start the buying process with the right foot forward.
8. Get a Business Valuation
There are a few ways to go about a comprehensive business evaluation. You might be interested in the market cap, earnings multipliers, or book value. Whatever method you choose, it should give you a complete overview of the fair value of the business. This can help ensure you are not overpaying or unaware of some unsavoury details that were overlooked in the listing.
You might compare a few valuation formulas to fully understand the business’s value. Perhaps you are more concerned about assets, or market potential. In any case, these details should be relatively easy to understand and confirm your assumptions regarding the financial requirements you’ll have to meet.
9. Consider How You’d Like to Purchase the Business
The following steps are the most technical and financially involved, so understanding your intent and concerns ahead of time can ensure that you are staying on track and comfortable moving forward. If you are going into business with a partner, a contract is vital to set out specific circumstances and avoids the pitfalls of “what-ifs” down the road.
You’ll have to put together an Offer to Purchase, a Letter of Intent, and a Memorandum of Understanding. These serve as a dated and signed offer with a set time frame for response. These aren’t necessarily binding, except for exclusivity and confidentiality. You’ll also likely be required to make a deposit at this time.
10. Submit a Letter of Intent
This document establishes the terms to help move negotiations forward.
From there, your offer focuses on those conditions related to the review of the business after the seller has agreed to the offer. Throughout this stage, the goal is to arrive at an agreement that works for both parties. Listening to your broker is key as they can relay the seller’s findings and understand their priorities and concerns.
This step may go back and forth a few times as each side discovers more conditions they would like included. Each revision is taken to the seller for discussion but is always vetted with the buyer before moving forward.
11. Secure Funding for the Purchase
While progressing on your journey to buy a business, you might get stuck on this step. But without proper financing, there is no way forward.
Most banks rarely provide loans for small business acquisitions unless they are structured as an asset purchase. But even in that case, the funds will only cover certain aspects and percentages.
Seller financing is a possible option for many looking at purchasing a company. In this case, the seller will put forth a significant amount of the sale, approximately 20 to 50 per cent, and their interest rate is typically lower than other loans. Earn-outs are another form of seller financing. This is based on a portion of future performance, which can settle concerns on both sides. However, it can be more costly if the business is incredibly successful.
12. Negotiate the Price of the Business
The price of buying a business can differ based on the way an enterprise values itself. Assets are preferred cost benchmarks since they can result in a greater depreciation expense, meaning taxes could be reduced in the future.
However, sellers tend to want a share purchase instead. This can lead to liabilities, especially if an audit is required by Revenue Canada. In addition, there could be ongoing legal concerns that are not present.
Price can be negotiated, but it is best left to your broker to determine how to approach these discussions. They may be inclined to accept a share purchase on your behalf if the seller is willing to provide significant financing for the purchase and the correct offsets can be met.
All businesses will be evaluated differently, so allowing the expertise of your broker to guide you through the price negotiation can ensure you don’t overpay or fail to include the right terms. It is worth noting that the deal hinges on its ability to work for the seller; many failed negotiations happen because the buyer is interested in the agreement only meeting their terms.
13. Finalize the Deal
Depending on the type of business you are buying, you might have several concerns to finalize before coming to the end of the deal. After the offer is accepted, there are legal and financial details to consider that will require the knowledge of your lawyer and accountant.
In addition, a walkthrough of each area of the company is necessary to ensure items such as the lease assignment, lender-required documentation, and other aspects like capital assignments are in motion or in place. You’ll have to meet with the landlord, the lender, and any other parties involved and take inventory of the premises.
Other Factors to Consider When Buying a Business
When determining how to buy a business you are interested in, it might be easy to focus solely on the issues. However, considering all angles is essential to ensure this is the correct move for you. Without this perspective, these details could stall or prohibit you from closing the deal.
Reason for Buying a Business
Many seek the financial rewards of business ownership. But it can be more complex than that, potentially connecting to personal freedom and the desire to become one’s own boss. Maybe you are interested in working with family or partners that share your vision and expand an already successful business into something you can be proud of. Whatever your reason might be, ensure it is something that can keep you motivated through the highs and lows.
When determining a business’s valuation, a few formulas can be implemented to come to a final number. The multiplier used might depend on several factors or approaches, such as profits, assets, or market value.
The most common multiplier used is the one that focuses on profits. It compares a company’s gross income minus expenses and multiplies it by a number from two to 12. Another option views the total assets of a company. The final is the market valuation approach. While you might not need all formulas to come to a decision, it can be helpful to have plenty of information at your disposal to understand best the investment you are making.
Timeline of the Sale
Like all good things, sales take time. Even if you show interest in buying a business, it will likely be weeks before you find one that suits your skillset and budget. From there, it can take months to go back and forth with the owner to decide on a deal that works for everyone involved. After all, they are still required to run their business during this time which might not leave a lot of time for them to dedicate to negotiations.
Purchasing a company is something that you have to be committed to for the long haul. Even once the deal is complete, you may still work with the previous owner for a period to fully understand the ins and outs of day-to-day operations. This might be known as a transition protocol and can be written into negotiations. All of this should factor into your decision and understanding of the timeline.
After you’ve secured the funds and financing required to purchase a company, you’ll need to consider the tax implications before you are hit with considerable fees. For some buyers, incorporating a holding company where they can transfer the money and have the company acquire the business is preferred. In this case, you can take your cash out through non-taxable dividends from the operating company to the holding company and tax-free loan repayment from the holding company to you.
You’ll also want to plan for taxes with your lawyer and accountant. The knowledge these professionals bring to the table is invaluable and surely saves you stress, headaches, and a large tax bill in the long run.
Additional Costs to Purchase a Business
While the purchase price will play the largest factor in your decision, there are other financial details to consider. These might include rent for the building, equipment maintenance, start-up inventory, insurance, or operating licensing fees. In addition, should you be interested in relaunching the company under your ownership, marketing costs will be required to promote this.
Planning out a budget for the first six months after closing the deal could be worthwhile to understand the expenses you’ll be responsible for fully. This is especially helpful if you have only seen a snapshot of the needs of the business or are trying to plan for your own financial situation after you take ownership of the company.
Going into business with someone else could be part of your personal steps to buying a business. You may have been partners or know someone with a complementary skill set, and you want to see where your talents can take you both. Perhaps you’re looking to work with family or friends and have decided you will enter this venture together.
The best thing to do is spell out everything in a contract. Outline contributions, roles, rights, and responsibilities. You might not always have the same goals or ambitions, which can lead to difficulties regarding decisions and what to do about disagreements. A partner can be a great resource should you maintain honesty and good communication. Ensure those details are in place before you make any big decisions.
Common Mistakes When Buying a Business
When considering the process of how to buy a business, not everyone concerns themselves with the details outside of the deal that matter. On the buying journey, it’s easy to have blinders on and focus solely on the goal of being a new owner. However, this can lead to mistakes that can delay or hurt the deal, potentially having it fall through or resulting in unsavoury ownership.
At Sunbelt, we’ve seen the mistakes listed below made countless times. As brokers, we help ensure buyers consider these factors and make them avoidable rather than impending issues.
Ignoring the Impact on Others
The responsibilities placed on your shoulders as an owner can be a heavy burden to bear for anyone. It means you must look after employees, clients, suppliers, financiers, and your family.
Not accounting for the fact that this will change your availability and personal relationships with your loved ones is a big oversight for many potential business buyers. The long hours you will work won’t always be necessary, but they will shape your relationships and may change how your loved ones feel about you.
You need to ensure you have the support of your family throughout this process. There may be times of financial stress or days when they won’t see you because of your commitment to the company. Their understanding will make all the difference, so take the time to discuss your choice with them and gauge their feelings before moving forward.
Failing to Have a Business Plan
In general, it’s best to keep the business you buy at status quo for the first six months after the deal goes through. This gives you enough time to gain perspective into what’s working and what isn’t. But failing to have a business plan when buying an existing business can lead to issues you didn’t foresee coming and are unequipped to deal with.
Systems, staff, and technology all keep the company moving forward. Still, a new set of eyes can really transform the way things are done. Whatever you notice throughout the buying process, jot it down and keep it for later. Over time, you’ll have some key details you can use to build a business plan around. These changes don’t have to be monumental, but staying agile can be a great advantage should there be any adversity.
Waiting Too Long to Secure Financing
It can be easy to search through listings and inquire about businesses that you can see yourself owning. But without the right financing, ownership is impossible. Plan for how you’ll pay for the business, whether that be seller-funded, personal savings, or bank loans.
Often, banks avoid lending for this kind of investment for various reasons. They can be a dangerous crutch to lean on if you believe you have a good credit standing and upfront capital that the bank will put up the rest or help you. Choosing to work with an experienced broker, like our team at Sunbelt, means we can determine supports you need ahead of time and have access to resources and the knowledge you need to know about securing financing.
Buying for the Wrong Reasons
The specifics of this mistake can differ from buyer to buyer. Perhaps they were offered to purchase a business from a friend who is the current owner or want to expand their skills by buying a business they know nothing about. In any case, you should avoid entering into a deal simply because you feel pressured or have made a last-minute decision.
A broker can work with you to understand your goals and unique situation, bringing you companies that fit your needs best. They can also steer you away from deals that might not work for you or result in losses you can’t afford.
Not Knowing Why the Business is Being Sold
This might be a lesser concerning detail to you, but it is an important one. Without this knowledge, you could be purchasing a company in legal trouble or one with a rising competitor in the area that is drawing away business.
As the buyer, you’ll want to ensure you know the real reason for the sale, whether that be because of retirement or the individual wanting to spend more time with their family. This can also give you a view into what the climate will be like due to your takeover. An already contentious environment could lead to difficulties before you can even make your first decision, whereas one that is open and welcoming is easier to foster your ideas in.
Overlooking the Reputation of the Business
It might be tempting to save an ailing business that you believe is easily fixable or transform the company’s image not long after you purchase it. Realistically, changing the reputation of a business takes much longer than a simple change of ownership. It can take years and will be met with significant pushback and difficulties that you might not be prepared for. The image of a business is integral to its success, and transforming what is already established could be disastrous.
In general, you should feel confident to meet a company that you are considering buying where it is at. This mindset will give you the time and opportunity to fully understand it before implementing changes that could change its reputation or be received poorly.
When you endeavour to buy a business, there are plenty of details to consider. While this can be a worthwhile investment and positively impact your life in numerous ways, various concerns must be accounted for. Without the support of your family, industry professionals, and the guidance of an experienced business broker, you may be left with a deal that falls through and sets you back from being able to call yourself a small business owner.
At Sunbelt, we’re passionate about helping our clients buy the right business for them. Our industry expertise gives us an advantage, and we have access to companies for sale that aren’t always marketed due to our network of buyers and sellers. Whether you are a first-timer or have gone through this process more than once, we can provide the information you need to make an informed decision.
Leverage our resources and knowledge so that you know the steps to buying a business and can ensure a successful purchase. To learn more about our broker services, contact us today.