Purchasing a small business can be a quicker route to entrepreneurship than starting from scratch. However, it’s essential to thoroughly evaluate all critical and minute details before making a sound decision. It’s crucial to avoid overspending on a business and ensure that you have the ability to manage it post-acquisition. Additionally, some business opportunities may be misleading, making it essential to conduct thorough research before making a purchase. This article provides comprehensive guidance on crucial factors to consider before buying a small business in Canada.
Choosing the Right Type of Small Business to Buy in Canada:
Exploring Franchise and Independent Options
Franchises: A Low-Risk Option for Buying a Small Business in Canada
Investing in a franchise can be a smart move as they are typically established businesses with a proven track record. The risk involved is lower as the business model has already been tested. The process of buying a franchise is also usually more straightforward compared to an independent business. In the event of a failure, selling a franchise may also be easier as the brand is already recognized by customers. Additionally, marketing costs and efforts to build brand recognition may be reduced as customers are already familiar with the brand. Furthermore, franchisees receive support from the parent company, which can save time and effort in areas such as creating company policies, advertising, and employee uniforms. Troubles with staff or sales can also be addressed with the help of nearby franchisees.
Small Independent Business
When purchasing a small independent business, you will have more control over how the business is run, from establishing policies to choosing designs. You have greater freedom in managing operations and making decisions, and the profits from the business activities are entirely yours to keep. Moreover, you may consider buying a struggling but potentially profitable business. If you can turn things around, you will see the benefits of your hard work, which can be satisfying.
What is the location of the business and how well are its facilities maintained?
When considering the purchase of a small business, it’s important to assess the location and facilities. Is the business located in an area with high foot traffic, such as a retail or restaurant space? Is parking available for customers? Are there any major renovations needed for the interior of the building? If it’s an office space, what investments will be necessary for a functional workspace? A turnkey business is generally more valuable than one that requires significant work. Lastly, consider the ease of shipping or delivering items to customers from the business location. These factors all play a role in determining the value of the business.
What is the reputation of the business?
Having a positive reputation among customers can significantly increase the value of a business. To determine the reputation, you can search for reviews on Google and Facebook, which can provide quick insight into what customers think about the business. However, it’s recommended to speak directly with a few customers to get a better understanding of their experience, as online reviews may not always be reliable. Negative reviews can harm the value of the business, and you may need to invest more time and money to regain customers’ trust or even rebrand the business.
Is GST/HST payable when buying an existing small business?
If you are considering purchasing an existing small business, you may be wondering if you need to pay GST/HST on the transaction. However, there are ways to avoid paying GST/HST if you purchase at least 90% of the property reasonably required for the business. To do this, you can use Form GST44, Election Concerning the Acquisition of a Business or Part of a Business. However, this election is not available if the seller is registered for GST/HST and you are not.
It’s important to note that in order to qualify for this exemption, you must purchase more than 90% of the company’s assets and not just the assets alone. Additionally, the purchased assets must allow you to operate the business, and you must submit Form GST44 before the deadline for filing your GST/HST return for the first reporting period of your new business. Another way to acquire an existing company is by purchasing shares of a corporation, and in most cases, GST/HST is not charged on the purchase of corporate shares.
What steps can you take to protect yourself when buying a small business?
Purchasing a small business can be risky, as there is no guarantee of its success and changing ownership can affect employee morale and public opinion. Moreover, you may be liable for any wrongdoing committed by the previous owner. To safeguard yourself, it is advisable to work with a business broker who can provide you with advice on the acquisition and handle all the documentation related to the purchase. A good broker can also assist you in selecting the right insurance to further protect yourself.
In Canada, there are two main types of small businesses: individual small businesses and franchises. Franchises are usually established businesses and may be a safer option as the concept has already been tested and proven. When evaluating the value of a business you wish to purchase, it’s important to consider factors such as the business’s current state of operation, the location and facilities, and the reputation of the company among clients.
It’s also important to be aware of the technical aspects of purchasing a small business in Canada, such as the requirements for avoiding paying GST/HST on the transaction and the need to file Form GST44 before the deadline for submitting your GST/HST return. Working with a reputable business broker can help safeguard you during the purchase process, as they can provide advice and handle the necessary documentation. With the right knowledge and preparation, buying a small business in Canada can be a worthwhile and rewarding investment.