Hundreds of thousands of perfectly capable employees are been laid-off in the current economic climate. Many are turning to small business ownership as the alternative to the tough current job market. So, is it the right solution? there is certainly no general answer that fits everybody.As a business broker in Toronto, Ontario, I can certainly recognize the growing trend of downsized corporate executives/employees seriously looking to purchase an existing business. Unfortunately recent statistics in North America have shown that despite this enthusiasm, only 10% of potential business buyers buy a business in their lives. The other 90% find job alternatives. This is so unfortunate since the majority of these buyers sincerely believe that will buy a business and devote tremendous time, energy and money to the purchase of a business. While already in a very precarious financial situation, 90% of these potential buyers will have their finances deteriorate even more because of a non adequate wish. The fact is that the purchase of a business requires some risk tolerance capacity that most people don\’t have. No matter how hard you can try to evaluate a business opportunity, you will never eliminate the risk completely. It is necessary to stop analyzing and take a big leap of faith at some point and the majority of people cannot do it. This is what separates entrepreneurs from employees. It\’s an entrenched personality trait and there isn\’t much you can do about it in the short term.Therefore, if you have been laid-off recently, then seriously consider all your options. Do a serious investigation about your own personality and find out how tolerant you are to risk. Don\’t let ego and proud misguide you. There is nothing wrong in recognizing that you will be better off as a lifetime employee. However, those who manage to take the described “leap of faith” and who do a good job in selecting a reasonably priced business with a viable business model that fits their personality end-up reaping huge rewards. To cite only a few: more control over your destiny, higher income, increased self esteem are among the huge benefits of business ownership.
Buying an established business is generally a wise business decision. Businesses with a proven track record of success present a low and manageable risk for the buyer and a high potential to make decent profits right after the purchase. Nevertheless, many business buyers make huge mistakes that cost them a lot of money and sometimes cause them to fail. These are some common mistakes that buyers can avoid with some planning:
- Starting the search for a business to purchase prior to arranging proper financing. Buying a business is extremely time and money consuming. Spending your resources and been unable to buy because of insufficient finances is unfair to you and to sellers. Some might argue that this is a great learning experience worth doing anyway. That cannot be further from the truth. If you are enable to purchase, then save yourself the hassle of trying to buy. Recent statistics have shown that only 10% of buyers end up buying a business in their lives. The remaining 90% never buy.
- Looking for the absolute best”perfect” deal. This is very frequent and buyers in most cases end up with no deal at all. Potential business buyers must understand that there is no perfect deal. The best possible deal is the deal that can make you money after the purchase, and a business that you enjoy and that makes you happy. Paying a little bit more than you should is almost irrelevant. I have seen buyers overpaying who were very successful after the purchase and I have seen buyers who got a real bargain just to fail miserably after the purchase. Furthermore, if sellers end up with a price they are not happy with, chances are that they will not happily transfer to you all the businesses knowledge so necessary to take over the business. This could have dire consequences on your success.
- Taking too much time to purchase the business. I have seen buyers spending years and still been unable to make a decision about buying. This can be devastating morally and financially. I advise against trading your valuable time for little money. Years wasted looking for a business that doesn’t exist are worth a lot of money. Keeping delaying the decision to buy just for the purpose of saving some money on the purchase price is not the way to go.
- Hesitating and been vulnerable to the buyer’s remorse. Business buyers should be prepared for buyer’s remorse. It’s normal and happens all the time. When you sign an agreement to purchase a business, it’s not a good idea to discuss your deal with every potential friend, acquaintance of family member. If you do, don’t expect people to encourage you in your decision. Human nature is conservative. We fear the unknown and most of us are not entrepreneur. So most people you will talk to will scare you and probably talk you out of the deal.
- Been too suspicious in screening business opportunities and not suspicious enough during due diligence. Paradoxically, business buyers are extremely suspicious when talking to business sellers for the first time but as soon as they establish a personal relationship with sellers they stop investigating the business and refuse to see any red flag about the business. This is very wrong. A buyer should be open minded when inquiring about a business for the first time and should not jump to conclusions about the honesty of the seller or the viability of the business. This excess of premature suspicion can only cause you to miss some good opportunities and doesn’t add any value because it is not fact based. However due diligence is very important when a conditional deal has already been signed in order to protect you from some unscrupulous sellers.
- Not respecting the Non-Disclosure Agreement signed with the sellers or their brokers. Some buyers become so excited by a business they have visited that they start talking to friends and relatives about it despite having signed a non disclosure agreement. The word goes out that the business is for sale and the upset seller stops any contact with the buyer. In the best case the seller will forget about the buyer otherwise the buyer might have to deal with a law suite for breach of non disclose agreement.
- Using inexperienced advisers. while the use of knowledgeable advisers such as lawyers and accountants can add a lot of value to the deal, sometimes an incompetent adviser can beak a very good deal. It is very important that any adviser used be very experienced in the business purchase and sale. Frequently, an adviser lacking experience in deal making will focus so much on protecting his/her client and becomes so demanding that the other side gets upset and decides to walk away from the deal. A good deal negotiator tries to reach a win-win situation when negotiating a deal or advising the negotiating parties. Business buyers should choose advisers who have a successful track record in similar business deals.
These are some of the most frequent mistakes that we see repeated again and again with devastating consequences on business buyers. If you are looking to purchase a business in the near future, please take some time to learn about the business purchase process so you can avoid costly mistakes.
Most buyers inquiring information about my businesses for sale think that buying a business is like buying a car. You just need money. With more money, you buy a better car. Unfortunately buying a good business is not so easy.
Two years ago, a serious buyer came to my office inquiring about one of my businesses for sale. He seemed such a good fit for that business, so I arranged a meeting for him with the owner. The meeting was excellent and the seller liked him. We received a reasonable offer from this buyer and after multiple meetings involving the seller’s accountant, lawyer and tax expert as well as the buyer’s lawyer and myself, we agreed on most issues. After the due diligence was satisfactory and the buyer had spent more than $12,000 in legal fees and a few months of negotiation, the seller decided that he would be better-off giving his business to his son instead of selling it, which son he hadn’t seen for the last 10 years because of a family conflict. I asked to talk to the son and learned from the son that he was obliged by his father to take the business over even if he had no interest in it. He even told me that his father said he would disinherit him if he refuses to take over the business. it was an obvious case of seller’s remorse situation that I hoped would be resolved by giving the seller some more time to think about it. I suggested that the seller tests his son for at least 3 months before giving him the business.
As I expected, the son could not manage a business he disliked and the seller contacted me back to sell the business again. Fortunately, the buyer had not purchased a business yet and was still interested in the purchase. A few months down the road the seller got another episode of seller’s remorse and decided to hire a manager for the business instead of selling it. This was a 70 years old seller who had been working his business for the past 40 years and simply could not let go. This was the second time this was happening to the buyer whose legal bill was becoming very high with no result. What amazed me the most in this unique situation is how the buyer was sticking to his desire to purchase this particular business. The buyer didn’t have any particular knowledge of this industry or any special technical skills that could help him in this business but he was incredibly enthusiastic about it. This same buyer kept calling me every other week asking if the seller would reconsider selling again. After a few months, the seller again decided to sell and as expected the buyer was there still trying to purchase the business. Needless to say that the few following months were not easy for the buyer because the seller’s right mind was looking for new reasons not to sell but finally the buyer’s determination ended up winning. The whole process took 18 months and the deal closed. I am still in contact with both the seller and buyer and both seem very happy with this deal.
This story might seem very unusual but it’s not. Most sellers experience some kind of seller’s remorse at some point of the transaction and many deals fall through because of that. Buyers have to keep that in mind when purchasing a business. Unfortunately, buying a business is much more complicated than buying a car!
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.
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.
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
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?
Powered by Omar Kettani
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.
Powered by Omar Kettani
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.
Powered by Omar Kettani
Business buyers are constantly looking for new business for sale listings. Some spend long hours looking in different newspapers and magazines. Others rely mostly on networking, asking everybody they know about business opportunities on the market. Accountants and lawyers are also considered a source of information about new businesses for sale.
While these sources will certainly produce results over the long term, the process is very time consuming. The Internet emerged in recent years as a growing source of business for sale listings. Many new websites appeared in the last 10 years and some have gained high popularity. Some sites are international and have a decent number of listings, especially in large cities in North America. An excellent way to see these listings is to search for the term “business for sale” in Google and to visit these sites one by one. Most of these sites provide a geographical business search. Another effective way of searching for listings in your area is to search for “business for sale” + “your area”. This search will also provide websites for top business brokers in the region, who can also assist in finding business listings that match your preferences.
Please Check this business for sale Ontario web site for profitable business listings in Ontario, Canada.
Powered by Omar Kettani