What to avoid when buying a business | BDC.ca
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How to avoid getting burned when buying a business

Read time: 3 minutes


Making an acquisition can be a great way to grow your business. After all, you're buying an established operation with staff, assets and customer relationships.

But you have to be careful to buy a company that's a good fit for your business and makes sense in terms of your strategic plan. You also have to be able to buy it at a price, and with a financing structure, that doesn't put your personal or business finances at undue risk.

First, you have to understand why you want to make an acquisition, develop criteria for what you're looking for and how much you're willing to pay.

It's essential to stick to those criteria as you go through the acquisition process, especially in hot markets where there are more buyers than sellers, as is the case in many parts of the country.

Here are some tips to keep in mind as you shop for a business.

1. The right business

Go beyond financial statements to ask lots of questions about the business. Start with the most basic: Why is the current owner selling? Is there a hidden problem or is the industry headed for a cliff? Is the company overly dependent on a few customers or suppliers? Are customers loyal to a charismatic current owner and likely to slip away to competitors when he or she is gone?

The folks who do well spend a lot of time searching for companies, looking at companies and talking to companies.

2. The right fit

Make sure the business you're buying has a culture that's compatible with your own. Think of a web-development firm with a free and easy T-shirt and flip-flop style. When it was acquired by a buttoned-down telecom giant, it didn't take long for the acquisition to turn sour.

3. The right price

Do your homework on what businesses are selling for in your industry and region. It's important to be disciplined about how much you pay, even if your bankers are willing to lend you more. Overpaying will reduce your financial returns and increase your risk of default.

4. The right financing structure

Remember to finance your acquisition in a way that maximizes repayment flexibility. Besides a loan secured on assets of the company, you should typically seek financing from the existing owner. Vendor financing usually comes with a reasonable interest rate, flexible repayment terms and no personal guarantees. To round out the financing, consider growth and business transition capital because it also features flexible terms and usually requires limited or no personal guarantees.

The mix of financing tools that you use can dramatically change the return you realize and what kind of risk you're facing in the company and personally.

5. The right mindset

It pays to be patient as you search, especially if you're in a hot market. The September 2017 BDC report The Coming Wave of Business Transitions in Canada showed that four out of 10 Canadian small business owners are considering divesting their business over the next five years. This should tip the balance in favour of buyers.