How is a business valued?
Ultimately, a business is worth whatever you think it is worth. A good starting point is to examine historic income to estimate future earnings so you can ask yourself “what is this income stream worth to me today?”. You could also take a book value approach, which means examining the balance sheet to add up all the assets and then subtracting the liabilities to reveal the owner’s equity. If assets reflect their fair market value, the resulting value could be fairly accurate. However, any differences in book value and fair market value will require calculation of the ‘adjusted book value’ because tangible assets will have been depreciated for accounting purposes. The actual value won’t be reflected on the balance sheet. There are numerous ways to value a business and the above examples are just a few ways to do this. Hiring a certified business appraiser is also another way to get a business valuation, however that doesn’t mean you will be successful in negotiating a deal with the seller. Business brokers or investment bankers can work with you to identify a business that fits your acquisition criteria, estimate value and facilitate negotiations for a mutually agreeable deal.

 

How do I find my perfect business?
Understanding your personal strengths and weaknesses, clearly defining your acquisition criteria, and knowing how much and where your funds are coming from are all crucial first steps when looking for the perfect business to acquire. You may be able to find a business you like on business sale websites, however most businesses will not be posted to these websites at all. When Omnium brokers work with buyers, we provide assistance in clarifying acquisition criteria and subsequently research and contact businesses that fit the search criteria and are not being actively marketed throughout Canada or preferred geographic areas.

 

What is the buying process like?
See our page on the ‘Buying Process’.
Buying a business is one of the biggest decisions you can make and can be filled with emotions on both sides. On average, you can expect the entire process to take between 6 to 12 months, depending on the size of the business and complexity of a deal. The entire process can be broken up into 4 main areas: preparing for purchase, document review, offer preparation, and completion and transition. Be prepared to experience back and forth negotiations as to the price and terms of an acquisition. The value of a business is perceived differently depending on whether you are a Seller or Buyer, however both parties can almost always reach a mutually beneficial transaction by allowing room for creativity in the deal-making process. As a Buyer, you should also be prepared to hire a reputable business lawyer (to help put together an enforceable contract of Purchase and Sale) and an accountant (to advise you on any tax implications that arise from the purchase of a business). To avoid making costly mistakes during the acquisition process, consider hiring a qualified business broker who will act in your best interests at all times.

Unlike typical real estate transactions, a Seller’s broker does not share their fee with a Buyer’s broker so be prepared to pay your broker a closing commission, as well as a monthly retainer or hourly rate which will often be credited, in part or whole, towards any commission earned.

 

What is the typical transition period when buying a business?
Buyers can expect a transition period of 1-3 months when buying a business. Owners that sell their business have usually spent a great deal of time and money to get it to where it is today and will want to see the business succeed once it has changed hands. While the actual term and specifics of a transition period will vary from business to business, you should still expect to pay some form of compensation for the time and expertise that a seller brings to the table.

 

Will the owners provide vendor financing?
Depending on the purchase price, vendor financing (or vendor take back) is quite common when a business is changing hands, however you should not rely on this to always be the case. Businesses with a purchase price of less than $1 million rarely have a vendor financing component. For businesses with a purchase price greater than $1 million, it is more common to ask for vendor financing in order to bridge the gap between available financing and the purchase price. The amount of vendor financing and interest rate ultimately comes down to the level of risk a seller perceives. Sellers are usually unwilling to accept any vendor take back in excess of 25% of the purchase price and will typically request some security for their loan, both from the assets of the business in addition to a personal guarantee from the buyer as well.

 

When is an earnout appropriate?
An earnout is a type of payment tied to some future measure of performance of the acquired business. This often occurs when the seller believes the business is worth more to a buyer because they believe future earnings will hit a certain level. As a buyer, you may agree to pay this higher price if the business is able to reach those targets.

 

How do I finance the acquisition of a business?
See our page on ‘Acquisition Financing’.
Before discussions with a seller start getting too serious, you should start lining up your financing for acquisition. There are a number of options when it comes to financing: use your own money, borrow money, use other people’s money (friends and family), or ask for help from the seller. A typical deal usually involves some combination of the previously mentioned sources of financing. Take a creative approach when structuring a deal. As long as you are negotiating in good faith, sellers will be open to consider many of the options you put in front of them.

 

Is it possible to find a business with management in place?
Finding a business with management already in place is certainly possible, however, you should be prepared to pay a premium for such an arrangement. Typically, businesses that are selling for under $1 million often have only one or two managers on the team. Smaller businesses like these still require a fair deal of owner involvement in the day-to-day operations. Businesses that pull in revenues in excess of $5 million per year are usually more sophisticated, with their own management and/or sales team already established. If this is something that is important to you, be prepared to pay substantially more for a business of this caliber.