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Business Valuation Aspects Crucial for Purchasing a Business

In the world of trade and commerce, the purchase of one business by another is not uncommon. In fact, whenever a business wants to grow, besides widening its avenues of trade, it also tries to acquire other relatively similar businesses with a view to establish a larger presence in the commercial world. The entire process may look quite simple. However, in reality it is a pretty complex exercise as there are a lot of technicalities that are required to be taken into account to make sure that the decision turns out to be financially fruitful for the company vying for the deal at the end of the day.

Here we bring to you some finer points that a company needs to take into consideration prior to acquiring a business. Things are no different in purchase of businesses in Edmonton. Hence, all these points revolve around the concept of business valuation in Edmonton, which is an indispensable factor on which buying a business in Edmonton as well as in the rest of the world depends.

  • The Suitable Standard of Value that is to be Considered – When it comes to taking into account suitable standard of value, there are two varieties of standards. While one is fair market value the other is the strategic value.
    1. Fair Market Value – It is the value that represents the value or the worth of a particular business in case it is to be sold out to a third party who is not related to the business. It also determines the floor value of the business which ultimately decides the acceptable price or value in the event of a sale. It is typically considered as the most realistic or appropriate value in case financial buyers are involved in the sale. This is simply because these buyers do not have any synergy to squeeze out of the business and hence are more inclined to acquire the business in “as it is” condition and continue with its normal operation unabated.
    2. Strategic Value – This comes into play when the acquiring a business that are from the same niche of industry and the deal that is struck between them is a strategic one. This happens when the purchaser considers the effect of the redundant expenses that can be eliminated or avoided. The elimination of these expenses would allow the purchaser to pay a cost that is more than the fair market price though that will still give a greater return at the end of the day.
  • The Amount of Impact the Purchase Structure will Have on the Price – The structure of a deal greatly impacts the price. Parties involved in a deal may ponder over the fact as to whether they should structure a particular deal as a stock deal or an asset deal, for this will in turn ultimately put an effect on the price of the deal once it is struck. Sellers of businesses generally opt for stock deals as their proceeds are considered taxable as capital gains only once. In case of stock deals, the buyer is purchasing the legal entity and all items on the balance sheet which will include all the contingent as well as unknown liabilities would be assumed by the purchaser.
  • Taking into Account the Earn-outs – Earn-out is an effective tool when it comes to considering business valuation in Edmonton for acquiring a business. It comes in handy when bridging the difference between the seller and buyer of a business in case they cannot agree in terms of price. In case of an earn-out, the two parties come to an agreement that once the transaction is closed, the seller might get some additional payments that are based on the performance of the company. It enables the purchaser to compensate the seller in certain aspects if and when certain activity levels are attained and to keep the price lower in case the targets are not achieved.

If you take into account the concept of business purchase on a broader perspective, the issues that we have discussed so far collectively form a mere tip of an iceberg. This is because there are innumerable aspects of business purchasing that comes into play depending upon the real life scenario that crop up during these deals.

All said and done, it is a process that is better handled by Performance Business Brokers who are experts in business purchase deals and related activities.

Contact us today to discuss. info@performancebb.ca or call 780-756-2990

Why You Shouldn’t Hire A Real Estate Agent To Sell Your Business

Article by: Chris Griffiths

Special to The Globe and Mail

While I have benefited greatly from the services of real estate agents for the sale of personal and commercial properties, I would never use one to broker the sale of my business. Here’s why and some ideas for alternative approaches.

If you are selling your business and your business includes a real estate asset or assets, by all means, use a real estate agent for those transactions. I have done several real estate transactions over the years and in 100 per cent of the cases, the real agents I dealt with added tremendous value and an obvious return on investment from their commissions and fees.

Most businesses who own real estate acquire those properties under separate holding companies, so it’s easy to treat the sale of the property (retail store, repair shop, manufacturing facility) differently than the sale of the operating company. Many buyers looking to purchase a business may prefer to rent, so even if your operating company owns a property, you may find yourself selling it separately or as an option.

A real estate agent is a valuable contributor, whether it be on a commission basis during a sale offering, or on a fee-for-service basis as a consultant on how to approach the sale or your business property. However, when it comes to preparing a operating business for sale, and managing the transaction process to closing, hiring a real estate agent is not your best approach.

You see, an operating business is far more complex than a structure and land. Your business has many dynamics that influence its performance and valuing your business fairly, for both you and your buyer, is extremely complex – at least when it’s done correctly.

I often look in the real estate sections of my local paper and see businesses listed and wonder how an owner and the real estate agent could attract me to buy. As a buyer, I want to see:

  • Detailed income statements, balance sheets and cash flows for the past three years as well as a prospectus on the business that covers the history and the future, including detailed financial projections;
  • Non-tangible assets; for example, customer lists and subscription retention rates, and I want to see industry information and a competitive analysis;
  • A list of owner benefits; costs that the business absorbs, but benefits the owner on a personal level as well, such as vehicles or other;
  • Employee performance histories and compensation levels.

I’d also want to discuss terms, an asset sale versus a share sale, and explore areas where there may be risks for future litigation. I’d want to discuss representations and warranties so I know there is some fall back if it turns out I was sold a lemon through misrepresentations of the facts.

But above all, I want to talk to someone who can answer all the questions above, and more, with confidence. As an owner, you may not be prepared to answer these if you haven’t been coached through the process in advance.

Besides running ads, most real estate agents don’t have the background to help a small business owner prepare all the aforementioned information. The bigger the business, the more important this information becomes. After all, you are not just selling a business, you are selling money – future money. An acquirer will value your business based on the profitability and free cash flow that your business is currently generating and will generate many years into the future. Sure, some small businesses are acquired as “lifestyle” businesses, where high growth and free cash flow are not prioritized as much as a steady income and the involvement in an industry that the buyer may be passionate about – looking for little more than a decent salary. Control over his or her own destiny and some fun may be what some buyers are after.

This is why you need to hire a business broker. He or she can help you position your business for all different types of buyers. Whether on commission or fee-for-service, business brokers can identify these and other ways that you need to prepare your business for sale.

While the broker may guide you, you should want to play a proactive role in the creation of your prospectus — a detailed document, like a business plan, that outlines all key aspects of the business. After all the years you’ve spent selling on behalf of your business, this may be the most important sale of your life and only you can portray all the value your business can bring to a new owner.

With the guidance of a business broker, you will be challenged to take nothing for granted and look at business value from many, many angles that may not be top of mind for you. A business broker will help position the business for sale and help negotiate the terms – which can get complicated with earn outs, escrows, hold backs and owner financing options.

So don’t let what may be the biggest transaction of your life turn into something you think will be “obvious” to a new owner based on an ad in the paper. Do your homework and ask for help from experts so you maximize your sale and have no regrets.

Contact us today to discuss your needs in selling your business.

Info@performancebb.ca 780-756-2990

What Are Buyers Interested In When Looking For A Business To Buy?

Performance Business Brokers has had the pleasure of engaging many business owners and buyers regarding buying and selling businesses. Sure there are industry multiples, rules of thumb and valuations for determining a price. But what are the things that a buyer really evaluates when scanning the business horizon for their next investment? I have narrowed it down to three fundamental things regardless of price.


The three key factors a savvy buyer evaluates are:

1. Is the business profitable?   2. Will the business run well without the current owner?   3. Are the financial records adequate?

Many business owners get a little nervous showing their financial statements. One of the best kept tax secrets is owning a business. A well run business with a good book keeper or tax accountant will show great cash flow and modest profit. Buyers not only understand that fact, they are attracted to it. There is nothing wrong with showing a net operating loss as long as the business has strong cash flow. Business owners do not get extra credit for overpaying their taxes. High debt combined with a net operating loss will chase buyers away.

Business buyers are attracted to businesses that are immune to the owner’s skills. Clearly there must be basic business management in place. What I’m referring to here is the critical elements of success must be able to thrive under new ownership. For example, if the owner is successful due to their active involvement in a key process, buyers will often pass even if they have the same skill set. Think of it this way. It is the difference between an artist and a painter. Painters are more about process and can be duplicated. Artists are the brand and take a piece of the business with them when they leave. One exception here is when a Private Equity entity assumes ownership and the “artist” remains in place.

In today’s environment with nifty software applications, financial records are typically not an issue. A simple profit and loss statement combined with tax returns are sufficient in most situations. If the business offers employee benefits, make sure you check the contract language to determine if “change of control” creates any lump sum payouts. Buyers want cash flow and leverage. Paying off key employees can be a deal breaker.

Before you begin the journey of determining the price tag for your business, make sure you have these three critical components in place. Do not underestimate the time it takes to market and sell a business. You should begin serious preparation 1-2 years in advance. Buyers always come to the table with a healthy dose of caution, but the deals that are consummated are inked with mutual respect between buyer and seller.

Contact us to discuss your business info@performancebb.ca

What Other Business Brokers Won’t Tell You About Selling A Small Business: The “Small” Is The Problem

A business needs to be a certain size before it makes sense to try selling it. It needs to be generating a decent sized net profit of at least several tens of thousands of dollars (after paying the owner a fair market salary for the time spent running the business​).

It’s been my recommendation for a long time, that businesses operating below a certain threshold​ are often better off just closing down than attempting to find a buyer​.

For very small businesses my advice is to not waste time or energy​ trying to sell the business. For slightly larger businesses ​it may be worth attempting to sell the business​ yourself (not via using a broker). And only after you’ve reached a certain stage in the growth of the business does it make sense to engage someone to assist with the sale.

​The thresholds aren’t set in stone and I can’t give you exact figures but ​the rule of thumb is that ​the lower your net profit / EBITDA, the less it makes sense to ​go to market​. ​That said, the content below may give you a better idea on ​thresholds.

Today I shall explain ​
– The Owner Trap
– The Broker Trap
– The Buyer Trap
– The Geography Trap

​There are ways around some of these problems,​ but let’s look first look at the points above ​and how / why they impact on the difficulty of sale.

The Owner Trap

T​he smaller the business the greater the reliance of the business on the owner/s. One man band (OMB) businesses are, of course, entirely dependent on the skills and time of the owner. Such business owners often come to me convinced that there must be someone out there who’d pay to acquire the cash flow (profit) the business is generating.

I can easily transfer my skills to the new owner,” they argue.

Unfortunately, their view of buyer demand differs greatly from the reality. Buyers see such investments as highly risky and generally avoid OMBs​.

Take a typical OMB – a plumber with a list of regular clients. His pool of available buyers is extremely small. The buyer would need to be a qualified plumber, would need to be interested in buying a business, would need to have the money to make the acquisition​ and would need to be based in or near the city our OMB is in​! ​What about retail shops, cafes, dog walking services, window cleaning rounds etc., where no skill or trade is involved? Those suffer the same geography disadvantage (discussed in more depth later).

​​The next step up from the OMB is the business that has employees but where the owner/s is still performing a critical role. Even when such a business has strong profit generation the transferable value of the business is very low because of the reliance on the owner.

​Buyers, whether individual buyers or corporate entities, see themselves as investors. They are generally not looking for a job, they are not looking for a business in which they have to perform work. They are looking for an investment where their money performs the work for them and generates the profit they are looking for.

Small businesses tend to not fit the profile of what the typical buyer seeks.

The Broker Trap

To understand why it doesn’t make sense for a competent professional to take on a micro business, one needs to appreciate what’s involved in selling a business.

Selling a business properly is very different to selling a house. You don’t just create a brochure and post an ad online. Well, that’s what some brokers do (and that’s why some of them do not sell even one in ten of the businesses they take on!).

It takes hundreds of hours to analyse the business, recognise and fix some of the flaws, get the business ready for sale by putting together all the right documents, prepare the business for buyer “due diligence”, market the business, find the right buyers, and liaise with numerous buyers to answer the millions of questions they have etc. And all of that before one gets a single offer.

And once you get an offer, and get past the negotiation to a deal that both parties agree to, it’s still shaky ground! The chances are 90% that the offer will collapse at some point and you’ll have to start again. Yes, even if it looks like a solid, cannot-fail offer. It takes a lot of skill, project management, use of psychology, use of tact and all kinds of other skills to manage all the competing egos and the various ​players (shareholders, key staff, both buyer and seller’s accountants, both parties’ lawyers, any third party finance companies etc etc) to coax the deal to completion. Yes, that’s the reality. ​Even for the simplest of deals!

In fact, it takes 200 to 500 hours, or more, for a competent broker to get even a small business from start to finish (if he’s doing a proper job).

A competent professional in this field wouldn’t work for minimum wage and would expect at least $100 an hour. So, given he could be spending 500 hours, he’d need to see a clear route to

at least $50,000 in fees! And he won’t get that kind of compensation when he sells a $100K or even a $200K business. The business needs to have a market value of at least $500K – $1M for a decent broker to get involved. And I’m talking a genuine $500K – $1M valuation (not the inflated valuations provided by the typical broker).

So what happens is that at the lower end of the market you don’t get the competent professionals. You get the pile ’em high and sell ’em cheap broker​. You often end up with brokers who do little to no work to sell your business​ and there are many horror stories involving business brokers operating at this end of the market. That’s why I generally recommend that owners of smaller businesses attempt the sale themselves​ rather than seek the help of brokers. But it isn’t easy. I do offer a consultancy service where you can book me by the hour for advice and assistance. Get in the touch if you wish to enquire about this.

Bottom Line: If your business is highly likely to sell for a few million dollars it makes sense to hire proper professional assistance. If it’s a micro business – tread very, very carefully before signing up with a broker as the chances are that only the bad ones will take you on. If you fall in-between the micro business and the multi-million dollar business, drop me a message as I have a different solution for you.

The Buyer Trap

Most vendors of businesses have never bought a business themselves so have very little understanding of the process from the buyer’s point of view.

Buyers are fussy, they need to be. Small businesses are high risk investments. Buyers have to be ultra cautious. They can’t believe a word you say about anything because you’re the seller and have an incentive to dress up the truth. So buyers have to spend a lot of time digging into accounts, your operation, your customer base, your staff, your lease and a million other things. Sometimes they do it themselves, sometimes they use external help from the likes of accountants and lawyers.

Whether they are doing the due diligence themselves or using outside professionals there’s a cost to all this work. It tends to be between $5K to $10K per prospect business (sometimes more).

And after doing all that work and paying all that money they often uncover something that puts them off and they change their mind about making the acquisition. Of course when the buyer changes his mind he doesn’t get a refund of that $5K to $10K already spent!

A buyer might make 3-4 such failed attempts before finding the right business and completing on the purchase. But in the meanwhile he’s spent $15K – $40K in fees! . From the buyer’s point of view that’s an acceptable cost if he’s acquiring a business worth $1 million but it’s not worth it if he’s looking to acquire a smaller business worth, say, $50K.

Bottom Line: If your business is highly likely to sell for a few million dollars it makes sense for the buyer to go through the process, incur the costs and take the chance. But the smaller the business the less keen buyers are to incur professional fees to check the business out and verify the seller’s claims. Also, buyers know that smaller businesses are more likely to have some major flaw that was not disclosed early on in the process!

The Geography Trap

If the business is a small business you are restricted to a pool of buyers living within a close geographical radius. Buyers from the other end of the Canada or Alberta wouldn’t generally move house, move the wife and kids etc., to buy a $100K business or a $200K business.

But for buyers looking to buy a $5m business generating $500K in annual profits it makes sense to move the family.

We discussed a plumber OMB earlier. What about a corner shop that’s well established? The pool of buyers is slightly larger given that there is no specific skill set required to run a corner shop (unlike with the plumber example). But the vendor is still restricted by geography.

The smaller the business the greater the chance that you are severely limited in the number of potential buyers ie. you are limited to only those people living within a small radius of the location of the business. That has huge implications both for price and for the probability of sale.

Bottom Line: If your business is a small business then the large majority of keen buyers of businesses like yours live outside the viable radius and would therefore not consider your business.


The smaller your business the more difficult it is to find a buyer. If you’re making $20K or so in profit – net profit after all expenses and after paying yourself a decent salary- then you’re probably better off just closing the business down rather than trying to find a buyer.​

That’s harsh, but it’s the truth (and there are some more truths here, truths that the average broker just wouldn’t share with you).

At this point vendors often argue that they may not be making much profit from the business but a new owner could make a lot more. They grasp at straws:

“We have never advertised. If the new owner does some marketing this business could be a lot more profitable.”

“We have never used social media. If the new owner knows how to use social media he can get a lot more interest in our products and make a lot more sales.”

​”If someone invests a bit more money in this business they can make a lot more profit.”

​”I have various ideas of how a new owner can improve this business and generate a lot more revenue than we are generating now.” etc.

​In rare cases there may be some elements of the business that override the lack of profit. An example would be if the business owned assets worth a six figure sum, vehicles etc. Sometimes intangible assets such as patents, or a lucrative and long term government contract, can also be worth money.

In other cases it may be possible to make some changes to the business to improve its attractiveness to buyers, but with very small businesses the chances are slim. If there is some aspect of your small business that you feel is exceptional and overcomes the lack of sizeable profit, ​get in touch with me ​and give me some information on your turnover, profit and why you feel your business would be of interest to buyers … ​and it’s best if you have something solid other than your opinion of the “potential” your business has.

Every single seller, bar none, claims their business has a lot of potential. Buyers don’t pay for potential, they pay for what you’ve already achieved! Yes, even strategic buyers. If a strategic buyer pays for potential, IF, he’ll tie that potential to delivery ie., he’ll pay you in the future if and only if all your financial projections actually materialise. He doesn’t just take your word for it! So by emphasising potential you are effectively saying that you will take a large part of the price only when (and if) that potential materialises and generates higher profit for the buyer.

Contact us at info@performancebb.ca to see if your business is set up for a successful sale.


By Marcel Schwantes – inc.com

Warren BuffettGetty Images
Warren BuffettGetty Images

In his 1989 annual letter to Berkshire Hathaway Shareholders, Warren Buffett called attention to a valuable personal rule which he credits to much of his success.

The Oracle of Omaha said: After some other mistakes, I learned to go into business only with people whom I like, trust, and admire.”

Why the focus on the people behind business relationships? According to Buffett, it’s simple: “We’ve never succeeded in making a good deal with a bad person.”

In a 1998 address to University of Florida MBA students, Buffett reiterated this golden principle, saying “I only work with people I like. If I could make $100 million with a guy who causes my stomach to churn, I would say no.”

Of course, when your net worth isn’t measured in billions (or millions, for that matter), it can be easier to fall into exciting opportunities with the wrong kinds of people. And unless your life resembles an HBO drama, by “wrong kinds of people,” I don’t mean gangsters, hitmen, or drug dealers. I simply mean folks who put less stock in values.

Maybe a potential business partner is willing to make false claims about a competitor’s product, or your accountant wants to get creative with the numbers so you can avoid paying your fair share in taxes. There are always people looking to toe the moral line, whose behavior might not get them locked up, but is still unsavory, to say the least.


Buffett’s point is that associating with these types of people is risky, not necessarily because you’ll end up in legal or financial trouble, but because over time you’ll grow to be more like them. As he puts it, “You want to associate with people who are the kind of person you’d like to be. You’ll move in that direction.”

To make sure you’re moving in the right direction, here are three things to consider as you put Buffett’s personal rule into play.


If you’re serious about associating yourself with the right people, that will inevitably require disassociating yourself with the wrong types. Once you’ve decided to make this change, only you can determine the appropriate pace. If your manager is pushing you to upsell customers who don’t need your product, you might want to keep a casual eye out for a new role. On the other hand, if the CEO’s money-funneling son is your direct report, don’t walk — run toward the exit.


Don’t wait to do some digging until you’ve signed on the dotted line — the best time to learn about business partners is before you go into business. Do your due diligence upfront, researching their past decisions and looking for trustworthy references. If you’re having trouble finding any information, move on to step three.


You should give people a chance, but that doesn’t mean ignoring your intuition. If you have a bad feeling about someone, whether they’re a new employee, a potential board member, or a mutual acquaintance interested in investing, trust your gut. Meet them for dinner or coffee to get to know them a little better. If the feeling remains, nip any future association in the bud.

As Buffett acknowledges, you’ll make mistakes along the way. Sometimes a golden opportunity will blind you to the people involved, or your intuition might fail to warn you about an individual’s true character. All you can do is learn from these mistakes, adjust accordingly, and move on.

Are you curious about how sellable your company is and what you would need to tweak to sell it when you’re ready? Contact us at info@performancebb.ca to discuss.