Have you been waiting for the chance to run your own business in British Columbia? With over half a million small businesses in operation and several key industry players, now may be the right time to invest. If you’re seriously considering taking the plunge into business ownership, it’s never a bad idea to plan ahead and ask the right questions to minimize risk. Keep reading as we unpack four essential questions to ask when buying a business in British Columbia.
Avoid Red Flags When Buying a Business in Vancouver by Asking the Right Questions
When it comes to business purchases, there’s always some degree of risk involved. While you can’t avoid it 100 percent, there are fortunately steps you can take to minimize it and stop yourself from walking into an unforeseen circumstance. Before you head into the business buying process, do your due diligence, and ask the seller these questions.
1. What’s the reason for selling?
When you first meet with the existing business owner, it’s crucial to understand why they’re looking to sell. More often than not, British Columbia business owners sell because they’re retiring, moving, or because of an illness. Be careful if they mention or hint at financial troubles as the main reason. Although small business owners were selling left and right during the pandemic, it still should warrant some concern. If this is the case, try looking into the history of the business to get an idea of their performance before COVID-19 hit.
2. Can a non-competition clause be signed?
As a new business owner, the last thing you want to hear is that the former seller or key employee is planning a new startup in British Columbia or working for a nearby competitor. Such a move could potentially take all your sales and hinder your chances of growing your customer base. To prevent this scenario from unfolding, ask if the previous owner and employees can sign a non-compete agreement (NCA). A signed NCA prohibits them from working with a rival business or setting up one within a specified time period after the business sale.
3. What are the operating expenses?
If you want to avoid any surprise fees or hidden charges, ask the current owner about their operating expenses. These expenses can cover anything ranging from employee compensation, raw materials, utility bills, insurance, and more. When discussing with the seller, also get permission to review financial statements. These documents include tax returns, cash flow, balance sheets, and income statements. Make a note of any recent drops in revenue and working capital. Among signalling financial hardship and default, low working capital can be challenging to recover from.
4. What’s the asking price?
As you’re wrapping up asking important questions with the business owner, don’t forget to bring up the asking price. Once disclosed, make sure you’re aware of how they arrived at the price point. Understanding the reasoning behind the selling price can potentially help you negotiate during the final buying stages and prevent you from overpaying. If they hired a third-party valuation service, then the pricing is more than likely an accurate representation of the value of the business. Professionals usually base their estimates on past financial performance and Vancouver’s market conditions.
Although these are by no means an exhaustive list of questions to ask before purchasing a British Columbia business, they certainly can serve as a good starting point. Besides completing your due diligence as a potential large or small business owner, it’s always recommended to seek professional advice. At Pacific M&A and Business Brokers, we’ve connected countless new owners to their ideal business opportunity. Our brokers can help you identify potential red flags, set you up with seller financing options, and assist with other tasks involved in the buying process. Contact us today to get started!