Top 3 Considerations when buying a business:
Before you close the deal with a purchase of an existing business there are 3 considerations that must be addressed. We are going to walk you through the business valuation process, tax considerations, and some important strategies to factor into your decision making process.
At the end of the day when purchasing an existing business you want to ensure you are paying a fair price and not pay more than what the business is truly worth. In order to prevent overpaying, you will want to perform a business valuation and come up with reasonable range on the valuation of the business and how much you are willing to pay.
A good starting point is looking at audited financial statements for the business in question and assessing what the normalized EBITDA ( Earnings before interest, taxes, depreciation & amortization) looks like. From there, you will want to perform market research on assessing a comparable multiple for a business in the same or similar industry. Please see this link on some guidelines on multiples by industry, this can range from 5 times to 50 times depending on the industry of course.
Once you establish a multiple you can apply this to the EBITDA and arrive at a starting point for the business valuation. At the end of the day you will want to assess the historical performance of the business and consider other factors below:
1) Is the business in a steady state position and what is the likelihood of continued performance?
2) Does the business have major competitors and what is their current market share? Can the business increase their market share with a tweak in the business model and strategy or are they at capacity already?
3) Is the current management team in place effective and can they quickly implement new plans, strategy, and execute accordingly?
These are all factors to be considered, and will impact the price you are willing to pay for the business.
As with every transaction you must consider the tax implications. With the purchase of a business, there are a few tax planning opportunities. If the business is a CCPC ( Canadian controller private corporation) It is important to understand that the seller will want to sell you the shares of the business since it is in their best interest from a tax position. Selling their shares of the business results in the ability to use their lifetime capital gains exemption, in turn paying NIL taxes on the first $800,000 capital gain. The seller will want to utilize this tax strategy and there may be an opportunity to negotiate the purchase price should you only want to purchase the assets of the business and not assume all liabilities as well.
Decision Making Process:
Purchasing an existing business is a complicated process, and there are many factors to consider before closing the transaction. This is an investment and you will want to be certain that the business is generating healthy cash flow, has opportunity to grow, and has a solid management team in place that can deliver results. Some of the important considerations in the decision making process include:
1) Are you familiar and comfortable with the industry of the business and do you have the expertise required?
2) Does the previous owner have ties to the business and relationships with customers/vendors that are critical to the sustainability and continued success of the business? If so, you will want to have the previous owner assist in the transition period and stay on board to ensure a smooth transition.
3) Can the business continue to grow and what is required to support the growth? ( i.e. internal controls, processes, capital investment) What is the additional investment required?
More more information Contact an MP Group Advisor to further discuss how we can assist you in the purchase of a existing business. Call 416-214-0527 and see how we can help.