The business sales process and thrashing out a deal

Skrlac advises buyers to do a fairly thorough self-assessment before buying a business

BFS: How do you negotiate the best price without alienating the vendor?

SS: Buying a business must truly be a win-win scenario. Unlike a real estate deal, a business sale must be done in a way that ensures the seller does not feel they were exploited during negotiations.

This is critical since the seller will likely be training the buyer after the sale and transitioning the business to them.

To successfully negotiate the deal, determine early on what is important to you and what is less important. For example, if the purchase price is a key factor then perhaps you would be willing to compromise on things like the closing date or seller financing terms. Don't get caught up in the heat of the moment.

To successfully negotiate the deal, determine early on what is important to you and what is less important

BFS: What are the most common mistakes buyers make?

SS: Failing to narrow their search and not having a clear sense of how much money they will have to put into a deal. Many buyers simply look for any business as long as it is profitable.

I always advise buyers to do a fairly thorough self-assessment to determine their strengths and weaknesses before they buy something.

Also, buyers need to know how much equity they have and what source of financing would be available to them. For instance, if borrowed funds are coming from a home equity line or credit, RRSP, etc.

They should know early on what options they have. I tell buyers to remember, not only will they need money for the actual purchase but also for working capital once they take the business over.

BFS: How do you convince a vendor you’re a serious buyer?

SS: Be prepared to ask intelligent questions. Serious buyers should go to a meeting armed with questions about the business.

Buyers should be eager to learn ways they can improve and grow the operation. If you’re not prepared and haven’t done your homework then it’s a clear signal that you are not a serious buyer.

BFS: What kind of signals should serve as a warning that you could be dealing with a disingenuous or unreliable vendor?

SS: There are many signals, but a few common ones are a lack of proper financial statements, a ‘cash’ business or a company where there is no clear paper trail.

Other signals may be questionable information found during due diligence, an unwillingness to provide any level of seller financing, or a business where the customer base is tied to the seller personally.

BFS: Why do deals tend to fall apart?

SS: A variety of reasons but some common ones are: a lack of financing, information uncovered during the due diligence process that was not previously disclosed, cold feet on the part of either the buyer or seller, or personality clashes.

BFS: What type of people buy businesses? Do you think their profile differs from those who start them from scratch?

SS: People who buy businesses are usually much more risk-averse than people willing to start their own from scratch, as an existing business is a proven, successful entity. Typical buyers of small businesses are new immigrants to Canada, former business owners or corporate executives looking for a new challenge.

BFS: What other advantages are there of buying a business...

SS: When you buy an existing business there is a significantly lower level of risk, as start-ups have a higher failure rate. Also there is normally existing customer base, vendors, trained employees and brand recognition. After buying a business the existing owner usually stays on for a period of time, to assist in transitioning the sale and training the new owner, which is an advantage over starting up on your own.