What Are the Costs of Buying a Business?

One of the most important considerations of any business activity is cost and the cost to buy a business is no exception.  While I have no doubt most people we deal with at VR understand the importance of this simple financial measure we find a number of our prospective (typically first-time) buyers do not have a clear idea of all of the necessary costs involved in buying a business.

With that in mind we’ve created the following worksheet to help you: 

Cash Requirements Worksheet

Many of these costs are self explanatory but this sheet should provide a complete picture of the necessary costs when buying a business.  A quick overview:

Initial Cash is the total cash tendered by the purchaser.  It includes cash funding provided by the purchaser as well as bank financing provided to the purchaser and encompasses inventory not included in the sale price.

Existing Encumberances are any liabilities the new owner is assuming from the old.  With the exception of payments on capital equipment there is typically very little included here.

The availability of Seller Financing has steadily become more important in recent years and can have a drastic effect on the saleability of a business as well as its final selling price.  (See Jey’s article here for more detail.)

Closing Costs are miscellaneous costs involved in closing a deal.  The skills of several different professionals factor importantly into this stage of the process and ensure that the interests of both parties are protected and observed.

Startup Costs include licensing fees, and other support activities/costs the new owner must cover in order to complete the transfer of operations to his or herself and ensure the business continues to operate.

If you are a prospective buyer or have any further questions regarding this worksheet or the selling process in general please do not hesitate to contact us at the VR Edmonton Office and one of our friendly, knowledgeable staff will be happy to assist you.

Submitted by Kenji Miki

A Good Business That Makes Lots of Money

We often receive calls from buyers interested in buying “a business” and when asked what type of business they are interested in, the answer is invariably “a good business that make lots of money!”.  As much as we love to help buyers find a “good business” that make “lots” of money, we’re often lost in the buyer’s definition of the “good” and the “lots”. To help these buyers narrow their search, they should ask themselves the following list of questions:

1. What do I want to accomplish from owning a business?
for example, to travel less for work and spend more with my young family or to relocate somewhere closer to my aging parents or to get out of my boring job etc.

2. What am I willing to do to accomplish my goal in question 1?
for example, take a temporary reduced wage as long as the income from the business supports my current lifestyle or to uproot my entire family and move to where my parents are located.

3. How much time am I willing to work in the business? On the business?
A small business owner usually have two roles, one is to work in the business, making sure it is cash flow positive and the second role is to work on growing the business.  Both roles require different skill sets.

4. What skills and experience do I have that is transferable to business ownership?  Do I have skills to work IN the business?  Do I have the experience to work ON the business?
If I don’t have the skills to work in the business, can I hire someone easily?  If I don’t have the experience to work on growing the business, how and where can I find help?

5. What kind of job I absolutely hate to do?
For example, I hate the cold and don’t like working outdoor

6. What is the minimum wages I need from the business in order to maintain my current lifestyle?
This will determine the cash flow needed from the business

7. How much cash down payment do I have to purchase the business?  How far will it set me back if the business fail?
For example, I have $300,000 savings.  My wife has a stable job and we can live off her salary if needs to be.  It will probably set me back 5 years of savings if I failed in the business and since I’m only 42 this year, it will not be devastating.  However if I can maintain the cash flow of the business, I would be mortgage free before I turn 50; which is 10 years sooner than if I continue with my current employment!

These questions will not only help buyers narrow their search for a suitable business but also allow them to ask questions that focus on whether a particular business for sale will meet their goals.  A buyer who is armed with a self evaluation of what he or she wants to accomplish through business ownership will be able to quickly make a decision when the right opportunity present itself.

Submitted by Siew Cheng

Survey of Business Financing

Biannual Survey of Suppliers of Business Financing Statistics (2011 data analysis): This document represents the first public release of information from the new biannual Survey of Suppliers of Business Financing. The survey collects hard data on business lending activities.

Industry Canada recently released its first survey results on the suppliers of business financing. The overall trend points to an increase in business lending activities by the Banks. This is good news if you are a business with tangible assets that can be easily securitized by the Banks.

However if you are buying a business in the service industry and/or business with little tangible assets, than you might just have locked yourself out from borrowing from the Banks. Also an established and profitable business will sell for more than just the value of its assets. So the question in Canada remains, how does a small business owner sell his business and ensure that the Buyer can obtain reasonable amount of financing from the Banks for his business.  Unfortunately the answer today is this is NOT possible.

Here is what we know of small business sales. A typical buyer is willing and able to put down between 20 – 30% of the purchase price towards the price of the business. The Banks are often able to finance 40 – 50% of the purchase price secured against the assets of the business. And the GAP of  20 – 40% is financed by the Seller.  This is just the reality of small business sales today and I do not see too many ways around it, especially if the Seller wants TOP dollars for his business. Of course he can choose to sell the business for a discount and get paid in all cash, typically this will be at 60 – 70% of the price.

Seller financing is a reality and a very important aspect of the sale of a small business. Why?
A seller who provides financing often will have a higher probability of successfully selling his/her business. In addition, seller financing often convey the message that the owner is confident that his/her business is capable of continuing to generate the cash flow to repay the loan after the sale. Other benefits of seller financing is also it may reduce your tax liability at the time of sale, provide you a higher value for your business since the portion that is financed also generates additional interest income.

So if you are planning to sell your business, my advise to you is to select a Business Sales intermediary who is able to price your business appropriately,  who understands financing and able to help a buyer negotiate the most amount of financing for your business, and then securitize your financing portion appropriately with the Buyer.

For more information on different financing options when buying or selling a business please click here. 

10 Simple Steps to Successfully Buy a Business

Most first time buyer of businesses still believe that buying a business is like buying a house. While there are many similarities the process is completely different. Buying a business is a major lifestyle change which can be fun, exciting, challenging and very rewarding providing you do it properly.

1) See your Commercial Banker and find out how much money you can borrow then add this to the cash you already have to establish how much you can afford to invest in a business. Most people visit their local branch and speak to the first Banker they are introduced and assume that they will have no issues in getting financing. A good commercial Banker will be able to point you in the right direction and educate you on how business financing works and what is the maximum amount you might be able to borrow.

2) Meet with your accountant to tell them that you are looking to buy a business and ask them to review your structure (company, partnership or trust and taxation set up). Advise them that when you find the right business that they will be required for due diligence.

3) Establish what sort of business that you would like to buy. What are your interest? What are you good at? What skills do you have? Remember a business is a lifestyle change therefore you must buy something that you are going to enjoy. Four basic questions to ask are:
a.  Is the business profitable?
b.  Can the business generate sufficient cash to pay down the loan?
c.  After paying the loan payments, can the business afford to pay me a wage to support my family?
d. What will be the return on my cash investment?

4) Know your income requirements and financial needs. If you need to earn $100,000 a year from a business to live comfortably and meet your financial commitments then this forms part of your criteria. Generally businesses net between 10 to 20% of their gross revenue, therefore look for businesses in that price range based on your income required to support your family.

5) So you know how much you can afford, what would interest you and your income requirements; now “start looking”. You need to learn what businesses meet your criteria are worth. You need to speak to business brokers, get information on businesses you see advertised and get to know what their real value is. This will take time however, it is time well spent.

6) Be prepared as you may not get everything you want for the price that you can afford. You may need to compromise which may mean prioritizing your requirements or criteria. There is no such thing as a “perfect business”. If you are looking for a perfect business, don’t buy one – start your own!

7) You have now looked at lots of businesses, spoke to many business brokers and received advice from everyone including the cab driver and your daughters’ gym instructor. By now if you are not totally confused or have given up you know exactly what you want, what it is worth and what is available.

8) You find a business that you believe is right for you. Do you place an offer right away or carry out due diligence before you make an offer? Neither answer is right or wrong. If you make an offer first, you are essentially entering into a contract with the seller to purchase the business and under the standard terms and conditions of the offer to purchase you must have sufficient time to do due diligence. In doing so, you have effectively taken the business off the market so that no one else can look at it and make a competing offer, while you complete your homework and be sure that all of the information is correct and that this business is exactly what you want. You are only fully committed to the offer to purchase once all of the conditions of sale have been met. By taking this step, you need to engage a lawyer to advise you on the contract and complete the legal due diligence and your accountant to complete financial due diligence. If you carry out due diligence before entering into a contract you may save on legal and accounting fees however, if someone else makes an offer in the meantime then you have effectively wasted your time and money. My advice, if you find something you believe is good and you like it then make the offer, as good businesses are always in demand and if you like it then you can be sure others do too. Also, to do a thorough due diligence most sellers will only give out detailed financial information once they have received a formal offer to purchase.

9) You have now made an offer to purchase a business. How exciting! Make sure that you have a good commercial lawyer that is experienced and understands business sale contracts as you need this person to guide you through the sale process and advise you at each step, beginning with the offer to purchase. Your accountant will ensure your structure is right and do a thorough financial due diligence. Your lawyer will ensure that contract deadlines are met for finance, due diligence and the receipt of information as well as transfer of assets, intellectual property and payment of encumbrances. When you buy a business, legal ownership is extremely important and requires the preparation and signing of a lot of necessary paperwork.

10) The business stacks up, passes due diligence, meets your criteria and you are moving on to settlement. Now you get very excited! You are one final step away from owning a business and making a lifestyle change. For the most part your lawyer will prepare everything for final closing and instruct you on what you need to do. You need to get your own house in order so that you are prepared to commence running this business the day of closing. The seller usually stays on for some period of time for transition and training.

There are no short cuts to buying the right business. Jumping any of these steps will only cause you unnecessary stress, expense and ultimately cost you more time. All throughout the buying process, the business broker is there to help you, chase up information and then at the contract stage manage the process so that everyone is happy and mutually beneficial outcome is achieved by all parties.

Business Financing Survey

Have you ever wondered which industries and segments of the economy gets the most assistance in financing from lenders. Here is a short 2 page survey released by Industry Canada showing financing activity by lenders during the first half 2012.

Overall it notes that Canadian Banks are still doing the bulk of this country’s business lending. What is actually more interesting to see is that contrary to popular believe more funding went to the retail sector than compared to others. To download a copy of the full survey, click here.

13 Reasons to Buy a Business in Edmonton

In January of 2013 VR Business Sales in Edmonton  received a total of 218 buyer inquiries for the businesses we had for sale. The buyers came from all over the world. We had buyers contacting us from almost every province in Canada and some states in USA such as New York, California, Carolina, Texas. We had buyers call us from France, Turkey, England, Ireland, and Monte Carlo. One of the interesting things we notice from  all of the buyers is they have all heard of Edmonton and Alberta and the success we are experiencing. So I decided that perhaps it is time that I share the great things that we are experiencing in this Province and City so we can celebrate it together.

1) Adjusted for inflation, Edmonton’s economy is expected to grow 3.5% to 4.5% in 2013 as compared to 2.4% for Canada.

2) In 2012 the population of greater Edmonton was 1,205,000; predictions for 2013 and 20 18 are 1,224,000 and 1,331,000 respectively.

3) Edmonton’s population has grown 2.5 times faster than the national average of 1.1%; Alberta’s population grew 2.9% to 3,906,800 in 2012.

4) Of all Canadian provinces and territories, Alberta and Saskatchewan are the only two to experience net positive interprovincial migration.

5) After a 480,000s.f. expansion in 2011, Edmonton International Airport served 6.7M passengers in 2012 (400,000 more than in 2011).

6) Edmonton has a strong labour market and a resulting, country leading, low employment rate of 4.0% (Canada is 7.2%).

7) Alberta’s unemployment rate in 2012 decreased to 4.7% from 5.5% in 2011 and 6.5% in 2010; the potential of a labour shortage is on the horizon.

8) Alberta’s avg. weekly earnings of $1,098 are 20..8% higher than the national avg.; $5.9B of consumer spending in October 2012 set a new record.

9) In November 2012 there were 258 rigs drilling in Alberta, a 12.2% drop from 2011 due to caution over shipping constraints and inventory pooling.

10) Over the next 25 years, Alberta’s oil sands, serviced primarily through Edmonton, will generate over $2.1 trillion in economic activity in Canada.

11) With 170 billion barrels, the oil sands represents 97% of Canada’s total reserves which are the world’s third largest after Saudi Arabia & Venezuela.

12) Edmonton’s industry is not only about natural resources. Our Economy is more diversified than those of Toronto, Montreal or Calgary, as ranked by the Conference Board of Canada.

13) The University of Alberta is the second largest research institution in the country. The Edmonton Public School Board has a reputation has one of the best school boards in the country, and one of the largest.

So based on the above 13 points (and I can add more), there is no surprise as to why more and more people are looking to move to Alberta and Edmonton and this is a great place to buy a business.

For a list of businesses that we have for sale please visit our site by clicking here.

Here are a few more links about this topic that might be of interest to some readers:

Alberta recognized as one of the fastest growing province in Canada

Alberta confident of economy in 2013

City of Edmonton Economic Outlook Report

Conference Board of Canada report on Edmonton real GDP growth in 2013

Size of Construction Boom Comes as a Surprise

What will Edmonton Downtown look like in the next 5 years? It is hard to imagine that Edmonton with just under 1 million people has close to $4.8 Billion (OK realistically $3 Billion) worth of construction projects slated to complete in the Edmonton downtown area over the next 5 years. The Edmonton Downtown Business Association just released a report showing all of the projects that are currently slated for Edmonton downtown.

Now what will this development do for local businesses and the potential for new businesses want to set up in the area. I think local businesses will benefit the mosts with more people choosing to live in the downtown area and more activities taking place after business hours. One of the biggest concerns for most retail businesses that wants to set up in Edmonton downtown in the past has seen lifeless streets after business hours, litters, old buildings, etc. especially after comparing to other parts of Edmonton like WEM, SEC and Whyte Avenue.

With new developments being slated to take place, I believe downtown Edmonton will finally become a destination where people want to play, shop and just hang out.  I think downtown has improved significantly and sure the recent recession might have slowed the process a little, albeit 2009 – 2011 would have been the best time to have started some of the major projects as it would have been cheaper and everyone benefits when the economy takes off again. Overall I am excited about the prospects and hopefully the City, Edmontonians and the developers will follow through with this projects.

Click here, if you are interested in reading the full 34 page report.

How to Negotiate a “Put and Call” Agreement When Selling Your Business

I am often interested in learning more about how business sales transactions are negotiated and structured. Here is a great way to structure a deal that caught my eye. If you are thinking about selling your business, and would consider retaining a minority position in the company, this method of structuring the transaction will be attractive to you. This method of structuring the deal also takes away some of the more traditional fear of “buy/sell” agreements from a seller’s perspectives.

How to negotiate a put and call agreement when selling your business | Smart Business

Buying the Right Kind of Business

Once you have decided to buy a business, the difficult decision is over.  Well, almost.  Choosing the right kind of business to buy can also be a very difficult decision.  Regardless of how you arrived at the decision to buy a business, the decision of what kind of business you buy is a separate and independent decision.

For many people, deciding to buy a business and deciding what kind of business to buy are related.  However, my advice to anyone buying a business is to look at all options available, before deciding to purchase a certain kind of business.

At VR Business Sales in Edmonton, we receive hundreds of inquiries each month from prospective business buyers who often have the desire to buy a business, but struggle with what type of business to buy.  As a result they tend to spend too much time “kicking tires,” trying to figure out what is best for them.

Below are a couple of common examples of businesses that are frequently bought and sold, and that people consider.

The Gas Station:
The longest standing business all North Americans use and love – the corner gas station!   A gas station is a great business.  Everyone in my family and your family uses it to buy gas, maybe a pack of cigarettes, lottery tickets or milk, etc.  There are often many gas stations for sale close to your location.  However, you need to know there are two kinds of gas stations; the franchise gas station or the independent retailer.  There are pros and cons to each.  If you buy a franchise gas station, you get the name brand recognition and the traffic associated with it, but you will need to purchase expensive gasoline from a particular oil company.  However, when you purchase from a big oil company, you will not have to worry about environmental issues.

With an independent gas station, you can sign contracts with any gasoline supplier, but you run the risk of more exposure to environmental issues.  Also, the marketing support provided by large oil companies is guaranteed to be very helpful if you are new to the gas station business.

When looking to purchase a gas station – keep both options in mind, along with their pros and cons.  Regardless of which option you choose, the decision to buy a gas station is a good one.

The Restaurant:
Buying a restaurant is a slightly more risky than buying a gas station.  Gasoline for the most part is a commodity, without much product differentiation and buying gas is a necessity.
When thinking about buying a restaurant there are countless options.  The first step in choosing a restaurant to purchase is identifying a restaurant that you like — the type of food being served, the ambiance, the location, the prices etc.  Certainly you can change most of these variables except the location.  However, if you purchase a restaurant, I would recommend purchasing only if you absolutely love the restaurant as it stands.

Whether you decide to buy a gas station or a restaurant, it is critical that you go through the recommended steps before buying any business.  You need to evaluate the financials and determine the value and suitability to your operational experience amongst other various factors.

In the VR Business Sales office, we have an 88 point checklist for a buyer to review as part of their due diligence when they buy a business. This is an important step in your life and often times most people buy a business only once in their lifetime and it is important that you have the right professionals helping you throughout the process.

There is Something About Gas Stations

Over the years we have been fortunate to have had the opportunity to sell a few gas stations and c-store businesses in the Greater Edmonton area. Most of this gas stations and c-stores are independently owned and sometimes also comes with a car wash. We have noticed that each time our office has a gas station listed our number of buyer inquiries spike up by about 5 to 6 times. Our typical buyer inquires each week is approx. 20 to 30 and when we have a gas station on the mix it typically increases to about 100 that week. I recall on one particular gas station we recently sold, we received a total of over 1,400 inquires to our office over a period of 3 months on that one listing alone. I have no clue if a gas station owner can handle that number of inquires on their own nor would they want to deal with that many of the so called “curious lookers.” Because at the end of the day out of all those inquires we were only able to narrow down to about 3 or 4 serious buyers who was willing and able to buy the business.

One interesting observation that I was able to pick up while dealing with most of the buyers is the myth that gas stations are easy to manage and operate and it requires low skill employees and/or management. Most buyers want to buy a gas station and hire low wage store clerks to run the business while they cash in the profits. Unfortunately I have to DISAGREE with this assumption completely. Gas station business is one of the most demanding and challenging businesses to operate in the retail industry. For one, it is a cash business hence the importance to have good management control of the cash that comes in each day. Secondly it is an inventory intensive business, where it is very important for an owner to manage the inventory and knows what to buy and what not to buy based on sales patterns. Thirdly, gas station and c-store businesses are changing rapidly. Today this businesses sell more than just your average gas and chocolate bar. Today they include services like money transfer, phone cards, groceries, etc. as such an owner needs to be constantly involved in understanding what the consumer demands.  Furthermore, an owner who spends time observing his or her customers and gets to know them might be able to add products most desirable by its customers base and increase the revenue of the store.

When buying a gas station, there is also the issue of financing. As most buyers will find out that banks are very hesitant to finance gas stations due to both the lack of capital assets in the business and the potential environmental risk associated with it.

Most buyers are also misinformed on the profitability of gas stations and c-stores. Most of them talk to us with the expectation of wanting to make over $100,000 a year owning a gas station while not putting in 100% of their time and effort. Unfortunately the reality has been that most successful gas stations with good profit margins are family owned and operated and the owners are involved in the business 120% of the time. In my experience as a business broker, I have seen very few small businesses with absentee owners able to generate high profit for the owner and yield a return of over 15% on the cash investment. So for all those buyers out there thinking that owning a gas station business is an easy business to run…..please think again and I encourage you to speak with an experienced business broker first before planning to go further.