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  • JASON BRICE | Business Broker

Case Study: Saunas & Sales



Today, we’re going to look at how a business is sold. In 2022, Jason Brice successfully negotiated many business sales in BC. including the sale of a sauna manufactuer. We’re going to take a detailed look at this sale to help you understand how businesses are sold.


The Confidential Information Memorandum (CIM)

This confidential document serves as a detailed introduction to the business, its operations, the asking price, and more. It’s both a financial document and a marketing document.

The Elevator Pitch

It’s important to give prospective buyers a concise and enticing look at your business. In this CIM, we included:


  • A business concept page detailing products—complete with images of custom-built saunas

  • An overview of the business, including the number of employees, revenue, cash flow, cash flow as a percent of rev


enue, the assets and working capital included with the sale of the business, and more.

  • High-quality pictures of all of the custom and prefabricated saunas the company sells




By keeping the first few pages of the CIM short and sweet, we can stoke interest. From there, we get into the finer details of the operations, assets, and other features of the business.

The Overview

A single-page overview is featured near the beginning of the CIM. This overview includes:


  • The Name of the Business for Sale

  • Where the Business Is Headquartered

  • Satellite Locations

  • Local Website

  • Operating Since



  • Business Ownership

  • Pricing

  • Employees

  • Customers

  • Assets Included

  • Fixed Assets Value

  • Business Sale Structure

  • Working Capital Included

  • Training Included

  • Transition

  • Asking Price

  • Terms



In this particular case, the asking price was around ~$1.7 million. The transition process is briefly explained—the owners of the business were willing to provide extensive training to buyers, offering up to two years as independent contractors (more on that later).


By detailing the assets, working capital, employees, customers, and more on a single page, prospective buyers get a detailed, easy-to-understand snapshot of business operations—and the obligations they’ll be taking on.

The Employees

Here, employee salaries and hours are included. The names of the employees are kept confidential, however—remember, as part of the memorandum, the prospective buyer agrees to keep the information confidential, and cannot speak to any employees.


Nonetheless, a salary breakdown is required to better understand the costs of running the business—and knowing how long employees have


been with the company gives the buyer a better idea of their level of experience and loyalty.

The Finances

Business finances are presented as succinctly as possible—for this business, the bottom line is calculated as Normalized Cash Flow/EBITDA. Line items are listed in detail, offering a breakdown of:


  • Sales

  • Cost of sales

  • Expenses



  • Income from operations

  • Net income before taxes

  • Taxes

  • Net income

  • Normalizing adjustments (to calculate EBITDA)

  • Cash flow/EBITDA


In this case, there are a couple of notable line items to discuss for the purposes of calculating EBITDA. First, management had several benefits that led to adjustments:


  • $400 for fuel



  • $150 for cell phone

  • $100 for insurance

  • $300 for medical benefits


When these numbers are totalled, multiplied by 12 (for each month in the year), then multiplied by 3 (for each member of management), $34,200 are added to the EBITDA of the company. This is standard practice, as the buyer can add or remove these expenses as needed.


The second line item is one that we’ve seen often in the past few years—but that we’ll (hopefully) never have to see again. $20,000 was deducted from the EBITDA of 2021 for income granted through the Canada Emergency Business Account (CEBA). This is taken away from the EBITDA because it’s not a recurring source of income. You can learn more about how Covid benefits affect business valuation in our white paper on the topic.

Revenue Bre


akdown

Growth sells. To demonstrate consistent business growth, it’s important to break down the streams of revenue that business has developed. In the case of this sauna business, we broke down revenue into 3 categories:


  • Revenue by month

  • Revenue by years

  • Revenue by customer


The third category is particularly importa


nt for this business, as it demonstrates that the vast majority of sales are through lower value customers. That’s a positive that may seem counterintuitive, but it’s a tremendous boon—it means the business doesn’t rely on a few high value customers who may take their business elsewhere after a change in leadership.


Revenue by month gives a breakdown of the last 3 years of sales—as does most of the “Finances” section. Buyers are typically most concerned with a 3 year window, as the finances (and growth) of the business during that time tends to be most relevant to their decision to buy.



Transaction and Sales Breakdown

In the transactions section, we break down transactions per year, including:


  • Total revenue

  • Number of customers

  • Average revenue per customer




  • Median customer

  • Largest customer

  • Smallest customer


By providing this information, we give prospective buyers a clear idea of how revenue is generated.


We also do a breakdown of sales—both by product type and by customer location. In this customer’s case, it was simple to break down sales by location into just three categories: Sales in BC, sales in Alb


erta, and sales in all other provinces. Combined, this information tells prospective buyers both which products are generating the most revenue and where most sales are being made.

Other Financial Statements

To complete the financial information package, we also include a profit and loss statement for the last three years, a tax return, a balance sheet, and a breakdown of working capital, accounts payable, and accounts receivable. Other information is provided, including:


  • Information about the lease

  • A list of assets


While the assets are interesting (ranging from a Mercedes van to various shop tools), the lease is more relevant to our case


study. The buyer must agree to take on the remaining portion of the lease (~another 3 years) at the specified rate. The business owner is not, however, the landlord—the property owner may require a much greater security deposit. It’s always important to talk to landlords well in advance of selling the business and to pay off outstanding lease obligations before the sale is completed.

The Miscellaneous

There’s a lot more information included in the memorandum, including:


  • Inventory



  • The main competitors

  • Hours of operation

  • Workflow

  • The items that will be available in due diligence

  • A non-compete agreement

  • A formula for splitting profits on certain projects that are more than half complete by date of purchase

The Letter of Intent (LOI)

The Letter of Intent (LOI) is where all of the groundwork laid in the CIM comes to fruition. It’s an agreement to the terms of purchase for the business. The LOI for this business was sent a mere 10 days after the CIM—let’s see how terms changed during that short period of time.



The Legal Stuff

While the LOI is non-binding, some elements carry legal weight. The seller of the business agrees not to solicit proposals from other prospective buyers until the purchase of the business is completed—or until either party backs out of the LOI. Additionally, the buyer and seller agree not to disclose the intended sale publicly.

The Terms of Purchase

The purchase price in the LOI is now $1.6 million. This isn’t surprising—the price in the CIM is listed for the purpose of negotiation, and the process of moving from CIM to LOI happened in only 10 days. Both the Seller and Buyer were very motivated, which led to this price point.




$1.2 million was to be paid to the seller on closing, while $400,000 was paid through vendor take back (VTB) at an occurring interest rate of 5%, with a payback period of 5 years.

The Timeline

The Letter was signed 4 and 5 days after it was sent. The Closing Date was July 15th, with a window of no more than 30 days to complete the transaction at the agreed-upon terms.

There Is No “Average” When It Comes To Selling a Business

In many ways, this was an “average” business sale. Employees who have been with the company for years, consistent growth, inventory that was simple enough to track, and consistent growth. Even in this business deal, however, there are a few exceptions to the “normal” rules:


  • 25% VTB is significant and indicates a high degree of confidence in the business.

  • A willingness to stay on for two years post-sale is unusual—most sellers are looking to retire or move to a new business, and will stick around for only a few months.



  • CEBA was deducted from the EBITDA.


This case study is only a taste of the complexities of any business sale. By partnering with a Canada business broker like Jason Brice, you can work through the complexities—and you too may move from a CIM to a signed LOI in 14 days or less.



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