Buying a business can be a long and complex process. Knowing the many steps involved can ensure that when it comes time to make the purchase, the process will go smoothly. Understanding what types of businesses you are capable of buying and operating is the first step of the business buying process and a good way to narrow down your search criteria.
Many businesses require a certain level of specialization and while you may be able to hire the right employees to handle the technical aspects, some businesses require a hands-on owner with a specific skill set. For example, you will need an accounting designation to run an accounting practice, or you may need experience in plumbing to manage a plumbing firm. Acknowledging your own skill set and understanding your own limitations will save you time and energy in your search process.
Determining your financial capabilities and credit worthiness is also an important step when it comes to defining your search parameters. Some of the benefits of understanding your financial capabilities include:
- Saving you time by eliminating businesses that are out of your price range
- Allowing you to be more precise when it comes time to make an offer
- Putting you in a better negotiating position
As a rule of thumb, most banks require 30-50% of the value of the business as a cash down payment before they will consider financing your endeavour. Make sure you understand your own financial limitations. While a seller may finance a portion of the business, it is best to estimate your financial capabilities conservatively to avoid financing problems in the closing stage of the process. It is also important to factor in other costs associated with the purchase of the business. Some typical costs to consider when determining your budget include:
- Legal fees
- Accounting fees
- PST on assets purchased
- Land transfer fees (if real estate is included)
- Working capital (if not included)
- Loan application fees
Once you have determined your skill set and financial capabilities, it is important to determine what you want in a business. Ask yourself some basic questions in order to get a better idea of the type of business that is right for you:
- What do you enjoy?
- What are you passionate about?
- What are your strengths — operations, sales, supervision?
- What are your weaknesses?
- Are you an introvert or an extrovert?
- What is your background and experience?
- What do your past successes include?
- Where have you failed?
- Do you want employees? if so, how many?
- How much do you want to make from your business?
- Do you want to work 40 hours per week? more? less?
- Does location matter to you? Are you willing to relocate?
Asking yourself all these questions and thinking through them honestly with your family will help you determine what type of business is right for you and eliminate those that aren’t.
Thinking about buying a business? Download our FREE e-book on the buying process here.