6 Tips on Buying a Business

Ok, so you’re toying with the idea of buying a business. With everything that’s involved in making the transition run smoothly, it’s easily possible to overlook details. I sat down with Michael D. from the Exchange Group of Chartered Accounts and he offered up a little advice on the matter.

One way or another…
In Canada, you can purchase a business by buying the shares of the company or by buying its assets. When buying shares, the buyer takes on all liability, loans, etc. You are purchasing the business as is, so if someone sues you a week after you take over, just hope you have a lawyer better than Lionel Hutz defending you. As well, the seller is eligible for certain tax incentives when selling shares, so most likely they will be wanting to go that route, however this may be an opportunity to leverage the price down.

When buying assets you purchase the physical entities of the business such as the building, inventory, hard equipment and goodwill. While buying assets may allow you a little extra legal protection as well as tax benefits through write-offs, these benefits may be reflected in the purchase price.

Don’t Put All Your Eggs in One Basket
If your new business acquisition involves real estate, incorporate your building separately from you business. Your business would just pay rent to the incorporated building. That way, if your business goes bankrupt, the building (being a separate legal entity) stays put so you don’t lose everything.

With Ninja-like Peripherals…
So, as everyone knows I am an elite ninja……give or take. However, knowing what’s around you can bode well in the success of your acquisition. Do your best to learn about other companies that may be related to the one you are purchasing. By overlooking the possibility that the previous owner may have had interest in other companies that deal with the company in question, you may wake up to a surprise because now the other company has no interest in maintaining existing relationships as they are. For example, if the owner of Company A (that you are looking to purchase) also owned another company, Company B that supplied a product to Company A at a discount, after the sale that discount probably won’t last. That changes your bottom line.

Buying Something Developed Sometimes Means Starting From Scratch
Most suppliers look at you, not the company. With that in mind, you’re dealing with suppliers that you do not have credit or rapport with. So, until you have a solid relationship in place, be prepared to have enough financing to get you through the initial period.

Call in the Hardy Boys.
When going over the books, try to get 3 years of data. Aside from making sure all the columns and rows add up nicely, this will give you other information like how long accounts stay in receivables and how long you can expect to wait before income starts to flow. A closer look can also tell you where the seller allocates their costs. If they put more into overhead than margin, the company looks better than what it actually is.

Don’t be a hero.
This isn’t really a tip because I really hope that everyone knows this, but don’t go at it alone. I’m not going to tell you what to do, but enlist in the help of a professional lawyer and accountant. Ok, so maybe I told you what to do, but if you don’t consult someone who really knows what they’re doing…..I will fight you.

Buying a business can be an arduous task and a lot of work will go into it, but with a little help and a keen eye, it doesn’t have to be an overwhelming process. Has anyone else out there gone through the process of buying a business that would like to share their experiences?

A special thanks to Michael for all the information that I wouldn’t have even considered. The Exchange Group can be found at www.EXG.ca. I recommend that you consult with someone that is familiar with laws in your geographical area as many areas have different laws.