Buying an existing business can be an alternative to starting a company from scratch. Instead of building a customer base, finding suppliers and developing operations from zero, a buyer may acquire an established business with existing customers, equipment, employees, systems and revenue. But buying a business requires careful research. Here is a step-by-step guide to buying a business in Canada.
Step 1: Decide What Type of Business You Want to Buy
Start by identifying the type of business that matches your budget, experience and goals. Popular categories include:
- Restaurants
- Cafés
- Convenience stores
- Gas stations
- Retail stores
- Automotive businesses
- Construction companies
- Service businesses
- Manufacturing businesses
- Franchises
- Professional services
- Commercial properties
- Mixed-use properties
You should also decide whether you want an owner-operated business or an investment that can be managed by employees.
Step 2: Determine Your Budget
Your purchase budget should include more than the asking price. You may also need money for:
- Deposit
- Inventory
- Working capital
- Legal fees
- Accounting fees
- Financing costs
- Lease deposits
- Renovations
- Equipment
- Franchise fees
- Closing costs
A buyer should avoid using the entire available budget for the purchase price and leaving nothing for working capital.
Step 3: Search for Businesses for Sale
Use business-for-sale marketplaces, commercial real estate websites, business brokers and professional networks to identify opportunities. When comparing listings, look beyond the asking price. Consider:
Revenue + Profit + Location + Lease + Assets + Growth Potential + Risk
A lower-priced business is not automatically a better investment.
Step 4: Review the Financials
Financial performance is one of the most important parts of buying a business. Ask for appropriate financial documentation and review:
- Revenue
- Gross profit
- Operating expenses
- Net income
- Owner compensation
- Cash flow
- Tax returns
- Debt
- Inventory
- Capital expenditures
Do not evaluate a business solely on sales. A business generating $1 million in annual sales may be less attractive than a business generating $600,000 with significantly stronger profitability.
Step 5: Understand the Lease
For a leased business, the lease can be just as important as the business itself. Review:
- Current rent
- Additional rent/TMI
- Remaining term
- Renewal options
- Assignment provisions
- Personal guarantees
- Permitted use
- Rent increases
- Landlord consent requirements
A profitable business can become a difficult investment if the lease is unsuitable.
Step 6: Inspect Equipment and Assets
If equipment is included, create a detailed list. Check age, condition, ownership, financing, maintenance, replacement cost and existing liens. Make sure you understand exactly what is included in the purchase price.
Step 7: Conduct Due Diligence
Due diligence means verifying the information provided by the seller. This can involve financial, legal, operational and physical reviews — checking financial records, contracts, licences, liabilities, employees, real estate, leases and physical assets before completing a transaction.
Step 8: Determine the Business Value
A business should be evaluated based on its financial performance, assets, market conditions and comparable businesses. There is no single valuation method that works for every business — a restaurant, manufacturing company and professional service business may have very different valuation considerations.
Step 9: Make an Offer
An offer can include more than the purchase price. Important terms can include purchase price, deposit, financing condition, due-diligence condition, lease assignment, inventory, equipment, closing date, training, non-compete provisions and asset or share purchase structure.
Step 10: Arrange Financing
Depending on the transaction, buyers may consider bank financing, conventional lending, seller financing, personal funds or other financing structures. Speak with a qualified lender before making assumptions about how much you can borrow.
Step 11: Complete the Transaction
After conditions are satisfied, lawyers prepare and finalize the necessary agreements and the transaction closes.
Find a Business for Sale in Canada
SellBusiness.ca helps buyers search for businesses and commercial properties for sale across Canada. Whether you are looking for a restaurant, franchise, convenience store, retail business, service company or commercial property, start your search on SellBusiness.ca.