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Finding the right target for an acquisition

Finding the right business is often the trickiest step when buying a business

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Want to buy a business but don't really know where to start, or how to spot a good deal? An acquisition is a complex transaction not to be made on the fly.

Follow these tips to guide you step by step toward a successful transaction.

Start by determining your target

What are your goals in this acquisition? Are you starting a business? You need to determine which type of business and which industry you are drawn to.

  • A franchise or an independent business?
  • Manufacturing, retail trade, distribution, consulting services?
  • An online business?
  • A local or international market?

"Each of these questions leads to many others, and they aren't always easy to answer," explains Érick Perreault, Senior Client Partner, BDC Advisory Services. "Before looking for a business, you need a good idea of your target."

Or are you looking to grow with the acquisition? To widen your market, improve your margins, implement a new technology?

A clear business strategy will help you come up with a solid acquisition plan before beginning your search for a potential target.

Leverage your network

Finding a business for sale is no easy task. Leaders seeking to hand over the reins, whether to retire or take on other challenges, don't usually shout it from the rooftops. That's where your network of contacts can be a valuable asset.

Share your plan with people you trust : Family, friends, former work or school colleagues, business relations, and so on. They could provide you with useful leads.

"Also talk to entrepreneurs who have already made an acquisition," Érick advises. "They'll be able to guide you to the right resources. You could learn from their experience, too."

Get assistance

Lawyers and accountants are often the first to know about a seller's intention to sell. Some firms have even developed brokerage services that can direct you to good business opportunities.

There's also business brokers, who have a portfolio of businesses for sale, as well as many specialized websites. These are all resources to explore.

Along the way, you will have to pay many professional fees . . . Buyers often overlook these costs. They can total up to $20,000, or even more.

There is a caveat. "If the business is advertised publicly, it's important to ask yourself the right questions. How long has it been for sale? Is its product or service still in demand? Due diligence is even more important in this case," Érick warns.

It's good to get support throughout the process.

"It's essential to surround yourself with a team of professionals—such as an accountant, a lawyer, a valuator, a financier—you click with," Érick explains. "You will need information and advice to avoid certain pitfalls. The size of the team will depend on the size of the transaction."

Complete a preliminary evaluation

So you've got a target in mind. The next step: Learning more about the business to determine whether to proceed or pass.

  • What is its history of success?
  • Has it ever been the subject of complaints from consumers or employees? Searching the websites of regulators will provide you with more information.
  • Is it in an industry susceptible to technological changes? In a highly competitive market?
  • Does it have a solid management team in place? By going on LinkedIn, you can see whether they have been there long.
  • Why is the business for sale? Is the seller looking to retire? Entrepreneurs who aren't already engaged in a sales process are more likely to change their minds before making a deal.

The more you know, the better equipped you will be to make an informed decision. "This homework will prepare you for what comes next: Meeting with the seller," Érick explains. "You will be better able to ask key questions to move forward."

Express your interest

It's time to express your interest with the entrepreneur to get more information on the business. A bilateral confidentiality and non-disclosure agreement will have to be signed to protect your exchanges.

There will be many things to discuss :

  • the business's operational and financial performance
  • the sale timeframe
  • the details of the transition period
  • the sale of shares or assets
  • an overview of human resources (turnover rate, retirements, negotiation of the collective agreement, etc.)
  • inventory status
  • intellectual property
  • tax and legal issues (taxes up to date, outstanding litigation)

This list is far from exhaustive. Only once you are fully informed can you decide whether to proceed. Next is the round of negotiations, generally longer than desired, followed by the due diligence stage.

"Along the way, you will have to pay many professional fees, whether to write letters of agreement or prepare financial forecasts. Buyers often overlook these costs," Érick notes. "They can total up to $20,000, or even more."

The important thing is never to lose sight of your goal. "With acquisitions, it's better to avoid rushing. And it's not uncommon for a party to back out at the last minute. Then you have to start looking all over again. When this happens, buyers have to tell themselves that they are gaining experience. Eventually, it pays off," says Érick.

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