Buying or selling a business is a complex process. Contrary to popular belief, it’s very different from buying or selling a house. Charles Osuji of Osuji & Smith Lawyers in Calgary likes to take some of the complexity out of the business buying and selling process. Here, he keeps it simple and tells us everything you need to know about buying or selling a business in Calgary.
How to Find the Best Business to Buy in Calgary
Before you shop around for a business to buy in Calgary, consider:
- Business Type – What type of business are you interested in? What industry are you passionate about?
- Objectives – How much are you willing or able to pay? In what location do you want your business? Do you have the skills or experience required to run the business?
- Franchise vs Independent Business – There are pros and cons to both types of business.
- Asset Purchases vs Share Purchases – If you’re buying an independent business, there are legal and accounting implications of the type of purchase you choose.
Searching online for Calgary businesses for sale can help you find what you’re looking for, but most business sales are not advertised. Finding the right business for you to purchase requires patience and connections. Work with a business broker or mergers and acquisitions advisor, and network with people in the industry.
How Much Should You Pay for a Business in Calgary?
Up to 90% of businesses listed for sale never sell largely because they’re overpriced, according to the International Business Brokers Association. So how can you tell if a business is listed at a fair price?
There are many factors that go into a business valuation, and there are different methods used to determine business value, such as
- Historical Earnings – Estimated earnings based on historical data
- Future Earnings – Predicted future earnings or cash flow, discounted by capitalization rate
- Market Value – Similar to the method used by real estate agents who compare similar homes to determine a competitive price
- Purchase Terms – The terms of the sale could affect the purchase price (e.g. a cash deal might lower the price)
- Due Diligence – Legal or financial issues that arise during due diligence could reveal risk factors that would affect the valuation
Ultimately, the business valuation can be whatever the buyer and seller agree to, but it’s best to get an accountant, business valuation specialist, or experienced lawyer to help.
Financing a Business Purchase in Calgary
Few business buyers are prepared to purchase a business without financing. Simplify your business search by determining what kind of financing you can secure.
There are 2 main types of financing for buying a business in Calgary:
- Vendor Financing – The seller is the lender and allows the buyer to pay for the business over time (including interest and other terms and fees detailed in the purchase agreement).
- Lender Financing – A loan from a bank or other lending institution (or even the Government of Canada’s Small Business Financing Program).
Some business buyers use a combination of both vendor financing and lender financing.
How to Protect Yourself When Buying a Business
The only way to protect yourself when buying a business is due diligence. This is an investigative process that happens after the seller accepts your offer or letter of intent. The purpose of due diligence is to reduce risk and confirm the accuracy of the business valuation.
Know the Nature & Value of the Business
Review the financials of the business, including the balance sheet, statement of receivables, payment history, assets, legal status, and inventory. Get a clear picture of the financial obligations of the business, such as debt, encumbrances, and corporate taxes.
It’s not necessarily a bad idea to purchase a business that’s struggling financially. Sometimes a buyer has the vision and expertise required to grow the business into a profitable investment.
Understand the Business Operations
How will you run the business? What are the existing contracts with suppliers and customers? What are your obligations to the seller or the staff? Do you need to enter into new contracts? Are you required to complete testing or get permits to operate the business?
Taking over business operations is a complicated process. A smooth transition demands that you take the time to plan these details and understand what’s involved from beginning to end.
Fulfill Obligations to Employees
Check employee records and understand what is owed to each one. You may choose to keep the employees on because they’re already trained and know how the business operates. This can be a substantial liability, however, so review your options with a lawyer.
Confirm the Business Location
Are you able to keep operating the business from the existing location? If the building is leased, review the agreement to make sure you can take over the lease. If the building is owned by the business, due diligence is required before you purchase the business.
If you plan to move the business to a new location, choose wisely! Location has a significant impact on the success of any business.
How to Prepare to Sell Your Business
It’s a good idea for any business to have a succession plan or exit strategy. This can actually add to the value of your business when you decide to sell. It facilitates a smooth transition to the new ownership.
Preparation for the sale of your business includes:
- Financial Records – Prepare clear documentation that shows the financial history of your business and shows profitability and performance projections. Have your financial statements reviewed or audited by an accountant.
- Legal Documents – Ensure your corporate legal documentation is current, including shareholder agreements, leases, employment contracts, and other agreements.
- Role Succession – If your business is too dependent on you, it will be difficult to transfer ownership. Transfer responsibility and contacts to other members of your team who can carry on business operations and management after the sale.
- Buyer’s Due Diligence – You can expect the potential buyer to carry out due diligence, so be proactive and anticipate what that might look like and how you can get ready for it in advance.
Whether you choose to sell on your own or hire a broker, selling a business is a complex process. It is highly recommended to enlist the services of a qualified lawyer to ensure a successful transaction.
What is a lawyer’s role in buying or selling a business?
To ensure a successful business purchase or sale, it’s best to enlist the services of professionals (e.g. financial advisors, business brokers, lawyers, and mergers and acquisitions advisors).
A qualified business lawyer will help you organize the sale and transfer of the business. Their corporate legal knowledge helps you identify risk factors and avoid them when possible. Part of the business sale and acquisition process involves drafting and reviewing essential documents, such as
- Letter of Intent or Offer to Purchase
- Business purchase or sale agreement
- Partnership agreements
- Joint venture agreements
- Franchise agreements
- Shareholders agreements
- Asset purchase and sale agreements
- Service agreements
A business sale agreement is not the same as a basic real estate agreement, and online forms don’t always recognize location-specific laws. Because of this, involving a business lawyer is crucial to protecting yourself in a business acquisition.
Osuji & Smith: Legal Services for Buying or Selling a Business in Calgary
The business and corporate lawyers at Osuji & Smith are recognized in the Top 3 Best-Rated business lawyers in Calgary. Their expertise can save you stress and money in the buying or selling of a business. It’s their job to help you make sound decisions for you and your business, and it’s their goal to see your company thrive.