Entrepreneur: 6 Things to Consider When Buying a Business
“There are many routes to becoming an Entrepreneur and buying your own business is a great way to lower risk and work for yourself”
Buying a business in Canada can be a great way for you to become an Entrepreneur and build something of your own. There are many benefits to buying a business of your own versus, starting your own business, and we’ve listed a few of the reasons in a Blog of ours over here. While there are many routes to becoming an entrepreneur, buying a business in Canada tends to be the path less travelled. In order to prepare yourself better on the process, there are many books that are freely available, but the one we like the most is HBR Guide to Buying a Small Business. This book does a great job at preparing a potential buyer into the process of buying a business.
A great way to get the process started can be to contact your local business brokers, and/or look at business for sale online. Most business brokers are happy to connect with potential buyers, and usually create a database with buyers search criteria. When a deal comes up, your local business broker will reach out to you with more information. While a lot of larger deals aren’t listed on websites like business for sale, it is a great place to start. At any given time, there are a lot of owner retiring businesses for sale in BC, and some owners have been running their businesses for decades, and have built great businesses. We have listed a few points to think about when buying a business below :
1. Revenues
2. Industry & Growth Potential
3. Key Employees
4. Business Margins
5. Personality & Skillset
6. Return on Investment (ROI)
1. Revenues
When you plan on buying a business of your own, it might actually be lower risk than setting up your own business. It does help to setup a trend analysis for all aspects of the income statement and balance sheet through your own horizontal and vertical analysis. This helps a buyer gauge how the business has performed in the past, perhaps through a pandemic and can help decide what you want to pay for the business. Understanding Revenue breakdowns by customers can also be a great way to learn more about who the business caters to. Coming out of Covid, there is a greater need to understand the health of the businesses customers as well, and their potential ability to keep buying from the same businesses.
2. Industry & Growth Potential
When buying a business in Canada, there are a lot of publicly available articles all over the internet that look at the industry the business is in. As business brokers, we use a few different academic journals ourselves, to gauge the health of an industry. As a buyer, its paramount to understand the industry, its trends, and link that data to the business you are looking to buy. It’s important to compare industry statistics to the current businesses financial statements as well. The goal of any entrepreneur is to grow a business each year, either through Revenues, their team, or through improved margins or all of the above. There’s is nothing worse than a buying a business today, that may be a great deal, but in a dying industry, which does happen.
3. Key Employees
Any business owner will tell you that employees can make or break a business, and it can sometimes take just one bad apple to ruin things. When you are looking to buy a owner retiring business in Canada; employees, and employee turnover forms one of the pillars when evaluating a deal. If employees have been with the business for some time, that helps any buyer tremendously as there may not be a drop in service, or quality of work. Clients and suppliers may not be completely impacted as there may not be a change in who is servicing them, of course this is different for owner operator businesses.
4. Business Margins
Margins form a key aspect of any business, as they dictate what the profitability will be for every 100 dollars of growth in revenue. Again, its important to look at margins on a year over year (YoY) basis, as they can tell you a story of how a business performed in that specific year. The more the YoY margins stay the same, the lower the risk when buying a business, is the rule of thumb.
5. Personality & Skillset
Arguably this is one of the most important aspect of buying a business. As business brokers we frequently have discussions with potential buyers about their skillsets, personalities, and what they enjoy doing. There is nothing worse than sinking money into a venture that don’t play to your own personal strengths. We think all buyers should introspect whether they might fit with the business, and can add value that over and above the existing owner, and if they can see themselves in the owners chair even three years down the road.
6. Return on Investment (ROI)
When getting into any business venture, it helps to get a better understanding on the Return on Investment for the cash you are investing. Most people who are looking to buy a business can sometimes equate the business purchase with the same or similar level of risk as their investment portfolio. We would always caution against using this metric as business ownership has many moving parts, but isn’t entirely wrong. We look at the multiple of Normalized EBITDA as the returns calculator, therefore 4X would be a 25% Return, 5X would be a 20% return and so on. Again this depends on the deal structure, the amount of cash being injected and potential Internal Rate of Return the cashflow generates.
In conclusion, there are many steps and things to consider when buying a business in Canada. The points above are intentionally broad and only represent a handful of key reasons. Looking at business for sale and talking to your local business brokers is a great way to start to get a feel for what’s in the market, and what might fit your own skillset. If you’re interested to connect with one of our M&A Advisors, Click Here and some one from our team will reach out within 24 hours.