Buying a business
Buying a business
Buying a business can take time, energy and a fair bit of research. It can be less risky and more affordable to purchase an existing business than to start one from scratch, but it is important that you do your homework to ensure that you buy the right business for you, and that you pay a fair price for it.
Where to find a business to buy
Businesses for sale are often advertised in print media and online, but sometimes business opportunities can be misleading. Make sure to do your due diligence before you take action. Try trade publications or commercial investment magazines, or talk to a broker who specializes in a specific industry. Networking at business events can help get the word out that you are looking to buy.
What kind of business should I buy?
If you buy an existing business, you have two choices: franchise, or traditional (independent) business. There are advantages and disadvantages to both.
- Proven track record — This is an established business with a proven concept; there is less risk and less initial capital required than with starting something brand new. Similarly, when it comes time to sell, you may have an easier time finding prospective buyers for a known entity.
- Built-in customer base — People know what to expect from your business because they know the brand, and trust the product or service.
- Setup, support and training — Having a parent company means having the infrastructure and processes in place, from equipment to uniforms to corporate advertising, rather than having to develop them on your own. Other franchisees can also be a source of support.
- Set of rules and regulations to follow — When you operate a franchise, you have less control over the operations than if you own an independent business; you also have to pay a percentage of your revenues to the parent company, which reduces overall earnings.
- More control and responsibility — You have the autonomy to set your own rules, but the success or failure of the business rests solely on your shoulders.
- No fees or royalties — You keep all of your earnings without sharing any of the profits.
- More opportunity and risk — You can sometimes find a business that may not be doing well but has potential. If you are willing to do the work, you may reap the rewards; you must be prepared if things don't turn out as planned.
Evaluating a business
Before deciding to buy a business, you should evaluate its condition and potential. Think about the following things:
- What is the physical location of the business like? Is the office, warehouse, plant or retail space in good shape? What about any equipment or inventory?
- If it's an online business, how well-designed is the website? Is it secure? Are there any metrics to study?
- Does the business have a good reputation? You can check online for customer reviews.
- How visible and easily accessible is the business? Is it located in an urban or rural area? You will have to consider expenses like increased shipping costs if you are farther away from your suppliers and customers.
- Are the products or services generating revenue? Are sales increasing, decreasing or are they flat?
- Does the business have a good working relationship with its suppliers and bank?
If a business is doing poorly, examine what the potential causes are. It may be a case of poor management, or inadequate resources. If you think you can turn it around and make it profitable, you could stand to gain from your investment; on the flip side, you are taking a big risk if it doesn't work out.
If a deal seems too good to be true, chances are, it probably is. Learn how to determine what type of business you should buy.
Determining how much to pay for the business
As a buyer, it all comes down to knowing what you can afford before negotiations start. You should be flexible in your negotiations, but also keep your budget and the value of the business in mind.
What is the value of the business?
- You will have to determine the value of assets such as the building, equipment and products.
- Further factors to consider are the business' financial statements, annual reports and intellectual property (for example, patents and trade-marks).
- Other valuable assets to any business are its reputation, customer lists, and quality of personnel.
Talk to clients who buy directly from the business. It is better to find out the reputation of a business before you sign on the dotted line. Banks are more receptive to a business that has a proven track record.
- Take your time and verify all of the information you are given before you commit yourself.
- Buy a business in an industry you know well and with products or services you are comfortable selling.
- Buy based on the return on investment and not only the price. You don't want to leave yourself short of funds for future expenses.
- Investigate suppliers, clients and the reputation of the business before you buy.
- Buying a business — CRA
If you are buying a business along with its inventory and assets, learn about some of the requirements, changing ownership and GST/HSTconsiderations.