Equity Crowdfunding in Canada

Crowdfunding for Individuals

On May 14, 2015 British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia announced early stage companies can use online portals to raise $500,000 per calendar year. With equity crowd funding, non-accredited investors will be able to invest up to $2,500 per company. In British Columbia the restriction is $1,500.  Additionally, provinces restrict the type companies seeking funding. Basically an investor with annual income and or net worth less than $100,000 can invest 5% of his net worth or maximum of $2000 in a 12-month period. If the individual investors annual income is or net worth is greater than $100,000 then the individual can investment up to 10% of his annual income. Regardless of how wealthy an individual is no one is allowed to invest more than $100,000 in a startup using an online equity crowdfunding portal. Companies raising money have to follow strict filling requirements before and after the distribution of shares.

Valuing businesses and conducting due-diligence are critical skills required for investing in small businesses. Since the investments are small, all due diligence tasks must be completed by the individual investor as it may be too difficult to hire a lawyer or accountant to assist. Investors are required to understand and acknowledge all risk and warnings associated with the investment.

Usually private equity investment has been available only to accredited high net-worth individuals and institutional investors.  With equity crowd funding individual investors can invest in startups and established small businesses looking for funding.  Private equity investments are a good way to diversify because they are not co-related to public markets. In some cases, they can even be negatively co-related to stocks and bonds. However, investing in private-equity (small companies and startups) is a high-risk asset class as the failure rate for these companies are very high. Additionally, private equity investments have limited liquidity. At the moment there are no equity crowdfunding exchanges that allow you to liquidate these investments. Individual investors should also be aware that initial investments will get diluted over time as the company they have invested in raised additional rounds of funding.

Crowdfunding for Businesses

Companies to have to do a lot of work before they can raise funds from the private market. To start with companies, need a business plan that it can share with investors. They need to provide potential investors a solid business plan that includes description of the business, financial plan, marketing plan, competitive analysis and financial statements (Balance sheet, Income statement and Cash flow statement).  The business plan is not just a funding tool, it also helps plan operations and determine the company’s valuation.

Crowdfunding equity requires businesses to incur legal fees related to private equity exemptions and standard equity financing. As soon as a company has more than 50 shareholders they automatically forfeit the private equity exemption. In order to raise funds by selling securities in Canada, businesses need to file a prospectus with the securities regulators or their province.  However, because this step can be expensive for start-ups and small businesses, the regulators have created “start-up crowdfunding exemptions” for eliminate this step.  Under the “start-up crowdfunding exemptions” a start-up is not required to file a prospectus and a funding portal is not required to register as a dealer with the securities commission.

Running a crowdfunding campaign requires significant amount of time and effort. Companies need to determine the type and characteristics  of the securities sold, number of securities sold and the price at which they will be sold (valuation).  Companies must raise the minimum amount required within 90 days of publishing the offering document on a funding portal Website. Additionally, the businesses need to have a system in place to manage large of share holders after successfully completing a crowdfunding campaign.

BuySellBusinesses.com facilitates equity crowdfunding by aggregating deals from our partners and connecting business investors with startups.

Top Ideas for Corporate Businesses Services

Are you looking to start or buy a service business targeted  at Small and Medium Enterprises (SMEs). If you live in an area that has lots of SMEs then providing services to these businesses may be a good option.  The business you select depends on several factors including your skills, talent pool available in your area, capital required to start or buy the business and most importantly the competitive landscape  and demand for the service in the area. Here are a few service businesses to evaluate.

Business Travel Management

Help manage all travel requirements for businesses. Travel management services provided to SMEs can include advising clients with travel safety and security, booking tickets at the optimum prices based on travel requirements, tracking and reporting expenses, managing frequent-flier miles and other related tasks.

Accounting and Bookkeeping Services

Business owners have very little time and knowledge to work on bookkeeping and accounting tasks. Bookkeeping service is a critical service  to business owners. Accounting and Bookkeeping Services typically include Payroll Services, Data entry, Tax planning, Financial Statement Preparation, Audit and Review Financial Statements, Filing tax returns,  Filling state and federal sales taxes, Succession Planning and Income Tax Appeals .

Business Plan Consulting

SMEs usually work on a business plan at several points in their growth cycle and not just in the startup stage.  Business plans are used to track the progress of a company, to provide a roadmap for the future and to raise financing. It is a critical document if customer plans to sell the business. Business plan includes several components.  For example, a typical business plan should include Strategic overview of the business, Marketing and sales plan, Human Resources plan, Operating model,  Financial plan and an appendix to all data (facts and figures) to back up all claims made in the plan.

Corporate Event Planning

Corporate Event Planning refers  to organizing  Conferences and Conventions, Meetings, Fairs, Product launches, Rallies, Shows and Corporate picnics to list a few events. An event planner has to complete several tasks including conducting research, finding a venue, arranging the food and entertainment, decorating the  venue, sending invitations to all employees (attendees), supervising the venue to make sure everything goes as per plan and finally evaluating the event for lessons learnt. SME’s prefer to outsource Corporate Event Planning because they lack the time, knowledge and passion to organize an event effectively.

Copywriting, Editing and Proofreading Service

Copywriting services refers to assisting an SME with writing for websites, newsletters, presentations, proposals and company profiles to list a few. Copywriting services includes business writing which in turn includes assisting a business with business documents like business plan, tender documents, proposals and general business correspondence.

Proofreading service is required after a document is produced for quality control. This step must be completed before releasing a document to its consumers. Proofreading service includes checking the document for grammar, punctuation, spellings  and general “typos”. Additionally, the service also includes checking for consistency of terminology, fonts, references, page numbering, table of contents, glossaries and so on.

Public-Relations (PR) Agency

PR Agencies are the opposite of advertising agencies. They promote businesses by placing stories on websites, new papers, magazines and TV programs. This is the opposite of advertising agencies who place content on paid media. PR Agencies work by developing contacts with reporters and other media outfits. The most common service provided by PR agencies is helping clients develop press releases and going public with the press release. Other services provided include conducting market research for a firm’s messaging, social media promotion and responding to negative opinion online.

Mailing Services

Mailing service businesses provide SMEs services such as parcel shipping, accepting mail, mail merge service, mass mailings and direct mail marketing brochures. Mailing service can be a home based business.

 

Top Ideas for Computer Related Businesses

Digital Economy

All companies require computer related services. Computer related businesses are specially well suited to people who have a technical background or are very interested in the area. Following are computer and Internet related businesses for consideration if you want to operate in this domain:

Computer Repair Service

Most people now have multiple computers including laptops, desktops and smart phones. When these computers have problems, downtime can cause significant impact to business and other users. Computer repair businesses help people by fixing their computers. Computers can be fixed remotely using virtual private networks (VPN) rather than actually going to location of the computer (house calls). Computer technicians and computer repair businesses tend to be very busy given people reliance on computers for business and personal work. Computer problems may be related to keyboards, mouse, printers, internet connection, component failures, disk failures and so on. Additionally, computer repair firms can also provide data backup services. There are several tools that allow you to back up data online and becoming affiliates for the these backup service providers can add to your revenue.

Website Design

Big and medium sized companies have well established Websites. However small companies can also benefit from online presence. Small companies have smaller budgets and Website design consultants can help these companies create and manage their Websites for a fee. Initially one can start with a few small companies and do this part-time. Developing Websites is simple with several advanced content management systems (CMS) available. CMS systems like WordPress makes it simple to develop Websites. Website designers can develop digital products like CSS themes and sell them on online market places for additional income. Additionally, Website designers can also make a mark up on hosting websites. They usually buy hosting from cloud providers like Amazon Web Services (AWS) and Microsoft Azure, but charge a markup for hosting. On the softer side, website design business allows you to be creative every day.

Internet Marketing Consultant

Internet marketing relates to promoting businesses online. It includes Search Engine Optimization (SEO), SEO experts help companies get more traffic from Google, Bing and other search engines. To be an SEO expert, you need to keep up to date with the latest changes in search engines and analyze websites to check if they implement all the best practices. This is a good business opportunity because there are millions of websites competing for maximum visibility. SEO requires copywriting skills and analytical skills. There are hundreds of websites online that teach you SEO skills. Additional benefits of this business include working from home, starting small (part-time) and scaling the business.

Blog Consulting

Blogs are discrete posts (articles) written by one or more individuals to and presented in chronological order. That is the most recent article is presented on the top sorted by date and time. It is one of the most common and powerful way to present your voice online. Many well established news sites now use the blog format to present news as it happens. There are millions of blogs online on every topic conceivable. Blogs are not necessarily written by one person. Typically there is a team supporting a blog. If you are good at writing and have time to research topics, blog consulting can be a good business. You can start this business on part-time basis and then scale the business over time to include multiple blog consultants as the market for blogging is large. Blog consulting is primarily content writing, but can also include blog setup, site customization and site hosting. The start-up costs for blog consulting is minimal. Blog sites typically make money through affiliate marketing, sponsorships and advertising. On the downside, one must be aware a blog site requires two to five thousand unique visitors per day before it can attract a sponsorship opportunities, so it requires significant internet marketing effort to get traffic.

Online Bargain Finders

Looking for bargains online requires time and knowledge of the Internet. There is an opportunity to find bargains online and re-list the bargain item on your own website. The re-listing website must sign on as an affiliate to sites where the deals are available. Your website makes commission on each sale through the affiliate relationship.

Data Entry Business

Several professions like legal and medical require significant amounts of data entry. The service includes data entry from hard copies to database (soft) format, data cleansing, legal forms, making soft copies of hand written information and several others. Data entry businesses can provide a steady source of income where the business gets paid by the hour or by the amount of data entered or transcribed into a system. Data entry services include data entry from images, PDF document indexing, Like other computer related business ideas, data – entry businesses have low startup costs and can initially be done part-time from home.

Internet Research Business

The Internet know has millions of websites and each website potentially has thousands of pages of information. Looking for information online, even with the Google and Bing search engine, is like looking for a needle in a haystack. It can take hours to compile a report. Additionally searching for information on the Web requires knowledge of internet safety.

Ink and Toner Cartridge Recycling Business

Ink and Toner cartridges are made by HP, Cannon, Epson, Lexmark, Brother and several other printer and photo copier vendors. Ink and Toner recycling business can be run part-time from home and the main skill required is the tools and ability to fill cartridges. Startup costs for the business are low between $2000 and $5000 and the return on investment (ROI) is high. Your clients can get recycled cartridges for less than 50% of the cost of a new one. Additionally, its green business because toner recycling businesses prevent millions of used cartridges from showing up in landfills.

Custom 3D Printed Products

Custom 3D printed parts have opened up a hundreds of opportunities for startups. As the cost of 3D printing comes down rapidly more and more use cases become feasible in manufacturing, health care and several other sectors. Key areas to focus on 3D printing includes mass customization, rapid proto typing, personal part fabrication and fabrication of non-standard parts.

Computer Training

Computer training businesses include training people on Windows, Office, Macintosh, Internet and other software products.

Computer Consulting

Computer consulting in Software development, Windows and Linux systems. networking and other services. Software development is perhaps the toughest area to get into because it requires computer science skills. But if you have these skills the demand for computer programmers, database administrators, computer systems analysts and software architects is large.

Deals Closed in 2014 – Statistical Analysis

Approximately 50% deals took between four months to six months to close in 2014. See illustration below. Based on this distribution, on an average, a business will take 8.5 months to sell. The time required to sell a business depends on a number of factors including type of business and asking price for the business and type of buyer. Types of business include Manufacturing, Business services, Consumer goods & services, Health care & biotech, Wholesale & distribution and several others. There are two types of buyer’s strategic buyer and financial buyer. Understanding the buyer type is perhaps the single most important factor when it comes to engaging a buyer and negotiating a deal.

Time to sell Business

There are several reasons a business transaction may fall through. Top three reasons are valuation gap in pricing (29%), insufficient cash flow (22%), and lack of capital to finance (12%). Valuation gap is responsible for almost 30% deals not going through. Both the buyer and seller must complete valuation of the business independently and come up with a valuation range. If there is an overlap then zone of probable agreement (ZOPA) exists and there is a good chance the two parties will find a number during negotiations.

Insufficient cash-flow and lack of capital to finance is another major reason to deals do not go through. It is important to qualify buyers before negotiating a deal.

Reasons For Failing

Of the 30% deals that did not go through because of valuation gap, 65% of the deals had a gap between 10% and 30%. As expected the numbers deals failing for less than 10% gap is very low. When the numbers are so close the buyers and sellers should generally be able to agree on a number and come to a deal.

About 50% are strategic buyers and 50% are financial buyers. Financial buyers will not negotiate much as they have to stick to their financial models. Strategic buyers on the other hand have longer term view and may have synergies with existing assets. On a an average, 21% strategic buyers paid 0-10% more and 29% paid 11-20% more.

Valuation Gap Business Deals

For these reasons it is critical for sellers clearly understand the buyer persona. Financial buyers look for value and evaluate business financial statements in detail. They leave very little room for premium and remain close to the valuation price. They are driven by Return on Investment (ROI) and use large amounts of financing. A financial buyer may not hold the business for long. They may fix the business, improve the financial statements and sell the business.

Strategic buyers on the other hand tend to stay in the business for long periods of time. They may buy the business to enter into a new market, increase market share or foreclose a competitor from acquiring the business. In terms of duration, strategic deals are also done much faster. Strategic deals are preferred because they are done within six months, there are lower chances of valuation gap pricing issues and seller may walk away with a small premium between 10% and 30%.

 

Business Valuation Considerations

Business value is not a specific number and there is no one absolute value that defines it. But rather business value is range and varies greatly based on assumptions used and factors considered. Market value is one type of business value.

Fair market value is the price at which a business changes hands between a willing business buyer and seller. It is important to keep in mind there is no one true value for a business because the value of a business is influenced by many factors. So rather than think of the value of a  business as an absolute number, one should think of it as a range. There are many reasons owners value businesses including buying and selling businesses, employee stock ownership plans, estate taxes, business equity transfer, financing and so on. Business valuation is also required for tax purpose when a business transferred to the next generation.

One place to start is to engage a professional business appraiser. Appraisers tend to conduct detailed analysis and use intrinsic valuation techniques rather than using rules of thumb because it tends to be overly optimistic.  Business appraisers have their pulse on macroeconomic and microeconomic changes effecting the economy and they can help business owner’s trade-off terms with cash when negotiating a term sheet.

There are two factors that affect small business valuations the most namely cash flow and the value of assets it holds. Cash flow is the amount of cash the business generates. Other factors that influence a business include Supply and demand, Interest rates, nature and history of the business, location of the business and so on. When the number of businesses for sale is large the value tends to be lower and vice versa.  If interest rates go up money gets tighter, interest payment becomes larger and the value of the business goes down.

Some additional considerations for business valuation include:

  • Financial condition of the business. The best measure for this is the book value. Book value is the total assets minus total liabilities of the business. The book value of a business can be determined by analyzing the balance sheet and income statement.
  • Ability of the business to generate cash, pay dividends and so on.
  • Prior sales of businesses in the area. In the best case there would be similar businesses in the geographic location that can be used as comparable.

Following is a checklist of documents a business owner requires to value a business.

  • Financial statements which includes balance sheets, income statements for up to the last five fiscal years.
  • Income tax returns for the last five years.
  • Equipment list, depreciation schedule, Accounts Receivable, Accounts payable, inventory list, lease, and prepaid expenses.
  • List of stockholders or partners, with number of shares owned by each or percentage of each partner’s interest.
  • Description of business including competitive analysis and factors that make the business unique.
  • Regulatory filings, associations the business belongs to and relevant trade publications.
  • List of patents, copyrights, trademarks, and other intangible assets.
  • Is the business at risk from new regulations or legislation.

Investing in Commercial Property (Commercial Real Estate)

Broadly speaking real – estate can be classified as commercial, industrial and residential. Commercial Real Estate  is property used solely for business purpose.  It is any property used to produce income. Examples of commercial real estate include malls, restaurants, convenience stores  and office spaces.  Industrial real estate is used for manufacturing and production. Businesses that occupy commercial or industrial real estate usually lease space. Commercial and industrial real-estate is usually owned by investors who own the building and collect rent from each business (tenants). Similar to buying a business, investors should complete due-diligence before investing in commercial property. Key element of due-diligence include Location,  Property Type, Budgets and several other factors listed below.

Location

Location is a critical element of commercial property investing. Investors must understand the soundness of the location, demand / supply dynamics and vacancy  rates. Additionally, investors should ensure that job market, economy and population growth in the area is favorable. Without sufficient research they may land up buying  property in micro markets with high vacancies.

Property Type

There are different types of commercial property available  including retail, office space, industrial, multi-family and land .The most popular being retail and office space.   Investors looking for retail space have several options including free-standing street outlets and shops in malls.  These outlets can be as small as 500 – 1000 square feet. Shop in malls belong to a strata and are pre-sold to individual investors.

Industrial and commercial properties may have capital appreciation and rental yield.  Rental yield is the annual rent divided by the value of the property. Rental yield is critical element for valuing a property. A low yield implies the property is overvalued. Rental yield varies by country and market. For example, commercial properties with rental yield of 11 %to 12% is considered correctly valued in major Indian cities like Mumbai and Bangalore. Commercial property with yield less than that is considered overvalued.

Due – Diligence

In addition to the above factors Investors should check the credentials of the developer, potential infrastructure development in the area, access to public transport and quality of property management. In case of a retail store front -age and visibility are critical.

The buyer usually provides the seller a due diligence checklist.  The checklist includes request for information related to tenant information, building information, operating information, financial information and other miscellaneous items. Tenant information include rent roll showing the rents paid. Rent information must include tenant’s name, suite number, size of premises and several other attributes. Operating information should include financial statements of the property for the  past three years, current operating and capital expense budgets for the property, utility bills for the last three years, tax bills and more. Financial information includes understanding the break-up of cash flows. This includes collecting data on vacancy factor, maintenance expenses, property tax, building insurance, lease term, lock-in period and expiry dates for leases, long-term capital appreciation potential, cost of refurbishment and potential for refinancing. Additionally, the buyer should obtain new third party inspection report and title report.

Whatever information is provided by the seller, they usually include a provision in the purchase agreement stating the information contained in the documents must be verified by the buyer. It does not constitute a representation of warranty of the seller as to their accuracy.

 

Negotiating a Term Sheet

The term sheet is not a legal document. It is used to negotiate the broad parameters of an investment. The actual agreement is set in several other documents including the stock purchase agreement and investor rights agreement.

Term sheets are non-binding agreement between parties involved except for certain terms that include confidentiality and no-shop provision. Most deals that get negotiated using a term sheet are finalized. Term sheets have an exit date and agreements must be signed before the expiry date.

Term sheets can be for a debt offering or equity offering. Terms common to debt offering and equity offerings include pre-money valuation, amount to be invested, post-money valuation and cap-tables. Debt-offering terms include convertible offering, fixed or indeterminate conversion price, automatic or optional conversion, assets used for security and interest rate. Interest rates are not usually negotiated if it is in a reasonable range. Anything between 3% and 8% is considered reasonable.

Equity offering terms include shares (common or preferred), liquidation preference, conversion price and valuation, automatic conversion, anti-dilution, pre-emptive rights, protective provisions, voting rights and shareholder rights.

Additional common terms in a term sheet include full legal name, type of security (debenture, common shares, and preferred shares), size of round, price per security, number of closings, number of tranches and milestones, targeted closing date, use of proceeds and expiration date.

A term sheet can be for a note deal (debt) or for an equity deal. Usually it is cheaper and quicker to do a convertible note deal because there are a lot fewer terms to negotiate and draft as compared to an equity deal. Additionally, a convertible note term sheet kicks the valuation can down the road to when the note matures. For example, in case of a convertible note deal if the investor invests in 100 thousand when the deal matures (say after 1 year) the investor will get $106 thousand worth equity at the negotiated equity price.

The convertible note puts a stop in the valuation discussion and frees up the business to go and get work done. In effect the valuation discussion is pushed to a later point in time when the business is more established. Convertible notes are only useful if it includes terms that protect the investor from runaway valuation. For example, the investor may invest $100,000 in a business at an early stage, but then if the company gets an investment in millions of dollars the original investor is completely diluted. Suddenly the investor who took the biggest risk has the lowest percentage in the company and correctly compensated for the risk. Convertible debt makes sense only if the term sheet has terms to protect the original investor investing through convertible debt.

The most negotiated terms in a term sheet are valuation, type of security, board of directors, significant financing threshold, IPO threshold, drag along threshold, anti-dilution provisions, pay-to-play and management carve-out.

The term sheet is usually served up by the investor to the entrepreneur. However, in case of a seed round or party round it may fall up to the entrepreneur to create and serve up term sheet and serve it to the investor. Both investors and entrepreneurs should take the opportunity to get legal advice before signing a term sheet.

Ideally, all inside rounds of financing should be shopped around using term sheets. Doing so facilitates a market check that helps determine the correct valuation for the business, which is the correct outcome for everyone involved. That said a term sheet may include a no-shop provision.  During due-diligence investors should be mindful of this provision because can affect the valuation of the company long-term.

Exploding terms sheets are term sheets that must be signed in a very short time. Ideally, investors should avoid exploding term sheets because it does not give them sufficient time to complete due-diligence on the company.

Small and Medium Enterprises (SME) in India

In 2006 there were 26 million micro, small and medium businesses in India. 97% of these businesses do not show up in international statistics because they are unregistered or operate as sole proprietorships and partnerships. Only a very small percentage of businesses in India (> 3%) are incorporated. Over 98% are ‘Micro’ enterprises do not have employees and provide services to local markets with minimal investment. They use traditional techniques and do not have access to bank credit.

In India, businesses are classified as Micro, Small or Medium depending on the amount invested in plants & machinery (MSME). Within Manufacturing sector, micro businesses have  an investment  range of under USD $ 50 thousand. Small businesses have an investment range between USD $ 50 thousand and less than USD $ 1 million. Medium businesses have an investment range between USD $ 1 million and USD $ 2 million. SMEs form 95% of the total manufacturing and manufacture thousands of quality products that are used domestically and exported. As per estimates from SME Chamber of India, 21 Million SMEs in the manufacturing sector contribute 45% of the nation’s industrial output and 40% of the total exports.

Within the service sector, micro businesses have  an investment  range of under USD $ 20 thousand. Small businesses have an investment range between USD $ 20 thousand and less than USD $ 400 thousand. Medium businesses have an investment range between USD 400 thousand and USD $ 1 million. MSME employ ~ 60 million people and contribute ~ 20% to India’s GDP.

Internet Usage in India

India’s Internet base in 2013, was 150 million users representing about 10 percent of the country’s total population. Indians primarily use the internet is for communication including email and social media.  India has 110 million mobile internet users.

India’s eCommerce Market

India’s eCommerce market is USD $16 billion industry and is estimated to grow at a CAGR of 40% $18 billion by 2015 from $4.75 billion in 2011. The eCommerce market grew by 88 percent in 2013. Popular products sold in India include tech and fashion categories like iPads,  digital cameras and jewelry. 78 percent of shoppers prefer to shop on mobile phones for deals. Approximately 75 percent of online shoppers in India are 35 years old or younger.

Venture Capital and IPO in India

On an average less than 100 Indian companies get VC funding each year.  The average VC deal size in India is 20 crore (USD $4 million). The average pre-money valuation at 40 – 60 crore (USD $10 million). Very few businesses receive angel funding and government schemes for startups fund approximately 100 businesses every year.

Approximately 50 companies get listed (IPOs) on Indian stock exchanges. Most companies listed on exchanges (NSE and BSE) are quite illiquid. To stand a chance of an IPO on the NSE or BSE, a company must ideally have revenues of over 100 crore.

IT Services

Indian IT services is USD $52 billion and grew at 17% during the year 2011-2012. About USD $ 40 billion is from exports and the remaining USD $ 12 billion is from the domestic market.

Business Transfer

Business transaction starts with due diligence investigation and negotiation. Usually the prospective buyer makes a written offer (Letter of Intent) that sets the broad parameters of the negotiated deal. The negotiated deal must include consensus regarding price, payment structure, price allocation and all other details that comprise the final deal.

Once all the terms of the offer are accepted by both parties a Purchase-and-Sales agreement is drawn up. The agreement must be drawn up by an attorney who specializes in commercial law possibly with the assistance of an accountant and business broker. The details of the Purchase-and-Sales agreement must be based on the accepted offer. Banks (lenders) also need the agreement signed by both parties to analyze the deal and issue loans.

PURCHASE-AND-SALE AGREEMENT (P&S)

 The Purchase-and-Sale (P&S) agreement is a contract that shows the buyer has decided to acquire the business and the seller has decided to sell the business for a certain price within a certain period of time. This document covers everything negotiated and listed in the letter of intent (term sheet).

The P&S agreement is legal and binding once it is signed by both parties.  It is the conclusion of in-debt investigation and due-diligence by the buyer and seller. At this point the seller has determined the buyer has the financial and business capability to see through the transaction. The Purchase-and-Sale agreement can be several pages with exhibits and attachments that address all the necessary points to be covered. It is important for the buyer and seller to understand the elements covered in the agreement. Listed below are a few items covered in the P&S agreement.

Buyer, Seller and Business Names Names of the business buyer, business seller and the name and location of the business.
Asset Inclusion and Exclusion List of assets included with the sale of the business.  Assets include equipment, machinery, inventory, accounts receivable (AR), brand (business name), goodwill, real estate and so on. The P&S agreement shall also list all items that must be excluded from the agreement cash and real estate.
Price The total purchase price for the business. This section must breakdown the price into its component including down payment.
Closing Date (Time frame) Closing date for the business transaction. It can take 3 to 6 months to get a commercial loan, so the closing date must be a few weeks away.
Liabilities (Accounts Payable) The business seller usually retains responsibility for Accounts Payable (AP). All current business loans must be re-paid by the seller so that the new owner has clear titles on all assets. If the buyer takes on any expenses it should be reflected in the selling price.
Accounts Receivable  Accounts Receivable (AR) that is money owed to the business is also typically retained by the seller. In some cases the AR may be sold with the business by adjusting the selling price higher. If the AR is sold with the business the seller must provide a detailed list containing amounts, counter party details and expected dates.
Payment Terms This section includes the amount of cash that will be paid on the closing day, deferred payment scheme and seller financing details.
Inventory Contains list of all inventory items included in the sale. The inventory should be counted when the agreement is created and once again just before the deal closes.
Seller Agreements This section usually includes non-compete covenant, inspection reports (federal, state and local, environmental) and other actions required by the seller such as repairs and transfer of licenses.
Taxes Taxes due should be paid by the seller before the closing date.
Escrow Agreements Escrow Agreements are created only if there is an outstanding obligation where some work needs to be done by the seller after the closing date. In this case money is held in an escrow account and released when the obligations have been satisfied.
Seller’s Representations and Warranties This one of the important parts of the agreement. It is used to ensure the seller has provided correct business information through the due-diligence process.

Business Transition

The process of buying a business includes several activities. The business buyer must search for an appropriate business, analyze the business and financial data, develop a viable offer, close the sale and transition to the new business. The business transition step is critical because after the sale is finalized the original owner may not be available to answer questions.

The business seller should start grooming the business for sale several years before actually putting up. This period is crucial because it allows the business seller to organize the following documents:

  1. Prepare financial statements for three to five years.
  2. Corporate tax returns for three to five years.
  3. Inventory value and capital expense and equipment.
  4. Customer lists and list of employees.
  5. Documents related to leases and franchise agreements.
  6. Artifacts related to transitioning the business to the new owner.

Completing all artifacts for smooth transition significantly increases the chances of a business being sold as it reduces risk of owning a business for the new owner. Some common areas both buyers and sellers must discuss include:

  1. The business seller must be clear why he is putting up the business is for sale and document the reasons. The buyer must ask this question and the business seller must provide a detailed explanation.
  2. The buyer and seller must determine the value of the business and set an asking price range. The asking price breakdown must include asset value, interest expenses, business quality, business value and goodwill. Goodwill amount is the difference between the total value of assets and the selling price.
  3. The business seller must create a marketing plan that contains the type of business, the industry the business belongs to along with trends and projections for the industry. The marketing plan must include market share, growth potential, target market and other elements. The marketing plan must include competitive analysis and rank the competition.
  4. Location of the business and the history of the location. Both parties must be clear if the business can be re-located and / or merged with another business.
  5. The seller must create a customer list. The customer is the most valuable asset in a business, so it critical for the buyer to understand the customer profile and behavior. The Buyer must evaluate any customers who account for more than 10% of the business as losing this business can significantly impact profitability.
  6. Define all products, services and document their history if they have changed over time. The business seller must document how the products or services are priced and create a list of all suppliers.
  7. The seller must also document proprietary processes or trade secrets that must be transferred to the new owner.
  8. All operational tasks related to how products and services are produced from start to finish. Buyers must gain access to payment terms of suppliers, operating manuals and handbooks and any other information that can help them understand the day-to-day operation of the business.
  9. Job descriptions and pay rates of all employees. The new owner usually has the opportunity to re-hire existing employees and review their current and future responsibilities, wages and benefits.
  10. Buyer and seller financing. Buyer financing is the ability of a new buyer to raise sufficient money to buy the business. Seller financing is the seller’s willingness to finance part of the business. The discussion on financing must include liabilities. Usually all debts are paid by the seller unless there is a mutual written agreement stating the amount of debt the new owner will take on.

All the items above are important considerations to reduce the dependency on the current owner and simplify business transition. If the owner of the business agrees to assist with transition after the sale, the decision should be included in the purchase and sale agreement. The agreement must include specific tasks that the owner will perform during the transition period and the length of time for which he will perform the tasks.