You want to buy a business but do not want to over pay. How do you minimize the risks of over paying? Many people can relate better to the real estate market. In Canada, we know that interest rates will increase in the summer, there are new rules for people borrowing money and HST will be implemented on July 1 in Ontario and BC. Everyone knows that this will impact us but no one understand the exact impact yet. As a result, sellers are trying to get rid of their houses now. One person last week made a prediction that he believes that house prices would drop by 20%. How does this impact businesses for sale?
You may think that there is no correlation between the housing market and the businesses for sale market but in my opinion the two are linked for the low end buyers. Many who want to buy a business must borrow money in order to be able to afford the business that they want to buy. If interest rates increase, and the amount that they can borrow drops because the value of their house has dropped, they do not have as much financing available to buy that business. If banks do not provide the difference, the seller of the business must decide, does he drop his purchase price or does he offer vendor take back and hopes that he get paid it down the road.
From a sellers prospective, if you know that HST will have an impact on available cash to investors, interest rates are going up, then the consumer may have less money to buy goods, sell the business now. If the consumer buy less goods, sales from some businesses will suffer and the revenue and profits will drop. If profits drop, then the business is worth less money. When you are looking to buy a business, you need to look into a crystal ball and determine if you believe that the business for sale which you are looking at is affected by HST, slower retail sales if consumers disposable cash drops or if infrastructure spending artificially increases sales of the business you are looking to buy for a short period of time. If any one or more of these affects the business you are thinking of buying, you may want to rethink the value of the business in your opinion. Instead of looking at what the business was doing historically may not be a good indication of future profits therefore the purchase price should be adjusted to reflect the impact of the economy on future sales.