Buying and Selling a Business in Canada

At some point in time you will likely consider selling your business or expanding your existing business by purchasing a competitor or complementary business.  But what is the business really worth?
 
Logic would dictate that the business is worth more than just the value of the assets, what about the value of the years it took to develop the business, the clients you have, contracts for regular services, outstanding orders etc.  
 
There is no easy answer, however in most instances it is best to contract the services of a Certified Business Valuator (CBV), an Accountant that has undergone additional training and education to acquire these very unique skills.
 
When buying or selling a business there are a number of key issues that affect the purchase price; the business owner may enjoy the freedom of self-employment and the independence that comes with it, however, a potential buyer is only looking at specific factors.
 
Cash is the key—a buyer of a business in normally only interested in 2 items; cash flow and earnings.  The cash flow is determined by reviewing the cash flow statement, or by reviewing income statements and removing non-cash items such as depreciation, accruals and amortization.  The earnings of the business are generally calculated before interest, taxes and depreciation (EBITD).
 

Earning Potential

 

In addition to the cash flow and earnings, the valuator will look at another specific factor—what is the earnings potential of the business without the current owner, and what will it cost to replace the current owner?  If the expertise of the owner lends strongly to the earnings of the company, the value of the business may not be as great when this expertise leaves.
 

Fair Market Value

 

Other considerations will include the Fair Market Value of the Assets of the business, such as the real estate owned, equipment, inventory, and intangible items such as patents or trademarks.  These items have an ‘insurance’ value to a potential buyer, if the earnings are not as strong as expected, assets can be liquidated to increase cash flow.
 
The Business Valuator may also look at specific financial ratios and compare the business to the industry average for a similar type of company.
 
Potential buyers may wish to interview staff, customers, suppliers and especially the management of the business—they need to be comfortable in knowing that the business is competent to carry on after the sale.
 

Is your business ORGANIZED?

 

Another important factor in the valuation of the business will be the level of organization; a potential buyer would like to see that the business is organized and information flows in an efficient manor.  Do you have operations manuals, policies and procedures, sales and production reports, comparative financial statements, sales contracts, organizational charts etc.?
 

Sales and Assets

 

The type of purchase or sales may also affect the value of the business, will the sale be of assets or will it be structured as a sale of shares?
 
A buyer generally wishes to purchase the assets of  a company, thereby avoiding potential contingent liabilities, whereas as vendor generally wants to sell the shares for the potential tax savings of Capital Gains.
 

In Summary

As you can see, buying and selling a business can be a very complicated matter and the valuation is best left to persons that specialize in this area.  In the end, you will need a good Accountant, Lawyer and Certified Business Valuator to protect everyone’s interest in the buy/sell process.

Last updated: 28th February 2024