Buyers Guide

BUYER’S
GUIDE
ESSENTIAL INFORMATION
TO HELP YOU BUY A BUSINESS
DIVESTITURE » SUCCESSION » EXIT PLANNING » SELL
1.888.859.5388 | www.pavilionservices.com

Dear Buyer,
Buying a business is a major investment and a powerful growth opportunity for your company. This guide provides
an overview of the main steps and considerations for private buyers. It considers practical advice based on our own
experience managing business transactions for our clients over the years.
In most cases, it is easier for a new business owner to purchase an existing business rather than trying to set up a new
business from scratch. You will benefit from established infrastructure, business processes, customer relationships,
skilled employees, supply channel agreements and cash flow.
The purchase of a business involves risk. A patient approach to buying a business can result in significant growth for your
business. Patience is key and it’s vital to take a closer look at the business you wish to purchase.
When you’re searching for a business to purchase, all of your emphasis should not be placed on the business’ financials.
Weight your decision and consider other factors, like whether you’re passionate about the industry and if the business’
sector is an ideal fit. Be honest with your broker about your finances, it will allow the broker to understand your true
financial capabilities to purchase the business and save time for all parties involved.
In this guide, we will review the following three core processes to buying a business:
1. Finding the right business
2. Making an offer to purchase the business
3. Completing the transaction
This guide is comprehensive and covers the overall range of details related to the process of buying a business. However,
the content is general in nature and does not substitute early and professional advice as you navigate potential
acquisition opportunities.
Yours sincerely,
Greg Spafford
Managing Director

Table of Contents
Finding a Business 3
Why is the Business for Sale?
5
How Much is the Business Worth?
5
5 Step Method of Valuing a Business
6
What is the Business Owner Selling?
7
Does the Sale Include Real Estate?
7
Is the Transaction a Share Sale or Asset Sale?
8
How can the Business be Financed?
9
Making an Offer
10
What is Included in a Letter of Intent?
11
What is the Timeline for Completion?
12
Who is Part of Negotiations?
12
What is Due Diligence?
13
Completing the Transaction
15
What Happens on the Closing Date?
15
Contact Pavilion Business Services
To learn more about the various exit options you have as a business
owner and how we can help you successfully sell your company –
call us to arrange an exploratory meeting and discuss your options
in a confidential manner.
1.888.859.5388
www.pavilionservices.com
2

FINDING A BUSINESS
Before diving into the financial documents, key employee
profiles and legal contracts that are part of buying a new
business, take a moment to ask yourself these questions:
WHY AM I BUYING A BUSINESS? – Are you
creating employment for yourself, adding the
company to another that you already own or
looking for a short-term return on your investment?
Have you done your own research and analysis to
understand how an acquisition will be a part of
your current operations? There are many reasons to
buy a business so make sure you understand your
own motivations first.
Place weight on other factors than just the
company’s financials. Are you passionate about the
industry? Are you motivated to own and operate
the business? Are there changes you can make to
the business that would make the business more
successful?
HOW MUCH CASH DO I HAVE TO INVEST? –
Sellers will want to know up-front that you are
serious with your intentions to purchase the
business. They will be looking for a deposit to show
serious interest.
Be honest with your broker about your finances,
it will allow the broker to understand your true
financial capabilities to purchase the business and
save time for all parties involved.
HOW MUCH FINANCING WILL BE AVAILABLE
TO ME? – Talk to your financial advisors before
going into negotiations. This will confirm your
commitment to the process to the seller and make
your offer more attractive when others are also
presented at the table.
HOW INVOLVED DO I WANT TO BE WITH
RUNNING THE BUSINESS? – The current owner
may have been very involved with the day-to-day
management of the business or they may have a
strong management team in place to keep all areas
of the business in line. Evaluate your own strengths
to understand the role you would like to take as the
new owner of the business.
HOW COMFORTABLE AM I WITH RISK? – There is
inherent risk with any business transaction. Come
to terms with this early in the process to avoid cold
feet as the deal comes closer to completion. Legal
and financial advice can provide some direction
on acceptable levels of risk and the terms of the
deal that can be put in place to minimize personal
exposure.
WHAT IS MY TIMELINE TO COMPLETE THIS
TRANSACTION? – Business transactions often take
months to complete and there are a number of
different professionals involved in the process. It is
essential to allow adequate time for investigation
and negotiation to enable a positive outcome.
3

Who is my Support Team?
The seller will often be represented by a Business Broker
or a Merger and Acquisition Specialist throughout the
negotiation and sale process. They will also have legal
and financial advisors to ensure their best interests are
maintained throughout the negotiation process.
As a buyer, you should also have a support team offering
legal and financial advice to ensure your own interests are
fairly represented in the negotiation process.
Registering Your Interest To
Purchase a Business
The business you are considering to purchase is probably
listed with a Business Broker or a firm that specializes in
mergers and acquisitions. In order to get more information
about the business that is listed, you will be asked to formally
register your interest in buying the business.
For listings represented by Pavilion Business Services,
all buyers are required to complete in full the Buyers
Registration Form that is available online. This information
is used to assess the sincerity of the interest from a
potential buyer and to generate preliminary non-disclosure
documents before sharing further detailed information
about the business listing for sale.
Signing a Non-Disclosure Agreement
The seller will be concerned about confidentiality throughout
the process. Information needs to be presented to you as a
potential buyer, however it is essential that information is not
gathered for other purposes that will undermine the sellers’
current operations.
The Non-Disclosure Agreement (NDA) is signed by any
interested buyers who wish to get additional information. It
is delivered to the Business Broker and a copy is retained by
the buyer. This legal document protects any unauthorized
disclosure of private information that is provided by the seller
throughout the negotiation process.
Reviewing the Business Profile
Once a NDA is signed, the broker will release a Business
Profile, also known as a Confidential Information
Memorandum (CIM) that presents key information about the
business opportunity that is for sale. The Business Profile may
include an overview of the following:
• Description of the Business
• Company History
• Location, Facility and Premises
• Products and/or Services Descriptions
• Administration and Operations
• Sales and Marketing
• Historical Financials
• Competitive Overview
• Market Overview
• Growth Opportunities
The Business Profile includes preliminary information to
help guide a buyer’s decision to understand more about the
business opportunity that is being presented and determine
if the business meets the buyers selection criteria.
4

We could offer this similar statement to buyers: the business
is worth the best price and the best terms that the seller is
willing to accept.
There is no magical formula or correct value to establish
the price of a business. The offer will often be based on a
business valuation that has been professionally prepared
and is available to qualified buyers to review. Some areas of
consideration:
Historical Financials
Past financial results are a good indication of future
performance. Take into consideration how your personal skill
set could elevate the business for stronger results.
WHY IS THE BUSINESS
FOR SALE?
Business owners exit their business for several reasons and
a buyer is completely within their rights to ask questions
about the seller’s motivation to exit. A seller should be able
to present a clear reason for their intent to sell the business,
this could include:
Revenue Forecast
Look for trends to indicate if revenue forecasts are realistic.
Examine short-term peaks as they may be related to less
profitable promotional activity that would not be wise to
repeat.
Market Saturation
If there are several similar businesses in a desired market, the
acquisition price may drop due to increased competition.
Similarly, if there are a limited number of businesses
available to acquire in a particular market there may be a
number of buyers negotiating offers for the same business
opportunity.
• The achievement of established business goals
• Retirement
• Relocation
• Health or family concerns
• Death of the former owner
Be wary of sellers who are not clear on their reason to exit.
This could be a red flag for the current operations of the
business that has yet to be discovered and disclosed to you
as a potential buyer.
How Much is the Business Worth?
When advising clients who are selling their business, we
often say that the business is worth as much as a buyer is
willing to pay.
A stagnant or downward trend
in financials does not always
mean the business is not worth
buying. Owner fatigue or a lack
of motivation to operate the
business at its optimal level can
be reflected in the company’s
financials. If you are patient
and motivated, you can take the
business to a new level.
5

5 STEP METHOD TO
VALUING A BUSINESS
Obtain accurate financials for the last three to five
years. Ideally this will include Audited Statements,
Review Engagement or Notice to Reader.
Analyze the Income Statement and Balance Sheet
for at least the last three to five years. Reconstruct
or normalize the income and expenses as
appropriate. It is best to work with an Accredited or
Certified Business Valuator for this task.
Tentatively distribute the overall business value
between the various tangible and intangible assets.
This apportionment of the value will most likely
become part of the negotiations between the
buyer and seller. This last step is also important
because this is where you determine the actual
business assets that you are going to purchase.
Once the Income Statements and Balance Sheets
have been adjusted (normalized), capitalize the
available cash flow of the business according to a
return on investment (ROI) which is appropriate for
your expectations and the risks involved in business
ownership to arrive at a preliminary valuation.
Determine if any inventory or assets are obsolete.
Well maintained assets at transfer will help ensure
positive future cash flows in the business.
In most instances, the Pavilion team
has conducted a business valuation
by an accredited Business Valuator
for the seller. This information may
be available to qualified buyers
who meet the financing criteria and
signed a Letter of Intent (LOI) for the
purchase of the business.
6

What is the Business Owner Selling?
There are two types of assets that will be included in the
business transaction. Your purchase will outline what is
included from these tangible and intangible assets.
Assets
Tangible
Real-estate (land, building, lease)
Inventory
Furniture
Equipment
Existing orders from customers
Accounts receivable
Exisiting employees and customer contracts
Does the Sale Include Real Estate?
Real estate is a major asset that may affect the sources of
financing and the price you pay for the business. The transfer
of real estate may include any of these components:
• Outright purchase of the business premises (land and
building) along with the sale of the business
• Lease of the property from the seller
• Lease of the property assigned to you if it is not currently
owned by the seller
Generally, it is in the buyer’s best interest to purchase the
real estate with the business when it is currently owned by
the seller. The real estate should be valued along with the
business as an integral part of the operations.
The existing location of the business may be vital to current
operations. Retail and service locations that draw on a
physical establishment for the customer-base need to be
protected so you can continue operations with a reasonable
expectation of established or loyal customers.
Intangible
Goodwill
Trade names and trademarks
Patents and licences
Customer lists
Copyrighted material
Proprietary information
Seller’s agreement not to compete
7

Asset Sale
IS THE TRANSACTION A
SHARE SALE OR ASSET
SALE?
If the business is not incorporated and is run by a sole trader
or a partnership, there are no shares available for purchase.
The sale is comprised of the assets – including future
contracts and goodwill – and is sold by the seller as an Asset
Sale.
When the business is owned by a company, the business sale
transaction can be completed as either an Asset Sale or as a
Share Sale. With a Share Sale, the new owner acquires shares
in the company from the current shareholder(s).
Generally, buyers prefer to purchase the assets of a business
and sellers prefer to sell shares in the company. The structure
of the sale should be agreed upon early in the transaction
process as part of the negotiations between buyer and seller.
Buying a business is generally considered less risky than
starting your own business, especially if you can buy a wellmanaged,
profitable business for the right price. Consider
these advantages:
• The difficult start-up work has already been done. The
business should have plans and procedures in place.
• Buying an established business means immediate cash
flow.
Seller keeps current liabilities of the business (unless
otherwise negotiated)
Money from the sale is received by the selling company
Seller extracts the money due by dividends
(shareholder) or liquidation (private owner or
partnership)
Dividends are paid out to the shareholder and taxes
are inefficient
Liquidation returns funds to the owner and can be
an expensive tax burden
Share Sale
Seller has a complete break from the former business
and liability remains with the company
Buyer will often negotiate for warranties or indemnities
to limit the risk assumed by outstanding liabilities
Money from the sale is received by the shareholder(s)
Seller benefits from a one-time Capital Gains Exemption
(CGE) on their taxes – currently $850,000 for each
shareholder in Canada
It is advisable not to change direction part-way through the
negotiation process, as this can be an expensive decision
that will add unnecessary fees for both the buyer and seller.
The format of the sale (Asset or Share) will be a key factor in
structuring the rest of the deal.
• The business will have a financial history, which gives
you an idea of what to expect and can make it easier to
secure loans and attract investors.
• You will acquire existing customers, contacts, goodwill,
suppliers, staff, plant, equipment and stock.
• A market for your product or service is already
established.
• Existing employees and managers will have experience
they can share.
8

How can the Business be Financed?
New buyers are occasionally surprised to find that a large
portion of the sale will be expected to be presented to the
seller as cash. This is one reason why early research into
your own finances and available credit will determine your
eligibility and ability to purchase an existing business.
In many cases, financing is attained from a number of sources
including personal equity, personal loans from family and
friends and bank loans. In addition, seller financing may
be available for a portion of the sale price – also known as
Vendor Take-Back.
The seller’s willingness to finance part of the deal will be
an essential piece of information early in the negotiation
process. Buyers should ask the representing broker about the
following conditions for financing:
1. What percentage of cash down payment is required?
2. If the seller will hold financing, what is the time-frame
for repayment?
3. If the seller will hold financing, what is the interest rate
on the borrowed sum?
4. What personal guarantees will be required?
It’s not unusual for the seller to want 75% of the transaction
to be paid in cash before agreeing to further financing. The
seller is exiting the business, often for retirement or to invest
in other opportunities, and is expecting to have a sizable
amount of funds after fees, taxes and other related selling
expenses have been paid.
The seller will also be assuming risk by releasing the
management of the business to the new buyer. If the buyer
fails in the operations of the business, the seller is less likely
to receive their financing in recovery.
Here is an example of a purchase deal structure:
Purchase Price $2,000,000
Cash Down Payment
$1,000,000
Owner Transition Period
Part of the negotiation process will determine the transition
of ownership and what support the new owner can expect
from the seller. Whenever possible, the buyer should take
advantage of the seller’s offer to stay with the business for a
limited amount of time.
Regardless of personal experience, there will be numerous
questions that arise from new ownership. Often the only
person fully equipped to answer the questions is the person
who is selling the business. Part of the sale should include an
employment or consulting contract for the seller for a fixed
period of time.
The seller should be willing to stay with the business for a
three to six month period following the closing. If the seller
is unwilling or unable to take this opportunity, consider
offering a portion of the sale price of the business as a
consulting agreement so the seller is available to answer
questions and provide support for any difficulties that you
may encounter.
Any employment or consulting contract should specify the
duration and the remuneration between the parties.
Seller’s Non-Compete Agreement
A buyer can expect the seller to enter into a Non-Compete
Agreement after the sale of the business. This legally binding
contract is an agreement that the seller will not open a
competing business that will affect the operations of the
business you have purchased.
Generally, the seller has no intention of opening another
business in your market – they are planning retirement,
taking care of personal or family matters, or entering a new
career path. This document is protection for the buyer that
the investment you are making in the business will not be
lost by a reversal of intentions on the seller’s behalf.
A seller should not hesitate to this agreement. If there are
concerns about formalizing the agreement, this should be
a red flag for their potential intentions and something the
buyer should consider before completion of the transaction.
Bank Financing
Seller Financing
$500,000
$500,000 over 3 years
9

MAKING AN OFFER
Whatever your motivations are for buying a business,
take the time to validate the information you have been
presented with against your own needs. All parties are in a
better position for negotiations when critical information
that may impact the deal is known at the beginning.
Some points to consider:
• Conduct a site visit to verify the business operations
meet expectations. Examine the assets to verify the
condition and consider hiring an independent appraiser
for a valuation of the equipment.
• Examine the financial statements with an accountant.
Verify accounts receivables that will be due. Confirm that
accounting practices are standard for the industry.
• Review open contracts with vendors and customers.
• Verify the company is in compliance with labour
standards.
• If applicable, conduct any environmental tests that are
required for the real estate transaction.
• If the company is incorporated, verify that they are in
good standing with the province.
• Understand the industry in which the business operates.
Review trade publications to better understand new
developments and trends that will have an impact on the
future direction of the business.
• Determine whether the industry as a whole is growing
or susceptible to external cyclical influences. A buyer
does not want to come to find that they are a small player
in a small market that is on a declining growth trajectory.
• Review past business plans to see how objectives were
set and met by the former owners. This will provide
insight into capabilities of employees that may be
managing the operations of the business.
10

WHAT IS INCLUDED IN A
LETTER OF INTENT?
The Letter of Intent (LOI) outlines, in broad terms, the steps
that need to be taken before a formal Purchase Agreement is
put into place. It is often a non-binding agreement between
the buyer and seller to continue negotiations in good faith.
The LOI will often include the following terms:
When the buyer has the acceptance of the LOI from a seller,
they are temporarily in an exclusive position to purchase
the business. The seller is agreeing not to accept other offers
for the business and the buyer is agreeing to complete
their research of the business to allow for a formal offer of
purchase.
4 Understanding of the percentage of the business that
is being purchased
4 Agreement that the buyer will complete due diligence
on the financial statements and any other relevant
information in a timely manner, generally by a specified
date
4 Price of purchase and terms of the sale
4 Deposit payable to Broker or Lawyers trust accountusually
5 – 10% of purchase price
4 Description of the business and assets to be acquired
and the liabilities to be assumed
4 Employment or consulting contract for the seller (if
applicable)
4 Date to agree on normalized working capital to stay
with the business at the time of closing
4 Date to provide assurance of financing
4 Closing date
4 Date to accept the terms of the LOI by both parties
11

Who is Part of Negotiations?
The seller will probably be represented by a Business Broker
or Merger and Acquisition Specialist to represent their best
interest in the negotiation process, supported by financial
and legal advisors.
It is important for the buyer to understand who the key
decisions makers are during the negotiation process and the
role that they have in the process. The buyer should also have
independent advisors supporting their best interests during
the transaction.
WHAT IS THE TIMELINE
FOR COMPLETION?
A number of business transactions that Pavilion has brokered
between buyer and seller have included the involvement of a
financial intermediary to help both the buyer and seller, and
their respective accounting teams.
Buying a business is a complicated process and many trusted
accountants and bookkeepers are not familiar with the
implications of the structure of the deal and how funds can
be transferred.
Both the buyer and seller will have an idea of when they
would like to complete the transaction. Each will have a
more optimistic timeline that the process will be completed
with great efficiency and few delays or interruptions.
From a buyer’s perspective, you will be able to plan your
personal life for taking ownership of a new business. This will
be a significant undertaking. You may also be arranging for
additional financing that will need to be available when the
deal closes. Buyers may have an advantage in negotiations
to use the timeframe desired by the seller to better your
bargaining position.
The seller will also want to have milestone dates identified to
ensure the buyer is committed to complete the transaction
and is not having second thoughts and wasting their time.
Without dates agreed upon early in the negotiation process
both buyer and seller risk incurring additional expenses
through professional fees and unnecessary delays.
12

What is Due Diligence?
With a LOI in place, the buyer is responsible for completing
financial and operational due diligence. Due diligence is the
process of investigating the claims made by the seller to the
potential buyer.
The seller will release financial statements to the buyer’s
financial advisors so the business pro-forma earnings which
have been used to determine the valuation and purchase
price can be reviewed.
Buyers should be looking for the following financial details:
• Sustainable margins and gross profit
• Investments that support growth
Buyers will also review and scrutinize the business
operations. In particular, look for:
• Highly-skilled employees able to handle high-level
functions as the business grows with new ownership
• Infrastructure that supports growth or potential
expenses to support future growth
• Diversification of product or service offerings and
customer-base
Sample Due Diligence Checklist
Financial Information
• Annual and quarterly financial information for the past
three years
• Financial projections
• Capital structure
• Other financial information
Products or Services
• Description of each product or service
• Market share
• Cost structure and profitability
Customer Information
• List of top customers
• List of strategic relationships
• List of top suppliers
Competition
• Description of competitive landscape within each
market segment
Marketing, Sales and Distribution
• Strategy and implementation
• New business generation
• Sales force productivity
• Current and projected marketing plan and projected
budgets
Research and Development
• Description of research and development
• New product pipeline
Management and Personnel
• Organization chart
• Historical and projected headcount by function and
location
• Summary biographies of senior management
• Compensation arrangements, including stock plans
• Significant employee relations problems
• Personnel turnover
Legal and Related Matters
• Pending lawsuits
• Employee safety issues and liabilities
• List of patents, copyrights, licenses and trademarks
• Summary of insurance coverage
• Summary of material contacts
13

Buyer Responsibilities
The buyer is responsible for:
4 Successfully obtaining financing for the transaction
This should be completed before the due diligence
process begins and should include a contingency plan if
one source of financing is not acquired.
4 Reviewing and signing any leases
Do this as early as possible so any problems can be
resolved right away. If there are problems, be prepared
to have a reasonable compromise for the seller’s
consideration.
4 Applying for licenses and permits
As soon as possible, apply for any business permits as
they may take significant time to be processed.
Preparing the LOI and Purchase and Sale Agreement
documents
The buyer provides the first draft of these documents.
These documents need to be reviewed by the buyer’s
legal team before being submitted to the seller.
4 Taking inventory
Prior to closing, take an actual physical inventory count
to ensure the business assets are as they claim.
4 Final inspection of the assets
Prior to closing, confirm the condition, quality and status
of the business to ensure they meet expectations to
date.
Seller Responsibilities
The seller is responsible for:
4 Preparing the real estate lease
If lease is involved, it needs to be presented and
prepared by the seller. This should be done early so the
terms can be reviewed and resolved without impacting
the closing date.
4 Preparing vendor take-back notes
If the seller is providing financing to the buyer, generally
they are responsible for preparing the contract. The
buyer should confirm that the seller is getting this ready.
4 Settling any liabilities and liens that are not included
in the sale
This needs to happen before closing so the liability is
not transferred to the new owner. Generally the Business
Broker or Merger and Acquisition Specialist working with
the seller will ensure that these debts are being arranged
for appropriately. Legal representation is essential at this
stage.
4 Providing access for inspections and inventory
counts
The buyer will need access to the facility to ensure the
assets are as they have been presented.
4 Preparing any additional documents
As per the terms of the Purchase Agreement, the seller
may be responsible for providing a number of legal
documents necessary to close the deal.
4 Complying with any other provisions outlined in the
LOI or Purchase Agreement
The seller needs to help close the deal without causing
unnecessary and costly delay.
14

COMPLETING THE TRANSACTION
When the terms of the LOI are met and due diligence has
been performed, the buyer may wish to proceed with the
purchase of the business by working with a lawyer to draft
a formal Purchase and Sale Agreement to present to the
broker and seller.
Both the buyer and seller are advised to review the terms of
the agreement with legal representatives.
Sample Terms of a Purchase and
Sale Agreement
Description and exclusions of assets
• Purchase price and allocation
• Payment of deposit and purchase price
• Assumption of liabilities
• Representations and warranties of the seller
• Covenants of the vendor
• Representation and warranties of the purchaser
• Covenants of the purchaser
• Survival of representations, warranties and covenants
• Conditions precedent to the obligation of the purchaser
• Conditions precedent to the obligation of the seller
What Happens on the Closing Date?
The actual closing of the transaction will take place at a
mutually agreed upon location with legal representation
present.
At the time of close, the seller’s transfer of ownership will
include (but is not limited to) the following:
• All deeds of conveyance, bills of sale, transfers and
assignments
• All approvals to validly assign leasehold property and
material contracts
• Possession of the assets
• Release of any liability that the buyer is not assuming
The buyer’s transfers will include (but is not limited to) the
following:
• Agreement to assume and pay or perform and
indemnify the seller against the Assumed Indebtedness
and other obligations included in the transaction
• A certified cheque or banker’s draft to be held in trust
for the portion of the purchase payable in cash
The transfer at closing signifies the end of a deal that started
months earlier and represents the start of a new business
opportunity for the new owner.
• Closing
15

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26
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