Tips on finding a business for sale
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Despite all the talk about baby-boom entrepreneurs selling their companies, it still can be difficult to find a profitable business to buy in many regions of Canada.
That’s why it’s important to be patient and take a cautious approach. Once you’ve found a target, you should do in-depth research to ensure you understand what you’re purchasing and make sure you’re not overpaying. It often pays to get expert advice.
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.
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.
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.
Plan purchase to avoid a shortfall
When you’re buying a business, it’s very 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 you can show to bankers and investors. Even if the business has been extremely profitable under the previous management, financiers will want to know how you intend to run the company.
What your banker wants to know
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?