Buying a business
- Steps to buying a business
- When I would like to make an offer to buy a business, who will prepare the offer?
- I sometimes hear the term “identify, offer, subjects, closing”. What do they mean?
- How much will I be able to borrow from the bank to make my purchase?
- How much down payment will I need to purchase a business?
- How much should I pay for a business?
- What business should I buy?
- How long will it take to find an appropriate business?
When I would like to make an offer to buy a business, who will prepare the offer?
The Real Estate Board of Greater Vancouver (REBGV) has prepared a standard contract for the purchase of business assets.
This contract is available to all business brokers that are also members of the board. One of the jobs of a business broker is to assist you in completing the offer to purchase.
Working with your business broker, you can make an offer at a price and conditions with which you are comfortable. At this time you will assume the information given to you so far is correct, but you will have time to fully verify to your satisfaction before any money exchanges hands. This is done by the addition of conditions to the offer to purchase.
I sometimes hear the term “identify, offer, subjects, closing”. What do they mean?
These are the four phases to buying a business.
Identify – locate the business that you would like to purchase
Offer – determine a price and make an offer for the purchase of the business through a business broker. Negotiate the price until both parties are satisfied
Subjects – subjects are the conditions to your offer and include items such as financial due diligence and transferring of contracts and licenses. These need to be satisfied by both the buyer and seller for the deal to continue forward
Closing – on this day the final money is given to the seller and the keys to the business are given to the buyer. This is also called completion. Furthermore on this day often an adjustment is done for deposits, inventory, prepaid expense.
How much will I be able to borrow from the bank to make my purchase?
Commercial banks are traditionally hesitant to lend funds for the purchase of a small business. However some banks will lend funds that are secured by hard business assets sufficient to safeguard the amount of the loan or personal holdings such as home equity.
How much down payment will I need to purchase a business?
The amount of down payment varies with each sale depending on the amount of hard assets included, amount of inventory and your financial situation. As a rule, buying a business is very down payment driven as financing on the strength of a business is often difficult.
How much should I pay for a business?
Many small to medium sized business base their asking price on annual earnings multiplied by years. Earnings Multiples are very specific to each industry but broadly speaking it is usually between 1 and 5 times normalized EBIT (Earnings before Interest and Taxes).
To a buyer, paying 1 to 5 times earnings represent getting their initial investment in the business back in 1 to 5 years from profits of the business. This is a projected annual return of 20% to 100%.
The right multiple is the amount the marketplace is willing to pay for the business. This is influenced by factors such as security of income, economic volatility, and availability of financing.
What business should I buy?
1. Consider your background. If you choose a business that you’re familiar with, it is more likely that you will do well.
2. Decide what industry is of most interest to you. Are you interested in a specific product, or an operation that’s service‐oriented?
3. Consider how much money you need the company to earn annually to pay your salary and possibly financing charges. This amount will often determine the size of purchase necessary as most small-medium businesses are sold based on earnings.
4. Check our Feature Listings section use the search engine on the Home page and check out other websites like Vanbiz.com to find interesting local businesses that are for sale.
5. Contact us directly and ask what is currently available in your area of interest.
How long will it take to find an appropriate business?
This generally takes longer than one might think. The reality is that although there may be several businesses for sale, there may be very few that fit your parameters. The best advice is to be patient as well as diligent in your search.