Thinking about starting a small business? Consider buying one

Starting from scratch is the fabled path for many would-be small business owners. But for the following three entrepreneurs, buying an established business allowed them to avoid the pitfalls of previous owners—and carve out their own path to business success

Dr. Michelle Tao is wrapping up a busy Wednesday at her office—a small seven-employee family dental clinic painted a cheery shade of yellow and housed above a convenience store on Vancouver’s Commercial Drive. She’s run her practice for just over a year, and while dental work comes easily to her, she’s still navigating how to operate the business. So once the tools get tucked into their cabinets, she hangs up her white coat and starts going over the books or meeting with members of her staff.

“The best part of my day is the dentistry,” says the 39-year-old UBC School of Dentistry grad. “I love treating patients. I love the actual work. The part I don’t like is the administration stuff. I don’t like knowing about the Employment Standards Act; the rules regarding tax deductions. It’s not me.”

Tao is both businesswoman and dentist—a combination she’s aspired to since her UBC days. “I think it’s the dream of all dentists to have their own practice,” she says. Like many fellow entrepreneurs, however, Tao has achieved that dream not by starting from scratch but instead by buying an established business. Tao had worked as an associate in another clinic for more than 10 years, but when she gave birth to her first child she sat down to think hard about her future. She realized she wanted more control over her schedule and to not spend so many weekends and evenings at work. Tao mentioned her thoughts in passing to a colleague, who had coincidentally been talking to another dentist, Dr. Penny Thompson. Thompson was looking for someone to take over her practice when she retired.

The business Tao bought from Thompson—like two-thirds of small businesses in B.C., according to an exclusive Insights West/BCBusiness survey (more on that on page 44)—was a family business. With so much of the economy taking the form of family-owned private enterprises, almost every type of small and medium-sized business eventually changes hands as owners retire or as family circumstances dictate (death, divorce and disputes being among the most common).

Buying an existing business may lack the romance of building one from the ground up, but from a practical perspective there are advantages that shouldn’t be ignored. Buying a business carries less risk, says Pino Bacinello, founder and president of Vancouver-based Pacific Business Brokers Inc. While some small and micro-businesses are bought and sold through word-of-mouth, many other transactions are guided by business brokers like Bacinello’s firm. Brokers are to small business owners what real estate agents are to homebuyers: they help market companies for sale, and guide buyers and sellers through the transaction.

Bacinello says buyers of businesses have it much easier than founders: all the hard work of finding suppliers, hiring staff, finding a location and building a clientele has been done. “The business has been established, the learning curve is over,” he says. “The seller has learned through the mistakes; they’ve paid the price. And so there’s very little risk compared to starting one.”

Industry Canada reports that 30 per cent of small businesses don’t survive beyond two years, and about half make it to five years. Bacinello says that one of the biggest reasons for that is “underplanning and underestimating the required capital.” It takes time to build a reputation, find reliable suppliers and hire skilled employees, he notes. New businesses can burn through cash working through those kinks, without the revenues to balance expenses. When you buy a business those issues should have been taken care of already. “You’ve got instant cash flow starting the day you open the door.”

Tao concedes that building a new clinic from scratch would have let her control every last detail: “Everything is designed the way you want; you get to pick absolutely everything in there including the colour of the walls, the type of floors, the hand pieces you use.” But, she’s quick to add: “Then you open your doors and there’s nobody there.”

When Tao put her own name on the shingle, the chairs were already in place and the appointment calendar had names of people waiting to fill them. And while launching a brand new dental practice with mid-range equipment can cost upwards of $400,000, according to Tao, there’s no limit to how much you can spend if you want the most advanced equipment and a bigger clinic that can handle more patients and staff. Buying someone else’s practice costs a similar amount, she says—yet while the equipment and furniture aren’t new, the cash flow is instantaneous.

“Starting your own practice is a huge financial outlay with very scary results. I think if you have good skills, eventually you’ll build your practice the way you want to,” Tao says. “But it was a little too scary to dump that much money into something that had zero patients.” And while Tao has plenty of clinical knowledge, she says she’d be lost trying to market and promote a new clinic.

When Penny Thompson sold her practice, her intention was not just to retire but to ensure her patients and staff were in good hands. She worked part-time in the clinic for about eight months after Tao bought her out, and she did everything she could to ensure a smooth transition.

“She was really invested in making the transition a success,” says Tao. “It’s really hard to find a buyer and a seller whose goal is singular, which is to promote the practice and keep everybody happy.” Tao says almost all of Thompson’s roughly 1,400 patients stayed through the transition, and some of those who left did so because the practice became too busy to slot them in. There were also patients who followed Tao from her previous clinic, despite her being contractually bound not to entice them.

While some businesses, like dental practices, require prospective owners to have specialized expertise, many just need startup capital, initiative and some skilled management in place. Paula Lindner had built a career in management for nonprofit organizations such as St. Paul’s Hospital Foundation and the Alzheimer’s Society of BC. But when she had her second child, Lindner realized there were few opportunities in her field that gave her the flexibility to spend more time with her young family. She had been a customer of a knitting supplies shop called Baaad Anna’s Yarn Store for several years and watched as the business grew into a vibrant hub for the knitting community. When the owner, Anna Hunter, chose to move with her family to Manitoba, Lindner saw buying the business as an opportunity to take more control over her schedule. After nine months of research and negotiation, Lindner took over the keys this spring.

“I have a manager, and she has quite a good, extensive retail background,” says the 38-year-old former Czech radio journalist inside her East Hastings storefront as a customer settles into an armchair to knit. “We work very well together. She helps maintain the bread-and- butter of the store.” Lindner spends two days a week in the store to stay in touch with staff and customers but otherwise oversees things from home, where she can now spend more time with her two young children.

As the size of companies involved in a sale grow, the deals become more and more complex—and the expertise required to broker those deals increases. David Lam is the Vancouver-based Mid-Market Corporate Finance Leader at Deloitte Canada. His firm acts as an investment banker, discreetly marketing private companies to buyers and investors around the world. “In today’s marketplace, capital knows no boundaries,” he says. “There is no geography. It comes from all over.” In June, Charles Chang’s Burnaby-based natural health company Vega was bought by Denver-based WhiteWave Food Company for US$550 million.

Private equity firms and strategic corporate buyers are usually the ones with the capital to buy B.C. companies that are no longer just mom-and-pops. But deals do get done closer to home among local families, as was the case when Richmond-based Nature’s Path Foods bought Vancouver-based Mexican food maker Que Pasa Foods in 2012 for an undisclosed amount. “We’d been eating those wonderful chips for years as a family, and they were always our favourite chip,” recounts Nature’s Path founder and president Arran Stephens. When the brothers that owned Que Pasa made plans to retire, they asked Stephens if he was interested in buying the company. “I talked it over with my family, and my son said, ‘Yeah, that’s a great product, great brand!’ And so we jumped on it right away.”

Sometimes, finding the highest bidder is not the top priority for sellers. “They could have sold it to a multinational conglomerate,” says Stephens about Que Pasa, “but they approached us because they thought we would be the better stewards for the business and the brand.”

Regardless of the type of small business, Bacinello says the main things prospective buyers should look for are opportunities for growth and sufficient cash flow. “If it’s a business in a mature industry without any opportunity for growth, then what you’re buying is a business that’s dying,” he says. The company’s cash flow should be sufficient to pay the owner fair compensation for time put into the business, support debt servicing (if the owner borrowed to buy the business) and provide a reasonable return on the buyer’s investment. “Because otherwise, why are you doing it?”

And yet, Bacinello says buyers should seek out businesses with a few imperfections. “The deficiencies of a business quite often are the opportunities for the buyer,” he explains. “If the business is perfect, there’s nothing for the buyer to do to add value.” In the case of Nature’s Path’s acquisition of Que Pasa, the company made wonderful products, says Stephens, but its chip factory was archaic. “We closed the old plant down, opened a brand new plant in Delta with brand new equipment, and we’ve almost doubled the volume of chips.”

As for Michelle Tao, she’s gradually making Thompson’s old practice her own. “Have I put my stamp on it? Yeah,” she says. She changed minor details like paint and the placement of garbage cans, but more important, she spent tens of thousands of dollars buying equipment like a panoramic X-ray machine and intraoral cameras to take pictures of patients’ teeth. She can care for her patients more intimately with better diagnostics instead of referring them outside her office.

“Despite the hard work, if you feel strongly about it, there’s nothing like having your own business,” she says. “I feel like I’m working towards something great.”
 

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Succeeding Through Succession

Although Nature’s Path Foods has grown through acquisition, Arran and Ratana Stephens want the world to know: the company itself is not for sale. The founders of North America’s biggest organic breakfast and snack food maker post this message on the company website: “Arran and Ratana built this family company from the fertile, organic ground up. We haven’t ‘sold out’–and we don’t intend to.” Undaunted, prospective buyers still send Arran about one pitch per week and return every six months for a fresh rejection.

Arran Stephens is 71 and has been making plans to leave the 30-year-old Richmond company for about 15 years. He and Ratana still come to the office for a few hours every day, but three of their four children work for the company and have taken over much of the responsibility for running things on a day-to-day basis. Stephens says the children found their roles in the company through natural selection, based on their skills and passions. “We held them to a higher standard than others and expect them to work harder and more strategically,” he says. “There is no room for nepotism.”

The couple owns all the shares in the company and plan to pass them to their children. “When we go, at some point, it will go equally to the children, because we don’t want fights after we’re gone,” Stephens says.

Their succession plan is strikingly elegant compared to the squabbles and lawsuits that commonly plague other family-run businesses. Some founders’ children fight because they are left with a smaller share of equity or an outsized responsibility within the company.

Entrepreneurs are good at planning how to get into business–but not about getting out. Succession is simply not something many entrepreneurs map out, says Michelle Osry, who leads Deloitte Canada’s Family Enterprise Consulting division in Vancouver. Family dynamics can get crossed with financial decisions, creating conflict among family members. Sometimes the discussions are so tough, they don’t happen at all. “Only 20 per cent of families successfully transition the business to the second generation–either because the family does not stay intact or the business and the wealth does not stay intact.”

There are numerous options on the table for business founders planning to get out. Some, like the Stephenses, know their children will be faithful stewards of their company. But other founders’ children may lack the desire or the skills to take over. In those cases, the family could hire professional managers to run the business for them. Or they could sell some or all of the equity to other interested buyers, including company managers or employees, a competing company or a private equity firm. As Arran Stephens can attest, there is ample liquidity among private equity firms hunting for investment vehicles.

But to work out which option is best, families need to open discussion. There is help available for those who seek it. Stephens works with the Business Families Centre at UBC’s Sauder School of Business and highly recommends family business owners seek its advice.