Frequently Asked Questions
Q: How much is my business worth?
Q: How do I calculate "positive cash flow"?
Q: What about employees?
Q: How do I know for sure that the business makes money?
Q: What is "Due diligence"?
Q: How do I know that the business I am buying is free and clear of any and all encumbrances?
Q: How much bank financing will I be able to Secure?
Q: How much inventory will I be required to buy as a part of the purchase?
Q: What is "Agency Relationship"?
Q: How will I know how much profit the business generates?
Q: What is an "Earn-out"?
Q: How long does it take to find an appropriate business?
Q: Do I need to use a lawyer? An accountant?
Q: If I want to make an offer to buy a business, who prepares the offer?
Q: What is the difference between an "Asset sale" and a "Share sale"?
Q: What is the biggest mistake made by small business?
Q: Then how much capital is enough?
Q: How much can I afford?
Q: What is the best advice available?
Q: What is a "Good faith deposit"?
Q: When does my good faith deposit become non-refundable?
Q: How much training can I expect from the seller?
Q: What should I look for regarding the business premises?
Q: What is a demolition clause?
Q: What is "Potential" really worth?
Q: What is "Work-in-progress"?
Q: What sectors are "Hot" these days?
Q: I sometimes hear the term "The closing". What does it mean?
Q: What happens to the Accounts Receivable and the Accounts Payable?
Q: What about phone numbers, fax numbers, web sites, and email addresses?
Q: What about the business license?
Q: What about liquor licenses?
Q: What about health permits?

 

Q: How much is my business worth? 

A: Ultimately a business is only worth what the market will pay. This will be dependent upon a number of factors: 

  • How much are the assets of the business worth? 
  • How much positive cash flow does the business generate? 
  • How stable is the goodwill of the business? 
  • What opportunities are there to expand the business? 
  • How stable is the workforce? 
  • Does the business have security of premises? 
  • How dependent is the goodwill upon the current owner? 

In summary, valuing a business is multi-faceted, and no set formula works for all.

^top of page

Q: How do I calculate "positive cash flow"?

A: This is loosely defined as the total amount of discretionary dollars that are available to the business owner after paying all expenses that are incurred in the normal course of business. Their precise allocation is not critical. For small businesses, it is the sum of: 

  • the owner's salary (via T4) 
  • the pretax profit of the business 
  • any depreciation of assets taken during the period
  • all interest charges any other items that are non-essential to the business such as vehicle leases or meals & entertainment.

^top of page

Q: What about employees? 

A: Typically, employees want to retain their jobs with the business, and are generally just as concerned about losing their jobs as the buyer is concerned about retaining them as valued employees.

^top of page

Q: How do I know for sure that the business makes money? 

A: This is where you would bring in your accounting people and have them verify to your satisfaction, that the business performs as the seller has indicated.

^top of page

Q: What is "Due diligence"? 

A: It is generally the period immediately following the acceptance by both the buyer and the seller of an agreement of purchase and sale for the business, during which the buyer satisfies such subject conditions as lease arrangements for the business premises, performs accounting reviews of the books and records, verifies proper licensing and permits for the business, and arranges any financing required.

^top of page

Q: How do I know that the business I am buying is free and clear of any and all encumbrances? 

A: Under the laws of British Columbia, all security must be registered with the province to be enforceable. Your solicitor will check this provincial registry and any charges against the business will be removed before any sale proceeds are released.

^top of page

Q: How much bank financing will I be able to secure? 

A: Canadian commercial banks are traditionally hesitant to lend funds for the purchase of a small business unless those funds are secured by assets sufficient to safeguard the amount of the loan.

^top of page

Q: How much inventory will I be required to buy as a part of the purchase? 

A: This is always negotiated as part of the contract to purchase the business. As Martha would say, "No surprises is a good thing".

^top of page

Q: What is "Agency Relationship"? 

A: Under the Real Estate Act of British Columbia, a realtor is required by law to discuss and define the realtor's relationship with both the buyer and the seller.

^top of page

Q: How will I know how much profit the business generates? 

A: Under the Real Estate Act of British Columbia, by law the seller's agent must provide the buyer with full financial disclosure of the past performance of the business.

^top of page

Q: What is an "Earn-out"? 

A: This the term used when a portion of the purchase price is determined by the future performance of the business. It provides the buyer with an assurance that if the business does not do well, he pays less than he might have. It provides the seller with a higher selling price if the business performs better.

^top of page

Q: How long does it take to find an appropriate business? 

A: This generally takes longer than one might think. The reality is that although there may be several businesses for sale, there may be very few that fit your parameters. The best advice is to be patient as well as diligent in your search.

^top of page

Q: Do I need to use a lawyer? An accountant? 

A: It is strongly advised that both the buyer and the seller make use of appropriate professionals.

^top of page

Q: If I want to make an offer to buy a business, who prepares the offer? 

A: The Real Estate Board of Greater Vancouver (REBGV) has prepared a standard contract for the purchase of business assets and it is available to all members of the board.

^top of page

Q: What is the difference between an "Asset sale" and a "Share sale"? 

A: The answer to this question revolves around businesses that are owned and operated from within a limited company. If the assets of the business are what is being sold directly, this is referred to as an asset sale, and the seller is actually the limited company. In a situation where the shares of the limited company are what is actually sold (and thereby indirectly the business assets), this is referred to as a share sale.

^top of page

Q: What is the biggest mistake made by small business? 

A: LACK OF CAPITAL!!! Be sure that you are well financed. Nothing is worse than running out of cash and credit just when you need it most.

^top of page

Q: Then how much capital is enough?

A: Be sure that you have sufficient capital for the following: 

  • Acquiring the business (this one is easy) 
  • Acquisition costs (rent deposits, legal, PST, property tax adjustments...) 
  • Working capital (inventory , accounts receivable) 
  • Contingency funds (in case there is a surprise)

^top of page

Q: How much can I afford? 

A: How much cash do you have?

^top of page

Q: What is the best advice available? 

A: Hope for the best. Plan for the worst.

^top of page

Q: What is a "Good faith deposit"? 

A: It is the deposit that accompanies the initial offer and is a sign of the sincerity of the prospective buyer. As this initial offer is almost always subject to certain conditions being satisfied, this initial deposit is refundable to the buyer until such time as all subject conditions outlined in the offer have been satisfied and removed.

^top of page

Q: When does my good faith deposit become non-refundable? 

A: Generally once all subject conditions have been satisfied and removed.

^top of page

Q: How much training can I expect from the seller? 

A: This will depend upon the nature of the business, but typically for small businesses, it is for 2 - 4 weeks and without further compensation to the seller. Larger enterprises may have much longer seller participation and will offer compensation to the seller.

^top of page

Q: What should I look for regarding the business premises? 

A: This will depend upon the exact nature of the business, but typically the buyer will want to be assured that the business can continue to occupy the premises for a period of time acceptable to the buyer.

^top of page

Q: What is a demolition clause? 

A: Some landlords like to have the option of terminating a lease for the purposes of demolishing the building and rebuilding on the site. Typically, a business will be given 6 - 12 months notice to vacate the premises. This can be devastating to a small business, and care should be taken to ascertain if such a clause is in the lease.

^top of page

Q: What is "Potential" really worth? 

A: Sellers generally would like to have buyers pay for the "potential" of a business. The reality is that buyers will buy a business because of perceived potential, but they will be very reluctant to pay for it. The argument being that if it is really there, then the seller should demonstrate it first, then the buyer will pay for it. So potential is "good", but it is generally only a motivator.

^top of page

Q: What is "Work-in-progress"? 

A: Think in terms of a manufacturer. His inventory will consist of "raw material" and "finished goods". However, there will be product that may be part way from raw to finished, and is therefore work-in-progress. The precise valuation of any work-in-progress will be mutually agreed upon as part of any contract to sell the business.

^top of page

Q: What sectors are "Hot" these days. 

A: Anything that makes money. Profitable businesses that are well established are always in demand.

^top of page

Q: I sometimes hear the term "The closing". What does it mean? 

A: "The closing" is the term given to the actual transfer of the ownership of the business. It's when the buyer gets the keys and the seller gets the cash.

^top of page

Q: What happens to the Accounts Receivable and the Accounts Payable? 

A: Typically, for small businesses, the seller collects the a/r's, and pays the a/p's. A variation on this is for the buyer to assume both, and the price is adjusted to reflect these assumptions. For larger businesses, they are generally considered a part of the business with the seller guaranteeing that the receivables are collectable.

^top of page

Q: What about phone numbers, fax numbers, web sites, and email addresses?

A: If they are used in conjunction with the business, then they are considered to be part of the assets of the business, and are included in the sale.

^top of page

Q: What about the business license? 

A: If the transaction is an asset sale, then the business license is generally transferred to the buyer as a part of the closing.

^top of page

Q: What about liquor licenses? 

A: These licenses cannot be transferred and the buyer will need to apply for a new one. Until the new application is processed, the buyer can continue to operate under the previous license.

^top of page

Q: What about health permits? 

A: In British Columbia, all premises where food is prepared must have a valid health permit. These are provided after an inspection by the local health inspector.

^top of page

 

Home | FAQ's | Buying a Biz | Selling a Biz | Commercial Real Estate | Resources | Search