Why Buy An Ongoing Business?
By Eugen Klein, B.Comm(UREC), CRES, ARM®, RI, FRI
Real Estate Broker
When I present to investor groups on the subject of buying a business, I am often met with incredulous looks that slowly turn to understanding and interest as I make my case for the advantages of being a business owner. Because by their nature, businesses have more flexibility, complexity, risk, revenue, net return, and time demands than comparably priced investments, people rarely take the time to evaluate all the positive features of taking over a business in operation.
There are several reasons why one should buy an operating business. The most obvious is the return that a business will offer a purchaser or investor. The income multiplier on a typical business may run from 2x to 5x; for an investment property the multiplier may be 10x to 20x; this means that the same net income stream will cost the purchaser four to five times as much when they buy a investment property instead of a business. For example, we have a closing next month on a business that has a normalized return of $150,000, at a purchase price of approximately $350,000. A commercial building generating $150,000 net would cost in the neighbourhood of $2,000,000, almost six times as much.
There is good reason to purchase investment property. In general, investment property has less inherent risk and greater liquidity than businesses. However, if you base your decision to purchase a business on established customer base, experienced employees, a recognized market position and solid business operating systems, you can often get an amicable combination of bank or vendor financing.
A concern of many new business owners is the loyalty of clients – particularly if the exiting owner has a strong or unique personality with which the business has become identified. Careful structuring of the transaction can protect the buyer through a transition period wherein the owner remains involved to train the new owner and introduce him or her to the clients. Although difficult to value, client lists are of immense value to a purchaser even if outdated; it can be a good avenue to generate return business that will cover any shortfalls during the transition period.
It is important when taking over a business that the experienced, skilled and predictable employees are retained. They often know the business operations inside and out, and if the transition is handled well they can be re-energized by new ownership; the injection of fresh leadership can be a catalyst for employee creativity. However, employees naturally fear change and instability so it is important that they are not made aware of the transaction too soon. Usually, the buyer is allowed to talk with key employees only after a purchase and sale agreement has been signed and it is certain that the buyer will buy the business. It is extremely important for both buyer and seller not to mishandle this process.
An established business has the additional advantage that its products, marketing techniques, and systems for accounting, inventory tracking, employee payroll and production have all passed the basic Darwinian test of the free market: survival. Rather than building from scratch, one is in the position of an expert race car mechanic, tinkering delicately to obtain optimal performance.
More on businesses next month….
You may be wondering why you are receiving Prosperitas issues dated July and August in October. Well, thanks to the good people at Microsoft and their Service Pack 2, it has been impossible to send out Prosperitas. However, we now have a new internet guru to assist us, so the newsletters will flow regularly. I want to thank you all for waiting so patiently.
I want to assure you that, although the articles remain the same ones I had written for those earlier issues, we have replaced the investment opportunities on the middle pages so that they are up to date. You should see an increasing variety of projects in future months; our efforts over the summer to increase our inventory were more successful that we imagined, so that we are now able to present many more businesses and investments today. This has in turn generated a lot of buyer-side interest; if you are considering whether now might be a good time to test the market I can assure you there are serious investors hungry for product.
As always, you are welcome to contact me any time with your questions and concerns regarding the disposition of your commercial investments or business.
Eugen L. Klein
B.Comm (UREC), CRES, ARM®, RI, FRI
Since mid-2001, the value of household real estate assets has increased 27 per cent nationally, according to Scotia Economics’ Real Estate Trends. “Rising home ownership rates, combined with appreciating home prices, have been the dominant driver of Canadian household wealth gains over the past three years,” says Adrienne Warren, senior economist.
Home equity has traditionally been the single largest component of net wealth for most households, but its share of the average household investment portfolio steadily declined through the 1990s as stock market returns outpaced gains in real estate prices. “This trend has now reversed, with real estate assets becoming an increasingly important component of household net worth and non-registered savings,”
Gains in real estate wealth typically have a more powerful impact on consumer spending than do equity gains, as they are perceived as more permanent, and real estate is more widely held. Real estate equity (assets minus mortgages) represented 70 per cent of Canadian household real estate assets in mid-2004, versus only 55 per cent in the United States.
Digging Debt Free
Robust Economy Improves BC Budget Outlook
Robust economic conditions and sound fiscal management are generating a healthy budget surplus, according to Finance Minister Gary Collins.
“Our plan to balance the budget and revitalize the economy is working,” said Collins. “The BC economy continues to gather steam and the budget surplus is growing.”
The first quarterly report expects this year’s budget surplus to reach $865 million, significantly higher than the $100 million surplus estimated when Budget 2004 was tabled in February.
BC’s economic growth continues to be robust this year, reflecting solid employment gains, near record lumber prices, higher energy and mineral prices, sustained housing market activity and stronger retail sales.
British Columbia Ministry of Finance,
1. INTERNET SOLUTIONS FRANCHISOR
5 full time employees; 7 existing franchises; $480,000 revenue; $49,000 net income; Scalable model; Expansion-ready for BC, AB, ON, USA
2. COFFEE BAR – FRANCHISE OP
Only fair trade organic coffee franchise serving roaster direct coffee. Three locations: Burnaby, Main Street, Yaletown. Already averaging over $1100 / day.
3. GLOBAL SAFE DISTRIBUTORSHIP
Exclusive distribution rights for revolutionary safety/cleaning product endorsed by major insurers.
4. GLOBAL SAFE DEALERSHIP
Cleaning & safety product endorsed by top international insurers – reduces slip-fall claims. Profit $1 per sq. ft. treated.
5. FRASER VALLEY SPORTS BAR/CLUB
Established sports bar/club with loyal clientele. Minutes from downtown Surrey. Excellent lease, 5000 sq. ft.; completed full renovations.
6. ENGLISH LANGUAGE SCHOOL
Central loc. downtown Vancouver. $1,000,000 revenue, $190,000 net w/mgr., expenses down 30%.
7. PICTURE FRAMER / GALLERY
Business running for five years, three at current location; net income ~ $45,000.
8. FURNITURE MANUFACTURING
1st class business w/ all equip. & tools. Contracts w/ major hotels, incl. Pan Pacific.
9. LANGLEY BURGER RESTAURANT
Very popular drive-in, down town Langley. B Liquor license, 52 patio + 38 indoor seating. Owner will stay to train.
10. 46 ACRE DEVELOPMENT SITE
Between I-5 & Pacific Hwy; truck stop, manufacturing, duty-free potential $4.50-$6.50/sq.ft. Border proximity. 10 parcels all serviced.
11. ABBOTSFORD AUTO MALL
Ideal for showroom or auto service/accessories; 30,000 sq. ft.; $10-$12 psf NNN; High traffic location; Can subdivide space
12. HASTINGS-BBY RETAIL STRATA
237 sq. ft. Retail strata unit, good street visibility and walk-up traffic. Perfect for electronics/communications sales & service.
Deli & smoked meat manufacturing outlet. Established & profitable retail & wholesale operation. $2190 gross rent per month.
14. AUTOMOTIVE SHOP
Mercedes-Benz auto repair and body shop. Exclusive clientele,; also well established licensed car broker.
15. ABBOTSFORD WAREHOUSE
Excellent warehouse at business park near Abbotsford airport. 1st class office, 22’ clear ceiling height, 1 acre parcel of land.
16. LANGLEY TANNING SALON
Central Langley, first class equipment; stand up tanning & hair removal. Call for complete equipment list.
17. TACO TIME
Three locations in Greater Vancouver, Managers in place in all stores, owners retiring, franchises offered below market
18. REGAL RIDGE
48 new lots, 17 sold already! ~3.2 acres ea. Stunning views, Osoyoos BC.
19. DOWNTOWN STRATA OFFICE
Howe Street, Vancouver; opposite BC Supreme Court. Perfect for independent professional. Parking space included.
20 REVELSTOKE FOUR STAR HOTEL
Exclusive hotel in Revelstoke built in 2000; on 18.73 acres of land. 26 suites and private chalets. Newly approved major destination ski resort approved nearby.
Vancouver residences for land assembly
Industrial building; south side of Fraser River, 1.5 acre lot with building preferred
20,000 – 30,000 sq. ft. retail location in close proximity to downtown: lease or buy
Mobile home parks, 30-60 units; waiting list of buyers!
“We always look for industry professionals that can deliver their material in a timely and well researched fashion… Eugen Klein presented his detailed commercial overview as well as secrets of the marketing of businesses and trailer parks. His presentations were without exception well received”
President, Jurock’s Real Estate Insider
“The time and energy that you have taken from your personal life and put into your elected post is a direct benefit to me and my companies and all other realtors and brokers. I just wanted to let you know that your dedication is much appreciated. Thank you for your hard work.”
Rennie Marketing Systems
“I take this opportunity to express my sincere appreciation to you for continuing to send me your ‘Prosperitas’ newsletters. Your writings are always a great read … concise and yet very informative. Your articles in the Real Estate Magazine (REM) have also not gone unnoticed…”
Wayne Yu, CCIM, FRI, CLO, CRES, RI
President, Real Estate Institute of Canada, Greater Vancouver Chapter
“You’re one dynamic business person! Not only do you have vision, leadership and integrity, you’re open mindedness and thirst for learning makes you one step ahead of the game. I really appreciate your honesty, good advice and ‘do whatever it takes’ attitude.”
My ‘Community’ section is dedicated to the extraordinary people who have contributed to my life with exceptional service. I would like to share my good fortune of knowing them with you. Please feel free to convey my recommendation.
Mr. Jesse Bannister
New Westminster (604) 519-0333
BANK OF MONTREAL
Mr. Joe Corrado & Mr. Mark Tower
Vancouver (604) 665-2682
CAPITAL WEST MORTGAGE
Mr. Daymon Eng
Vancouver (604) 899-3799
Mr. Grant Gilmour
Langley (604) 888-4200
CIBC RESIDENTIAL FINANCE
Mr. Adam Beaudin-Ball
West Vancouver (604) 981-2549
CIBC RESIDENTIAL FINANCE
Mr. Derek Christiansen
Vancouver (604) 220-6161
Mrs. Valerie Orr
Vancouver (604) 605-4339
Mr. Gary Khangura
Vancouver (604) 879-0235
CYPRESS INSPECTIONS LTD.
Mr. Noel Murphy
West Vancouver (604) 312-8606
Mr. Jason Romo
Vancouver (604) 420-3400
FLOWFORM DESIGN GROUP
Mr. George Verdolaga
Vancouver (604) 321-8008
GRAPHIC DESIGN & ART WORK
Mr. Denis Meyer Jr.
Burnaby (604) 777-0550
MAHOVLICH MARBLE & GRANITE
Mr. Frank Mahovlich
Vancouver (604) 293-0093
MCKITRICK CLARK MCLEOD
Mr. Bruce J. Preston
Vancouver (604) 736-6717
NATIONAL HOME REVIEWS
Mr. Dean Kazoleas
Vancouver (604) 681-2108
PINK LIME SALON & SPA
Mr. Youssef Jawhari
Vancouver (604) 683-7444
PLAN-IT WITH US TRAVEL
Mrs. Pam Gosal
Richmond (604) 916-8044
RENOVATIONS & APPRAISALS
Mr. Chris Lewin
North Vancouver (604) 562-5799
Mrs. Vanessa Stenner-Campbell
White Rock (604) 535-4749
VANCITY CREDIT UNION
Mr. Joe Chan
Vancouver (604) 877-8296
VANCITY VENTURE CAPITAL
Mr. Axel Christiansen
Vancouver (604) 877-6582
Eugen L. Klein
B.Comm (UREC), CRES, ARM®, RI, FRI
Toll Free: 1.800.818.8599
Please do not hesitate to call me at 604.818.5888; it is my pleasure to serve your real estate needs. Please visit us on the world wide web at www.eugen-klein.com