10 Questions To Ask When Buying a Business—Do Your Homework!

Published in Nanaimo Magazine - December 2010 Issue

Buying a business is an arduous, yet rewarding process, and can take weeks or months. Because buying a business will involve investing a fair amount of money and time, it is critical to do your homework when gathering information about the business. This process is commonly referred to as due diligence.  It helps the buyer discover information such as whether the purchase price of the business is too high; the type and condition of the business being bought; bad financial situations if they exist, and contingent liabilities. There are so many questions to ask when considering the purchase of an existing business. In fact, there is not enough room on this page to list them. But let us give you a few examples that relate to financial, marketing, ownership and operations: 

1. Ask why is the seller selling—and verify the answer.

2. Ask to review the certified financial statements of income, cash flow and balance sheets for the last three years. If you borrow from a bank to pur- chase the venture, the bank will want to see them.  Recent audits and projections should also be reviewed.

3. Ask  to see the company’s Tax Returns (not the owner’s personal) for the last three years.

4. Ask for a copy of all documents of all outstanding indebtedness like notes payable, accounts payable, real estate and equipment leases.

5. Ask if the seller is willing to stay around for awhile after the sale to help with transition.  If so, have you discussed some compensation for his/her services during that transition period?

6. Ask if there has been any significant turnover of employees. If so, why? Ask to see employment agreements and organizational charts.

7. Ask about the quality of customer relations at the company. Review customer lists if possible.

8. Ask about the relationship between the company and its vendors. Do vendors display preferred, regular or irregular relations with the company?

9. Ask to review key contracts.  Also ask to see any litigation-related documents.

10. Ask for information about patents, copyrights and other intellectual property-related documents.

If you are contemplating small business ownership, feel free to give the Sunbelt Nanaimo office a call at 1-877-289-0969 or visit the website at www.bcbusinessbroker.ca or www.sunbeltnetwork.com/vancouverisland - we can help you find a reliable business that suits your background.  We are Certified Business Intermediaries with special training to help our clients analyze business opportunities and assess future probability of success.  President of Sunbelt Business Brokers, Michael Naprawa, is the Director of Education for the Canadian Chapter of IBBA (International Business Brokers Association), an organization that creates business standards and a code of ethics; and creates training and professional designations for Canadian Business Intermediaries.  Feel free to contact our Nanaimo office with your questions or comments.

View the article and check out Nanaimo Magazine here

Help! What Is My Business Really Worth?

Published in Nanaimo Magazine September 2010 Issue.

To view the published article: http://www.downtownmagazine.ca/nanaimo/nanaimomag.php

Popular approaches often used to value a business are Income, Asset, and Market methodologies. There are five different Income methodologies, in each case businesses are valued based on company earnings. Buyers’ main concern is the true or absolute income of the company. The net ordinary income, reported on the profit and loss statements for tax purposes, does not depict the true earnings of the company based on non-cash, discretionary, & non-recurring items expensed by the owner.  Reported earnings are usually intentionally kept low to manage taxes. Therefore, to determine the true earning capacity of a business, the profit & loss statements must be re-cast during the valuation process. The business value is then calculated by applying a multiple, consistent with the industry and a weighting of the factors affecting the business, to the SDE or adjusted EBITDA.

Seller’s Discretionary Earnings (SDE) is generally utilized for businesses under $1 million in earnings. Typically, these businesses are owner-operated, the owner receiving a salary through the company.  It is important to determine the ‘owner benefit’ as opposed to the ‘earnings’ of the business. Add-backs or normalizations are applied to the pre-tax business earnings and expenses to adjusted fair market value.

Earnings Before Interest Taxes Depreciation Amortization (EBITDA) is generally utilized by larger companies with income in excess of $1 million to define the earnings of the company.  In most cases, the owner/investor does not actively direct the company operations and pays a general manager to perform that function.  Therefore, the EBITDA calculation differs from SDE as it includes the manager’s compensation in the earnings calculation as an expense.  EBITDA is a good measure of core profit trends because it eliminates some of the extraneous factors and allows a more "apples-to-apples" comparison.  However, EBITDA should not replace the measure of cash flow, which includes the significant factor of changes in working capital. 

These methodologies all use historical data and do not account for the current cycle or health of the industry in the current economy, nor do they account for the condition of the geographical area the company services. These two factors are the other important considerations in each valuation analysis provided by BC Business Brokers. To develop a full picture of the health of any given firm, a multitude of measures must be taken into consideration.

BC Business Brokers receive in-depth training in the 12 common accounting methodologies of Business Valuation through the IBBA University (International Business Brokers Association), have prior business ownership experience, and are provincially licensed and regulated.  If you are contemplating the sale of your business, or may be considering small business ownership, feel free to contact the Sunbelt Nanaimo office – we can help you.  Visit our local website at www.bcbusinessbroker.ca or www.sunbeltnetwork.com/vancouverisland or phone 1-877-289-0969.

Sunbelt Bridges Connection for Entrepreneur

Finding the perfect business– or securing a qualified buyer for your business is all about having the right connections, maintaining relationships and providing synergistic ownership strategies.  Effective business brokers, sometimes referred to as business intermediaries, can do just that.  Sunbelt Business Brokers in Nanaimo serves buyers and sellers throughout Vancouver Island and interior BC, and most recently, has represented a publicly traded company in the sale of a Richmond-based meat producer. 
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