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10 steps to buying a business

Best practices refine the purchasing process.

Business ownership presents entrepreneurs with a decision that is steeped in emotion.

The myth of a four hour work week lures even the wariest investors, whilst promises of hefty profits bait those with a more practical bent.

The high risk, weighty commitment and challenging capital investment required for business purchase further entices entrepreneurs to leap before they look in an attempt to overcome their fear. Best practices refine the purchasing process, tilting the odds in the entrepreneur's favour. 

1) Naming Your Industry

This step may seem too redundant to mention, yet it is a defining one that is commonly cast aside. Rash entrepreneurs shop for businesses in the same way they shop for shoes, prioritising passion over industry projections. Industry experts offer invaluable projections depicting how the marketplace will change in the coming years.

The Canadian industry is responding to the eco-friendly bug as dramatically as the rest of the world is, whilst the emergent technology market continues to push newspaper sales down. Market research and acquisition profiling need to be comprehensively carried out to ensure that the business bought continues to balloon in keeping with growing industries. 

2) Finding Your Business

Businesses that are already on offer and commercial premises for start ups can be found on BusinessesForSale.com. However, bolder entrepreneurs target companies that are not for sale in the hope of gaining a gem. 

3) Phase One of Due Diligence

Before hiring costly lawyers and accountants to assess the business' mettle, an initial analysis of the companies on your short list lays a solid foundation that is affordably achieved. Assessing the financial records, debts, and legal complications associated to property and employees helps to create an accurate mirror image of the business, which may differ significantly to what is initially presented. 

"Assessing the financial records, debts, and legal complications associated to property and employees helps to create an accurate mirror image of the business, which may differ significantly to what is initially presented. "

4) Negotiations

Whilst values may be batted between buyers and sellers at this early stage, any figures arrived at are subject to contractual agreement. Warren Buffet said that buying 'a wonderful business at a fair price [is better than buying] a fair business at a wonderful price."

Nonetheless, a deal may be struck in which a wonderful business is bought at a wonderful price, as long as investors take their time establishing a powerful and comprehensive negotiation process. 

5) Valuations

Amazon is a prime example of how valuations often go awry. Its paltry profit margins and high valuations depict the importance of hiring an independent surveyor. Whilst physical assets offer a sturdy way to arrive at the company's partial worth, it is often the unmeasurable aspects that tip the value scale most profoundly. Business concepts, brand strength, reputation and returns projections affect long term investment potential far more than physical infrastructure can. 

6) Payment

Procuring the targeted business is streamlined by the Canadian government's financing programs, which are set up to revitalise the economy by encouraging budding entrepreneurs. Private funding can be obtained from investors, through bank equity loans or through revenue-based financing.

The fierce competition in Canada's financing industry has pushed forward a number of new financing methods that add flexibility to the loans in offer. 

7) Heads of Agreement

This is the most tentative document to appear during the buying process. It isn't binding but is instead tailored towards setting up a guideline to streamline the purchasing process. 

8) Due Diligence

At this later stage, it becomes important to rely on professionals in each niche to exercise due diligence more thoroughly. Accountants, lawyers, marketing research experts and investment analysts can all help the entrepreneur to arrive at a point of certainty. 

9) Tying up Legal Loose Ends

Business sales are closed by the Purchase and Sale of Business Agreement, which sculpts the deal into defined prices, warranties, rights and limitations. Buried in the fine print, there are typically clauses limiting sellers from establishing competing companies in the locale and other finer details. 

10) Completion 

Too many business owners try to invest in a lifestyle when buying a business. This thought process acts as a decoy, leading entrepreneurs far beyond the bounds of due diligence. Failure to approach the process on a financial level is one of the most effective ways to doom a prospect to eventual closure.

Once the deal is sealed in accordance with best practices, the odds of success are drastically improved.



Matt Skinner

About the author

Matt Skinner writes for all titles in the Dynamis stable including BusinessesForSale.com, FranchiseSales.com and PropertySales.com as well as other industry publications.

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