A report from Business Development Bank of Canada (BDC) shows that entrepreneurs who acquire existing businesses can earn 4X the profits of non-acquirers.
However, not all businesses for sale are for good reasons. You could overpay or inherit an unprofitable venture, hidden debts, outdated systems, and other common pitfalls if you aren’t careful.
In this guide, we walk you through a step-by-step process for buying an existing business, when it makes more sense to buy, and the financing options available for you. We also explore how an advisor can help you avoid acquisition mistakes.
TL;DR: Buying an Existing Business Checklist
Short of time?
Here is your 6-point checklist for purchasing an existing business:
- Define your acquisition goal
- Find a suitable business
- Conduct due diligence
- Determine the business’s valuation
- Negotiate the key deal terms
- Close the deal and transition ownership
When Buying an Existing Business Makes More Sense
Considering buying a business in Ontario, Toronto, or Québec, or evaluating a broader acquisition of an existing business in Canada?
Check out the scenarios when this route makes sense:
Expanding Your Business Footprint
Purchasing a set business in new markets offers a pathway to establish your presence in a specific geographical area with an already existing customer base.
It also opens doors to well-established distribution channels. This eliminates the cost and time you would have spent building an independent presence in that particular market.
Complementing Your Existing Business
Acquiring a business that offers products or services that match your current company’s offerings diversifies your revenue streams into a new industry.
You can leverage cross-selling across your solution portfolio to provide better value to your customers. It is a smart way to meet your customers’ ever-changing needs while minimizing operational disruptions.
Avoiding High Industry Entry Barriers
Canada has strict compliance requirements, such as the Investment Canada Act (ICA). These regulations make it difficult for startups to enter certain sectors, such as banking and telecommunications.
Therefore, if you acquire an established business, you can avoid the entry barriers that come with a startup.
Strengthening Your Market Position
You can strengthen your market dominance and market share by acquiring a competitor’s business.
When you consolidate the businesses with related products or services, you prevent your rivals from gaining a strategic advantage.
Pros of Buying an Existing Business
Most entrepreneurs are acquiring existing businesses as a lower-risk way to enter business ownership.
Here are some of the advantages:
- Established Brand Recognition: Inherit a business with an established brand identity for a head start in the market. You can use the established credibility to attract new prospects and retain loyal customers.
- Existing Relationships: Gain access to pre-existing relationships, including customers, suppliers, stakeholders, and an experienced team. They facilitate smooth operations and present an opportunity for long-term business success.
- Immediate Operations: Run the business with equipment and optimized processes, so you can scale without setup hassles.
- Faster ROI: Step into already running operations, which means there’s a potential for predictable cash flow and a quicker return on investment.
- Valuable Past Data: Access past data and market insights on the consumer behavior and economic shifts the business has experienced. You can use the insights to make informed decisions and manage future risks based on concrete evidence.
Disadvantages of Buying an Existing Business
While there are numerous advantages, you can face potential drawbacks when acquiring an existing business.
Some of them include:
- Limitations on Rebranding: You may not be able to rebrand the company because it risks eroding trust and loyalty among existing customers and stakeholders.
- Potential Liabilities: You might inherit liabilities that may affect your business’s future operations, whether it’s debts and unresolved corporate taxes, legal issues, or low customer concentration.
- Culture Integration Challenges: Employees may be resistant to adapting to different leadership styles, decision-making processes, schedules, and work styles. It can create friction between you and the existing team.
- Client Expectations: Customers may have concerns about changes that affect products or services. You may lose the existing customers to competitors.
How to Buy an Existing Business Step by Step
Whether you’re in Canada or exploring a cross-border acquisition opportunity from the U.S., buying an existing business in Canada should be a strategic process.
Here are the 6 steps to follow:
1. Define Your Acquisition Goals
Start by defining the right business for you. It should align with your acquisition goals, experience, and expertise.
Also, it should be within your industry of interest, your preferred geographical location, and your budget.
2. Find a Suitable Business
Use online business-for-sale platforms, business brokers, industry trade associations, and local chambers of commerce to find a potential acquisition opportunity.
Zero in on the right company that aligns with your ideal business criteria. Prioritize the financial health and stability of the business you’re interested in. Also, go for an option with growth and expansion potential.
3. Conduct Due Diligence
Once you identify a business that interests you, conduct a comprehensive review to verify the accuracy of the seller’s information.
You can conduct due diligence in Canada by:
- Reviewing the business’s financial statements, tax reports, and compliance history.
- Evaluating the legal standing and potential liabilities.
- Assessing its market position and growth potential.
4. Determine the Business’s Valuation
After finding the right match, consider business valuation services to buy a business at the right price.
You can use a variety of methods, such as EBITDA, Seller’s Discretionary Earnings (SDE), and asset-based approaches, to value a business.
An expert can help you prepare an accurate valuation report, analyze the potential risks of each target, and support informed decision-making.
5. Negotiate on the Key Deal Terms
After determining the business’s fair price, negotiate the deal terms with the seller. Consider mergers and acquisition services to get assistance with drafting a Letter of Intent (LOI) based on agreed terms, such as:
- Agreed price
- Conditions for closing the deal
- Payment terms and deal structure
- Assets and liabilities included in the deal
- Confidentiality and non-disclosure provisions
6. Close the Deal and Transition Ownership
Once you have the legal documentation ready, the final steps are to:
- Secure the necessary financing, transfer funds, and finalize the remaining legal paperwork.
- Ensure licenses, permits, contracts, intellectual property (IP), and assets are transferred to you.
- Communicate the new ownership changes to employees, suppliers, and customers.
Consider 30-90 days of ongoing support from the previous owner to ensure a smooth transition, optimize existing processes, and keep the business running smoothly after the sale.
If you feel overwhelmed by the process of buying an existing business, you can partner with a top M&A advisory firm to guide you through each stage.
Our team at JS CPA Strategic Solutions guides Canadian and US founders generating $1M to $50M annually and planning to scale, acquire, or exit in the next 3 to 5 years. We help you structure your deal terms in accordance with Canadian legal, tax, and regulatory requirements.
Book a consultation today, and let us help you maximize your business’s long-term value.
Financing Options for Buying an Existing Business
Different financial options serve different needs, affect your ability to close the deal, and change your repayment terms.
Here is a breakdown of the five financing options during acquisition:
| Financing Option | How It Works | Best For | What It Means For a Buyer |
| Equity Investment | You can raise capital by exchanging partial ownership of the company for cash from third-party investors. | Companies with high growth potential, but unpredictable cash flow. | No repayment obligation. The investors hold a minority stake in the company, typically between 15% and 40%. |
| Vendor Financing (VTB) | Amounts to 10%-15% of the purchase price. The seller acts as the lender and is paid a portion of the purchase price plus interest over an agreed period of time. | Businesses with intangible assets like customer relationships and goodwill. | Can close the deal without external financing. Provides more flexible repayment terms and allows ongoing seller involvement. |
| Senior Debt | You get a loan from an individual or institution secured on the company’s assets. | Established, highly profitable businesses with predictable cash flow. | Requires collateral, offering more favorable interest rates and repayment terms. However, it takes priority over any other form of debt and equity in repayment order. |
| Mezzanine Financing | It is unsecured financing that covers the financing gap left after funding is sourced elsewhere. | Established companies with strong, predictable profitability. | Requires no collateral or personal guarantees, so it carries interest rates of 12% to 20% compared to other financing options. Offers flexible repayment terms. |
| Canada Small Business Financing Program (CSBFP) | A government-supported program that offers loans through lenders registered with Innovation, Science, and Economic Development Canada (ISED) | Businesses with annual revenue of up to $10 million | Provides a maximum of $1.15million. You can get up to $1M for term loans and up to $150,000 for lines of credit. |
How Advisors Help Buyers Avoid Costly Acquisition Mistakes
Acquiring a business means negotiations, agreements, financing, and a lot of other elements that can go sideways if you aren’t careful.
Let’s explore how an M&A advisor can help you avoid those mistakes:
- Determine the Business’s Value: They use valuation methods and industry benchmarks to determine a business’s fair value. You can get accurate, defensible valuation reports to use when negotiating, helping ensure you don’t overpay for the business.
- Structure the Deal: A professional evaluates whether it makes sense to purchase assets or the entire business entity. They then structure the deal to help you minimize tax exposure, get favorable financing terms, and avoid liabilities.
- Due Diligence Support: They help create a due diligence checklist to uncover any outstanding liens, verify the financial records, and ensure the business is transferable. Working with an expert protects you from potential post-acquisition liabilities.
- Deal Closing and Post-Close Support: An expert creates agreements and plans to ensure a fast, smooth transition of ownership.
At JS CPA Strategic Solutions, we offer a Growth Mosaic Strategy that integrates M&A advisory, business valuation, fractional CFO services, and tax and compliance services. We use it to provide structured guidance in purchasing a business aligned with your growth objectives.
Frequently Asked Questions (FAQs)
Here are quick answers to questions most buyers ask when considering a business acquisition:
Is Buying an Existing Business Always Better Than Starting From Scratch?
It depends on your unique situation.
If you want total control over how the business operates, creative freedom in branding, and a low upfront cost, consider building your business from scratch.
On the other hand, buying an existing business gives you access to revenue streams, a customer base, operational systems, and key employees.
Can You Buy a Business with No Money Down?
No.
Financing options such as vendor takeback (VTB) and equity financing require you to raise a specified percentage of the purchase price.
What Documents Should You Review Before Closing?
As a buyer, you should review documents, such as the purchase agreement, corporate records, leases, and employment agreements, before closing the deal.
What Taxes Apply When Buying an Existing Business?
Depending on the location, here are some of the taxes that apply when you’re purchasing an existing business in Canada:
- Harmonized sales tax (HST) and goods and services tax (GST)
- Depreciation and capital cost allowance (CCA)
- Provincial retail sales tax (RST)
- Federal and state tax rates
Consider tax and compliance services to get strategic tax planning for a profitable transition.
Conclusion
Buying an existing business offers a more stable, predictable process than starting a company from scratch. However, you need to adopt a strategic approach to ensure a successful, profitable investment.
If you want to navigate this process with ease and set your business for long-term success, consider working with professional M&A advisors.
At JS CPA Strategic Solutions, we help you verify the business’s actual value, identify potential risks, and structure your deal, thereby improving your likelihood of buying a profitable business.
Schedule a consultation to purchase your business with confidence.
