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Frequently Asked Questions
Q:
How much is my business worth?
Q:
How do I calculate "positive cash flow"?
Q:
What about employees?
Q:
How do I know for sure that the business makes money?
Q:
What is "Due diligence"?
Q:
How do I know that the business I am buying is free and clear of any and all encumbrances?
Q:
How much bank financing will I be able to Secure?
Q:
How much inventory will I be required to buy as a part of the purchase?
Q:
What is "Agency Relationship"?
Q:
How will I know how much profit the business generates?
Q:
What is an "Earn-out"?
Q:
How long does it take to find an appropriate business?
Q:
Do I need to use a lawyer? An accountant?
Q:
If I want to make an offer to buy a business, who prepares the offer?
Q:
What is the difference between an "Asset sale" and a "Share sale"?
Q:
What is the biggest mistake made by small business?
Q:
Then how much capital is enough?
Q:
How much can I afford?
Q:
What is the best advice available?
Q:
What is a "Good faith deposit"?
Q:
When does my good faith deposit become non-refundable?
Q:
How much training can I expect from the seller?
Q:
What should I look for regarding the business premises?
Q:
What is a demolition clause?
Q:
What is "Potential" really worth?
Q:
What is "Work-in-progress"?
Q:
What sectors are "Hot" these days?
Q:
I sometimes hear the term "The closing". What does it mean?
Q:
What happens to the Accounts Receivable and the Accounts Payable?
Q:
What about phone numbers, fax numbers, web sites, and email addresses?
Q:
What about the business license?
Q:
What about liquor licenses?
Q:
What about health permits?
Q: How
much is my business worth?
A: Ultimately a business is only
worth what the market will pay. This will be dependent upon a
number of factors:
- How much are the assets of the business worth?
- How much positive cash flow does the business generate?
- How stable is the goodwill of the business?
- What opportunities are there to expand the business?
- How stable is the workforce?
- Does the business have security of premises?
- How dependent is the goodwill upon the current owner?
In summary, valuing a business is multi-faceted, and no set formula works for all.
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Q: How
do I calculate "positive cash flow"?
A: This is loosely defined
as the total amount of discretionary dollars that are available to
the business owner after paying all expenses that are incurred in
the normal course of business. Their precise allocation is not
critical. For small businesses, it is the sum of:
- the owner's salary (via T4)
- the pretax profit of the business
- any depreciation of assets taken during the period
- all interest charges any other items that are
non-essential to the business such as vehicle leases or meals &
entertainment.
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Q: What
about employees?
A: Typically, employees want to
retain their jobs with the business, and are generally just as
concerned about losing their jobs as the buyer is concerned about
retaining them as valued employees.
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Q: How
do I know for sure that the business makes money?
A: This is where you would bring in
your accounting people and have them verify to your satisfaction,
that the business performs as the seller has indicated.
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Q: What
is "Due diligence"?
A: It is generally the period
immediately following the acceptance by both the buyer and the
seller of an agreement of purchase and sale for the business, during
which the buyer satisfies such subject conditions as lease
arrangements for the business premises, performs accounting reviews
of the books and records, verifies proper licensing and permits for
the business, and arranges any financing required.
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Q: How
do I know that the business I am buying is free and clear of any and
all encumbrances?
A: Under the laws of British
Columbia, all security must be registered with the province to be
enforceable. Your solicitor will check this provincial registry and
any charges against the business will be removed before any sale
proceeds are released.
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Q: How
much bank financing will I be able to secure?
A: Canadian commercial banks are
traditionally hesitant to lend funds for the purchase of a small business
unless those funds are secured by assets sufficient to safeguard the
amount of the loan.
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Q: How
much inventory will I be required to buy as a part of the
purchase?
A: This is always negotiated as
part of the contract to purchase the business. As Martha would say,
"No surprises is a good thing".
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Q: What
is "Agency Relationship"?
A: Under the Real Estate Act of
British Columbia, a realtor is required by law to discuss and define
the realtor's relationship with both the buyer and the seller.
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Q: How
will I know how much profit the business generates?
A: Under the Real Estate Act of
British Columbia, by law the seller's agent must provide the buyer
with full financial disclosure of the past performance of the
business.
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Q: What
is an "Earn-out"?
A: This the term used when a
portion of the purchase price is determined by the future
performance of the business. It provides the buyer with an assurance
that if the business does not do well, he pays less than he might
have. It provides the seller with a higher selling price if the
business performs better.
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Q: How
long does it take to find an appropriate business?
A: 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 advise is to be patient as well as diligent in your search.
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Q: Do
I need to use a lawyer? An accountant?
A: It is strongly advised that both
the buyer and the seller make use of appropriate professionals.
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Q: If
I want to make an offer to buy a business, who prepares the offer?
A: The Real Estate Board of Greater
Vancouver (REBGV) has prepared a standard contract for the purchase
of business assets and it is available to all members of the board.
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Q: What
is the difference between an "Asset sale" and a
"Share sale"?
A: The answer to this question
revolves around businesses that are owned and operated from within a
limited company. If the assets of the business are what is being
sold directly, this is referred to as an asset sale, and the seller
is actually the limited company. In a situation where the shares of
the limited company are what is actually sold (and thereby
indirectly the business assets), this is referred to as a share
sale.
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Q: What
is the biggest mistake made by small business?
A: LACK OF CAPITAL!!! Be sure that
you are well financed. Nothing is worse than running out of cash and
credit just when you need it most.
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Q: Then
how much capital is enough?
A: Be sure that you have sufficient
capital for the following:
- Acquiring the business (this one is easy)
- Acquisition costs (rent deposits, legal, PST, property tax adjustments...)
- Working capital (inventory , accounts receivable)
- Contingency funds (in case there is a surprise)
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Q: How
much can I afford?
A: How much cash do you have?
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Q: What
is the best advice available?
A: Hope for the best. Plan for the worst.
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Q: What
is a "Good faith deposit"?
A: It is the deposit that
accompanies the initial offer and is a sign of the sincerity of the
prospective buyer. As this initial offer is almost always subject to
certain conditions being satisfied, this initial deposit is refundable
to the buyer until such time as all subject conditions outlined in
the offer have been satisfied and removed.
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Q: When
does my good faith deposit become non-refundable?
A: Generally once all subject
conditions have been satisfied and removed.
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Q: How
much training can I expect from the seller?
A: This will depend upon the nature
of the business, but typically for small businesses, it is for 2 - 4
weeks and without further compensation to the seller. Larger
enterprises may have much longer seller participation and will offer
compensation to the seller.
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Q: What
should I look for regarding the business premises?
A: This will depend upon the exact
nature of the business, but typically the buyer will want to be
assured that the business can continue to occupy the premises for a
period of time acceptable to the buyer.
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Q: What
is a demolition clause?
A: Some landlords like to have the
option of terminating a lease for the purposes of demolishing the
building and rebuilding on the site. Typically, a business will be
given 6 - 12 months notice to vacate the premises. This can be
devastating to a small business, and care should be taken to
ascertain if such a clause is in the lease.
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Q: What
is "Potential" really worth?
A: Sellers generally would like to
have buyers pay for the "potential" of a business. The
reality is that buyers will buy a business because of perceived
potential, but they will be very reluctant to pay for it. The
argument being that if it is really there, then the seller should
demonstrate it first, then the buyer will pay for it. So potential
is "good", but it is generally only a motivator.
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Q: What
is "Work-in-progress"?
A: Think in terms of a
manufacturer. His inventory will consist of "raw material"
and "finished goods". However, there will be product that
may be part way from raw to finished, and is therefore
work-in-progress. The precise valuation of any work-in-progress will
be mutually agreed upon as part of any offer to sell the business.
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Q: What
sectors are "Hot" these days.
A: Anything that makes money.
Profitable businesses that are well established are always in
demand.
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Q: I
sometimes hear the term "The closing". What does it
mean?
A: "The closing" is the
term given to the actual transfer of the ownership of the business. It's when the buyer gets the keys and the seller gets
the cash.
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Q: What
happens to the Accounts Receivable and the Accounts Payable?
A: Typically, for small businesses,
the seller collects the a/r's, and pays the a/p's. A variation on
this is for the buyer to assume both, and the price is adjusted to
reflect these assumptions. For larger businesses, they are generally
considered a part of the business with the seller guaranteeing that
the receivables are collectable.
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Q: What
about phone numbers, fax numbers, web sites, and email addresses?
A: If they are used in conjunction
with the business, then they are considered to be part of the assets
of the business, and are included in the sale.
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Q: What
about the business license?
A: If the transaction is an asset
sale, then the business license is generally transferred to the
buyer as a part of the closing.
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Q: What
about liquor licenses?
A: These licenses cannot be
transferred and the buyer will need to apply for a new one.
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Q: What
about health permits?
A: In British Columbia, all
premises where food is prepared must have a valid health permit.
These are provided after an inspection by the local health
inspector.
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This Article is copyright © 2005 by www.vanbiz.com
"Vancouver's meeting place for Business Buyers and Sellers"
Jim Clark, ReMax Real Estate Services, Vancouver, BC
Tel: 604-263-2823 Email:
jimclark@vanbiz.com
Website:
www.vanbiz.com
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