Types of Businesses for Sale – from a Business Buyer’s Perspective

One of the first questions my clients frequently ask me is the types of businesses that are for sale in the market. I personally see two distinct categories:

Liquid businesses for sale: by liquid, I mean businesses who sell very frequently. Supply and demand for this type of businesses is high. It is generally easier for a potential business buyer to locate and purchase such businesses. This category includes restaurants, fast food businesses, Laundromats, dry cleaning businesses, gas stations etc.
These businesses are generally in high demand because they represent a very good alternative to the job market for new immigrants. Most these business do not require extensive language skills and are perceived to be easy to manage. Moreover, business buyers can employ their whole family including younger children which will not only save them a lot of money on wages but will also make it easier to control the business; it is always easier to trust family members than complete outsiders.

While having some real advantages, this type of businesses has some serious disadvantages:

  1. Relatively higher price than other businesses (or lower returns): Because these businesses are easier to sell and buy, they are generally sold at higher prices. The increasing immigration numbers and the need for new immigrants to make a living, increases demand for this type of businesses and increases prices as a consequence.
  2. Longer working hours: most of these businesses are in retail, they lack processes to control prices, inventory, and costs, and have a large cash sales ratio. As a consequence, these businesses require owners to be constantly present to avoid theft and other loses.
  3. Difficulty to grow: because of the owner’s need to constantly supervise the work, these businesses are difficult grow. Growth needs even more supervision and there is only so much the owner can do in a day.
  4. Extreme competition and lower profits: Most of these businesses have very low barrier to entry, which increases competition, lowers prices and decreases profits. The owner end up working more and more for less and less profits.

Unique businesses rarely for sale: Most other businesses require specific skills to manage. As a result, there is a very limited pool of business buyers who can purchase them and manage them. These businesses are not generally in the market because owners realize that it will be difficult to find a buyer that will be a perfect match. Owners end up either selling to one of their employees or family members or shutting the business down when they want to retire. The recent development of the business brokerage profession in Canada is providing an alternative to these business owners by enabling them to search for the “perfect buyer”.

For a potential business buyer looking to buy a business, this type of businesses presents huge advantages:

  1. This type of businesses will be generally less expensive to purchase and will provide higher returns to the right buyers: because of the limited number of buyers who will be a good fit, demand for these businesses is lower and prices are lower as a consequence.
  2. These businesses are more profitable and have lower competition: Because these businesses require specific skills, it is harder for competitors to imitate the business and as a consequence competition is lower and margins are higher.
  3. Lower risk: because these businesses have lower competition, the risk of losing customers after the purchase is much lower.
  4. More interesting work: These businesses are all unique in some sense and require permanent thinking and learning. Every day is different, every customer and every project are different. It is challenging and interesting.
  5. Bigger potential for growth: Because they are unique, these businesses offer some real value to their customers and can grow dramatically with the market growth.

This type of businesses has however some disadvantages for the business buyer:

  1. The business purchase process is lengthy, difficult and requires a lot of persistence: Business owners understand that they are selling their business at a relatively low price and might have second thoughts about selling many times during the process. This makes it a hard experience for buyers. After spending plenty of time and money (accountant and lawyer fees) deals might not go through and buyers might need to start looking for another business to purchase.
  2. The risk of not been able to understand the business and fail to reproduce the past business model: Because this type of businesses is based on the specific skills of the previous business owner, the buyer might not be able to continue to present the same value to customers and the business might fail after the purchase.

For more information on how to purchase a business, you can check our Business Buying Process. If you are interested in buying a business in Toronto GTA and other surrounding areas in Ontario, Canada, please check our businesses for sale:

Liquid Businesses: Restaurant in Toronto, Fast Food Franchise, Convenience and Variety Store

Unique Businesses: Structural Metal Fabricating, Snow Plowing Business, Tire Recycling, Event Decor, Health Food Retail, Senior Clothing Concept, Transportation and Trucking, Manufacturing Promotional Items, Custom Machine Shop, Belly Dancing and Fitness.

Buying a Business in Canada

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?

  1. 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.
  2. 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.
  3. 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.

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How to Negotiate a Purchase Price for a Business

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.

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Seller’s Remorse – Hesitations When Receiving a Good Offer

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:

  1. Sellers must understand their true motives before putting the business in the market. The reason for sale has to be genuinely stated and understood.
  2. 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.
  3. 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:

  1. 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.
  2. 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.
  3. 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.

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How to Deal with Business Brokers

Business brokers specialize in helping business owners sell their businesses. Most business brokers represent the sellers rather than the buyers. As a result, business brokers are responsible for qualifying buyers to weed out “tire kickers” and make sure that only buyers with the motivation and financial resources to purchase a business are presented to sellers. There are two reasons for the need to qualify buyers:

  1. Save the broker’s and sellers’ time. Statistics have shown that only 10% of business buyers actively looking to purchase a business end up buying a business. The other 90% never buy a business in their lives.
  2. Protect the sellers’ confidentiality. The business could be substantially harmed if the word goes out that the business is for sale. Confidential information should only be given to serious buyers to reduce this risk.

What should a business buyer do to be considered a serious buyer?

  1. Spend the necessary time: Buying a business is time and energy consuming. Serious buyers are not afraid to devote their time to research the right business. Business brokers generally require that buyers come to their office for a meeting before providing them with more information. Buyers who negotiate where to meet or require considerable information before meeting are generally considered not very serious about buying a business.
  2. Show proof of available financial resources: Brokers only work with buyers who can demonstrate that they have the financial capabilities to purchase the business or borrow the necessary funds. Buyers should not be offended when asked for proof of financial capabilities.
  3. Show focus and determination: Asking information about too many unrelated businesses is generally interpreted as lack of focus and discourages brokers from working with buyers. Unfocused buyers are very difficult to work with as brokers cannot identify their needs and as a result cannot help them.

Business brokers can be an excellent source for detecting the right business to purchase. Brokers know the market and can help serious buyers locate and purchase profitable businesses that fit well with buyers’ personalities and goals. However, buyers interested in getting the most value from brokers should be ready for purchasing a business and should prove it.

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Business Buyers’ Myth: Only Bad Businesses are for Sale

When we present our businesses for sale to some of our buyers, we are frequently asked: if this is such a good business, why is it for sale? Why would somebody sell a business that makes money?

While we recognize that some business owners are selling their businesses because they are not making decent income, we also insist that many excellent businesses are for sale for reasons unrelated to profitability. Recent statistics about businesses for sale in North America show that the most frequent reason people sell their businesses is boredom. Business owners are entrepreneurs. When their business becomes successful and only requires repetitive maintenance work, they lose their excitement and become unhappy, looking for new challenges. The only motivation for selling the business is freedom, the freedom to create a new business from scratch. The freedom from the repetitive tasks of managing a mature business.

We always tell our business buyers that our market economy thrives on different needs. The needs of a former corporate executive looking for a profitable business to accomplish his entrepreneurial dreams are very different from the needs of a serial entrepreneur looking to implement his/her new business ideas.

As business brokers in Toronto, We focus on profitable businesses for sale as most of our business buyers are first time buyers and are looking to increase their income through a business acquisition. Most of our sellers are selling for personal reasons, such as health, retirement or other opportunities.

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The Necessary Leap of Faith to Buy a Business

Statistics about the sale of businesses in North America have shown that 90% of people actively looking to buy a business never buy any business in their lives. This represents tremendous waste in time and effort. These people not only waste their own time and money but also brokers’ and sellers’ time.

Business buyers generally need to gather as much information as they can about the business to make an informed decision. This could become a never ending process as the more information is accumulated the more issues and concerns are raised. In their effort to eliminate risk, business buyers end up looking for the ideal business that could only exist on paper.

The decision to buy a business is not a mathematical decision where all parameters are known. Business is full of uncertainty and the risk can never be completely eliminated. Due diligence and analytical thinking can help reduce the risk but not eliminate it. A leap of faith is necessary when the time comes to make a final decision about the purchase of a business.

We find that the leap of faith is even more important for former corporate executives looking to purchase a business. Large Corporations use very strict business decision processes. While costly and time consuming, these processes are justified for multimillion dollar investments. Are they justified for small business acquisitions?

In our relationship with potential business buyers, we find that a majority of buyers spend more than a year looking for the perfect opportunity. Is it worth the time? Would buyers be better-off spending this time improving a “non perfect” business rather than looking for the perfect one?

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Emotions While Selling or Buying a Business!

Most business buyers underestimate how emotions can impact the business purchase process. A lot of money, time and effort is repeatedly wasted on business transactions where buyers and sellers fail to deal with each others’ emotions.

From the seller’s perspective: Business owners have spent a lot of time and energy building their business and when the time comes to sell it, they are generally not emotionally prepared. As often described in business language, their business is their “baby”. They want it to be in the right hands. They want the perfect buyer; the one that will pay the right price, will take care of employees and treat them the same way they were treated before the sale, will grow the business, will honor the seller’s previous engagement, etc. Obviously, this ideal buyer doesn’t exist. As sellers start to realise that the buyer is not ideal, hesitations start coming. Other hesitations usually haunt sellers: What if they are not satisfied with the after sale life? What if they feel lonely, lose their power and status in society?

From the buyer’s perspective: Buying a small business is closer to buying a job than to a purely financial investment. Buyers must love the business to be successful in it. Unlike simply taking a new job, buying a business is irreversible. For these reasons, business buyers live a long period of hesitation before signing the purchase and sale agreement. They are not really sure whether they see themselves managing the business. What if the day to day activity is not what they expected it to be?

It is crucial that business buyers and sellers spend the necessary time to understand each other’s emotions when contemplating a deal. All efforts must be made to nurture a healthy relationship from the beginning to the end. Buyers must understand that business owners are selling their babies and sellers must understand that buyers are making an irrevocable life changing move.

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Baby Boomers Looking for Successors.

In our marketing efforts to find new business listings, we find that baby boomers in the retirement age represent a large percentage of business sellers. In most cases, selling their business is the only remaining option. Their children are often not interested in taking over the business for multiple reasons:

  1. Children are seeking more independence from their parents and do not share the values and strategies the parents are following in their businesses.
  2. Children do not necessarily have the entrepreneurial spirit that has driven their parents to start and take the business to its current level of success. Their life goals might not be similar to those of their parents.
  3. Parents are bright entrepreneurs but not necessarily good managers. They have hard time sharing information with the children and delegating tasks. This incapacity to delegate often frustrates children.

This situation creates great opportunities for business buyers. A lot of excellent businesses for sale will be coming to the market in the next few years as more and more baby boomers will come to the retirement age. Recent statistics have shown that every year, 20% of the existing businesses will be for sale.

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Buy an Exiting Business or Start a New One?

The skills and personality traits necessary to start a new small business and make it successful are much different from the skills necessary to take over an existing business and grow it . A small business start up needs an entrepreneur who has a vision and is passionate about his/her idea. The entrepreneur will work in a chaotic environment where idea generation and learning are the real engine for growth. This is a high risk transitional period when the entrepreneur should expect a high rate of failure and when failure should be used as a learning opportunity.

Most people are not very comfortable living in this chaotic environment since most people fear uncertainty. This explains why few people have the entrepreneurial personality necessary to create very successful companies from scratch.

Buying an existing business requires a completely different mindset. Management capabilities, organization skills and hard work are paramount. The owner needs to control the key parameters that make the company successful. This is more of a consolidation period and less of an experimentation period. The business owner can use the past results to predict the near future and make decisions concerning managing the company.

Before deciding whether you should start a new company or buy an existing one, you should dig deeply into your own personality to understand what your personality traits are. In what category of people, from the categories described above, do you fit the most?

For more information please visit our Toronto Business Broker website.

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