Over 90% of companies in Canada are privately owned small and medium-sized businesses. As the country’s population ages, many of these first-generation entrepreneurs are retiring, creating buying opportunities in the market. Businesses are complex entities with multiple moving parts. At first glance, purchasing a business can seem quite daunting as questions of value, growth potential, and risk pile on. In the following article, the Transaction Advisory team at Beacon simplifies the process, outlining the basics of buying a business from the initial search, to LOI. The team also provides key insights into the buyer landscape going forward and discusses potential opportunities that buyers may find.
There are many business brokers, intermediaries, and M&A advisors in Canada who exclusively represent the business for sale opportunities. Buyers can get in touch with these intermediaries to establish relationships so that they have access to the business opportunities that fit their investment criteria. In addition, Canadian business opportunities can be found on several websites that actively market businesses for sale.
Buying a business is a risky and complicated process since buyers often take on the liabilities associated with the business depending on the type of sale. For this reason, it is important that buyers make an informed decision and conduct thorough due diligence before making the final decision. An uneducated buyer can not only find themselves overwhelmed but also slow down the negotiation and potentially blow up the deal if the sellers and intermediaries think that the buying party is not a good fit for the company. Therefore, it is important for buyers to have a good understanding of the buy-side process.
Initially, when buyers come across an opportunity that fits their investment criteria, they must inquire about the opportunity and signal interest to brokers managing the deal. These days most brokers have online systems allowing buyers to sign a non-disclosure agreement. Buyers are required to fill out this form to ensure that confidentiality is maintained. In addition, brokers and M&A advisors will often request a buyer profile highlighting the buyer’s experience to assess qualitative and technical fit. Once the first step is complete, professional brokers and M&A experts will reach out to buyers and share confidential information memorandums (CIMs) through secure online data rooms to help the buyers understand the company’s operations. Upon reviewing the CIM buyers usually have enough information to decide whether they would like to pursue the opportunity further or move on. Buyers that choose to continue often contact the brokers and intermediaries for more information at this stage.
As negotiations continue, the broker will set up additional calls and meetings between the buyer and seller to facilitate the deal process. After preliminary questioning, brokers and agents might set a deadline for all interested buyers to submit offers in a process called an auction. Alternatively, the first offer that is submitted and executed wins, and negotiations with all other buyers are suspended. A buyer will require the help of an attorney who has experience in corporate finance and M&A to draft a letter of intent. Letters of intent are non-binding agreements and subject to due diligence. A letter of intent highlights the terms of purchase and conditions that must be met before a definitive and binding agreement is prepared. Often buyers will include an exclusivity clause in these agreements, following which the buyer and seller will enter an exclusive due diligence period.
During due diligence, buyers will submit a checklist with all documents that the seller must share. The purpose of this process is to uncover any potential red flags that might create future liabilities for the buyer. Since the buyer assumes downside risk, the buyer must carefully examine the company’s operations and financial statements. Many deals fall through during due diligence for multiple reasons. Buyers can hire external accountants or buy-side advisory firms to assist with the due diligence process.
During due diligence, buyers must simultaneously start arranging for funds to acquire the company. If the acquisition is partly to be financed through debt, buyers must have documents and business plans ready to provide to creditors. In Canada, the financial system is well regulated and structured. Most of the large banks have commercial banking divisions providing business loans.
In addition, the Business Development Corporation of Canada is a crown corporation dedicated to providing capital to small and medium-sized businesses for various purposes including acquisitions.
I n the current market environment, due to tighter lending standards, it is harder to obtain acquisition financing for small and medium-sized businesses due to liquidity risks. In addition, private companies cannot raise capital easily through capital markets.
Consequently, this is an important consideration and buyers must be sure that they can arrange for funds before involving lawyers and accountants and spending time and money on due diligence. Buyers can also explore other avenues such as private lenders and non-bank financial institutions that provide business loans. These alternative lenders often charge higher premiums for the risk that they take on. Once the due diligence is complete and funds have been arranged, buyers must engage their attorneys to draft a final purchase agreement. These terms in this final agreement may differ from the terms of the initial letter of intent depending on due diligence. These terms however are binding. Once executed, the sale process is complete. At this point, the buyer must transfer funds and the seller can begin the formal process of transferring assets. While the lawyers and accountants continue to assist with closing formalities, buyers can take over and begin training and transition.
The pandemic has asymmetrically impacted small and medium-sized businesses. Many of these companies are private owner-operated businesses that do not have the resources or expertise to adapt to disruptive environments. Coordinated Central Bank and Government policy measures which include unemployment aid, CEBA business relief loans, and wage subsidy programs, have helped these businesses survive extreme shocks and widespread insolvencies. Despite this the pandemic has triggered fire sales in several industries, producing opportunities for buyers to acquire good assets at a discount.
Canada is expected to have enough vaccines for everyone by the end of September. Following this growth is expected to quickly recover due to pent-up demand and economic tailwinds. The Central Bank of Canada projects that the Canadian economy will grow by 4% in 2021 and 5% in 2022. Consequently, this is an opportunistic period to buy a business in Canada. Due to cheap acquisition financing and lower multiples, buyers have a limited window of opportunity to purchase established businesses with existing clients and goodwill at a relative bargain. Buyers must implement caution in determining whether the business can survive lingering headwinds for the remainder of the pandemic. Thorough research and due diligence can help buyers find the right business for a fair price, thereby maximizing return on investment for buyers.
At Beacon Advisors, we provide our clients with a full suite of intermediary brokerage services. We act as a business intermediary and assist with selling and buying businesses in Toronto and across the GTA. We work with small and medium-sized companies with revenue between $1 million and $50 million. Contact us today to let us know how we can help.
