Buying a Small Business

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YOU ARE LOOKING FOR FINANCING TO BUY A SMALL BUSINESS  IN CANADA! 

You've arrived at the right address! Welcome to 7 Park Avenue Financial 

        Financing & Cash flow are the biggest issues facing business today 

                              ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

YOUR GUIDE TO BUYING A  BUSINESS IN CANADA  

Buying a small business in Canada can be much less risky and stressful than starting your own enterprise from scratch - that's for sure! Taking over an established entity with built-in advantages like profitability and a loyal customer base has tremendous value.

It's a key advantage - You'll be able to skip the expensive start-up stage entirely - saving time and money in both areas! Does the Harvard Business Review have it right - ' think big, buy small' own your own company"

But for an entrepreneur buying a profitable small business is a challenge - let's dig in on the right strategies to buy a business and the financing you need to be successful.

THE CHALLENGE OF FINDING THE RIGHT BUSINESS  FOR SALE

Buying a small established business as well as finding a company for sale can take 12 to 24 months based on the complexity of your search. Statistics show that before finally signing the share purchase agreement for the type of business you're looking for you will have looked into numerous transactions potentially, as well as having done preliminary due diligence on target companies, prior to a final letter of intent.

Buying a small business in Canada can be much less risky and stressful than starting your own enterprise; Taking over an established entity with built-in advantages like profitability and a loyal customer base has tremendous value. But buying a profitable small business is a challenge - let's dig in on the right strategies to buy a business and the financing you need to be successful.

VALUATION / PURCHASE PRICE

Valuing a company when you buy a business can be difficult, but has tremendous value. Certified Businesses Valuators or Accountants often handle evaluating larger businesses. Before committing to any transactions to purchase an existing company, take some time and get more information about methods to value a business - let the 7 Park Avenue Financial team help you determine what's critical in your transaction.

THE SELLER / BUSINESS OWNER NEGOTIATION

 Do not walk into a meeting with potential sellers of your business thinking that you know everything about the transaction when you buy a business. Listen more than talk when first meeting sellers so that you can understand their motivations to sell, learn about how successful or unsuccessful they were as entrepreneurs, find out if there are any concerns for them in the future without being under new ownership or leadership.

If possible, ask questions like "What was most important to focus on during these past few years?" This will help broaden your understanding while reassuring owners who may feel anxious over whether future changes would affect their legacy.

DUE DILIGENCE

There are many pitfalls when buying a company. Many entrepreneurs later realize that they overpaid for the company they bought without properly investing in due diligence to help ensure fair pricing.

There are numerous ways to value your target acquisition. One common one is that the value of a business is typically based on earnings before interest, taxes, depreciation, and amortization - aka 'EBITDA'.

Take time to understand the fundamental drivers for profitability. While it sounds like an obvious step, don't be fooled by also projections and numbers and figures that might not paint the whole picture of what's happening with profit margins in the industry or how past performance will dictate future trends.

Dig deep into financials to see if there have been changes from previous years--either on average or compared against competitors--and question why these higher-than-average profits may exist now but weren’t present before such shifts occurred within the company (for example, new management techniques, technologies, manpower, etc.

FOCUS ON CASH FLOW

Conduct proper financial and commercial due diligence to understand the cash flow characteristics of any business you may be interested in investing in. Learn how your organization can identify anomalies (e.g., fraud, earnings management) or unique assets that their competitors have not been able to capitalize on yet. At 7 Park Avenue Financial, we recommend clients draft an initial ‘first 100-days’ implementation plan for their acquisition.

MORE ON VALUATION

Perhaps you have heard the quote/famous saying  ' Better to pay too much for a good business than to pay too little for a bad business. "!

Valuation is not a science, but as much art that should be used with caution and precision, considering all the factors involved in your final purchase price accurately. One thing to remember when running your financial models including what parameters you plug into them.

Another just as important aspect of valuation also includes common sense and knowing which numbers to exclude from calculations due to their volatility or tendency for inaccuracy- such as future cash flow forecasts where there are huge discrepancies between estimates.

Being conservative will always help avoid unpleasant surprises later on down the line; watch out for those hockey stick predictions!

FINANCING THE BUSINESS ACQUISITION 

When it comes to buying a small business financing your own equity investment is a sign of buyer commitment - its complementary to buying a small business with debt and typically is some percentage of the buying price.

These funds can come from various sources. Another source might be third-party investors / partners who become part-owners and invest in the combined company with equity participation that lowers its debt load by demonstrating to lenders how committed shareholders are to making it succeed. 

Senior debt is the bulk of any financing deal. The senior lender provides a loan secured on company assets, such as accounts receivable and inventory. As an example, a  senior lender might be willing to lend three times EBITDA.

SELLER DEBT / VENDOR FINANCING

When buying a small business seller financing via a  vendor takeback can come in many different forms. It’s sometimes based on a company's performance, increasing or decreasing with EBITDA production during repayment.

 CONCLUSION  - ADVICE ON BUYING A SMALL BUSINESS IN CANADA

The advantages of buying an existing business  are in some ways '  built-in ' : existing profits, already established customer base, and work done to build a brand or industry reputation

Speak to  7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with buying a small business in Canada and your business acquisition funding needs.

For more on how  7 Park Avenue Financial finances small business acquisitions in Canada click here for capital requirements.

FAQ: FREQUENTLY ASKED QUESTIONS  

What information do you need from the seller to help evaluate the business purchase decision?  Your  'Buying a small business due diligence checklist ' !

A  final valuation decision based on an appraisal of a company’s assets and liabilities that provides fair market value is the goal of the business purchaser. Valuation reports and documents are typically required by banks when they're considering lending money to larger businesses. The information needed for a valuation varies depending on what type of report someone needs but will often include:

  Financial statements from the past three years (or more)

  Management compensation info - such as salary, bonuses, stock options etc., if any

  Income statement expense analysis  related schedules / balance sheet analysis

  Sales forecasts / key customers

  Supplier/vendor cost information

  Tax records / filings - Are government remittances up to date

  Number of employees

How do you buy an existing business?

When buying an existing business, the buyer must decide how to assign a value for each asset. If there is no set price in the contract of sale, you should attribute goodwill and any remaining balance of purchase price that cannot be attributed to individual assets as goodwill. It is important not just for tax purposes but also when making decisions about which parts of your new company can or will need capital improvements

Click here for the business finance track record of 7 Park Avenue Financial.