Want to buy out the business you work for? Hire the right advisers

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Most would-be business buyers aren’t likely to find all of the advice they need at the dinner table. But then, it depends on where you’re eating dinner.

Brad Geddes, chief executive officer of Zucora Inc. was at the right table at the right time when he and his family were looking to buy the other 40 per cent of the business they didn’t already own.

It was 2016, and Mr. Geddes was at a Toronto Business Transitions Forum dinner, seated at a table with a banker and a regional director from Vancouver-based First West Capital, which works with buyers to provide junior capital for business acquisitions.

“It was pretty serendipitous,” recalls Mr. Geddes, whose London, Ont.-based company, which operates as ZucoraHome, provides consumer-protection plans, including repair and replacement, for furniture and appliances. “We all got to talking, and I said we were looking for financing to buy out our shareholder. Right away, there was all kinds of advice and offers for further conversation.”

That advice proved invaluable for Mr. Geddes and his family. Most business buyers, especially employees buying out an owner, are first-timers and don’t seek the expert advice they need including the different financing options available; from bank loans to seller financing (where the seller lends the buyer a portion of the business’ value) to private equity.

Most business purchases involve a combination of sources. For instance, First West Capital provides a variety of junior capital options, from mezzanine financing to minority equity based on the business’s needs and its growth prospects.

Mr. Geddes says his team chose to work with First West Capital in part because of its more aggressive approach to growth. “They also really took the time to understand our business and be patient throughout the process,” he says.

This isn’t to say they didn’t put Mr. Geddes and his team through the paces.

Buyers need a bulletproof plan

Junior capital lenders may be more risk-tolerant than banks, but any lender will want to ensure they’re making a good bet.

“Don’t start the financial process until you’re really ready,” advises Steve Chen, head of First West Capital.

Not sure what you need to make it work? Find out, Mr. Chen says: “Go to a lender and say, ‘Okay, here’s what I want to do, what do you need? What are the top 10 things you need, and I can go away and assemble a package.’ That’s an excellent way to stand out.”

Mr. Chen also recommends buyers get ahead of the due diligence process.

Depending on the type of business, a buyer could work with collection experts to appraise a company’s assets, a chartered business valuator to look at valuation and an accountant to pore over a company’s financial history. Not only will that help a buyer decide if the business is a good purchase, but it will also prepare them for any tough questions that could come up once the lender does its own diligence.

“First West Capital talked to our customers, got a feeling for how a third party sees us, talked to employees and suppliers,” Mr. Geddes says. “It was extremely thorough, from all angles: customer perspective, cash flow requirements, employee engagement. You name it; they touched on it.”

Lenders are looking for management with vision

With First West Capital, more intangible concerns also come into play, such as the management team and its vision.

“I’m looking for people who have a clear sense of purpose and know how they’re going to grow the company,” Mr. Chen says. “If someone can say, ‘I have many years in the industry, I know all the customers and suppliers, but no one is addressing this, or that market,’ that’s huge: People who can see opportunities that others aren’t.”

Identifying new markets was one hole in ZucoraHome’s plans. The business was solid and the management team proposing to buy the business was experienced. The company also seemed to have little competition, with most of Canada’s top furniture and appliance retailers already customers. But that also meant little growth potential and a fair bit of risk if the retail sector faltered.

“First West Capital said our market is relatively limited, and that’s true,” Mr. Geddes says. Together, they identified new opportunities for growth, such as more direct-to-consumer channels.

Buyers should prepare for their business to change

Once the ZucoraHome sale process was completed, the transition was relatively smooth, but that isn’t always the case, says Mr. Chen, especially for management teams buying out an owner leaving the business.

He says buyers should prepare for the possibility that the business they now own isn’t quite the same as the one they worked for. Apart from having new owners and likely a new management structure, new debt acquired to finance the sale often means the business will need to operate differently.

“That’s a shift that buyers often don’t see,” Mr. Chen says. “And then financial decision-making becomes chaotic because they haven’t considered it and they run into problems. A good finance person, in-house, can really help to plan out the 12 to 24 months after a buyout.”

There’s also a personal and professional shift that happens in a buyout. Mr. Chen recalls one group of clients — six managers and friends who’d come together to buy out a business — and struggled with decision making. In that case, Mr. Chen advised them to appoint someone from the group to be the CEO or hire someone from outside to step into the key role.

Seeking opportunities in trying times

The pandemic is also creating opportunities for potential buyers in hard-hit sectors such as energy and hospitality, Mr. Chen says.

However, he says buyers with a strong vision and solid business plan can find opportunities.

“It’s very difficult right now for many businesses, but there are people finding opportunities and making money in those challenging sectors,” Mr. Chen says.

He also says lenders like First West Capital are taking more risks on successful companies in hard hit industries they believe have longer-term potential.

“This is a real-life sensitivity challenge to business models,” he says. “If you can survive this, which is a demand and supply shock at the same time, you’ve proven yourself as a management team.”

Advertising feature produced by Globe Content Studio with First West Capital. The Globe’s editorial department was not involved.