Buying a business is one of the biggest decisions that you’ll make in your life. As a Toronto Chartered Accountant, I can help you determine what to look for when buying a business in Canada.
The top 5 things that you should look for when buying a business in Canada are:
1. Profitability
The number one factor you should look for when buying a business in Canada is profitability.
The business that you’re planning to buy should be profitable. To determine whether a business is profitable, you should review its financial statements. The financial statements will tell you what the company’s EBITA (Earnings before Interest, Taxes and Amortization) is. EBITA is the most widely used definition of ‘profit’ for purposes of evaluating the financial health of a business.
It’s important to hire a Chartered Accountant in Toronto to help you evaluate the financial statements of a business in Canada that you intend to purchase. Chartered Accountants have a wealth of experience and knowledge in buying and selling businesses.
For additional information on evaluating the profitability and financial performance of a business, please see Accountant in Mississauga Business Advice
2. Price
The number two factor you should look for when buying a business in Canada is price.
How do you know if you’re paying too much for a business, or if the price is just right? The answer is that you must first calculate the fair market value of the business and then compare that amount to the seller’s asking price.
The fair market value of a business is calculated as 3 to 5 times After-Tax Net Income, plus or minus the following adjustments:
- Bonuses paid to the owner-manager (subtracted from net income)
- Non recurring expenses (added to net income)
- Non recurring sources of revenue (subtracted from net income)
- Salaries to family members (added to net income)
- Personal expenses (added to net income)
I recommend that you take an average of the last three years of after-tax net income, in order to adjust for any fluctuations.
3. Growth
The number three factor to look for when buying a business in Canada is whether a potential for growth in revenue and net income exists.
Ideally, you want to buy a business whose net income and sales are expected to increase over time. Assessing the growth potential of a business is very subjective and difficult. The opportunity for growth usually exists when any of the following factors are present:
- The business is in a growth industry (e.g. technology is a growth industry)
- New contracts are already in the pipeline
- Additional sources of revenue are possible, but were overlooked by the current owner
- The business is easy to expand (e.g. second or third location may be opened)
- The business has a recognized brand name and is viewed positively by customers
4. Location – what to look for when buying a business in Canada
The number four factor to look for when buying a business in Canada is the location of the business.
Certain businesses, especially those that are in the retail market or that sell to individuals (as opposed to businesses), must have a good location to be successful.
To assess whether a location is good, I recommend speaking with business owners in the area, speaking to a commercial real estate agent, and observing the surrounding traffic.
5. Key employees
The number five factor to look for when buying a business in Canada is the employees of the business.
Successful businesses usually have good, loyal employees. Therefore, when purchasing a business you should ensure that the existing employees will remain.
About the Author – Allan Madan – Tax and Business Consultant Toronto
Allan Madan is a Chartered Accountant in Canada and is also a tax and business consultant. He has assisted many clients in buying and selling businesses.
To learn more about Allan Madan, please see Small Business Accountant Toronto and Mississauga
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