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Why Buying A Business (With Its Real Estate) Is Currently The Best ICI Cash On Cash Return

by Heather McDowell on 03 Feb 2023

There’s a trend that’s growing at an alarming rate; small business owners who want to sell their businesses. While some may attribute this trend to the slumping economy or a reduction in bricks-and-mortar consumer demand, the reality is that the #1 reason by far is retirement. 

A report by the Canadian Federation of Independent Business found that over 56% of entrepreneurs are looking for an exit hatch in the next five years.   

The Grey Economy

Sometimes referred to as the grey economy, it can make significant waves in the financial wealth of the cities and towns in which the business is located. Many economists warn that mismanagement could have a ripple effect on the already fragile Canadian economy.

In reviewing data trends from Statistics Canada on small businesses in Canada, there has been a steady increase in those enterprises. In 2008 there were approximately 899,008 small businesses across our provinces and territories. Just 10 years later, that number has risen to 1,133,493. That’s an over 20% national increase in a decade.

Small Business, Big Benefits

Small businesses do more than provide jobs (although they definitely do that!). Small businesses made up 97.9% of all the employers in Canada in December 2020, according to StatsCan.

Small business enterprises also bring careers and opportunities to people. The good deeds of small businesses abound; successful small businesses return money to their local community economy through paychecks and taxes, which can support the creation of new small businesses and improve local public services. They impact the provincial and national economic trends by positively impacting overall consumer confidence. 

We connected with the team leader of The Vanguard Team, Rhys Wyn Trenhaile, for his take on why he thinks Windsor, Ontario may have the very best business buying opportunities of any major Canadian City. 

“If you buy a business that’s already profitable for years from an owner trying to retire, you have every opportunity to modernize, automate and add tons of new revenue streams to it. I find the person selling already knows many of these ways to increase profits, but they happily haven’t done them as they look to retirement. You buy an existing business because you can finance a lot of it against the profits, then use the profits to implement the value-add strategies. Best of all, the actual real estate properties of that business tend to be at a much, much more reasonable price than if you were trying to buy a larger ICI property for investment purposes. Windsor tends to be an excellent place to acquire these businesses owing to a serious lack of competition, traditionally robust immigration to get the necessary labour force to work, and all the advantages of being in a rapidly growing City within a 4-hour drive of over 80 million Americans.” 

There’s a reason why financing these businesses tends to be fairly easy; it’s not just that many vendors will withhold a loan – the government is invested in avoiding a potential crisis in the economy. These small businesses are the cornerstone of the Canadian economy. They cumulatively employ 10.3 million of the Nation’s workforce. Entities like the Business Development Bank of Canada go to great lengths to help entrepreneurs acquire the business and save those jobs. 

COVID-19 and The Impact On Small Biz

The COVID-19 epidemic has had a detrimental impact on the world economy and has particularly hurt small enterprises. While some organizations may have been more negatively affected than others, it is generally believed that 64% of Canadian businesses still have pandemic debt, 56% are still producing less money than usual, and 77% are still feeling the pinch of pandemic stress.

Poorly managed ownership transitions may lead to business closures, bankruptcies, a lack of services in the communities where the business is located, job losses, decreased productivity, and an unstable economy, in addition to business owners selling their company too soon and not getting the full value of it. 

A Fast Track For Entrepreneurs

When it comes to how entrepreneurs intend to exit their small business enterprise, the most common approach is to sell their business to the buyer(s) unrelated to their family. There's an opening for a well-thought-out offer to purchase from an investor to resonate with a selling business owner. Those that want high cash on returns, often with the real estate investment embedded in the deal, and are looking to leverage the infrastructure, expertise, equipment, and customer base of an existing business – there are simply more opportunities than investors to buy them.

So why Windsor specifically? Windsor is in the early stages of massive generational change, which has local community leaders predicting a doubling of the population over the next 20 years, anchored by securing the future of the automotive industry in Canada with its $6 billion battery plant – this plant, when completed next year, is forecast to create more battery capacity than the entire USA. Yes, Elon Musk included. Not to mention all the supporting plants coming to Windsor to support this plant. “huge” is an understatement.

Not Just A Car Town

Trenhaile’s excitement is palpable when he explains, “…But this isn’t “just a car town” anymore, the economy continues to diversify massively. It has a massive $5 billion 2nd International Bridge currently under construction, a new $2 billion freeway, a new $2 billion mega hospital announced, and a 100% doubling of electrical capacity required in the next 4 years – the rest of Ontario? A modest 4% increase…” 

Hidden in all these announcements is a burgeoning software sector with one of the highest concentrations of automation software companies in any North American city. 

The logistics sector is also planning for exponential growth including a FedEx hub in Windsor, and Amazon’s 120,000-square-foot facility just announced in 2022. 

Arguably best of all? One of two World Class Battery Research and Development facilities, over 100,000 square feet with over 650 PHDs and engineers figuring out how to improve existing products and create new ones. These hubs have historically created tens of thousands of jobs long term for any community lucky enough to get one. Even the new Mega Hospital has led to the announcement of a 60,000-square-foot medical research facility. The depth and strength of these announcements cannot be lost on an investor, they are a crucial factor in the safety of your investment. 

All of these fantastic announced and planned development may seem out of the reach for small-business investor clients as a new frontier opportunity, but it's quite the opposite. 

The influx of these business juggernauts to Windsor allows for the local small business economy to scale its revenue. By choosing to purchase an existing small business enterprise (SME) from an exiting baby boomer business owner, there's a tremendous opportunity to utilize the existing client base, reputation, and business practices. This allows an investor to start their entrepreneurial journey on step six and scale up, rather than starting on step one and dealing with all of the headaches and risks involved in a start-up. Statistically speaking, an established business survives and thrives 96% of the time, whereas almost 80% of all start-ups fail. By buying a business in a great market like Windsor, the investor can build into their business plan the servicing of the big box titans we mentioned and build vertically. The sky’s the limit!

From The Expert

We asked local real estate broker Rhys Why Trenhaile for his thoughts on what the announced growth in Windsor means for investors looking to purchase an established small business organization. Here’s what he had to say:

“It’s not an exaggeration to say the human brain struggles to truly fathom the scale of what’s happening here; it certainly means the end of Windsor “The Big Small Town”, and the emergence of Windsor “The Small Big Town”. It’s inevitable at this point, it’s just a question of how many out-of-town investors are going to take full advantage of this, as opposed to the truly paltry returns on a building acquisition in their hometowns. We just sold a business with a cash-on-cash return of over 70% a year after the financing. before doing any value-add work, increasing revenue streams, and finding efficiencies within the expenses. I mean… how are you going to beat that. How?”

The experts and the statistic are in rare agreement that there is a formidable opportunity just waiting for those investors looking to carve them out through the leveraging of existing small businesses as a launching-off point to scale upwards. By tapping into the market of those SME entrepreneurial baby boomers looking for an exit trajectory, there is an exceptional opportunity and mutual benefit to be had by both parties. It’s a phenomenon ready to be mastered and so rarely found in life and business; the art of the win-win.

If you or anyone you know needs the buying or selling power of a multigenerational, multifaceted industry-leading team, reach out to team leader Rhys Wyn Trenhaile at [email protected].

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