Myth 1: Foreign Buyers Will Overpay Just to Immigrate to Canada
Some owners seem to think that rich foreign buyers looking to reside in Alberta, or immigrate to Canada, will overpay to buy their business because they have tons of foreign cash. The facts are probably a bit different. It's pretty hard for foreign buyers planning to immigrate to Canada to purchase a business before they come here first. Most foreign buyers will move to Alberta first and find a job and then once they know the environment they live in and the business practices, will consider buying a business. At VR Business Brokers in Edmonton we notice that most immigrants have lived in Alberta for at least 2 years before buying a business.
Myth 2: Same Industry Buyers Pay More
Why should they? The trust is just the opposite. We found that buyers from the same industry in the same city usually pay the least for the business. This is even more correct in industries where there are fewer competitions. Why would your competition pay you more for your business when they know that naturally your customers, your employees will naturally go there if your business does not exists anymore. However, there are situations where your local competition might be willing to over pay when they fear losing the purchase to another buyer, perhaps a new competition from another area that wants to expand their market share. If a competitor is sufficiently smart and successful to build a business big enough to swallow yours, then they are not likely to suddenly get dumb enough to over pay. Yes, I know all about earn-outs over time to get a premium price, but if I could buy your business using your money, I would probably over pay too.
Myth 3: Excess Assets Make a Business More Valuable
No, the opposite is true. Too many non-performing assets can make a business difficult to sell. An example would be an underperforming manufacturer. Why would someone pay $1m asset value for a business earning $100k? How would a bank finance this transaction? How can the cash flow support the loan repayments? Businesses with underperforming or excess assets should sell off those assets and get their balance sheets in order before selling.
Myth 4: Inventory Should Be Added To The Price But Not Multiple
Majority of times, businesses are valued and sold on multiple of earnings. For example if you have earnings of $100,000 and the multiple used based on your industry, size, risk of your business is 3.5 times, then the value of your business is $350,000. However most sellers then want to add another $50,000 to that price for the inventory they have in stock. Unfortunately the inventory in a business is part of a going concern of the business. If you were to add the $50,000 to the purchase price now the total sale is $400,000 and the buyer just paid 4.0 times for your business which will impact the length of time it would take the Buyer to recover that his investment. At VR we recommend that normal level of inventory should be included in the asking price of the business. What is normal depends on the business and its purchasing cycle. Any excess inventory than can be either sold by the seller or sold or consigned to the buyer.
Some owners seem to think that rich foreign buyers looking to reside in Alberta, or immigrate to Canada, will overpay to buy their business because they have tons of foreign cash. The facts are probably a bit different. It's pretty hard for foreign buyers planning to immigrate to Canada to purchase a business before they come here first. Most foreign buyers will move to Alberta first and find a job and then once they know the environment they live in and the business practices, will consider buying a business. At VR Business Brokers in Edmonton we notice that most immigrants have lived in Alberta for at least 2 years before buying a business.
Myth 2: Same Industry Buyers Pay More
Why should they? The trust is just the opposite. We found that buyers from the same industry in the same city usually pay the least for the business. This is even more correct in industries where there are fewer competitions. Why would your competition pay you more for your business when they know that naturally your customers, your employees will naturally go there if your business does not exists anymore. However, there are situations where your local competition might be willing to over pay when they fear losing the purchase to another buyer, perhaps a new competition from another area that wants to expand their market share. If a competitor is sufficiently smart and successful to build a business big enough to swallow yours, then they are not likely to suddenly get dumb enough to over pay. Yes, I know all about earn-outs over time to get a premium price, but if I could buy your business using your money, I would probably over pay too.
Myth 3: Excess Assets Make a Business More Valuable
No, the opposite is true. Too many non-performing assets can make a business difficult to sell. An example would be an underperforming manufacturer. Why would someone pay $1m asset value for a business earning $100k? How would a bank finance this transaction? How can the cash flow support the loan repayments? Businesses with underperforming or excess assets should sell off those assets and get their balance sheets in order before selling.
Myth 4: Inventory Should Be Added To The Price But Not Multiple
Majority of times, businesses are valued and sold on multiple of earnings. For example if you have earnings of $100,000 and the multiple used based on your industry, size, risk of your business is 3.5 times, then the value of your business is $350,000. However most sellers then want to add another $50,000 to that price for the inventory they have in stock. Unfortunately the inventory in a business is part of a going concern of the business. If you were to add the $50,000 to the purchase price now the total sale is $400,000 and the buyer just paid 4.0 times for your business which will impact the length of time it would take the Buyer to recover that his investment. At VR we recommend that normal level of inventory should be included in the asking price of the business. What is normal depends on the business and its purchasing cycle. Any excess inventory than can be either sold by the seller or sold or consigned to the buyer.
