While I primarily specialize in selling construction services businesses with a minimum $1 million/year EBITDA, I aim to help those who are looking to sell or buy other kinds of businesses by sharing - hopefully helpful - insights during the limited free time I have.
Before deciding which business you will buy, be it a coffee shop, a full service restaurant, a fashion retail store, or some other type of established enterprise, I recommend that you do your due diligence by collecting and analyzing a range of key data points:
1. Business Financials
- Income Statement: Review revenue, gross profits, operating expenses, and net income for at least 2-3 years.
- Balance Sheet: Look at the business’s assets, liabilities, and owner’s equity.
- Cash Flow Statements: Ensure positive and consistent cash flow.
- Tax Returns: Verify the reported income and financial health.
- Accounts Receivable/Payable: Check payment history and outstanding debts.
2. Business Valuation
- Asking Price vs. Valuation: Compare the asking price to the actual market value of the business based on financials and asset valuations.
- Profitability Metrics: Look at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and profit margins.
3. Legal and Ownership Details
- Licenses and Permits: Ensure all business licenses and permits (liquor license, health certificates, etc.) are up to date.
- Contracts and Leases: Review the terms of contracts with suppliers, employees, and especially the lease agreement (if leasing property).
- Liabilities: Check for any legal disputes, pending lawsuits, or potential liabilities.
- Ownership Structure: Understand who the current owners are and the ownership structure (sole proprietorship, corporation, etc.).
4. Operational Information
- Customer Base: Assess the business’s customer demographics and any major customers.
- Employee Structure: Review the number of employees, their roles, salaries, and retention rates.
- Supplier and Vendor Relationships: Verify key supplier relationships, terms, and any dependency on specific suppliers.
- Inventory and Equipment: Check the condition and value of inventory, machinery, and equipment.
5. Market and Industry Analysis
- Market Trends: Understand current industry trends in Toronto and Canada.
- Competition: Assess the competitive landscape and market positioning.
- Location: Evaluate the business's location in Toronto (or another part of the province) and its effect on customer access and traffic.
- Growth Potential: Look at expansion opportunities and market growth.
6. Reasons for Sale
- Owner’s Motives: Understand why the current owner is selling (retirement, new venture, financial troubles, etc.).
- Business Performance: Investigate if the business is performing poorly or experiencing declining sales.
7. Due Diligence Period
- Contingency Clauses: Ensure the agreement allows for due diligence where you can review all documents and cancel the deal if issues arise.
Collecting this information will give you a comprehensive understanding of the business and whether it is a good investment. It’s also advisable to consult with professionals, such as an accountant, a business lawyer, and a business broker, during this process.
All the best and let me know if you'll have any questions.
- Income Statement: Review revenue, gross profits, operating expenses, and net income for at least 2-3 years.
- Balance Sheet: Look at the business’s assets, liabilities, and owner’s equity.
- Cash Flow Statements: Ensure positive and consistent cash flow.
- Tax Returns: Verify the reported income and financial health.
- Accounts Receivable/Payable: Check payment history and outstanding debts.
2. Business Valuation
- Asking Price vs. Valuation: Compare the asking price to the actual market value of the business based on financials and asset valuations.
- Profitability Metrics: Look at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and profit margins.
3. Legal and Ownership Details
- Licenses and Permits: Ensure all business licenses and permits (liquor license, health certificates, etc.) are up to date.
- Contracts and Leases: Review the terms of contracts with suppliers, employees, and especially the lease agreement (if leasing property).
- Liabilities: Check for any legal disputes, pending lawsuits, or potential liabilities.
- Ownership Structure: Understand who the current owners are and the ownership structure (sole proprietorship, corporation, etc.).
4. Operational Information
- Customer Base: Assess the business’s customer demographics and any major customers.
- Employee Structure: Review the number of employees, their roles, salaries, and retention rates.
- Supplier and Vendor Relationships: Verify key supplier relationships, terms, and any dependency on specific suppliers.
- Inventory and Equipment: Check the condition and value of inventory, machinery, and equipment.
5. Market and Industry Analysis
- Market Trends: Understand current industry trends in Toronto and Canada.
- Competition: Assess the competitive landscape and market positioning.
- Location: Evaluate the business's location in Toronto (or another part of the province) and its effect on customer access and traffic.
- Growth Potential: Look at expansion opportunities and market growth.
6. Reasons for Sale
- Owner’s Motives: Understand why the current owner is selling (retirement, new venture, financial troubles, etc.).
- Business Performance: Investigate if the business is performing poorly or experiencing declining sales.
7. Due Diligence Period
- Contingency Clauses: Ensure the agreement allows for due diligence where you can review all documents and cancel the deal if issues arise.
Collecting this information will give you a comprehensive understanding of the business and whether it is a good investment. It’s also advisable to consult with professionals, such as an accountant, a business lawyer, and a business broker, during this process.
All the best and let me know if you'll have any questions.