Have dreams of owning your own business? What if we told you there was a way to skip the expensive, risky startup stage and hit the ground running with an established company? From where to find businesses for sale to how to evaluate their potential, we’ll answer some of the most common questions people have about how to buy a business in Canada.
What kind of business should I buy?
There are a lot of benefits to buying a business over starting one from scratch. For one, you’re working with a proven concept, so people already trust the product or service. But not every business is a winner, so it’s important to do your research.
The first thing you should know about how to buy a business is that there are two types you can buy. Each has their pros and cons.
A franchise
With a franchise, you get a business with built-in recognition. Plus, working with a parent company means you have all the infrastructure and processes already in place. You can also turn to other franchisees for support and guidance.
On the other hand, you have less control over the operations. You also have to pay a percentage of your revenues to the parent company.
An independent business
With an independent business, you have more control and responsibility. You can set your own rules and create your own systems.
An independent business opens you to more risk.
If you are willing to do the work, you can reap the rewards. But if things don’t turn out as planned, you need to be prepared for that as well.
Whichever route you decide to take, make sure you buy a business in an industry you know well and with products or services you’re comfortable selling. Being prepared and knowledgeable is the best way to set yourself up for success.
Where do I find businesses for sale?
You can find advertisements in print media or online. Trade publications or commercial investment magazines are your best bet. You could also talk to a broker who specializes in the specific industry you’re interested in.
Business events are also a great way to build industry contacts and help you get the word out that you’re looking to buy.
How do I evaluate a potential business?
Appearances can be deceiving so you’ll want to do your due diligence before making any major moves. You need to assess the condition and potential of each business you’re considering.
Some questions you should ask:
- If the business has a physical location, is it in good shape? What about the equipment or inventory?
- If it's an online business, is the website well-designed? Is it secure? Look at key metrics like web traffic and bounce rate, as these indicate effectiveness.
- Is the brand well-known? Does the business have a good reputation? You can check online for customer reviews.
- Is the business visible and easily accessible? Is it located in an urban or rural area? If you’re far away from your suppliers and customers, you will have to consider expenses like increased shipping costs.
- Is the business generating revenue? Are sales increasing, decreasing or are they flat?
- Does the business have a good working relationship with its suppliers and bank?
- Is there a lot of competition in the area or in the industry?
A poorly-run business isn’t necessarily a bad purchase. For example, it could be a case of poor management or inadequate resources. If you think you can turn a failing business around, you could stand to gain from your investment. But do keep in mind that you’re taking a big risk if it doesn't work out.
How much should I pay?
Short answer: it depends.
You need to know what you can afford before you start negotiations .... but you should also be flexible. To start, you need to determine the value of assets such as the building, equipment and products.
It’s a good idea to bring in an expert to value any business you’re considering.
Some other factors to evaluate include the business’:
- Financial statements
- Annual reports
- Intellectual property (e.g. patents and trademarks)
- Reputation
- Customer lists
- Quality of personnel
Before you sign anything, take the time to talk to clients who buy directly from the business to get the most honest feedback about the company. It’s also a good idea to consult with a lawyer with experience in business purchases.
Final thoughts on how to buy a business
While buying an existing business or starting a franchise may be less risky than launching a startup, it’s not a decision to take lightly.
Take your time and verify all of the information you are given before you commit yourself. Talk to the suppliers and clients to get a good sense of the business’ reputation.
Don’t just consider the price but also the potential return on investment.
Buying a business could be your ticket to living out your biggest entrepreneurial dreams. But don’t let a pretty sign or a fancy website fool you. Do your research before you sign on the dotted line. Above all, make sure you know the industry and will be comfortable selling the company’s products or services.
