Buy A Business
BUYING A BUSINESS
Buying a business can be a great way to become an entrepreneur without starting from scratch. After all, you're buying an established company with staff, assets, and customer relationships.
An acquisition may be even more attractive if you want to grow your company. Indeed, a recent bank survey of more than 1,000 Canadian entrepreneurs found a clear link between business acquisitions and higher-than-average growth.
Whatever your situation, it is important to make the right choices and surround yourself with the right experts.
The right acquisition starts with a clear vision. What are your goals for this acquisition? Do you plan to expand the business? Are you simply buying assets? Do you want to closely manage the business? Your answers will determine what type of business you should buy. Here are 4 key questions you need to answer to start your search:
What industry are you interested in?
Your skills and interests are critical when buying a business. You need to match your skills and interests to the business and the industry that the business participates in.
How much money are you planning to invest?
The industry that you target will determine the multiple of pre-tax profit you might expect to pay. You should also budget for initial working capital to invest over and above the purchase price.
Which region/geographical area do you plan to invest in?
Are you willing to relocate, or are you looking for a business that can expand geographically?
Are you looking for a franchise?
Franchises benefit from the franchisor’s proven systems; however, you will have very limited control of the business; you will not own any intellectual property and you will be at the mercy of the franchisor’s policy changes.
Now that you have set your vision for a potential purchase, you need to find a business to purchase. Here are 3 methods to assist you in identifying a prospective business:
Go online and do a “Google” search of websites and databases.
Business brokerage websites are great because they include business listings. There is no fee to you as when a deal is reached. the seller typically pays the broker’s fee.
Use your professional network.
Business owners seeking to sell rarely make their decision widely known. A good starting point is to ask accountants and lawyers. These professionals deal with business owners and are a good source of potential leads. Talk to your banker(s). They also deal with business owners and can be a good source for referrals.
Hire and work with a business broker or intermediary.
While brokers, such as Sanderson Business Services (“SBS”), are typically hired by sellers, SBS has the knowledge and expertise to help you find a business that meets your requirements.
So, you have identified a potential target. The next step is to learn more about the business. You should start with two avenues to assess a potential acquisition:
You should start by assessing the target’s:
ProfitabilityDoes the business have a strong history of profitability along with repeat customers?
ReputationAsk your network about the business, is it a member of organizations like the local Chamber of Commerce? Inquire and search the websites of regulators for information.
CompetitionIs the target in a highly competitive market that can greatly impact potential earnings?
ManagementIs the business highly dependent on the owner(s), or does the business have a strong diversified management team? The more dependent the business is on the owner, the more difficult will be the transfer process.
MarketIs the business’ market growing and is it sustainable or are there impending regulatory changes that could impact your potential investment?You need to assess the seller’s motivation for wanting to exit. Look for these factors to determine the seller’s commitment to the sale:Is the business at risk of any of the 5 “D’s” of business exit: Death, Disability, Divorce, Disagreement, or Distress.
Continued involvementis the owner willing to stay on for a certain period to assist with the transition?
Price and processIt is important to discuss price and various terms and details of the sales process. This can prevent unrealistic expectations of both yourself and the owner.
Once you are comfortable with your initial assessment of the target, you need to enter into a process of full “Due Diligence.” This is a vital step when buying a business. You need to thoroughly review the business's financial records, potential legal issues including a review of tax filings and status, and market positioning.
Importantly, you need to also determine how you will finance the acquisition. This is a critical part of any acquisition process and different types of financing have different uses and costs. For instance, what percent of the purchase price are you committed to financing with your own equity? This shows additional lenders your commitment to the venture.
How much senior debt will you need to obtain? Senior debt is often the bulk of the financing package and it will be comprised of a first charge over the assets of the business. You will have to budget for monthly payments and fulfill loan commitments and financial covenants such as maintaining certain debt ratios.
Will you ask the seller to help finance the deal with a vendor take-back loan or a seller note? These loans are generally at favourable interest terms, and with fewer conditions than senior debt. In essence, the seller is allowing you to pay some of the purchase price over time. As well, the seller may be more patient in requiring repayment if the business subsequently runs onto financial difficulty.
Now that you have considered all of the above, and done your due diligence, the final step is to draft a non-disclosure agreement and letter of intent (LOI). The non-disclosure agreement protects the information and documents that both parties will share during due diligence. This includes financial data, customer and supplier lists, and intellectual property.
The letter of intent is the starting point for the acquisition process. It serves to reassure the seller of your willingness to submit an offer while setting out the key elements of the transaction.
At a minimum the LOI should have the following clauses:
● The nature of the transaction.
● Identification of the legal parties involved in the acquisition.
● A price for the acquisition, subject to amendment and the terms of payment.
● The duration of the exclusivity of the negotiations. This is the period that the seller agrees to not entertain other offers without consulting you first.
● The distribution of, and responsibility for the costs that will be borne by each party.
● A stipulation that the LOI is non-binding and that you may withdraw from the process at any time if the transaction does not meet your expectations, and, the closing conditions for the transaction.