Technical assistance with buying a new business

As the potential purchaser of a new business, you have a lot going on from the moment that you make the decision to purchase an existing business to the moment the “doors open”. Then the real work begins of making that business a success and if you’ve done it before, you know that is going to take a lot of care and nurturing.

So what can be done to help you through the jungle, out the door, and on with your operations? Consider assistance from a technology advisor early in the process BEFORE you complete the deal. For one thing, you want to hit the ground running and know your processes before you step up to the starting line. The operation of your new business is like a young child … it requires a little planning, making sure that things are in place before the baby arrives.

Does your potential new business have any accounts receivable? I once helped the owner of a large company buy a small business that they intended to roll into a larger business. I went with one of the owners family members to examine the computers that contained the accounts receivable. They wanted to be sure the computer was ok, that backups existed, and they wanted to know if the existing system could continue to be used going forward. I discovered quite a bit more than we bargained for by going a little bit beyond the hardware.

Early due diligence and attention to details can save you a lot of grief later. I had some background in university in accounting and had supported accounting systems for several years, so I took a closer look at the data. At first, the names of the advertisers were amusing. Later on, they stopped being amusing as there were so many odd and funny names that it suddenly crossed my mind that it seemed the names were made up. So I started looking at the customer records and started doing a few phone calls. In the end the result was an accounts receivable that was many thousands of dollars lower than advertised. In this case, it was a sales person pushing through ads in the system that didn’t exist. I also noticed that a fairly high number of receivables were more than 90 days. 30 days earlier the receivables looked a lot better.  The real catch was that the receivables looked ok when printed out on paper and scanned by an accountant, but the paper didn’t tell the whole story.  The sale went through but at a significantly reduced price.

Make sure you understand the history of any assets you are purchasing. A few years ago when a company was being purchased, I found out that the systems that were being purchased as part of the existing business were older than advertised and had already been written off to the point that if the new owner also attempted to write them off, she would have been exposing herself to a CRA audit.  In another case, I walked into the offices of a new client and sat down to work on a computer. The computer had an ID tag on it that indicated it belonged to one of my other clients! Turned out the new client was serviced by a consultant who suddenly left the country. That consultant had taken the computer from the first client’s office to the second one and nobody was the wiser.

The lesson here is to get clear ownership identified of all equipment you are inheriting as well as clear documentation about that equipment, when it was bought, how much it cost and whether or not the purchase was capitalized. And don’t forget to check for any existing warranty or service contract that is place, when it expires, what the renewal price might be, and so on.

You also need to clarify ownership of any software on those computers. Whatever software you are getting with a business purchase, you want to make sure that the ownership is transferred properly to you as well as any existing unused support contracts that the previous owner may have signed. There are a number of pitfalls that, unfortunately can cost you a lot of money to correct. I’ve seen business owners who have closed deals to buy a business assuming that the software on the computer was their own since they bought the computer. If this software is in any way unique or critical to the business you may not be able to get a critical update from the vendor without buying the software all over again. I’ve seen a case where the operations software had to be repurchased at a cost of thousands of dollars and this problem came to light when a patch was required from the vendor meaning the owner was penalized not just the costs, but the delay in getting the software working again while the licensing was covered off.

Stewart Francis, the founder of IT Roadmaps Inc, has helped owner-managed companies understand the value of technology processes and provides IT Management experience to small and medium sized businesses.  He can be contacted at 416-574-9675 Copyright 2008 IT Roadmaps, Inc.

Would You Buy a Business in a Recession?

In times of uncertainty, making a decision about buying a business becomes difficult. Some Potential buyers continue to screen businesses for sale to find the perfect match but at the time of making an offer on the elected business, indecision becomes overwhelming. These buyers experience an analysis paralysis period when they simply can’t make a decision.

There are obvious reasons to this indecision:

  • Some buyers might believe if there is a deep recession prices for businesses will go down. Waiting might be the best decision.
  • Some buyers might fear that the economy collapses completely and customers leave after the closing.
  • Other buyers might prefer to make safer investments such as bank saving accounts or GIC’s.
  • Some are simply paralyzed by the media hype about recession and can’t make any decision.

These reasons should not stop motivated buyers to acquire their dream businesses and change their lives:

First, in times of recession massive corporate layoffs put thousands of corporate executives in their mid forties and fifties out of the job market with a very small likelihood to find other suitable jobs. Buying a business becomes a very good alternative for these corporate victims. As a result there are more potential business buyers in a recession than in very good times. Therefore, prices for small and midsized businesses generally don’t decrease in a recession. Waiting for prices to decrease is obviously not a good idea.

Second, a recession is defined by two consecutive quarters with negative growth. In most recessions in the past, growth was slightly negative during a limited time period (generally 6 months) and then the economy starts growing again. In most cases economic growth slows by no more than 4% on average. This is not a huge number and on average will not dramatically change the prospects of the average business. Naturally, some businesses will continue to grow and be more profitable in times of recession and others will suffer dramatically (much more than average). This simply means that business buyers should look into businesses that will not be dramatically affected by the economic slowdown. Moreover, a good business is a good business irrespective of recession. Warren Buffet, the second richest man in the world, recently declared that his investment strategy will not change despite the recession in the US.

Third, investments perceived to be the safest are generally not so safe and are described frequently as the worse investment one can make over the long term. These investments generally produce very low returns, which after paying taxes end up below inflation rates. Investors are actually losing money when investing in these vehicles. Is losing money and knowing it in advance safe? Absolutely not. Moreover, investing your money doesn’t give you a job. If you are looking to be your own boss and doing something you enjoy doing, putting your money in a saving account will certainly not help you achieve your goals.

Finally, the media hype should not affect our determination to shape our own destiny. The media will continue to present events in a way that attracts people and humans are attracted by dramatic events. So the media has a tendency to dramatize events, especially those that affect our lives such as economic events.

People who are focused on success and have the character and personality to pursue their goals and make them happen will become successful irrespective of the economy.

If you are interested in buying a business in Toronto GTA and nearby areas in Ontario, Please visit our Business for Sale web page for a variety of businesses for sale or visit our business brokers website.

Selling a Business – Tips and Tricks

Many business owners think that selling a business is like selling a house. They put a price on the business that they think it is worth, they increase it to have room for negotiation and they start looking for buyers. If a buyer comes with an offer, they negotiate to the last penny to get the maximum price. A motivated buyer facing a lack of information on the business is tempted to reluctantly accept any price and put a conditional offer on the business that satisfies all the seller’s demands. The buyer’s reluctance creates some negative emotions early in the relationship. Naturally, the buyer will put a very broad condition on the offer to protect him/herself. Such Conditions include satisfactory due diligence, buyer satisfaction with the business financial records, tax fillings, profitability, level of sales at his/her own discretion. The buyer is willing to pay the price asked for only if the business matches the perfect image painted by the seller. This very rarely happens. Most businesses are imperfect and most sellers overstate the magnificence of their businesses.

Unfortunately, when the buyer starts his/her due diligence, they discover the imperfections and start having second thoughts. The negative emotions initially developed flourish and the relationship comes to an end. At the end, the seller has wasted tremendous time and effort explaining his/her business to the buyer, the market interprets this failure as a negative signal about the business, which makes it a very hard sell in the future. This is a scenario I have seen frequently as a business broker and I believe it could be avoided.

Selling a business is definitely not like selling a house. After a buyer has seen a house, he/she knows a lot about it, a simple home inspection and some lawyer due diligence can easily show imperfections, so buyers make informed decisions when putting offers. Houses sell much more easily than businesses and don’t stay as long in the market. Businesses on the other hand are much harder to sell and finding the matching buyer takes longer. Furthermore, business buyers are in the dark when they make offers. Because of confidentiality reasons, sellers won’t give away much information about the business before the buyer shows his/her seriousness by putting an offer. For these reasons, negotiating the purchase price for a business should not be very tight. Buyers and sellers should both feel they made a good deal with no hard feelings from any party. This is because the actual sale doesn’t happen at the time of the offer negotiation but happens only after due diligence

When the previous mistakes are made, the result is almost certain: the deal doesn’t close. The seller and buyer have wasted their time, effort, money on lawyers and accountants and the business is not sellable anymore.

Therefore, to be successful in selling your business:

  1. Put a reasonable price on it.
  2. Find the right business broker that your can trust.
  3. Agree with the broker on a commission everybody feels is fair.
  4. Be willing to negotiate with the buyer and understand their perspective.
  5. Give the buyer a realistic picture of your business with no over statement.
  6. Be very cooperative during the due diligence period and help the buyer make the right decision.
  7. Most importantly, be very honest because when selling a business you just can’t fool a buyer.

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.

What to do after selling your business?

A few years ago, I was attending a conference titled “Exit Strategy for Entrepreneurs” in which a successful Canadian entrepreneur was describing how he sold his business for top dollars. I was expecting the speaker to be full of joy and exhilaration after becoming a multimillionaire in just a few years. However, I was surprised to sense some kind of bitterness in his speech. The entrepreneur was simply describing his experience after the sale. The separation from their businesses causes most business sellers to feel some kind of regret after the sale. Many studies have been done and findings have confirmed that the few months succeeding the sale of their businesses are not the happiest for these business owners.

What should business do to make the “after sale” experience better?

  1. Know themselves and make sure they have good reasons to sell their business.
  2. Have a meaningful goal and make a clear plan and start implementing it in the few weeks before the sale.
  3. Be aware of their feelings and recognize the emotions that might come after the sale.
  4. Have a coach and discuss with them their motives, plans and advancement.
  5. Negotiate a smooth transition with the business buyer so the separation from their companies is smooth and less painful.

Why Sell a Business?

Business owners consider selling their businesses for many possible reasons:

  1. Boredom or need for change: This is the most frequent reason (statistically). After starting their businesses from scratch and spending countless hours exploring their ideas and implementing them, business owners simply lose interest in their companies. While this seems hard to believe, most entrepreneurs are more excited in launching a new business than in managing it once it becomes established. Managerial tasks such as accounting, managing people and solving daily problems are not as rewarding as implementing new strategies and growing the business. Many of my clients want to sell their business simply because they want to do something different.
  2. Succession planning/Retiring: The majority of small businesses are heavily dependent on their owners. If something happens to the owner, in most cases the businesses will not survive. When owners approach their retirement age, they need to find successors. While transferring the business to their children seems like the natural decision, this is not always possible for the following reasons:
    1. Children have other interests than their parent’s business
    2. There is no consensus in the family about who among the children should take over the business.
    3. Children don’t have the qualifications, expertise or the talent to manage the business.
  3. The business needs capital for a new strategic direction: This happens more frequently in consolidating industries. In some mature industries, huge economies of scale are necessary to keep the business afloat. The business could simply not survive in its current size. Ideally, a larger corporation/business would buy the business, merge it with its current operations, suppress some redundant costs and make it more profitable.
  4. Partnership disputes: Divorces and business partnership disputes are common and could be the reason for selling a profitable business with a lot of potential.
  5. The business is unprofitable and the owner is not able to turn it around: This is generally not a good reason to sell a business since most business buyers are looking for an income source and very few will look at unprofitable businesses. However, some business people with solid turnaround skills and management expertise are constantly looking for turnaround opportunities. The seller has to prove that the business has potential to become profitable.

It is very important that business owners contemplating selling their businesses spend some time understanding their own motives. Most buyers will become very suspicious if the business seller cannot clearly explain their reasons. If you are considering selling your business, visit our business brokerage website for more information about the business sale process.

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 Qualify Business Buyers?

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:

  1. 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.
  2. 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.

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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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