FINANCING BUSINESS ACQUISITIONS IN CANADA - OVERVIEW OF TYPES OF FINANCING AVAILABLE FOR PURCHASING A BUSINESS
Buying a business in Canada via the right acquisition financing will often involve looking beyond the numbers when it comes to ensuring business purchase financing options are in place and that you are successful in the optimal financing structure when considering buying small businesses in Canada. Let's dig in!
HOW TO FINANCE BUYING A BUSINESS IN CANADA - DIFFERENT TYPES OF FINANCING AVAILABLE FOR A BUSINESS PURCHASE
When it comes to ' how do I finance a business purchase ' business loans to buy an existing business is not just all about negotiating the sale price -
UNLOCKING THE DOOR TO BUSINESS OWNERSHIP WITH PROVEN FINANCE STRATEGIES
It's also about the necessary funding solutions & understanding other financing options from potentially multiple sources of funding, and a financing package that must be put in place to ensure business survival and profitability via conventional financing and/or alternative financing. Let's dig in.
WHAT LENDERS CONSIDER FOR A SUCCESSFUL BUSINESS PURCHASE
The pros, of course, call it ' due diligence, when it comes to
considering a business investment loan and how to buy a business at the
right purchase price.
On the other hand, as well financing a
business for sale is all about a pretty basic common sense premise:
ensuring sales, inventory, accounts receivable and accounts payable are
all reasonable, and that projected sales volumes make sense in the long
term. The right business acquisition loans are an integral part of
planning future growth to fund acquisitions.
Bottom line- the proper business purchase loan finance
solutions tie together your plans for mgmt, mfg or delivering services,
and marketing.
The essence of any business, large or small, is cash management. Working
capital solutions and business financing rates must also be considered
for effective ongoing operations.
A/R Financing/factoring -funding daily operational costs and maintaining adequate cash reserves
Bank Loan & revolving credit lines - repayment
terms based on fluctuations in revolving credit facilities -A senior
lender requires the loan to be paid off and has to meet financial
covenants. A senior lender such as a bank requires the loan to be paid
off in a relatively short period ( typically 5 years ) and will want you
to meet certain financial covenants.
Non-bank asset-based lines of credit - applicable to
leveraged buyout scenarios for firms with substantial assets - these
loans come with a higher interest rate but can provide significantly
more capital for your purchase
Inventory Financing
Tax Credit Financing
Business Credit Cards / Short Term Working Capital Loans - Certain conditions such as good owner personal credit scores apply - these loans are readily accessible and are a term loan structure but come with a higher interest rate
DIFFERENT GOVERNMENT PROGRAMS AND INITIATIVES ARE AVAILABLE TO HELP IN THE ACQUISITION OF SMALL BUSINESSES IN CANADA
Small business govt guaranteed loans
(maximum 1.1 Million $) Small Business Loans To Purchase A Business Can
Often Come From The Government Of Canada Small Business Loan Program
- In the U.S. the question is the same, ie bank or sba loan. The Canada
Small Business Financing Program was somewhat modelled after its U.S.
counterpart. The bdc small business loan interest rate is also very competitive.
The Canada Government Guaranteed Loan provides guarantees and safety measures to participating financial institutions when they lend money for a business purchase. Intangible assets and intellectual property can now be financed under the program but leasehold improvements and real estate continue to be part of the program - with financing now provided for working capital and lines of credit.
Banks and credit unions are the most
popular type of financial institutions participating in the program.
Monthly payments are based on competitive interest rates under a term
loan structure.
Firms that are not profitable or that have ' challenged' balance sheets
will not qualify for what we call ' traditional' finance. These types of
companies can't comply with the financial ratios and collateral
demanded by our Canadian chartered banks. Almost all businesses that
sell on credit, large or small, need some sort of business credit line.
Numerous alternative financing solutions are in fact available - but at
the same time, new owners/mgr must be able to address and talk to items
such as gross margins, operating inefficiencies, etc.
At 7 Park Avenue Financial, we speak to many clients who wish to
purchase a franchise business. That can be achieved via various
financing programs, and might often include some ' seller financing '
when it comes to an overall finance strategy. That seller finance
assistance in essence is another alternative capital that can allow the
buyer to successfully complete the transaction. We also note that both
new and used franchises can be purchased and financed.
VALUATION
As the buyer of a business job 1 revolves around your ability to accurately value the business from the viewpoint of a fair purchase price - Numerous factors will come into play when considering valuation:
Business buyers should focus on financial performance - which involves looking at the historical financial statements with a focus on sales growth and trends, profitability, and .. you guessed it - CASH FLOW. The ability to determine cash flow generation within the business is a key metric and will be key to getting the business lender/bank onside with your purchase.
Every industry in Canada has its own trends relative to general economic conditions as well as specific industry issues - Buyers will want to focus on long-term trends and the potential to grow the business based on the buyer strategy
Your ability to understand where the business lies in terms of competition and its ability to attract market share will require some potential external analyses as well as discussions with the seller
Businesses typically fall into two categories - asset-intensive businesses that require larger amounts of cash flow, or, on the other hand, service-based businesses - It is necessary to understand actual market values of key business assets that might include fixed assets/equipment, inventories, as well as intangible assets such as patents and intellectual property or a trademark. In some cases, it may be prudent for both the buyer and seller to engage a professional appraisal service to determine the fair value or in some cases liquidation or replacement values
External buyers of a business will want to ensure that key management and key employees are in place - in the case of a management buyout the current team will have a solid understanding of the business already
One of the basic ways to value a business revolves around looking at a valuation multiple within the financial statements - buyers and compare the value of the company to actual earnings, or in other instances look at price to sales or price of a business relative to cash flow generated - A good baseline for this type of analysis is to look at similar competitors in the industry if that information is available.
Buyers of a business without a strong financial background should rely on advice from business finance advisors, accountants, lawyers, bankers, or other experts in the industry.
Naturally, business values change over time, and also assume projections which may or may not come to pass around profits, growth, etc. The goal in any business purchase is to ensure that the buyer will not overpay for the target acquisition - at that point, it's a combination of risk/reward analysis when placing value on the price of the target acquisitions. Focusing on the right due diligence will always significantly reduce the risk that comes with a potential business acquisition.
It will almost always come back to the cash flows of a business when the buyer is looking at what a fair market value price will be for the business purchase. As a buyer focus on:
1. What working capital requirements will be post-acquisition
2. What amount of spending will be required on new assets or technology
3. What are the opportunities to grow in the industry?
Remember also that high cash flow projections around future performance also means a potentially higher purchase price - similar to real estate purchases ultimately the true value of the business is what a buyer will pay for the company which may not necessarily be reflected in all the financial factors and analysis around due diligence in the purchase. The importance of the transaction to the buyer will also drive the price and the perception of value in the negotiations around a fair price.
The operating results and the future operating potential play key factors in the final valuation and agreement of purchase and sale. In private transactions in the SME sector of the economy, buyers don't often have the luxury of publicly available information on competitors, etc - that is enjoyed by transactions for publicly listed companies.
The ability to negotiate a purchase from strength is often based on the buyer's perception of future synergy and potential. So the factors of the value of tangible assets, intangible assets such as the goodwill component and future synergies and potential all play factors in the purchase price.
Buyers also are in a position to assess post-acquisition savings that might come from a merger-type transaction - but most experts agree that post-purchase considerations should be viewed separately from the basic value around current operations - As a buyer, you don't want to be in a position of having to address higher costs and lower post acquisition benefit! Remember sellers don't need to be paid for post-acquisition perceive benefits and potential!!
SELLER FINANCING / VENDOR TAKE-BACK CONSIDERATIONS
Most buyers prefer to have a seller finance component in the purchase - that is sometimes called an ' earnout '; at least fo a specific period of time - They also would prefer to have an arrangement around the handling of any undiscussed issues and liabilities that might come up post-purchase.
Typically the buying of a business will be a combination of owner equity financing, debt, and the potential of seller financing. More sophisticated transactions might include non-compete agreements with the sellers or employee contracts. Those issues sometimes will be a consideration in valuation and purchase price.
SOME KEY RISKS IN BUYING A BUSINESS
Purchasers should consider :
Cash and financing need to acquire new assets or technology
Sales fluctuations that will impact cash flows
Higher costs around staffing and infrastructure
Interest rate changes in the general economy
Post-acquisition strategies failing
Warranty and vendor/supplier representations
BUSINESS ACQUISITION FINANCING CANADA - HOW TO FINANCE THE PURCHASE OF A BUSINESS
Buying a business for ' all-cash ' is
almost never the option available to purchasers. Top experts tell us
that not even a 1/3 of businesses purchased are done via 100% financing.
Unfortunately, sellers like/want cash! More often than not the final
structure of your transaction will be:
Owner Cash / Equity Financing / Dissolving Retirement accounts
External Financing
Vendor Note Take Back - Vendor Financing /Seller Financing (not always, but often) -
‘ABL ' (Asset Based Lending) is often a solid solution for a business
financing strategy, often in the case of leveraged buyouts with a focus
on ' assets'. These types of facilities allow you to borrow heavily
against inventory, accounts receivable and equipment/fixed assets.
One legal/technical issue often becomes a critical point in acquisition
financing. That is the issue of ‘asset sales' vs. 'share sales'. From a
buyer's perspective, asset sales tend to make more sense - sellers focus
on share and tax strategies for selling their businesses. This can
often complicate financing as it relates to specific assets of the
business and cash flows.
We've seen there are some critical issues that can make or break the
success of financing a business purchase. Those issues include proper
valuation pricing, debt load, working capital and cash flow financing
challenges. A solid business plan and proper cash flow projections are
key to successful approval of financing -
7 Park Avenue Financial prepares business plans that meet and exceed bank and commercial lender requirements.
ASSET PURCHASE VERSUS SHARE PURCHASE
In an asset sale, buyers acquire specific assets of a business, versus a share sale where ownership is acquired .
Buyers and sellers of a business must agree on either an asset sale or a share sale agreement - Key issues around share sales include
- Timing around due diligence
- How security is transferred to the lender in the share sale
- The preference of lenders to utilize an asset sale financing
DUE DILIGENCE
Buyers should allow for a proper amount of time on the due diligence - when done properly this helps guarantee a successful transaction fo the buyer - Buyers can use their own resources or engage experienced professionals. The best entrepreneurs and business people will look into all aspects of the business - that can come with both time and potential costs,
Solid due diligence allows you to investigate potential problems in the business and identify the key strengths of the company - Banks and other commercial lenders will want to know you have completed appropriate pre-sale diligence around valuation and the issues that might need to be addressed around creating additional value after the purchase - Those issues include the need for upgrades t and potential capital for new assets and technology. Proper searches must be done on secured lenders and any legal issues the target company might be involved in.
Financial statements must be obtained and reviewed from a historical and interim perspective. Lenders will rely on your due diligence, as well as their own on issues such as asset liens, etc. Proper agings of accounts receivable, inventories and accounts payable must be provided for review.
A business plan and financial projections are key to positive input from banks and commercial lenders.
CONCLUSION - THE BEST BUSINESS ACQUISITION LOAN FOR YOUR NEEDS
There are few people who can buy a
business with cash and without borrowing money . If you're focused on a
winning deal and financing a business purchase properly seek out and
speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your funding needs for a successful acquisition.
Let the 7 Park Avenue Financial team help you master the art of business financing for your business purchase We'll show you the most efficient way to fund your acquisition with a higher percentage of success with financing options specifically designed to your business needs!
FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION /PEOPLE ALSO ASK
Can I finance the purchase of a business?
When someone is buying an existing business, they typically use a combination of their own money and external financing to become a business owner. Unsecured loans are available from banks and a government small business loan or a loan from a business Development bank is also a potential financial solution for acquiring a profitable business - Some borrowers view the application process as government and bank longs too time-consuming. The business transaction will typically be structured around long term loans and a business line of credit - in some cases vendor take back financing is also helpful and will require fewer personal assets to be pledged or provided as a guarantee.
How much down payment do you need for a business loan?
There is no set deposit amount for business loans, as each business is unique. 10% to 30% is a commonly used amount.
Do banks give loans to buy a business?
What is a business acquisition loan?
A business acquisition loan is a small business loan for financing the purchase of an existing business. Financing typically covers the acquisition costs in the form of a term loan as well as potential working capital financing and business credit lines that might be required to fund day-to-day operations - Acquisition loans can be from banks, the government via various programs or government crown corporations, and commercial and alternative lenders. Mezzanine financing / cash flow financing can also be a component of financing in buying a business.
