I met Heer
Pasha on LinkedIn and we had a fun exchange about why small businesses often
fail. It soon developed into a list and
so we’re happy to present:
12 Days of Christmas Small Business
MIS-Management
Managing by cash and not seeing accruing liabilities
Not understanding cash flow
Not charting the workflow of their business function
Lack of attention to administrative tasks
Acting like a Princess or Prince… workers are not subjects
No job descriptions. Who is accountable for what?
….and 6
more that will make you shake your head, but you’ll have to watch the video
here: https://youtu.be/A9KhBUfBhx4
The video
is a little longer than my usual, but hey, what were you going to do after you
open all your gifts anyways?
Happy Holidays
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Forward this e-mail to someone you know who's 'into business stuff' so they can
sign themselves up.
I’m coming to Charlottetown, Prince Edward Island in January 2017. Seats
are already filling up. Find all my live events here: http://davidbarnett.eventbrite.ca
Over the last two weeks I’ve had two
different clients who were somewhat confused about how shares work in a
corporation. Both were small business
owners.
One owner was trying to pass the
family business on to their children.
They asked me how to ‘transfer their shares’ from the established
corporation to the new corporations of their children. Can one do this?
The other client was a pair of
entrepreneurs who wanted to bring on a third partner and have his investment go
into the company. They weren’t sure how
to accomplish this.
I taught them how they could achieve
their goals by splitting their existing shares and have the corporation issue
new shares to the new partner.
Not sure what I’m talking about? Learn how to use a corporation’s shares to
make your deals in this video: https://youtu.be/1EjKjSAd1F8
Please remember to like and share this
article, it’s the only way the people who run the internet have of knowing if
the content is any good or not. The more you share, the more likely someone who
needs this information will be able to find it.
If you would like to hear from me
weekly before anyone else, you can sign yourself up at www.DavidCBarnett.com
I’m coming to Charlottetown, Prince
Edward Island in January 2017. Seats are
already filling up. Find all my live
events here: http://davidbarnett.eventbrite.ca
Yes, I know
how to spell ‘stupid,’ please don’t e-mail me.
I’m cranky
and sore and upset. I’ve got a cold and
an ear infection.
What makes
me more cranky and upset is when I hear the same poor advice about rules of
thumb for pricing small businesses being passed around again and again and
again.
This week I
tell the story of the old accountant who told me once in a workshop,
‘Businesses sell for 5 times their cash flow.
Those with real estate sell, those without don’t.’
Simplistic
rules of thumb like this one guarantee only one thing… mistakes are being made
and it’s costing someone dearly.
I explain
why those with real estate sell, those
without don’t in this video and the answer will make you sick to your
stomach if you happen to be a business owner who could have fallen victim to
this kind of advice. Watch it here: https://youtu.be/ck_AmnOIzDE
If you own a
business and will want to sell one day, you need to educate yourself about how
this process works and give yourself time to get ready.
Learn what’s
involved in selling your small business.
Take my 3 hour online course at www.HowToGetOutOfMyBusiness.com or buy my Amazon best-selling book; How To Sell My Own Business. Available from Amazon.com or Amazon.ca
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com
I’m coming to Charlottetown, Prince Edward Island in January
2017. My live events always fill up
fast. Find all my live events here: http://davidbarnett.eventbrite.ca
The other
night I was in Halifax, NS doing one of my Business Buyer workshops.
One
gentleman was interested in buying a business that he could run with a manager
and not be involved in full-time.
He was
concerned that most small businesses had to be owner-run and wondered why
owners just didn’t hire managers when they wanted to step back into retirement.
The reason…
most small business owners aren’t capable.
I made this video to explain. Watch
it here: https://youtu.be/f3NPWgkYnLc
I also
explain how one of my very remarkable business buyers was able to manage
several businesses while keeping a full-time job!
If you think
you would benefit from my help and guidance over the coming year to meet your
business goals, you may wish to consider my 2017 mastermind. It’s for small business owners who want to
improve their business or people who want to find and buy one. E-mail me for
details.
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com
A few weeks
go I made a video and blog post about whether it made sense to pay off all your
small business debts in order to prepare a business for sale. Watch the video here: https://youtu.be/pOJ3B1_K9L8
I promised
to make another video discussing how paying off small business debt would
affect the personal wealth of the owner.
You see,
most small business owners are debt-averse.
They believe that debt is bad and that it makes sense to pay off debt to
increase one’s net-worth.
The reality
though is that debt gives you leverage and small businesses are risky.
Watch this
week’s video to see how paying off small business debt actually reduces your
rate of return and increases your risk!
If you think
you would benefit from my help and guidance over the coming year to meet your
business goals, you may wish to consider my 2017 mastermind. It’s for small business owners who want to
improve their business or people who want to find and buy one.
If you’re
thinking of selling your small business and want a whole bunch of FREE
information and advice, visit www.HowToSellMyOwnBusiness.com there are free videos, reports and
access to my modestly priced books and online course on the process of selling
a business.
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com
I recently
had an exchange with a fellow on the West Coast who had some questions about
selling his small business.
The
conversation ended with, ‘well my friend is a commercial Realtor so if I have
any more questions I’ll speak to him.’ Huh?!?
What on
earth does selling real estate have to do with selling businesses?
It’s not the
first time I’ve run into this in my career as a business broker and as a
private sale transaction advisor. There
seems to be some idea out there that links businesses to real estate.
Let’s
examine the characteristics of each and see where the overlap is:
Real Estate:
doors, windows, roofs, foundations, walls, insulation…
I’m
stumped. Well, not totally. There is a big reason why I think that many
small business owners somehow end up trying to sell their business using a real
estate agent and it has to do with silly outdated laws. I made this video to explain: https://youtu.be/s9HkiHiiEB0
What’s
really amazing though, is that while I was a business broker, I noticed that
many real estate agents who normally sold houses were willing to take on
businesses to sell.
AT THE VERY
SAME TIME, my biggest source of referrals were COMMERCIAL REALTORS. Funny
right? Watch the video and I’ll explain to you why.
If you’re
thinking of selling your small business and want a whole bunch of FREE
information and advice, visit www.HowToSellMyOwnBusiness.com there are free videos, reports and
access to my modestly priced books and online course on the process of selling
a business.
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com
I had an online exchange the other day with a guy on the
west coast who believed that paying off his business debt was a key ingredient
in preparing it for sale.
WRONG.
There are all kinds of problems with this thinking but this
week I simply want to discuss it from the buyer’s point of view.
(There will be another video in two weeks about how this
thinking affects the seller’s wealth.)
Does small business debt have an impact on the value of the
company?
Nope, just like your mortgage doesn’t have an impact on the
value of your house. The value of a business is derived from its cash flow.
Do you think they care if your business owes money?
Well, this is a little more complicated. A buyer may actually care quite a lot and it
may not be for the reasons that a seller thinks. I made this video to explain why some kinds
of debt within a business may be very interesting for a potential buyer. Watch it here: https://youtu.be/pOJ3B1_K9L8
This business owner would certainly benefit from working
with me to get his business ready for sale.
I’ve got another mastermind group starting up for 2017. E-mail me if you’re interested in learning
more. It’s for those who plan to buy,
sell, or improve their business in 2017; dbarnett@alpatlantic.com
HALIFAX, NS: I’m
coming on November 30, 2016. Find out
more and register at https://ceed.ca/calendar/
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good or not. The more you share, the more likely someone who needs this
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you can sign yourself up at www.DavidCBarnett.com
Expanding through acquisition? Watch out! Make this mistake and you could be
in for an unexpected cash-flow cut! - How to Buy a Business.
How can buying a business make its’ value go down?
I had a chat with Sarah Mullins from UpTree HR in Halifax.
Sarah and I discussed some of the issues relating to HR when
you buy a business or merge two companies in a strategic acquisition.
She’s been through dozens of them.
She even explains how buying another company can reduce its’
profitability. If you haven’t done the
right due-diligence, you could end up with less cash flow that you had
forecast.
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
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you can sign yourself up just to the left of this post.
I made this video a few weeks ago to explain the different
scenarios that someone might conceivably buy a business with no money and the
dangers for the buyers and sellers in each. Watch: https://youtu.be/NVTgDT7Cc2g
Cody, one of my viewers, sent in this thoughtful question in
reply to the video:
Hello David, thanks for all the videos. Have a question: I have heard of
people buying businesses through 100% financing, but not technically no money
down.
So they first go to a lender and borrow against the assets of the
business to raise cash, which they then give some or all that cash to the
seller, as a down payment.
Then they get the Vendor(Seller) to carry some kind of financing on the
rest, the seller is in a junior position to the lender in case the business
fails.
In theory this should work great, the seller will get about as much cash
at closing as they would if the seller liquidated.
Have you heard of this?
Does it work?
If it does work, is it easy to put together?
If it does not work, why not?
Great questions Cody!
The problem with this scenario lies in two places… are we
actually talking about buying a business or just a collection of assets? The reason I ask is that if a seller is happy
receiving an amount which approximates a liquidation then we’re not receiving
operating capital or paying for goodwill.
If there is no goodwill value, is the business a profitable
money maker?
Also, if you’re buying this as your first business then what
would your opening balance sheet look like?
The banker will want to see.
I must admit though, this strategy would work for a
different kind of buyer. See my video
response to learn who could pull this off. Watch: https://youtu.be/xZqJTa_YZj4
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
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you can sign yourself just to the left of this post.
I had the
pleasure of speaking to a business owner in Toronto while I was away on
vacation. It was just a brief consult done from a park bench in Brussels.
He and the
other owners had become aware of a competing firm that had been acquired by a
larger company and wanted to try to do the same thing.
The
conversation centered around the best strategy… hiring an intermediary, hiring
someone in-house to try to find a suitor, etc.
During this
time, my client made a little comment about how he and the other founders of
the company were working almost 16 hours a day and how they found it impossible
to hire people to help them out.
I made this
recording telling the story and how you can go about fixing it. Listen here (audio only on YouTube): https://youtu.be/9n68EuvNXfw
Needless to
say, it is quite difficult to convince someone to pay money to buy a business
that needs this kind of management engagement.
Proper
businesses have structure, organization and everyone knows what they’re
responsible for and what duties they need to get done. Without this, it’s impossible to grow and it
sure does look scary for anyone looking at buying.
The topic
was very apropos as I’m in the middle of creating my latest workshop; Building
a Business that Someone Will Want to Buy.
It’s going to be presented on October 18 in Moncton, NB and will likely
become an online course.
Please
remember to like and share this article, it’s the only way the people who run
the internet have of knowing if the content is any good or not. The more you
share, the more likely someone who needs this information will be able to find
it.
If you would
like to hear from me weekly before anyone else, you can sign yourself up just to the left of this post. If you need my help with your
project, give me a call at (506) 381-8416.
Do you live
in the Maritimes? I’ve got workshops
coming up on buying and selling businesses in the fall. Book now http://davidbarnett.eventbrite.ca
I received a
question from one of my viewers in South Carolina. Ben has an opportunity to buy part of a
business and wants to know what he needs to do to figure out what it’s worth.
Splitting up
businesses is a funny thing. Usually
businesses want to combine to realize synergies.
Think of two companies merging
and eliminating some of the administrative staff. The result of the merger should be lower
overheads as a percentage of sales.
So if you
buy part of a business and this leads to dis-synergies how do you figure out
what a part of the business is worth?
Well, all you can rely on is the sales figure.
Start by
taking the sales of the existing company for the department or product lines
that you’re going to be acquiring, then build yourself a new income statement.
Be prepared
for a tough negotiation though, the parts may often be worth less than the whole
and the sellers expectations may be very different from yours.
Please
remember to like and share this article, it’s the only way the people who run
the internet have of knowing if the content is any good or not. The more you
share, the more likely someone who needs this information will be able to find
it.
If you would
like to hear from me weekly before anyone else, you can sign yourself up at www.DavidCBarnett.com If you need my help with your
project, give me a call at (506) 381-8416.
Do you live
in the Maritimes? I’ve got workshops
coming up on buying and selling businesses in the fall. Book now http://davidbarnett.eventbrite.ca
If you’d
like to learn how to create high returns by making local private lending and
lease deals, check out http://www.LocalInvestingCourse.com The Local Investing Academy enrollment
is from September 26 to October 10 only.
For a quick
introduction, read Invest Local. It’s
available from Amazon stores worldwide or as a .pdf here: https://gum.co/quoB
Please
remember to like and share this article, it’s the only way the people who run
the internet have of knowing if the content is any good or not. The more you
share, the more likely someone who needs this information will be able to find
it.
If you would
like to hear from me weekly before anyone else, you can sign yourself up at www.DavidCBarnett.com If you need my help with your
project, give me a call at (506) 381-8416.
Do you live
in the Maritimes? I’ve got workshops
coming up on buying and selling businesses in the fall. Book now http://davidbarnett.eventbrite.ca
You see for
a ‘market’ to exist, you need many buyers, sellers and a product or
commodity. For example, there is a
market for 4-door used cars and a market for 3-bedroom homes in each town and
city, but small businesses are very individual.
They’re unique.
Therefore,
they each have their own market!
In the video
I give an example of the process engineer who will never buy the highly
profitable flower shop. I used to see it
all the time when I owned my business brokerage.
As far as
pricing goes, it doesn’t change much over time except if certain industries are
perceived to be more or less risky.
Business are valued on their cash flow and what the buyer is willing to
pay is based on their perception of the risk that the cash will continue to
flow into the future.
There is one
exception though. It’s an old story
about market manipulation.
I’ve seen
first-hand that government programs meant to encourage immigrant investors are
causing price bubbles in certain categories.
Convenience stores, franchise food locations, Laundromats, gas stations.
Anywhere
someone with limited English can run a simple business and quickly learn enough
words to make change and serve customers.
I recently
worked on a case where a newcomer was willing to overpay by 40%... because he
was up against a time-limit and if he didn’t buy a business he would lose a
$75,000 deposit that he had made to get into the country.
Welcome to
Canada, let us into your wallet. I bet
he feels all warm and fuzzy about igloos, beavers and maple syrup.
Just like in
any market where politicians and civil servants decide to meddle, an artificial
urgency has been created and business sellers are taking full advantage of
these victims created by government policy.
If you’d like to learn how to create high returns by making
local private lending and lease deals, check out http://www.LocalInvestingCourse.com
The Local Investing Academy starts in September. For a quick introduction, read Invest
Local. It’s available from Amazon stores
worldwide or as a .pdf here: https://gum.co/quoB
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com If you need my help with your project, give
me a call at (506) 381-8416.
Do you live in the Maritimes? I’ve got workshops coming up on buying and
selling businesses in the fall. Book now
http://davidbarnett.eventbrite.ca
Ed recently downloaded a copy of my 2015 Best-seller, Franchise Warnings from www.franchisewarnings.com
He wrote me an e-mail saying that he was looking at
franchises and enjoyed the book. He
thought that the central theme of the book was ‘do your homework.’
It’s not. The book’s
purpose was to dispel the myth that buying a franchise is less risky than
starting a business from scratch. Watch
the video here: https://youtu.be/JUItDU5cn-E
Ed also asks what I would look for if I were buying a new
franchise. Interesting question.
My first idea is that I would want a fee based franchise
over a royalty based one. It allows you
to grow the business and keep more of the gravy for yourself.
Secondly, I would need to ensure that the business systems
were actually provided and worked well.
I know of a two franchises who provide no operating manual and one where
the systems are very poor. (I’m sure they’re not alone.)
If you’d like to learn how to create high returns by making
local private lending and lease deals, check out http://www.LocalInvestingCourse.com
The Local Investing Academy starts at the end of September. For a quick introduction, read Invest
Local. It’s available from Amazon stores
worldwide or as a .pdf here: https://gum.co/quoB
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up at www.DavidCBarnett.com
Do you live in Toronto or the Maritimes? I’ve got workshops coming up for Toronto in
September on buying and selling businesses and in October-December in the
Maritimes. Book now http://davidbarnett.eventbrite.ca
I’ve gotten some questions from viewers asking how they
could buy a business with no money.
There is a belief out there that if you can structure things
correctly, it’s possible to buy a profitable business while using none of your
own money.
I’ve done deals where a buyer borrowed all the money to buy
a business, but they did so by putting up some personal assets as collateral.
I’ve done deals where a buyer gets a seller to essentially
finance 100% of the purchase, but the buyer was using lots of their own money
to improve the business with a short timeline to re-financing it.
In both cases, we can hardly say that the buyers had ‘no
money.’ They certainly had resources to
help them make the deals happen.
I made this video to explain the different scenarios that
someone might conceivably buy a business with no money and the dangers for the
buyers and sellers in each. Watch: https://youtu.be/NVTgDT7Cc2g
In asset purchases, the danger for a buyer, even if there is
no down-payment, is that there will be insufficient operating capital and you’d
be in a cash flow crisis from day one.
In share deals, if there is a net-positive operating capital
balance, the buyer could fleece the company and run away with cash and the
seller would be left with nothing. Who
would put themselves in this kind of position other than a parent handing over
a business to a child?
The one opportunity for buyers to get their hands on a
business with ‘no money’ is usually when there is negative equity. Watch the video to see my thoughts on this.
If you’d like to learn how to create high returns by making
local private lending and lease deals, check out http://www.LocalInvestingCourse.com
The Local Investing Academy starts in September. For a quick introduction, read Invest
Local. It’s available from Amazon stores
worldwide or as a .pdf here: https://gum.co/quoB
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up just to the left of this post.
Do you live in Toronto or the Maritimes? I’ve got workshops coming up for Toronto in
September on buying and selling businesses and in October-December in the
Maritimes. Book now http://davidbarnett.eventbrite.ca
I got a question from a viewer in Prince Edward Island the
other day.
He had read my 2014 best-selling book, Invest Local, and had a question about preparing
information for a lawyer in order to register security on a lending deal.
Many people who are contemplating investing in a small
business via making a secured loan often wonder how they can make sure the
borrower isn’t offering the same collateral to more than one lender.
I made this video to explain how registries work and give a
brief history of how they came to be. Watch: https://youtu.be/MeFAmvf6veE
The PPSR registries (or UCC registries) allow you to
publicly record the fact that a certain piece of property has been pledged as
loan collateral. They’re the most
versatile registries because you can record a lien on almost any kind of
property (outside of real estate.)
The system is so straight forward that many local investors
register their own security using online services. This is in contrast to real estate registries
which are strictly the domain of attorneys because they are so complex and
every jurisdiction is unique.
I’ve done dozens of deals where I’ve registered myself,
using a third party service provider, as
a lender in a PPSA database. I’ve also
done many lien-searches when investigating the purchase of used vehicles or
equipment.
It’s critical to learn how this works if you want to deal in
lending or used equipment because a lender’s rights under a lien don’t go away
if the property is sold.
Simply put, if you buy an RV and there is an outstanding
loan secured against it and the loan goes into default, the lender can still
take it to satisfy the debt whether you bought it or not.
If you’d like to learn how to create high returns by making
local private lending and lease deals, check out http://www.LocalInvestingCourse.com
The Local Investing Academy starts in September. For a quick introduction, read Invest
Local. It’s available from Amazon stores
worldwide or as a .pdf here: https://gum.co/quoB
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself to the left of this post.
Do you live in Toronto or the Maritimes? I’ve got workshops coming up for Toronto in
September on buying and selling businesses and in October-December in the
Maritimes. Book now http://davidbarnett.eventbrite.ca
Why does the seller make me WAIT so long for information?
I got a call from a client the other day. He’s been trying to decide if he wants to
pursue a business that is rumoured to be for sale.
I say ‘rumoured’ because it certainly doesn’t seem like it’s
for sale. The owner says he wants to
sell, he speaks highly of the business and its potential, but he just won’t
hand over the information the buyer is asking for; the latest financial
statements.
The first thing that is obvious is that this seller hasn’t
read my best-selling book; How to Sell MyOwn Business.If he had, he would know that you never go out looking for
buyers and talk with them before you’re completely prepared to answer all their
questions and you’ve got your ‘package’ together.
Putting together Confidential
Business Profiles is part of what I do for my clients.
From the seller’s perspective here’s what may be going on:
There may have been a pressing emotional or
personal need which pushed the owner to decide to sell and this need may no
longer be so aggravating.
If the business is profitable, then the longer
the seller delays the sale, the more money they make in the interim.
There may be some pressing business needs that
require their attention in the present, selling the business may actually be a
‘side project’ and doesn’t get the proper attention.
Outside advisors or service providers like accountants
may not be available because of workloads or vacations.
Let’s be clear, any delays caused by the seller are not good
for the deal. They upset the buyer and buyers can be hard to find.
One of the hazards of this scenario is that the more a buyer
follows up and ‘chases’ the seller, the more the seller may begin to think that
the buyer is in love with the business.
This can cause them to believe they can get more money for
the business. As a buyer, this is bad.
So stop it. Stop
following up, emailing and calling the seller continuously. Slow down. Look at other businesses.
One of the problems from a buyer’s point of view is that
they may be imagining themselves as the owner.
They start to get excited and REALLY want to buy the business NOW.
This is called Buyer Fever and it’s a very dangerous
illness. It can cost people hundreds of
thousands of dollars in over-payments when it leads them to make bad deals and
not do proper due-diligence.
Please remember to like and share this article, it’s the
only way the people who run the internet have of knowing if the content is any
good or not. The more you share, the more likely someone who needs this
information will be able to find it.
If you would like to hear from me weekly before anyone else,
you can sign yourself up just to the left of this post.
Do you live in Toronto or the Maritimes? I’ve got workshops coming up for Toronto in
September on buying and selling businesses and in October-December in the
Maritimes. Book now http://davidbarnett.eventbrite.ca
If you’d like to learn how to create high returns by making
local private lending deals, check out http://www.LocalInvestingCourse.com
The Local Investing Academy starts in September.
When buying or selling a business, a common question that
comes up is whether to buy or sell the shares or the assets of the business.
For some people who are not familiar with this, the concept
can be hard to grasp. That’s why I made
this video to explain things in simple terms: https://youtu.be/HgDLgwbXgj0
Here’s an illustration.
Imagine that Mark owns a lawn maintenance company; Mark’s Lawns
Inc. Mark’s Lawns Inc. owns a tractor.
If you wanted to get into the lawn maintenance business you
could buy Mark’s Lawns Inc. The
ownership of the tractor doesn’t change.
It was and still is owned by Mark’s Lawns Inc. In this case, the seller is Mark. He’s selling the shares of the corporation to
you.
The other way to buy the business would be to buy the
tractor. In this case, Mark’s Lawns Inc.
is the seller. The ownership of Mark’s
Lawns Inc. doesn’t change. Mark will
still own this corporation after the transaction, the only difference is that
the company will have money in it instead of a tractor.
Because corporations are people under the law, a share sale
makes a new owner subject to liabilities to past events. An attorney will do their best to structure
warranties to try to protect a buyer but at the end of the day, a share sale
could expose a buyer to unwanted liabilities.
Asset sales are technically just the purchase of
‘stuff.’ In this regard a buyer doesn’t
necessarily have to worry about most of the past issues with the
corporation. Also there are usually tax
advantages for buyers who buy assets because equipment that may have been fully
depreciated by a seller may now appear on the buyer’s books at fair market
value and can be depreciated again by the buyer.
Seller’s know this and there is an equal tax disadvantage
vis-Ã -vis depreciated equipment. Also,
in some places, such as Canada, there is preferred tax treatment on the sale of
shares of an eligible corporation.
So when people ask me if they should buy or sell shares or
assets I tell them this: Buyers should try to buy assets, sellers should try to
sell shares but at the end of the day it doesn’t matter.
The type of transaction will form part of the
negotiation.
Let me give you a simple example. A seller wants $250,000 for their
business. A buyer offers $200,000. The seller says that they can’t go that low
unless the buyer is willing to purchase shares… a deal is struck.
The tax advantages/disadvantages of either form of sale are
known by both parties and can sometimes be estimated by both parties. As such, it just comes down to dollars and
cents in most cases.. unless there are specific reasons to buy shares such as
contracts, government regulation, etc… but that is a subject for another day.
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Do you live in Toronto?
I’ve got workshops coming up for Toronto in September on buying and
selling businesses. Book now, there
isn’t much room left.. http://davidbarnett.eventbrite.ca
If you’d like to learn how to create high returns by making
local private lending deals, check out http://www.LocalInvestingCourse.com
The Local Investing Academy starts in September.