Tips on finding a business for sale

Start by determining your target

You’ll also need to know which type of business and which industry you want to work in:

• A franchise or an independent business?
• An underperforming business you'd like to turn around?
• Manufacturing, retail trade, distribution, consulting services?
• An online business?
• A local or international market?
• Buying a competitor?

Before looking for a business, you’ll need to know why you want to acquire one. Would you like to start your own business? Are you looking to grow with the acquisition? Do you want 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 to find the business that’s right for you

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.

Talk to entrepreneurs who have already made an acquisition and learn from their experience. They will be able to guide you to the right resources.

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.

Seek out specialists to help you select a target

Here are some sources that may help you in finding a business for sale.

• Business brokers—Brokers act as intermediaries between sellers and buyers of private companies and facilitate transactions. There are usually several brokers in larger communities.
• Lawyers and accountants—These professionals deal with business owners and are a good source of leads for companies that are either on the market or contemplating a sale.
• Bankers—Account managers also deal with entrepreneurs and can be a good source of referrals. They may have an interest in facilitating the sale of businesses because they want to finance the transaction and retain the entrepreneurs as clients.
• Websites—There are many sites dedicated to facilitating the buying and selling of businesses. However, you should be extra cautious when using these sites.
• Commercial real estate agents—Agents may know of business owners who are selling. Some agents may also sell businesses as well as real estate.
• Bankruptcy trustees—Trustees may know of viable businesses that are insolvent for a variety of reasons, including bad management.

Complete a preliminary evaluation

Once you've got a target in mind, the next step is learning more about the business to determine whether to proceed or pass.

• Is the purchase price within your budget (including integration and financing costs)?
• Does the company's staff have the skills you need? Is the company's brand strong and does it have a solid reputation? What's its track record 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 history of innovation? Does it own intellectual property or technologies you're looking for?
• 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.
• Is its culture compatible with yours (management style, employee relations, customer base)? This criterion is sometimes overlooked, yet cultural incompatibilities often determine the success or failure of an acquisition.

Doing research prepares you for the next step: meeting the seller. Figure out what key questions you want to ask to move forward. The more you know, the better equipped you will be to make an informed decision.

Plan out your purchase with financing in mind

When you’re buying a business, it’s important to plan the purchase well so that a sudden need for additional financing does not arise because something was overlooked or not considered.

Your preparations should include a business plan that you can show to bankers and investors. Even if the business has been profitable under the previous management, financiers will want to know how you intend to run the company.

Financing your purchase

Once you’ve found a business to buy, you will likely have to arrange financing. You should finance your acquisition in a way that maximizes repayment flexibility.

Here are some of the points your financial institution will want to know.

• How is the business performing? How profitable is it?
• Can you supply the financial statements of the company being acquired?
• Why is the owner selling the business?
• How was the proposed price arrived at? For example, if the price is $100,000, does this amount include equipment, working capital, inventory, etc.
• What are your plans for the business? Do you need additional financing to expand or implement changes?
• Have you worked in the company being acquired? If so, in what position? If not, do you have experience in the same industry?

Financing options

Besides your own investment, you will typically seek a term loan from a financial institution that’s secured on assets of the company. Buyers often also seek financing from the existing owner. The vendor takes a note instead of cash for a portion of the purchase price that is then paid off over time. This is called a vendor take-back.

To round out the financing, you should consider growth and business transition capital because it offers flexible terms and usually requires limited or no personal guarantees.

How to approach a business you want to purchase

Once you’ve done your evaluation and set up financing, 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. This step will be followed by rounds of negotiations, which tend to go on longer than desired, followed by the due diligence stage.

Do your due diligence

Due diligence is important. Look at getting an independent valuation and look into any liabilities. Find out how long the business has been for sale. Is its product or service still in demand?

It’s important to have support through the process. The size of the team depends on the size of the transaction, but the most important thing is to surround yourself with a team of professionals that you click with, such as an accountant, a lawyer, and a financier. They will help you avoid pitfalls.

Additional tips for a potential purchase

Ask important financial questions

Be sure to evaluate the financing involved in buying the business you're interested in. What percentage of the transaction is the selling company prepared to finance? What assets does it have to enable you to obtain a loan? Can you also call on mezzanine financing?

Don’t rush your search

Be disciplined, stick to your criteria and be patient in your search. Companies often make the mistake of being over-enthusiastic when looking for acquisitions, especially in an overheated market. This can lead them to make a non-strategic acquisition.

Expect a costly process

Keep in mind that the process can be very costly. Along the way you will have to pay many professional fees, from writing letters of agreement to preparing financial forecasts. These could cost up to $20,000, or even more.

Be prepared for the deal to fall through

Do not rush into acquisitions and remember that it’s not uncommon for a party to back out at the last minute. When this happens, count it as gaining experience. The important thing is to never lose sight of your goal.

Next step

Find out what it takes to successfully purchase a business in Canada by downloading the BDC free guide, Buying a Business in Canada