Purchasing a Business

Before buying an existing business, you must carefully evaluate the overall soundness of the business. Your accountant and corporate lawyer can help guide you through the evaluation process.

You should inspect the financial statements and tax returns for at least the past 3 years. If these are an accurate reflection of the business activities, financial statements will show you whether the business is growing or declining. Also, check the accounts payable and receivable. If bills are not being paid on time, there could be a cash flow problem. You must ensure that there are no liens against the business for unpaid bills, or against assets that you are purchasing. Review the accounts receivable and make special note of any overdue accounts, for example, older than 90 days.

Employees are also a key part of any business. Investigate how long key employees have been with the business and whether they intend to stay under new ownership. Determine how long it will take to train a replacement if they should decide to leave when you take over the business. If the workforce is unionized, have your lawyer review the current collective bargaining agreement and take note of its expiry date, to ensure that you know what your obligations are under the bargaining agreement and under Ontario's labour laws.

In many businesses, 20% of the customers generate 80% of the revenue. You should review the existing customer base and identify the top customers. Evaluate whether these customers are likely to stay with the business and the risks you face if they don't. What strategies will you employ to retain these key customers?

Ensure that any registrations, licenses, and other legal documents can be transferred. Also check into any local or municipal licenses, taxes and by laws that affect the running of the business. Consider the location, parking and condition of the building(s) in which the business is located, including any maintenance or repairs needed. It is crucial to consult with an experienced corporate lawyer when considering the purchase or sale of a business.