Today’s business buyers are well educated and most of them do their homework before starting their business purchase process. Most of them research and study the subject of purchasing a business on the Internet and read books and publications about this subject. Unfortunately, most of these publications have been written about the US Market and very few address the Canadian particularities. How is the Canadian market for business resale different from the American Market?
- The seller take back loan is much less predominant in Canada: Most publications about buying existing businesses stress the importance of getting some sort of seller financing before making the purchase. If the seller finances a part of the deal, he/she will be motivated to teach the buyer in the transitional period and help the buyer become successful to pay back the loan. Also, the seller will only take this risk if he/she believes that the buyer has the capabilities to become successful. This is an indication that the business is worth buying. Nobody knows the business more than the seller. Finally, bank financing for small businesses is quite rare and most of the time, seller financing is the only option. Unfortunately, Canadian business sellers are much more conservative than the Americans. In most cases, they prefer to lower the price and get paid cash rather than take the risk of never getting their money back. Furthermore, most of Canadian sellers are not aware that it is very difficult to sell a business with a large component of goodwill for cash.
- Bank financing for very small businesses is difficult to get: There is no real equivalent of the small business Administration loan program in Canada. The SBA loan in the US could finance up to 90% of a business purchase. In Canada the small business loan can only finance business purchases with a large component of equipment in the purchase price. Goodwill and inventory is in most cases not financed by banks, but they represent most of the value of the small businesses for sale. For these reasons, we strongly discourage business buyers to spend their time looking into a business purchase if they do not have at least 50% of the purchase price. For larger businesses (requiring more than 1M$ loan) it is possible to get some high interest rate loans (more than 12 - 14% annually) if the business has enough sustainable cash flow to pay for itself in 5 years.
- The Canadian market for business purchase is less liquid: The business sale and purchase market in Canada is much less active and liquid than the American market. As a result it could take more time and energy to find a good match for a purchaser. This requires serious business buyers to commit a lot of their time to the business purchase process. Buyers should not hesitate to talk to business brokers and should prepare themselves to show that they are ready, willing and able to buy a business.
While we recognize that the Canadian market for selling and buying businesses is less liquid than the American market, we also realize that there are some excellent Business opportunities in Canada that would enable persistent buyers to reach their entrepreneurial dreams.
Powered by Omar Kettani
One of the main things that deter business owners from selling their businesses themselves is the difficult process of qualifying potential business buyers. Statistics of business sales in North America have shown that only 10% of people actively looking to buy a business end up actually buying a business. This means that 90% of potential buyers never buy a business in their lives. If you are selling your business, out of 10 people who expressed interest in your business 9 will be wasting your time. The remaining one will finally end up buying a business but it might be another one than yours.
With these lousy statistics, most business sellers get discouraged while selling their businesses after spending a lot of their time with tire kickers. Sellers end up concluding that their business will never sell and take it out of the market.
In order to deal with this ordeal, we recommend two possible alternatives:
- List the business with a professional business broker: Competent business brokers know how to qualify business buyers. They will save business sellers’ valuable time and let them focus on the most qualified buyers. Business brokers apply rigorous processes and use their judgment to weed out tire kickers.
- Sellers could qualify business buyers themselves. These are some tips/hints that could help qualify buyers:
- What is the buyer’s motive to buy a business? Is he/she unemployed? How urgent does he/she need to find a business?
- Does the buyer have the necessary funds to purchase? Ask for proof of funds. If the buyer believes he/she will get most of the money from the bank, he/she is probably a dreamer.
- How long has the buyer been looking for a business? A buyer who has been looking for more than 2 years and who hasn’t purchased yet has probably unrealistic expectations and will never buy.
- Has the buyer put an offer on a business before? If yes, this is a good sign. This shows he/she has some readiness to act.
- How analytical is the buyer? Buyers with financial expertise and/or long experience in the corporate world tend to over analyze business opportunities and have hard time making a decision. The small business world is so much different from the corporate world. Business practices learned in the corporate world don’t necessarily apply to small business.
- Does the buyer see him/herself managing the business? This could be learned from the way the buyer talks about the business he/she is contemplating. If the buyer uses “I” frequently, it’s a hint that he has already projected him/herself in the business and there is a high probability he/she makes an offer.
Unfortunately, it will take much more than a few lines to explain the subject of buyer qualification. Most of the knowledge only comes after years of practice acquired in selling different kinds of businesses.
Powered by Omar Kettani
As usual in the business purchase process, emotions play a huge role in negotiating a purchase price. Sellers are selling their babies and need emotional comfort and conviction that they are not giving them away. Frequently, they discuss the offered price with their accountants and in most cases accountants will not push in the direction of accepting the offered price. While accountants starve to provide an honest professional advice in their clients’ best interest, they have much more to lose than gain from a potential sale of the business. They will probably lose the account after the sale since most buyers will bring their own accountants after the purchase. Buyers must understand that pushing too hard to reduce the purchase price is generally not the best strategy to purchase a business and make it successful. While a seller might accept a price he is unhappy with, he will probably not fully collaborate in the due diligence and/or transition period.
First, in most cases goodwill represents a big chunk of the purchase price of a small/medium size business. This goodwill is built on the relationships between the seller and his/her customers, employees, suppliers, etc. An unhappy seller will not make his/her best efforts to help in transferring these relationships to the buyer. As a result the new buyer will lose a lot of the goodwill he paid for. Second, a seller not fully satisfied with the purchase price he negotiated will likely experience the seller’s remorse during the sale of the business. At some point, he/she might stop collaborating and/or put an end to the sale. This often results in a huge waste of time and loss in accounting and lawyer fees for the buyer.
A business buyer should pay attention to the seller’s emotions during negotiation. If the seller seems too attached to the purchase price he/she is asking for, then the buyer should look for opportunities for negotiation other than the purchase price. Terms or the transition period length are other possible points to negotiate. If the asked price seems too high then the best option might be simply to walk away from the deal.
Powered by Omar Kettani
A large number of business sellers experience a period of indecision right after receiving an excellent offer for their businesses. When the dream of selling the business is so close to come through, sellers struggle with their emotions. Their businesses are their babies. Separation is very painful.
How to recognize seller’s remorse?
In most cases, sellers start wondering if the price they are getting is too low. The whole idea of selling the business becomes questionable. Maybe I should hang on to the business for a few additional years. I will make this same money in my business without having to sell it. Some sellers start asking for higher prices than those agreed upon or renegotiate terms and other matters already settled.
What is the effect of the seller’s remorse on deals?
It can be devastating. Buyers get very upset and get a sense that they have wasted a huge amount of time on an impossible deal. The tension between buyers and sellers increase and deals dye in most cases.
How to deal with the seller’s remorse?
From the seller’s perspective:
- Sellers must understand their true motives before putting the business in the market. The reason for sale has to be genuinely stated and understood.
- Sellers should recognize that they might experience the seller’s remorse at some point when they are close to making a deal. Recognizing it in advance will help to overcome it and all the fear that it entails.
- Sellers must be involved in the sale process before receiving any offer. Some spending in business valuation, business brokers’ retainer fees or other costs related to selling the business increase the sellers’ commitment.
From the buyer’s perspective:
- In your first interview with the business seller, ask for the reasons for the sale. If the reasons don’t seem to be clear and genuinely stated, walk away from the business.
- Test the seller during the negotiation period. Are they constantly coming back to previously negotiated points? If this happen frequently, the seller is probably hesitating about the sale.
- Have the seller pay some transaction costs early on in the process. Sellers who refuse to incur any costs before the closing are probably uncertain about selling.
Powered by Omar Kettani
