Buying a Business - the Right Business

The process of buying a business isn't easy. The majority of people who begin the search to buy a business spend most of their time looking at businesses that do not meet their criteria. Many acquire a business that they end up not even liking.

As a potential buyer, how do you find the business that's right for you? How do you make sure that you're not wasting your time during the search process?

Finding the Right Business – For You

First, look at your motivation for buying a business. For an individual buyer, a business represents an opportunity to fulfill lifestyle or entrepreneurial ambitions. Or, it may replace a lost or soon-to-be lost corporate job. For a corporate or strategic buyer, buying a business meets longer term objectives such as strategic growth, favorable uses of capital, and investment objectives.

First-time buyers in particular must understand that as important as it is to buy the right business, it must be bought in the right way. Both are necessary for a successful outcome.

Then, undertake an assessment of your skills, your interests, and your financial resources. A Business Exit Strategies Certified Business Intermediary can help you with this assessment and can help you educate and prepare yourself – if you're a first-time buyer, you will likely underestimate just how much is involved in each stage of the process of buying a business.

The rewards for persevering, however, can be incredible! You need to determine the type of business that is right for you and then focus your search only on the businesses that meet your criteria.

Importantly, look for a business that you will enjoy. You may be working long hours, at least initially. It's less difficult – and a lot more fun – to succeed in a business when you look forward to going to work each day.

Startup or Buy an Existing Business?

Starting a business is risky. After you pay the one-time costs to start up a business, the rate at which you spend your cash – your burn rate – for rent, utilities, payroll, advertising, etc., will continue until your sales are high enough to start paying yourself a salary. How long will that take? How deep are your pockets?

The failure rate of startups is high. Almost half of the firms in Canada that go bankrupt do so primarily because of their own deficiencies rather than externally generated problems. As a result, banks won't lend against the future value of startups, relying entirely on your personal creditworthiness.

Buying a business that is a going concern is, by far, one of the fastest, most cost effective, and least risky ways to gain control of your financial future. An established business will provide you with an income from the day you take over. You will already know what can be accomplished by the business. You will have trained employees, established suppliers and credit, established customers and referral business, and existing licences and permits. You will have training provided by the Seller, and perhaps most importantly, the availability of Seller financing.

Discretionary Earnings

In the process of buying a business, you will focus on its financial health, and that is where the recasting of financial statements, one of the services provided by your BES Certified Business Intermediary, will prove invaluable. The process of recasting is essential in determining the true value of a business and allows a buyer to more accurately assess the business' cash flow and future earning capacity. The recasting process identifies items such as excessive and discretionary expenses and nonrecurring revenues and expenses. Recasting provides an economic view of the company, allowing meaningful comparisons with other investment or business acquisition opportunities.

Price or Value?

Pay for the Past, Buy for the Future is the business buyer's maxim.

While you don't want to pay more than is necessary when buying a business, most business buyers don't comprehend the importance of overall value in a potential business acquisition.

Seen from a broader perspective, a slightly higher price for the right business won't undermine the viability of its purchase. The right business will pay for itself – including the debts that were incurred to buy it as well as for the owner's lifestyle – and will increase your net worth as it does so.

Financing the Purchase

The initial source of financing for Buyers is their own money, known as Buyer's Equity. Buyers should decide how much capital they are able to invest. The actual amount will vary, of course, depending on the specific business and the terms of the sale.

It is rare that a Buyer will have sufficient capital available to buy a business for cash – additional financing will be required. Commercial Lenders are usually the next source of business acquisition and operating capital to be considered.

The best financing option for a business acquisition is Seller Financing. The terms offered by Sellers are usually more flexible and more agreeable to the Buyer than those offered by a commercial lender.

The availability of Seller financing can lead to a sale being accomplished more quickly. Understanding the Seller's personal objectives and reasons for selling is a vital part of structuring the right deal for both Buyer and Seller. The terms of the deal are always more important than the actual purchase price.

Targeted Business Acquisitions

Most established businesses will never be advertised or listed for sale. Many business owners are simply too busy to put their companies on the market, or they may be just putting off their inevitable exit from their business. Some business owners first consider the idea of selling only when they are presented with a qualified buyer and legitimate offer.

A BES Certified Business Intermediary can represent a buyer to conduct a targeted search, based upon the buyer's specific set of business acquisition criteria. We can “package” a business buyer's qualifications and expertise, develop a realistic financing framework, and then proactively identify and contact business owners to gauge their interest in selling.

Your Next Step

Whether as a result of a target search or a response to a company advertised for sale, the BES Five Phase Buying Process will improve the likelihood of a successful conclusion, while also reducing your stress level. The following pages provide more detail on each phase of the process of buying a business.

Phase 1 – Buyer Profile

Before you start looking to buy a business, you need to conduct an assessment of your family situation, financial condition, and future goals. It must include a critical appraisal of your business experience, assessing your professional skill set and core competencies.

Phase 2 – Search

At BES, we tailor our business search to each Buyer's unique criteria – industry, revenue range, cash flow, management capabilities and other parameters revealed in the Buyer Profile. We evaluate potential opportunities to buy a business to ensure a match against these established criteria before presenting an opportunity to a specific Buyer.

Phase 3 – Making an Offer

An Offer to Purchase includes the details of the price to be paid to buy a business, the assets that will be included in the purchase, the training to be provided to you, the time period and area to be covered by any non-compete agreement, and the details of any financing to be provided by the Seller.

Phase 4 – Buyer's Due Diligence

Once the Seller accepts your offer to buy a business, the next step is for you to perform your Buyer's Due Diligence. Due diligence is the examination and evaluation of risks that a prudent person might be expected to exercise – not only the financial aspects of the target business, but also factors such as competition, changes in market dynamics, available financing, etc., that potentially affect the future operation of the business. While your accountant and attorney should review the financial and legal aspects of buying a business, the burden is on you as the Buyer – no one else.

Phase 5 – Closing

Upon the completion of the due diligence period, you and the Seller are ready for the completion of the sale. To facilitate the closing, your lawyer will draw up the definitive Agreement of Purchase and Sale, compile a Statement of Adjustments to be made at Closing, file the required paperwork, and ensure that all licenses and leases are properly handled for all parties to the transaction.

Building the Value of Your Business

Once you buy a business, your objective should be to build as much value in the business as quickly as possible. Read the Value Drivers and Exit Planning sections of this website to ensure that you invest your time and energy on those areas of your business that will provide the greatest future value.