In 1984 the small business brokerage industry did not exist in Calgary, nor anywhere in Canada except for large accounting firms such as Price Waterhouse and other consulting firms that dealt mainly with large acquisitions. Back then, Gary Perron and Doug Kosan, of Calgary, went shopping to establish the small business brokerage industry. They happened across Pam Ryan of Phoenix, Arizona, in September ’84. On January 1st of 1985, Pam made the move from 80 degrees to -30 to grab the opportunity to establish a small business brokerage industry in Calgary. Twenty-nine years later she is still vibrant as ever. Ryan talks about the small business brokerage industry today and explains who is buying businesses and how buying a business as a form of increasing net worth is different than investing in real estate.
Who are the Buyers of Small Businesses Today?
50 year olds who get the golden hand shake and a package (retirees), 20 year olds, who really feel they don’t want to be or can’t be an employee and prefer to work for themselves and immigrants, especially if their English is not good. Pam Ryan says, “I’ve seen many immigrants that I’ve helped with their first, second, third business and now they have a high net worth. They would have never been there just working for a company.”
Is Buying a Small Business the Same as Investing in Real Estate?
Many new buyers may think buying a business is similar to that of buying real estate with little or nothing down, but Ryan says, “You cannot borrow against goodwill.” She explains, even though there’s some promotion of banks for financing, banks want to know what hard assets or real estate are available as collateral before loaning money. If there is no real estate, then you can have equipment appraised and get maybe 50% of that, as a loan. “But you really need to have the cash available or have equity in a house or property that you can borrow against, not the business,” she adds.
Sometimes the vendor or the seller will carry some of that, but most times not 50%. You’re usually looking at maybe 20% or 30% of the total purchase price. You should have ready cash available-we’re talking as low as $50,000 to $500,000-depending on how small or large a business and net cash flow the business is generating. With many potential buyers not having this kind of money lying around, they look to an angel investor, home equity or cash in their RSP’s to fund the purchase of a business.
Critical Areas to Check When Evaluating a Dream Business
Completing the due diligence in checking the books and records and what an owner is able to pull out of that business is important. Ryan advises looking at the seller’s discretionary income which is the net income before tax, depreciation, the seller’s wages and fringe benefits.
A Franchise or Non-Franchise?
Ryan says that it is easier to finance a franchise as opposed to a non-franchise business. Branding can carry in some cases a lot of weight with bankers. So, say if a franchise cost you half a million sometimes you may get three quarters of that financed.
What are Buyers Really Looking for in a Business?
The experienced business owner generally has pinned down the industry and mainly wants to know the cash flows. “The new buyer, really a lot of times doesn’t have a clue. What they want most times, they just want to make a $100,000 income,” Ryan explains. If they want to make a $100,000 and the multipliers are anywhere from 1 to 3 times depending on the industry, then it is necessary to have at least $100,000, probably $200,000 cash available.
Preliminary Preparation for Buying a Small Business
First take look at what your net worth is. What is available as far as cash, RSPs and equity in your home or other assets. With houses worth a half a million to over a million and for people have free and clear property, with their homes paid off, they can have a credit line easily for $200,000 to $300,000 with low interest. “Take a look at your lifestyle and how you want to live,” Ryan advises. Then decide what experiences and strengths can enhance the potential to be a successful entrepreneur, this will help determine the type of business you may want to be in.
Should there be a glimmer of doubt in the process, a lack of time to complete the due diligence or you’d just like to have that matriarchal presence on hand to get your questions answered and to have assistance in making the right decision in choosing and purchasing the business, Pam Ryan can be reached at: http://commercialventures.com.