YOU NEED TO FINANCE A BUSINESS ACQUISITION
BUSINESS PURCHASE FINANCING CANADA / OWNER FINANCING BUSINESS BUYOUT SOLUTIONS
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Financing & Cash flow are the biggest issues facing businesses today
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Oakville, Ontario
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FUNDING BUSINESS ACQUISITIONS IN CANADA
Information on buyout financing in Canada, including due diligence and financing strategies to complete a successful acquisition and takeover financing. Are you thinking of buying a company or acquiring a competitor in your market?
Business purchase financing and your optimal financing structure on your acquisition deal - Simply speaking it's the process of funding the purchase of an existing business with sources of financing provided by banks, commercial finance companies, or asset-based lenders. let's dig in!
HOW TO GET A LOAN TO BUY A BUSINESS IN CANADA
Business purchase finance in Canada often requires some, shall we say ' deft ' takeover financing strategies when an acquisition is made. This might often include a management buyout scenario. Let's look at some of the acknowledged ' smart ' ways to buy and finance to buy an existing business. Let's dig in. There are often great rewards when an existing business is purchased properly with the right underpinning of finance and mgmt skills - the challenge is the right loan to buy an established business.
WHY ARE YOU CONSIDERING BUYING A BUSINESS OR A COMPANY BUYOUT?
If it's an add-on ( the pros often call it a ' bolt-on ' ) to your current business, it's obviously a solid mechanism to grow your customer base as part of your acquisition deal, and that might even mean acquiring a competitor or a vendor with whom you do business with. When executed properly, it's a solid method of gaining market share, acquiring skilled staff and an infrastructure and business model that is already established.
There is a huge transfer of wealth in today's Canadian business environment as employees consider management buyouts, businesses consider mergers and acquisitions, and family successions are in full force. Since the millennium turn, we have experienced the first-ever large-scale transfer of businesses in Canadian history. No matter if we are talking about management buyouts, mergers/acquisitions or family successions, we have a lot more experience today than we did 15 years ago.
At 7 Park Avenue Financial, we find many business purchase leads come from business brokers, real estate agents or even online listings of businesses for sale. A business purchase might also be the acquisition of a new or existing franchise in various types of industries when it comes to the challenge to finance an acquisition solution properly.
FINANCING OPTIONS WHEN ACQUIRING A BUSINESS - BUSINESS ACQUISITION LOANS IN CANADA
Different sources of capital might be used to fund a merger or the acquisition of a target company. The overall solutions are known as your final ' capital structure. 'In many cases, a combination of sources of funding will ultimately lead to a successful transaction, so it's all about the right ' mix ' at appropriate terms, rates, and structure. Certainly not rare, but typically uncommon is to use your own personal or company cash reserves to purchase a business outright - that is possible. Still, more often than not, external financing will be needed when financing acquisitions.
While it is often not considered in the early stages of business financing, it will often become apparent that some form of seller financing/vendor finance is required to close the gap in your financing package. This component of your financing has numerous advantages.
HOW TO BUY A BUSINESS WITH SELLER FINANCING
Advantages of Seller Finance / VTB - Confirms the third party seller's commitment to the new owner - owner financing is generally viewed as a very positive by commercial lenders and assists the purchaser in closing the gap in total financing for the purchase price required when the seller agrees to participate in the deal in some manner. Terms of seller financing are often flexible and creative and include provisions for the seller if the buyer defaults. They are sometimes referred to as an ' earn-out.' A business purchase agreement with a seller financing deal component will always assist your transaction relative to your down payment.
" The buyer of a business is not buying bricks and mortar, he is buying the cash flow " - Robert Kiyosaki
BANK FINANCING - SECURING FUNDING FOR YOUR BUSINESS ACQUISITION
Industry experts agree that Canadian chartered bank financing is typically available for only higher-quality credits. Many larger businesses cannot be financed without the involvement of a bank loan or a commercial loan firm.
The first step in understanding traditional financing is knowing that Canadian banks place a high emphasis on the reasonable personal credit history of the purchaser, industry experience to run the business, personal guarantees, and various borrowing covenants and ratios around their financing in the transaction. The interest rate from a financial institution such as a bank or credit union will always be attractive and competitive.
Banks will do a careful analysis of the financial health and cash flow of both the acquiring company and the target company if one firm is buying another in a combined company scenario. Alternatively, some transactions could have the 2 companies remain separate entities or under a holding company.
You can expect a higher interest rate from an alternative lender. Over the long term, the buyer must consider the cost of capital versus access to capital when evaluating terms sheets.
HOW TO FINANCE A SMALL BUSINESS PURCHASE WITH GOVERNMENT LOANS
Two sources of ' bank financing ' outside of chartered bank commercial loans are the Government Of Canada Small Business Loan program for transactions under 1 Million dollars and the government's crown corporation, committed to entrepreneurs - Business Development Corporation. These two solutions should be explored but have some specific requirements around how their business purchases are constructed.
A recommended strategy for these two solutions is to work with an experienced business advisor to determine if one or both of these two ' government ' solutions will fit your business purchase plan.
The Canada Small Business Financing Program is the Canadian version of the U.S. SBA loan. SBL loans finance 3 specific assets - equipment, leasehold improvements, and real estate. It's an excellent finance solution when small companies or franchises are being acquired. Talk to the 7 Park Avenue Financial team about certain conditions required under the program.
As a general comment, we can say that both of these 2 ways to acquire a firm are very focused on hard assets such as land, buildings, fixed assets, qualifying leasehold improvements, etc.
Unsecured Cash Flow Loans - Mezzanine financing Highly leveraged deals can also be financed successfully if the underlying assets are strong. You can demonstrate the acquisition will generate cash flow to support the higher leverage in the transaction. Pure cash loans, called ' mezzanine loans, ' are very focused on the business's past, present and future cash flows.
It is here where a detailed business plan and cash flow projection are absolutely required. Because ' Mezz ' deals are unsecured by assets, it's all about the cash flow! 7 Park Avenue Financial business plans meet and exceed the requirements of banks and commercial lenders.
VALUATION
We're told by ' experts' that the financial markets are ' imperfect ' to some extent, and that's probably the case with valuing and then buying a company. Business valuation comes down to cash flow analysis and profits. Your goal is to ' normalize earnings' to reflect how the new entity will perform in the future in the valuation process. Business valuators use ' multiples ' of key data points such as sales profits, and they are critical when considering how to buy a business in Canada.
From a ' valuation ' perspective, there are, of course, several time-tested ways to value the target firm. Naturally, there are different motives for buying a business that is already doing well. (Or a business that needs to be repaired! which often presents an even greater opportunity and risk)Those motives might be synergies, economies, faster growth, less competition, etc. Because many valuation strategies are subject to opinion, we've often focused more on the business's assets.' Good mgmt can usually reverse any losses, grow the business, etc.
The bottom line? Business value impacts the amount and terms of your financing!
EXAMPLE OF MULTIPLE VALUATION
If a firm generates 400,000 cash flow each year, it is not uncommon in many industries to sell at a 3 or 4 times multiple of that cash flow, thereby providing a potential selling price of $1,600,000.00 as an example 4x multiple. That suggested selling price must now constitute a financing package of your cash deposit, senior debt, operating debt, and potential seller financing.
The business's assets will allow mgmt to increase earning power if the asset's true value is understood. In many cases, a proper appraisal of assets may well be required or simply the right thing to do. The ' hard ' assets in the business are typically equipment, technology hardware, and vehicles. We also mustn’t forget leasehold improvements as a part of any firm's potential asset mix.
The ' current assets ' in the business will be providing the takeover with the liquidity and asset turnover it needs to be successful. Understanding the quality and turnover of accounts receivable and inventories are key to successful takeover financing. Note that almost always intangible assets and goodwill are normally not financeable in the SME (small to medium enterprise) marketplace.
Many firms invest in R&D, and in those cases, SR&ED tax credits can be part of the financing plan. All the analysis you do in the context of what we have discussed is knowns as ' going concern ' due diligence and may often require a final adjustment to an offer price to buy the business. All the valuation and diligence you perform will steer you to raise capital to buy a business. Getting proper financial statements from the target firm is key to any financing takeover success, again keeping in mind all the ' subjectivity' that comes with every item on the balance sheet ( except cash !).
HOW TO ACQUIRE A COMPANY - ACQUISITION FINANCING 101
What strategies are used to finance business purchases and mgmt buyouts in Canada? They include Bank Loans - When Canadian chartered banks are the senior lender in your transaction, they will always require a total charge on all the company's assets, including current assets such as a/r and inventory and fixed assets, including real estate. Govt Small Business Loans (new limit = $1,000,000.00) - This program is one of two ' government sources ' of capital to purchase a business.
Terms are flexible and competitive, and the personal guarantee is limited. The government does not lend money directly under the program, which INDUSTRY CANADA administers. Instead, it guarantees a large portion of the loan to the bank that lends directly to fund your acquisition. The program's main requirements are a down payment, good credit history, and industry experience in the business you are targetting to buy. The ' SBL ' loan is often the best way to complete a small business acquisition.
Asset-based loans- Asset-based credit lines are a key source of business purchase financing, particularly when there is a leveraged buyout financing component. They monetize the business assets into a loan that can be both term and operating in structure. The revolving portion of these facilities provided day-to-day working capital and is paid down as sales are generated and clients pay. ABL facilities are often key to successful business purchase financing.
Sale leasebacks - Sale-leaseback financing can generate cash on already owned and unencumbered assets ABL Business Credit lines - these lines of credit are practical to the day-to-day running of the business and can combine all the assets of the company into one borrowing facility that margins receivables, inventory and equipment, as well as real estate if applicable.
Tax Credit Financing - SR&ED Tax Credits Can Be Monetized To Secure Cash Flow A/R financing - Receivable financing is a component of asset-based lending. The ability to finance business receivables is key to unlocking day-to-day working capital needs. Intellectual property, goodwill, and client lists are difficult to finance as an asset class.
Numerous forms of invoice financing can address the day-to-day cash flow needs of the business. Our recommended solution to 7 Park Avenue Financial clients is Confidential Receivable Financing, allowing you to bill and collect your own receivables, unlike the typical ' factoring ' model of invoice discounting.
Invoice financing is a term for arrangements that allow you to finance your business invoice receivables. It is mostly used by small businesses to improve working capital and cash flow by meeting short-term liquidity needs. The two most used solutions are invoice discounting and factoring.
Franchise loans - Many franchises in Canada are financed under the Government Small Business ' B I L ' loan and a combination of equipment financing and credit business lines or business credit cards for additional funds.
DUE DILIGENCE - WHAT YOU NEED TO KNOW
It's important to properly and quickly identify the documents and information you require to assess the purchase price properly. A typical package will include several years of financial statements and interims if available, corporate tax returns, premises lease, equipment lists, aged payables and receivables, copies of bank statements and details surrounding current secured lenders, and their agreements/collateral held / covenants, etc.
Assessing cash flow is a key consideration in business purchase finance.
NEGOTIATING FAVOURABLE TERMS / THE ART OF NEGOTIATION
The entire due diligence process should be considered with the assistance of your lawyer, accountant, and business financing advisor. Large corporations typically used investment banking professionals.Their advice can be invaluable to the overall success of your purchase. It would help if you considered any cost-cutting or productivity improvements you can make to grow cash flow and profits in the overall financial diligence.
It should be recognized that many business purchases might also involve assuming some of the debt the company has in place and that new ' operating facilities such as business credit lines will often be needed when you're considering all your acquisition financing options and structures.
CONCLUSION - WHAT ARE THE BEST FINANCING OPTIONS FOR A BUSINESS ACQUISITION
Business acquisitions can be challenging for the owner/entrepreneur. In many cases, a combination of ways to finance a business and different methods may well be required. You need to ensure the right amount of debt, equity financing, cash flow, and working capital to get the right financing structure in place for the business you want. Use the power of proper leverage to acquire your dream business.
Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you in business purchase financing options that make sense for your transaction. If you are considering buying a business or acquiring a competitor talk to our team about business purchase financing takeover finance solutions you can use for a successful transaction around business acquisition financing.
FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION
What is a leveraged buyout?
Leveraged buyouts are when the buyer of a company takes on debt to purchase a business. A significant amount of borrowed money is used to fund the acquisition. Debt becomes the main source of funding the purchase/takeover.
What is merger and acquisition financing?
Merger and acquisition financing is the combining of two legal business entities into one - in the transaction, one of the businesses purchases the shares or assets of the other business. Different financial benefits arising out of this type of transaction. M&A financing will have benefits that are both strategic and operational around areas such as shared expertise, new products and services and access to new markets domestically or internationally. In larger transactions, private equity might be involved in the merger.
Operationally speaking other benefits potentially included streamlined operations and greater buying power.
What types of financing are available for business purchases?
The types of financing available for a business purchase include loans from traditional financial institutions such as banks, as well as financing provided by commercial finance companies and asset-backed lenders. The type of financing available from these lenders will vary based on factors such as credit risk, transaction size, type of industry, etc.
How do lenders evaluate a borrower's creditworthiness for the purchase of a business?
Business lenders evaluate business purchase transactions based on the overall creditworthiness of the borrower as well as the target company - Key areas of focus include the personal credit scores of buyers, business credit scores of the acquisition target, collateral available, and the ability of the business to generate cash flow and profits.
What is due diligence, and why is it important in the context of business purchase financing?
Due diligence is the process involved in reviewing the value and financial health of the business being targeted for acquisition. Buyers and lenders will focus on areas of potential risk as well as the value of the business in relation to the amount being financed - The growth potential of the business is also key in the due diligence process.
What are the key considerations when negotiating the terms of buying a business and arranging to finance the purchase?
When buyers negotiate the terms of a business acquisition they should consider interest rates on the financing and the amount of flexibility offered on repayment schedules. In some cases, buyers will be asked to provide collateral. The cash flow and profitability of the business must be sufficient to repay day and run the day-to-day operations of the business in addition to retiring the acquisition loan. In the due diligence process buyers must consider company and industry risks in the business purchase.