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Small Business Tips

What You Need to Know About Buying a Small Business in Canada

Victoria Morrison
Female hair stylist and customer talking, planning in hair salon

Buying a business can be quicker than starting a business from the ground up. But you have to make sure you buy a business you can manage, and that you don't overpay for it.  If you're looking to buy a business, keep in mind that certain business opportunities can be misleading. For this reason, it's important to do your due diligence before you buy. Read up on your industry and consult a business broker before you write any checks.

Should you buy a franchise or independent business?

Consider the two main categories of businesses: franchises and independent businesses. Each category has its pros and cons.  Pros of buying a franchise:

  • Franchises tend to be businesses with a proven track record. The concept is proven, which means there is less risk involved. Franchises can also be easier to sell
  • The brand is already recognized by customers, so you won't need to work on developing brand awareness as much
  • Being under the wing of a parent company means you won't have to spend any time figuring out minor details. This could include things like employee uniforms, advertising, or drafting company policies. In the event of an issue with staff or slow sales, you may also be able to turn to other local franchisees for support.

Cons of buying a franchise:

  • You will have less control over your operations
  • You will have to pay a percentage of sales to the parent company, which means lower profits.

Pros of buying an independent business:

  • You will have more control over how the company is run, and you can set your own rules, make your own design choices, etc.
  • Since the business is 100 percent your own, you won't have to contribute any profits to a parent company
  • You may decide to purchase a business that's not doing well but has potential. If you manage to turn things around, you will reap the rewards of your hard labour, which will be rewarding.

Cons of buying an independent business:

  • Running an independent business means more responsibility
  • The success or failure of your company is entirely on your shoulders, and that can be stressful
  • If you are tasked with building a brand from scratch or revamping a tarnished brand, buying an independent business can be higher risk than buying a franchise.

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What questions should you ask when buying a small business?

So you've found a business you want to purchase, and now you want to know if buying it is a good idea. The first thing you should consider is the price of the business. To find out if a business's price is fair, you will need to consider the following aspects, which can help you to determine the value of the business you want to buy.

Where is the business located, and in what condition are the facilities?

For example, if you are investing in a restaurant or retail space, does the area get a lot of foot traffic? Is there parking? Will you need to make significant renovations to the interior?  Similarly, if you are investing in office space, what kind of investment will you need to make? More specifically, is the space in need of renovation? A turnkey business that is ready to operate right away will be worth more than a business that needs work.  Finally, if you are planning on shipping or delivering goods to your customers, how easily can you do this from where the company is located? All of these aspects will affect the value of a business.

If the business is online, what is the website like? Is it designed well? Is it secure?

Good web design and web development services can cost thousands of dollars to implement. If you don't need to do anything to keep the business operational, that's a major asset for the business. If you are thinking of buying an online business that needs work in terms of design or on the back end, you will need a good resource who can help you with your technology needs.

What kind of reputation does the business have?

The company will be worth more to you if people already have positive associations with it. You can easily find out what customers think of the business by looking up reviews on Google and Facebook. Even if these reviews are generally positive, it's a good idea to interview a few customers in person to see what they think of the company, since online reviews aren't always reliable.  If the company has a lot of negative reviews, that will harm the value of the business. You will have more work to do since you will need to work to regain the trust of your potential customers. You might also have to invest more money into rebranding the business and advertising the change in ownership.

What are sales like?

One advantage of buying an existing business is, you will have a clear idea of how much money you can make based on the previous owner's sales. This makes the venture less risky from the get-go.  Ask to see proof of revenue, based on net sales. In other words, if a business makes $100K a year in sales but the business costs $110K a year to run, it's not profitable. From this perspective, high sales don't always mean profit.  You should also ask to see a proof of sales for previous years to see if sales are increasing, decreasing, or holding steady. Weak sales aren't necessarily a deal breaker if you think you can turn things around. However, they will affect the value of the business.

What is the business's relationship with its suppliers like?

A business that has stable vendors that deliver high-quality goods on time for a good price is worth more to you than vendors that are unreliable and overpriced. If you are going to be dealing with the same vendors, you want to make sure transactions will be smooth. If a company's suppliers aren't reliable, that may be a sign that you will need to put some time and effort into finding different vendors.

Buying assets vs. buying the business itself

In most cases, when you buy an existing business, you pay a set amount for the entire business. This includes all land, buildings, inventory, and accounts receivable tied to the business's operation. That being said, you can also make arrangements to buy the business's assets only.  Why would you do this? Because buying an existing business is risky! In fact, if the seller owes money or is being sued by someone, you can protect yourself by forming a separate company and only purchasing the business assets you want to acquire.  Whichever route you decide to take, you'll want to make sure all individual asset prices are outlined in the sale agreement. These prices should be reasonable to reflect the fair market value (FMV) of each business asset.  If the price you paid for the business is more than the value of its assets, the difference will be considered an amount assigned to goodwill. You can figure out this amount by outlining the value of each business asset as follows:  [table id=21 /]  In the past, amounts assigned to goodwill were classified as capital expenditures in the eyes of the CRA. But, as of January 1, 2017, all property that provides a lasting benefit but that does not physically exist is classified as depreciable property. This means that you can claim any amounts assigned to goodwill on your taxes under Capital Cost Allowance class 14.1 at a rate of 5% per year.  Any land or buildings involved in your purchase will also be eligible for CCA. Conversely, amounts paid for inventory and accounts receivable will fall under annual business expenses.

Do you have to pay GST/HST when you buy an existing small business?

If you buy a business or part of a business and acquire at least 90% of the property that is reasonably necessary for the business, you and the person selling the business might be able to avoid paying GST/HST on the sale. To do this, fill out form GST44, Election Concerning the Acquisition of a Business or Part of a Business. This election is not an option if the seller is a GST/HST registrant but you are not. It is also not an option if you only buy the company's assets; you need to buy more than 90% of the company's property in order to be eligible.  In addition, you must be able to continue to operate the business with the property you purchased under the sale agreement. You also need to file Form GST44 on or before the day your GST/HST return is due for the first reporting period of your new company.  Finally, there is another way you can buy an existing business, and that is by buying a corporation's shares. In most cases, when you buy corporate shares, those purchases are not subject to GST/HST.

How to protect yourself when buying a small business?

As mentioned above, buying a business is risky. This is because it's impossible to guarantee that a business will succeed. In addition, when a company changes hands, that can affect company morale and public perception. Not to mention any liabilities you might have to deal with if the previous owner was cutting corners or didn't have their customers' best interests at heart.  For this reason, it can be a good idea to work with a business broker, who will have the expertise to advise you on your purchase. A good broker will also take care of all of the paperwork involved in a business acquisition transaction, making sure to take care of every little detail so that you don't have to. A good broker can also help you select the right insurance to help protect you further.

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