How to ride the coming wave of business sales | BDC.ca

Buying a business: How to take advantage of the coming wave of entrepreneur retirements

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With so many baby boom entrepreneurs heading to retirement, the coming years will be a good time to buy a business in Canada.

Close to 60% of owners of small and medium-sized businesses are aged 50 or older and that means many will soon be leaving their companies.

In fact, 41% of entrepreneurs expect to exit their business, without acquiring another one, within the next five years, according to a 2017 BDC survey of 2,500 entrepreneurs in all industries.

The survey found that more than half of those businesses will be available to outside buyers, with the others being handed over to family members or wound down.

A boom in acquisitions will likely lead to greater consolidation

The good news for sellers is that there are many potential buyers out there, the survey indicates. Indeed, 19% of entrepreneurs said they intend to make an acquisition in the next five years—either to complement the business they already own or as a replacement for one they have sold.

Owners of larger companies are even more likely to want to buy a business, with 44% of owners of companies with 20 or more employees looking to make an acquisition.

“The abundance of buyers and sellers should lead to a boom in acquisitions,” BDC Chief Economist Pierre Cléroux says. “This is great news for the economy—consolidation will create bigger businesses that are better positioned to compete both in Canada and abroad.”

Not surprisingly, the survey found that most potential buyers are eager to grow their companies and willing to take risks.

In terms of industry, the largest number of entrepreneurs who want to make an acquisition are in the mining and energy industries—where respondents owning larger businesses were predominant.

Buying a competitor is the leading motivation for acquisitions

Why do entrepreneurs want to buy a business? The No. 1 reason identified in the BDC survey was to acquire a competitor, with the second most popular reason being a desire to expand geographically.

The survey also indicates entrepreneurs want to buy a business that is profitable but not necessarily growing at a high rate. It found that 61% want to buy a stable but profitable business compared to 31% who are looking for a growing and profitable one.

Just 8% of potential buyers are interested in trying to turn around a declining or unprofitable business. The message for sellers is clear. It’s essential to ensure your business is strong and profitable before putting it on the market.

At the same time, 62% of potential buyers want a business that is the same size or smaller than their own. This is especially true for larger businesses and even with those who identify themselves as risk-takers.

4 tips for buying a business

Buying a business can be a great way to grow your business and open new markets. However, acquisitions don’t always go smoothly.

In fact, many deals fall short of the expected financial performance—often by a wide margin in the short term, a separate BDC study found. Synergies are harder to achieve than forecast, and entrepreneurs tend to underestimate the costs and disruption involved.

To avoid the pitfalls, here are four tips to help you make the best decisions when shopping for a business.

  1. Go beyond the numbers—Entrepreneurs who get the best results spend a lot of time looking at companies. Yes, they look at the books, but they also take a hard look at a company’s strengths, weaknesses, opportunities and threats to its business model. They ask many questions, starting with: Why does the owner want to sell?
  2. Be disciplined on price—It’s essential not to spend too much on your acquisition. Overpaying will reduce your financial returns and increase your risk of default. Patience is a smart policy. More businesses will be coming on the market as entrepreneurs retire.
  3. Negotiate a flexible financing package—The financing tools you use can dramatically change the returns you realize on your investment and the risk you face in the company and personally. You want a financing package that maximizes your repayment flexibility and minimizes your personal exposure.
  4. Get help from experts—Many entrepreneurs underestimate just how complex and time-consuming an acquisition and integration can be. That’s why it’s a good idea to get outside advice as you move through the process. Your team should typically include such professionals as an accountant, a banker, a lawyer and a project manager to oversee integration.

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