The best place to start this endeavour is to determine the overall growth of the business you are considering purchasing. To do this you will explore how to:
- Understand and interpret statistics on small business,
- Determine the significance of the growth potential,
- Identify the growth that has occurred in the past 5 years,
- Identify the existing impediments to growth, and
- Examine the performance of your competitors.
Small Business Statistics
Fortunately, Industry Canada has collected data from businesses for many years. Review the most recent report entitled Key Small Business Statistics Annual Report. The 2013 report states that innovative high-tech firms are often aligned with high-growth firms. High-growth firms tend to be found across all industrial sectors. Growth is often measured in either revenue or number of employees. Over half the service firms in each sector expect to grow between 1% and 10%. Of the manufacturing firms, 19% expect to grow 11% to 20% and 9% expect to grow more than 20%. (Industry Canada, 2013).
[success]
NOTE:
Innovation is the lifeblood of small business. The main categories of innovation include:
- Product – tweaking existing products or creating new products
- Process – utilizing employee suggestions to streamline existing routines
- Organization – looking for more effective ways to utilize employees
- Marketing – continuously assessing markets to developing effective strategies and improve results
It is interesting to note that 38% of small businesses made at least one of these types of innovations (Industry Canada, 2013, p. 7).[/success]
Small Business Profile
British Columbia’s Small Business Profile 2014 breaks down the changing number of businesses by industry and region. This will become a terrific resource to test your future business and to see how many businesses are in a similar area.
The largest growth areas in the Thompson-Okanagan area include Public Administration and Mining, Oil & Gas. The largest number of businesses is in the Personal & Business Service as well as Trades and Construction.
Take time now to study the overall report. Visit the BC Stats page on “Analytical Reports,” then look for the most current report titled “Small Business Profile” and download the document. Read the report to gain an insight into small business growth, employment and the contribution to the economy. The appendix reports the number of businesses by industry and by geographic area. Which group would your business fall into?
Statistics Canada also compiles data by business category on their Canadian Industry Statistics (CIS) website. You can drill down to very specific business data,(e.g. search Bed & Breakfast), by province and the number of employees. With a little more digging, you can find the revenue and expenses of this category. This information would be most helpful when deciding the capacity your business has to support you and your family, and to see what the financial performance has been of your prospective business. For the B&B business (North American Industry Classification 721191), the number of establishments seems very low. A complete picture of this industry may not be available but the reported data can still be useful in determining the value of buying; the report is based on Revenue Canada Income Tax reporting and would be more accurate than guessing. The North American Industry Classification is a standard method for a business to classify its primary activity. The classification system is used in Canada, United States and Mexico, however Statistics Canada data excludes other countries. This is a powerful tool that is freely available.
Financial Performance Data
The Statistics Canada data can also provide insight into the competition. On Industry Canada’s website under the “Just for Businesses” tab, choose “Find Statistics by Industry” and then choose the sector “Accommodation and Food Services” which is North American Industry Classification 721191. Under “Accommodation and Food Services,” you will find the following links to additional information about Financial Performance Data, which includes Revenue, Cost of Goods Sold, Expenses and Net Profit. To continue with our bed and breakfast research example, you may want to look at the Financial Performance Data for the Bed and Breakfast industry.
It is interesting to note that in a Statistics Canada report that 30% of the businesses were not profitable and yet had higher average revenues than profitable ones. Also, notice that the average revenue was about $100,000. Having the raw data is only half the story. The reasons behind the results are more important. While all businesses are impacted by a “slow economy” there may be local factors that severely impact results, such as the opening of a big box store in the community. A business that is underperforming the average may present an opportunity to turn it around with a new owner. This data should form part of your due diligence process prior to tendering an offer to purchase.
[info]
Activity: Financial Performance Data
Each industry is broken down to this level of detail based on annual tax returns. Use the above link to examine data for the industry you are interested in. Determine its level of revenue and profitability now.
[/info]
The United States NFIB Research Foundation’s 2011 NFIB National Small Business Poll Growth-External Impediments report states that business uncertainty and weak sales are two principal impediments. During discussions with owners, questions about their confidence regarding improving business conditions will prove to be insightful. Be aware that doing business in the USA is very different from Canada. This study is American but it should still be helpful. You will quickly develop many questions and may be able to understand the business more intelligently.
Trends are important in choosing your industry and business. The Small Business Profile 2014 from BC Stats referenced above shows the number of small businesses that have increased across the Province (p. 5). Businesses with 1 to 4 employees grew 7.0% (6,800 more companies) and those with 20 to 49 grew 6.6% (900 more companies), while the self-employed without paid help were reduced 3.5% (7,500 businesses) (Small Business BC, 2014, p.5). If your prospective business has no paid help, you will be challenged. It would seem that the micro groups (1 to 4 employees) are increasing in numbers of businesses. This data does not measure any change in sales or profits, only the inventory of companies reporting across the Province.
Selecting a business with deteriorating opportunities would prove to be challenging. Drive-in movie theaters, for example, have basically gone the route of the do-do bird and are extinct today. Customers are looking for different venues for entertainment. When you find interesting and innovative products and services, then perhaps that industry will enjoy growth for the next several years. Data on the labour force is another key factor that you will investigate next.
[info]
Activity: Growth Potential
Before continuing to the next section, explore the statistics related to the business you are considering buying.
[button background_color=”#81a844!important” text_color=”#ffffff!important” url=”http://move-3.trubox.ca/wp-content/uploads/sites/46/2015/03/buyer2_statistics_activity.pdf” target=”_blank”]Complete Activity[/button][/info]