What is flipping?
Flipping is the term that describes purchasing an asset and quickly reselling it or 'flipping' it to make a profit. Vintage or refurbished furniture, cars, motorbikes, jewelry and phones are the best items to flip for money and are very popular with ‘flippers’.
Anyone who has seen 'Hoarder House' knows about 'house flipping' and has probably thought, "I can do that!" While flipping houses can be lucrative, beware of the tax implications after the federal government introduced the new Residential Property Flipping Rule making flipping houses a contentious issue in Canada.
If you've ever wondered how to flip money, let me introduce you to another lucrative idea - flipping businesses. The underlying principle is the same, i.e. buying at a low price, fixing it, and selling at a higher price for significant profits.
Why flipping businesses beats founding
If you have entrepreneurial ambitions, flipping a business is much easier than starting from square one. Or if you have just sold a business and know a few tricks of the trade, you could easily replicate the process and turn a failing enterprise around for even higher profits.
Close to 60% of small and medium-sized businesses owners in Canada are aged 50 or older, and about 75% of business owners plan to pass the torch within the next decade. Current Canadian tax rules stipulate that entrepreneurs have to pay more taxes if they sell their business to a family member than were they to sell to a third party. 48% of business owners say they wouldn’t recommend that their children go into business for themselves.
With so many baby boomers heading to retirement, and the question looming on who will fill their shoes, the coming years will be a good time to buy a business in Canada.
The advantages of buying a baby boomer business are an established and loyal customer base, brand legacy, an experienced workforce, and the fact it is considerably easier to secure financing to buy an existing business than to start one. Many of these businesses could have been in the family for years and are the work of someone's lifelong devotion and love. Their reasons for selling could be retirement, relocation, changes in lifestyle, poor health or any other personal reasons.
The potential for a profitable flip lies in the synergy between the old and the opportunity to modernize, innovate, introduce new technologies, and even expand into newer markets, transforming the business, priming it for growth and making it attractive to prospective buyers.
While the millennial idea of entrepreneurship is tech companies or online businesses, baby boomer businesses like restaurants, electrical, cleaning or plumbing businesses, auto shops and local retail stores are the ones that have a huge gap for modernization and innovation, hence profitable ideas for business flipping.
Distressed businesses are prime for flipping
The secret to making a neat profit from flipping is finding distressed businesses, fixing them, improving their valuation, and selling them at a higher price. A distressed business is a business that cannot pay its creditors, has insufficient cash flow, declining revenues and operational inefficiencies.
While traditional investors would shy away from such businesses, self-made billionaire Warren Buffet's advice is to "buy when there's blood in the streets." Astute entrepreneurs recognize the potential for significant profitability by implementing strategic changes that can turn a distressed business around and make it attractive to investors.
Where can I find distressed businesses for sale?
An online marketplace is an excellent platform to find businesses for sale in Canada. These platforms are a convenient way to connect directly with sellers, and you can filter listings by location, industry, asking price, turnover, revenue, etc.
Bank websites, bankruptcy auctions, government websites, local newspapers, real estate brokers and mergers and acquisitions websites are a few other places where you can scour for failing companies.
Four questions to ask before pursuing a distressed business
Is the valuation low enough?
The most attractive element of buying distressed businesses is their asking price. You shouldn't even consider purchasing if the company does not have a low enough valuation.
Our free valuation tool, ValueRight, will help you calculate a realistic business valuation if you have at least one year of financial details of the business you wish to buy.
Do I have the expertize?
If you want to flip a business for a significant profit, you must understand the business fundamentals of the industry and have subject matter expertize. The previous business owners presumably had a reasonable understanding of their industry yet failed to succeed. Successful business flips require expert operational restructuring, financial engineering, and strategic planning. If you do not have this expertize, you might as well throw money down the drain.
What do I bring to the table?
A great idea will not alone save the distressed business, but your astuteness to identify and address the problems that caused the current state of distress will. What skills do you have that will help you to turn the failing business around? What will you do differently than the previous owners? Do you have resources they lacked, innovative business systems or knowledge of technology and automation to transform processes and enhance customer experiences?
What is the growth potential?
The bottom line of flipping a business is to sell it quickly and profitably. The most important question you must ask yourself is if you can realistically turn the company around and increase the cash flow in a year or two. An unbiased assessment of your industry expertize and skills will help you answer this question honestly.
Three main methods for business valuation
One key aspect of business flipping is being able to sort out the overvalued businesses from the undervalued ones. An accurate valuation can give you the tools you need at the negotiation table, and the reassurance that you're making a sound investment.
An easy way to do this is to use BusinessesForSale.com's free ValueRight tool. This can provide you with a quick, accurate and free valuation for any business.
Ask the seller for their financial records, and use this information to complete a valuation through the online portal. You can regularly update this information to see how the value of your company is growing or falling over time, too - such as when you want to sell the business and complete your flip.
So what are the three main methods of valuing a business?
Seller's discretionary earnings (SDE)
SDE is the most common valuation for small and medium-sized businesses. It includes the profit before tax and interest of a business before the owner’s benefits, non-cash expenses, extraordinary one-time investments, and other non-related business incomes and expenses.
SDE is also the method that BusinessesForSale’s ValueRight tool uses.
Discounted cash flow (DCF)
A discounted cash flow valuation determines if an investment is worthwhile in the long run by looking at a business's projected cash flow.
The discount rate is usually the weighted average cost of capital (WACC). The WACC incorporates the average rate of return that shareholders in the firm expect for the given year.
EBITDA
EBITDA, an acronym for Earnings Before Interest, Taxes, Depreciation and Amortisation, is a widely used measure of corporate profitability. This valuation method shows the business's profit before subtracting the interest payable for debt incurred, the taxes applicable, the depreciation for impairment and the amortization of the investments made. A multiplier – which changes depending on the industry – is then applied to the business's most recent EBITDA.
Due diligence before buying a distressed business
While you can perform the due diligence yourself, we recommend engaging a professional team of experts, like your accountant, financial and business advisor, lawyer, and broker, to assist you in evaluating the debt load and assessing the risk of buying the distressed company.
You will need the following documentation to get a 360-degree overview of the business:
Financial records
- banking information
- income statement
- balance sheet
- proof of cash
- annual reports for the last three years
Corporate data
- an executive summary of the business
- organizational charts
- addresses of all offices, branches, warehouses and properties owned or leased by the business
Legal documents
- all licenses, permits and agreements
- tax registration documents
- power of attorney documents
- previous or outstanding legal cases
Human resource information
- a list of current employees, contractors, and freelance resources.
- pay scales and salary structures for all employees, contractors, and freelance resources.
- professional resumes of key employees
- annual leave, parental leave, paid leave, unpaid leave, and overtime policies
Marketing reports
- marketing and sales strategies
- proof of success of previous strategies
- sales reports
- list of top 50 customers and revenue generated from each for the past 3 financial years
- list of all channel partners
- list of all suppliers and distributors
Strategies for flipping businesses
Know your finances
Before you make an offer, understand your financial capabilities, risk appetite and tolerance, and options to secure financing for the purchase. Often when it comes to buying distressed businesses, you will have to move very quickly, therefore, it’s worth preparing proof of funding documents in advance.
Have an exit plan
In a fix-and-flip situation, an exit strategy is your goal line. Consider the time frame you intend to hold on to the business before unloading it, the ROI you expect and the nature of your financing while planning your exit strategy.
Acquire your target business
Once you've completed the due diligence and secured funds for the purchase, sign the dotted line. There are various ways you can structure your payment agreement. You could structure periodic payments or earnouts to the seller upon reaching pre-set revenue targets. However, an upfront full payment could result in a lower buying price.
Have fun flipping
Now that you own the business, have fun with it. Seasoned business flippers enjoy the adrenaline rush of tackling a challenge head-on.
Successful business flipping requires innovative solutions, cost optimization and effective resource management. Implementing leaner and more agile operational frameworks will be the driving force behind the turnaround. Get creative!
Track your progress
Create a project plan, set SMART goals and realistic KPIs, and communicate effectively with all stakeholders to ensure everyone is moving in the same direction. Keep an over-mindful eye on the causes of previous failures in the distressed business to ensure the same inefficiencies are not created.
Time to unload
Once all the hard work is complete and you have established a sustainable revenue stream and growth projections, it's time to list your revamped business for sale. You can list on the same online marketplace you purchased the business.
Celebrate your success
The best part about flipping businesses is seeing your hard work pay off. The thrill of turning around a failing company is unparalleled. Celebrate your accomplishments and revel in the confidence of achieving success before you set your eyes on your next flip project. What can we say - flipping businesses is addictive!
Get flipping
Your first time flipping a business will probably take longer than anticipated. However, after you've done it a couple of times, you will become increasingly familiar with the process and eventually find yourself flipping businesses for the sheer joy of accomplishment.