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What Is Acquisition Financing?
You or your company has made the decision to either merge or acquire another business. What are some of the key issues in successfully completing acquisition financing and business loans for commercial entities in Canada?
In certain circumstances, your business purchase might involve the taking over of a business already in family hands, versus the other end of the spectrum which would be a purchase of a competitor. Business owners/entrepreneurs are always focused on growth. It's critical that you establish a method to target the company you may wish to acquire.
The ability to be proactive in your search as well as to have a formal strategy is key to successful acquisition finance. The ability to buy and finance a business successfully is a proven way to grow clients and leverage the capacity of your business model - that translates into building your brand.
Business owners, we speak to at 7 Park Avenue Financial tell us they have found firms to buy in different ways. That candidate to buy might come from your own network of personal and professional contact; in some cases business brokers who know the market well are a strong source of deal flow. Accountants and lawyers are also good referral sources. It's important to establish some exclusivity around a transaction you are considering from a competitive viewpoint. That can be established via non-disclosure agreements, a letter of intent, or an agreement of purchase and sale based on certain conditions, one of which might be ... financing!
In many cases, acquisitions do not work out if the purchaser strays from his or her chosen industry. Staying in the industry you know provides a greater chance of success based on your industry experience, given that you have the ability to run a business in your particular industry. Therefore picking a company you know in an industry you know well typically leads to a higher probability of success. Naturally investigating thoroughly the true financial and business position of the firm is critical in the decision to buy process.
While that increase in revenue and profits can come from organic growth it makes sense to achieve scale more quickly by utilizing a business purchase model. That economy of scale can often be a faster growth in sales and profits. It's not always the case but many experts believe that a larger business enjoys numerous advantages, including more beneficial relationships with suppliers/pricing, etc.
Certain types of your clientele might prefer dealing with a larger firm, as well of course the obvious ability for a larger business to attract higher-skilled employees. Naturally, a larger firm has more capability to expand into new markets and services.
A good place to start is simply to ensure you’ve got the right reasons or goals around a merger or acquisition. In some cases you wish to diversify your company, more often than not though it’s simply a case of growing, both sales and profits of course
Is the term ‘opportunistic a negative one? We certainly don’t think so when it comes to legitimate business dealings, so in many cases, you simply have come across a firm or competitor that in your opinion is undervalued. The bottom line, it’s a bargain and you're focused on exploiting either undervalued assets or companies that are not performing well in certain market conditions. Almost always ' price ' becomes a key discussion point so experts caution when to know you have reached limits or criteria that would negate the sale.
On the other hand, just because a company is up for sale doesn’t mean the process will be any easier. Negotiations can break down, for instance, if the two parties disagree on the price. It is essential to set certain criteria and limits and be willing to walk away from the deal if certain conditions that are important to you are not met. Bottom line? Poor pricing on a good company is often a ' bad acquisition'.
How Does Acquisition Financing Work
Don't forget also that acquisition financing is all about some even more common sense scenarios as identified above. Its often a classic opportunity to lower your operating costs as overheads in the new firm can be cut and other efficiencies can be extracted from the combined mix.
Sources of Financing In Canada / Acquisition Financing Lenders
Typically, but not always a term loan is the main source of financing and comes from the appropriate term lender / senior lender on your transaction. This might be a Canadian chartered bank, or it may be a specialized commercial finance company in the traditional or alternative lending space.
In some transactions, your purchase may be completed by a cash flow loan based on historical and projected cash flows of the target company. There is always the ' equity component' of the transaction, and this amount varies based on the overall credit quality and size of the purchase.
Cash Flow Financing: In many cases, a business might not have the asset base from a viewpoint of ' tangible assets '. It is, therefore, necessary to demonstrate that cash flows have the ability to service your loan as well as covering off other fixed expenses. Good cash flow will allow you to obtain the most flexible terms possible for closing your transaction.
Seller financing can be a key aspect of your transaction and will sometimes ' make or break ' your deal. This financing, also known as vendor take-back / ' VTB ' can play a key role in business purchase success, especially if the seller is motivated and willing to participate.
A common form of acquisition finance for well-established target firms is mezzanine financing. It helps out the need to avoid additional owner equity, and while more expensive, it is based solely on the quality of cash flow of the firm you are purchasing. Rates are typically higher due to the lack of fixed assets backing the loan.
What are the types of acquisitions? We can summarize those into three areas, and in some cases, the type of acquisition you make will impact directly the type of financing and commercial business loans that you achieve.
Factors That Make Your Transaction Successful
Purchase prices are always dependant on reasonable valuations. There are numerous ways to value a company based on multiples of sales, profits, cash flows, book value of assets, etc. The cash flow generation we have already mentioned is key, as it will ensure a proper understanding of the company's ability to hand debt and expand via new planned capital expenditures.
It's important to know that your senior lender will also look at the quality of management based on business and industry experience.
Back to our three merger scenarios - they are as follows: friendly, hostile, and leveraged or management buyout. Many smaller companies are of course happy and content to be taken over; they fully realize the potential synergies. However, in certain cases it gets somewhat ' ugly ' in that the management or owners of the firm you intend to buy or acquire simply are opposed to the idea.
Leveraged and management buyouts tend to be asset driven. The downside of a leveraged or management buyout is that if done improperly a large amount of debt can leverage your new firm negatively. There are numerous creative ways to finance acquisition financing in Canada.
What Are The Ways To Finance An Acquisition?
Financing methods include asset based lending, subordinate or mezzanine debt (i.e. unsecured loans based on historical and future cash flows) as well as a private equity component.
Valuation is an important aspect in the area of acquisition financing. Your valuation will have a direct impact on the business loans you enter into to complete the purchase.
In evaluating a final valuation or purchase price you will want to look at things like general financial operating activities - i.e. the financials. But don’t forget also that other factors such as new assets that might be required, working capital needs, etc also will drive that final valuation number.
Generally speaking businesses with hard assets are easier to finance - Those assets typically have value and are excellent collateral for business acquisition loans. This is particularly true of asset based lenders if your transaction requires alternative financing vs. traditional bank finance solutions such as a term loan.
Buying a smaller company, or even buying and financing a franchise can often be easily achieved by using the government of Canada's " Canada Small Business Financing Program '. This is a very flexible term loan with a maximum borrow amount of 1 Million dollars. The potential drawback to the loan is that the main collateral must be equipment, leaseholds, or real estate so borrowers should consult an experienced loan advisor familiar with the Gov't Guaranteed Loan. Under the program, the Canadian government shares the risk of the loan with the lender.
INDUSTRY STATISTIC - During the last 10 years, the government of Canada has underwritten almost 10 Billion dollars of small business loans, for over 63,000 companies!
Target acquisitions must be for companies with less than 5 Million dollars in revenue. The program does not cover farms of non-profit types of companies. The government sponsor of the program is Industry Canada.
Challenges In Business Acquisition
Buying a business is all about planning and ensuring you have a strategy. As well as the risk of overpayment and of obtaining a poor valuation the purchaser will want to ensure he or she has a strategy of efficiently integrating the business to achieve maximum shareholder benefit.
Issues you want to address may include understanding the perceived or real weaknesses of the company in its chosen market. A business might have a wide variety of products and services so strategies must be implemented around pricing and service offerings. Your goal is of course to be a leader in your field and markets.
Business Valuation
Valuing your acquisition target is always a key challenge, and there are several different ways to come up with an acceptable value. Key factors such as what industry you are in, as well as the size of the company and typical profit ranges, will come into play. Companies also recognize sales revenues and profits in different ways. It is absolutely critical to come up with and understand what ' normalized ' financials will look like at the time of takeover/acquisition. Typically buyers will want to focus on the value of the company as ' going concern '. Buying distressed or turnaround situations is a whole different kettle of fish!
So in normalizing the financials you must look carefully at the core revenues and the assets that produce those revenues. You should be strongly focused on future income potential. One time events or expenses should always be discounted. For larger transactions, companies might choose professional business valuators.
At 7 Park Avenue Financial we want to be your key source for buying or selling your business - selling your company will often require either a valuation or business plan or probably both. Our goal is to ensure you have a financing structure that will allow for the proper sale, financing and growth of the business. Together with your accountant, lawyer, tax specialist etc, we focus on a smooth transition to a completed purchase.
In summary, when contemplating acquisition financing look at issues such as the proper mix of debt and equity, cash flow analysis, and various areas of operational risk and reward. If you want financial alternatives in financing your acquisition consider talking to a trusted, credible and experienced Canadian business financing advisor who will assist you in this exciting area of Canadian business finance.
7 Park Avenue Financial :
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Oakville, Ontario
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced
business financing consultant
.Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Stan Prokop
7 Park Avenue Financial/Copyright/2020
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