Acquisition Financing In Canada - How To Finance A Business Acquisition

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YOUR COMPANY IS LOOKING FOR  FINANCING TO BUY A BUSINESS

FINANCING A TAKEOVER VIA  DEBT FINANCING AND CASH FLOW FINANCE

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing businesses today

ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS  FINANCING OPTIONS?

CONTACT:

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

 

FINANCING AN ACQUISITION

 

Business acquisition financing of another company, appropriately done, plays a crucial role in helping to grow a business. Profitably!

 

INTRODUCTION

 

Financing your business acquisition with the proper financial planning plays a crucial role in purchasing an established business - Proper financing allows the entrepreneur to expand operations and leverage existing assets.  It is important to understand financing options and the various implications that come with those funding options, and whether they are available for entrepreneurial success in buying a business.

 

 

While there are some common ' go to ' solutions when buyers seek acquisition funding, such as lines of credit, traditional loans, etc., other financing options are available to enhance business operations. Specialized financing via non-bank private lenders is often a final solution, and these alternative solutions come with less strict criteria than those requirements by traditional financial institutions.

 

Bank financing for an acquisition focuses heavily on stable sales revenues, good cash flow, profits, and collateral. In some cases, those aren't always all available!

 

 

DO YOU HAVE THE INFORMATION YOU NEED TO BUY A COMPANY?

 

We're talking about the proper buy-side strategy in acquisition financing in the Canadian market,  whether that's m&a financing, a management buyout, or simply loans to buy a business in Canada. Let's get you to the goal line in your business buyer letter of intent to purchase a business and that final sale and purchase agreement.

 

Your purchase might sometimes be part of a succession planning process in transferring business ownership and a management buyout. Let's dig in on business acquisitions and the various types of acquiring a company with alternatives suited to your specific needs! Think of it as your buying a business checklist from 7 Park Avenue Financial.

 

ESTABLISHING VALUE IS  CRITICAL TO A SUCCESSFUL FINANCING OF A BUSINESS PURCHASE

 

Buyers can use various business valuation methods to determine the target company's value. In some cases, buyers can analyze the amount of time and cost it would take to start a similar business in areas such as technology, sales costs, financing costs, acquiring assets, hiring staff etc.; that is a lot of work!

 

Some purchases can use analytical techniques such as the company's net asset value or compare comparable prices to earning ratios of public companies in a similar industry.  Other methods, such as net present values of future cash flows in the analysis of the financial statements are more technical and might require the help of an experienced business valuation professional,

 

The Harvard Business Review has an excellent article on ' paying too much '  when buying a business - Click HERE for the article.

 

WHAT IS ACQUISITION FINANCE

 

Acquisition finance is all about the different types of capital that can be sourced to buy a business or, in some cases, merge with another. Funds can come from a variety of sources in Canada. Given the potential complexity of any deal, successful acquisitions and financing services will always have a plan attached to them.

 

In most cases, one type of financing may not provide the total solution, so a ' cobbling' together of different financings will ultimately lead to a successful transaction.

 

In some cases, established businesses might be looking for what is known as a tuck-in or bolt-on acquisition - considered for augmenting an existing business.

 

The question? What are the best sources of financing and business capital to complete your transaction based on financial flexibility and the cost of capital? The buyer can focus on the best acquisition financing solution to establish the target company's value.

 

CONSIDERING THE  ' DEBT VERSUS EQUITY ' QUESTION IN BUYING A BUSINESS

 

Financial professionals tell us debt is cheaper than equity  - a reasonable debt level will ensure no risk of diluting owner equity  - Naturally, debt levels are always a concern. Long-term debt can be a challenge to the financial health of a business. The key  benefit of more owner equity in a transaction is that it does not require repayment and will allow a company to assume more debt under the right circumstances,

 

 

WHAT ARE THE KEY WAYS TO FINANCE YOUR TRANSACTION 

 

Sales of business are completed by either a share sale or an asset sale, naturally for public companies, a significant share transaction.  Cash may also fund your transaction, often unlikely in the private sector, given the potential deal size. Most firms are acquired through debt and the cash flow monetization of assets - and in some cases, an acquisition bridge financing solution as a path to a complete transaction.

 

Most transactions are a combination of senior debt via a term loan based on assets or cash flow financing ability, which typically is the bulk of the total solution and complemented by an operating credit line or unsecured mezzanine cash flow loan.

 

Mezzanine loans/mezzanine financing is cash flow-based, and historical and present cash flows are analyzed carefully. Mezzanine finance is unsecured debt and ranks behind other secured lenders, meaning a higher risk level for the ' mezz ' lender.

 

Debt is much less expensive than equity, a financial point not always contemplated by many business purchasers. Cash flow financing, or mezzanine finance, might include a smaller equity component. Mezzanine financing provides additional flexibility to your transaction.

 

Key elements of your acquisition analysis include the target firm's profitability, overall cash flow potential, and the amount of debt it can manage post-acquisition.

 

When a transaction cannot be completed on a 'cash flow ' basis, the ability to assemble a proper asset-based finance solution is key. Asset-based finance - ' ABL' used the key assets of the target company to complete the transaction.

 

Those assets include equipment, real estate, accounts receivable, and inventory.  A strong asset-based will always help in a transaction with more leverage than typical.

 

As a potential business purchaser, you need to focus on financing your deal and converting that purchase price into a successful transaction within proper due diligence in m&a financing.

 

 

 

REASONS FOR PURCHASING A BUSINESS OR FINANCING A TAKEOVER

 

Why would you consider purchasing an existing business?  Reasons vary but are not limited to:

 

- Growing revenues faster

- Expanding into new markets or geographies

- To eliminate some existing costs and therefore increase profits

-  capitalize on new technologies /products/clients

 

 

Naturally, firms can grow ' organically' via various means, such as the introduction of new revenue sources, marketing strategies, and new clients - That takes time, of course, which is part of the appeal of buying another firm, allowing you to reach synergies and economies of scale. In some cases, real estate acquisition loans can be a part of a transaction, requiring additional expertise.

 

Various critical parts of the existing balance sheet can play a vital role in the financial acquisition of your purchase correctly. A solid example of this is to table the issue of a  ' vendor take-back / seller note ' that can alleviate the amount of capital you have to either put in... or borrow.

 

Those elements will shape your final financing structure and your equity investment in the business. That becomes your proof of commitment to your bank or commercial business lender.

 

Naturally, not all sellers are motivated to stay in the deal. Still, a fair vendor take-back note has two great advantages in financing the transition to new ownership  - reducing the amount you need to borrow and enhancing some of the cash flow requirements that a lender might be concerned about.

 

It might be opportune to mention to a seller that, in some cases, a higher sale price can be achieved with a Vendor take-back type deal.

 

The existing accounts receivable must be addressed in transactions we have worked on. Putting some... or all of the existing A/R into the deal may offer particular advantages to you as a buyer.

 

So let's get to the ' nub ' of our issue -  Funds can come from various sources!

 

WHAT FINANCING STRATEGIES AND LENDING SERVICES ARE MOST COMMON IN ACQUISITIONS FINANCING

 

The most commonly used and almost always successful (if done properly!) include these solutions from acquisition financing lenders ->

 

 

 

ACQUISITION FINANCE STRATEGIES IN CANADA / BUSINESS ACQUISITION FINANCING OPTIONS

 

Government Business Loans ( The SBL Guarantee Loan now has a limit of $1,000.000.00 )   Remember that this type of loan only finances equipment and leaseholds, so another form of financing may be required to complete your transaction.

 

Nonetheless, it's a classic small business loan for smaller companies with the help of the Government of Canada.  The federal government loan guarantee allows many small businesses to be purchased successfully - The program is similar to the U.S.  SBA loan under America's Small Business Administration. It provides a lower down payment requirement and competitive interest rates.

 

Borrowers must meet minimum requirements regarding net worth, income, good personal credit scores, etc. Ask the 7 Park Avenue Financial team if this loan program works for your business purchase.

 

The interest rate and flexible payment terms are a key part of the success of this program which is utilized by thousands of entrepreneurs every year. Buying a franchise in Canada is a common use of the Canada Small Business Financing Program. Talk to the 7 Park Avenue Financial team if this loan makes sense for your business purchase.

 

The vast majority of business purchases with government loans tend to be a small businesses or a franchise, given that the term loan portion of the transaction has a limit of 350k. A real estate component is often handled separately from an operating business.

 

Bank Term Loans/ Revolver and lines of credit facilities - These are critical elements of finance to buy a business - Receiving financing through your bank as the financing institution involves understanding the requirements of traditional bank loans to secure the funding you require via a bank financing term sheet. Canadian banks will, of course, strongly emphasize financial covenants and final debt ratios / EBITA calculations, etc.

 

Asset-based loans / leveraged buyouts:  These loans finance all or parts of receivables, inventory, and equipment, as well as provide revolving credit lines for the ongoing business. Asset-based lending via lender financing can help solve some of the traditional challenges of buyouts and acquisitions as an acquisition financing ' lbo model. '

 

Asset-based financing acquisitions are a solid solution for business purchases that don't meet criteria around cash flows. Using the target company's assets, such as accounts receivable, inventory, real estate, and even potentially intellectual property, allows for a business purchase that relies less on covenants and guarantees. Any business acquisition around a solid asset base can use those business assets to unlock capital versus a ' cash flow analysis' type of valuation in due diligence.

 

Utilizing ' ABL ' via leveraging assets is a reliable method to maximize the potential financing needed. Structured or  Leveraged acquisition finance via an asset finance solution can shorten the timeline of your transaction as alternative finance solutions tend to be arranged much more quickly. However, financing rates and fees can be higher than a bank solution.

 

Focusing on the actual value of assets such as accounts receivable, inventories, and equipment maximizes finance potential. Asset-based lending is higher cost but can help you achieve business purchase success.

 

It's essential to consider the share purchase vs asset purchase choice as the transaction has positive and negative aspects for both the buyer and seller depending on which deal closing is agreed upon.

 

Unsecured cash flow loans and Term Loans

 

Franchise Loans (Franchising is a huge part of the Canadian economy)

 

Let's not forget seller financing/owner financing, sometimes known as ' vendor take-back financing ', allows the buyer to reduce the funding required to complete the transaction.  A Properly crafted vendor take-back loan will reduce the amount you are required to finance and are a common way of engineering a successful deal when the seller agrees to participate in your transaction. In some cases, a creative earn-out payment with the seller might be able to be negotiated.

 

Seller financing is, in effect, a deferred purchase price deal.

 

Owner financing, aka a ' seller note, 'can be a very creative way to complete an acquisition - The strategy also helps sellers to sell a business more quickly via their participation in the transaction- Buyers benefit from reduced costs of financing and seller finance strategies often come with more flexible terms and reasonable interest rates.

 

When buying a business, questions should always include whether the seller would help with vendor finance.

 

At 7 Park Avenue Financial, we get many inquiries around  100 percent acquisition financing on an acquisition deal,  which is generally not available in Canada as Canadian commercial lenders/banks, etc., require your proof of personal commitment to the transaction.

 

That equity financing commitment will not be the lion's share of your transaction but still varies based on various factors, including the type of transaction, industry, deal size, and overall perceived credit quality.  A potential solution might be a third-party investor or partner.

 

Large Canadian transactions might consider private equity firms, although this is rarely an option in the ' small business' SME/SMB company regarding a leveraged buyout.

 

CONCLUSION - BUSINESS ACQUISITION LOANS CANADA

 

Acquisition financing is a required tool for buyers looking to purchase a company. Understanding how it works and ensuring you are up to date with various business finance options helps the business owner make informed decisions and allows for leveraging the benefits of different traditional and alternative business financing methods. Whether it's conventional loans from banks, government loans, alternative loans via asset-based lending, or a combination of own equity and seller financing will allow the business purchase to realize financial objectives.

 

Financing is often a factor in the proper preparation of a transaction. If you're focused on obtaining financing and a commitment letter on the acquisition of a business and if you need expert advice on business acquisition and the right financing solutions properly.

 

Speak to  7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with buying and financing a business properly with acquisition debt financing that makes sense. Grow your new business with proper financial solutions to make a successful acquisition.

 

We'll work closely with you to finance an acquisition and determine the best acquisition finance structure and the methods of valuation you might employ to complete your transaction and understand earnings quality to achieve your desired future growth strategy in financing acquisitions.

 

That final capital structure and company recapitalization is your key to entrepreneurial success. In many cases, the more information you have, the better prepared you will be to succeed with a loan to buy a business in Canada when financing a takeover.

 

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

 

What is acquisition financing, and how does acquisition financing work?

 

Acquisition finance refers to business capital used to purchase another business via debt and equity finance. The financing provides the resources required to close a transaction between a buyer and seller on favourable terms for both parties. All cash deal transactions are rare in SME acquisitions, and typically, a bank loan /alternative debt funding and owner down payment make up a final capital structure.

 

  

What are the common choices for acquisition financing?  

 Common choices include lines of credit, traditional loans, Government Small Business loans, debt security, and owner financing, and each type of financing requires a risk assessment.

 

  

How can companies secure acquisition financing from traditional banks or specialized lending services?  

 

Companies can apply for loans through traditional banks or specialized lending services by meeting their requirements, such as demonstrating steady revenues and profitability.

  

 What happens to debt in an acquisition?   

When a company acquires, it will either assume the target company's debt on its balance sheet, deduct it from the total sale price, or repay it before closing the deal. The buyer can negotiate with the lender and reduce the target company's debt to lower the total acquisition cost.

 

How does a bridge loan work in acquisitions?

 

Bridge loans are types of acquisition financing acquisition loan that are a means of quick funding to fill a gap until a company can obtain long-term financing or if the transaction requires more equity capital. These are short-term loans for companies to secure and fund a business acquisition or a leveraged buyout with asset backed financing or mezzanine debt, or subordinated debt based on the company's cash flow when there is enough free cash flow to support debt.

 

What is an earnout?

An earnout in the acquisition financing process on target companies is a financing mechanism that provides additional payments to the seller's shareholders if the business achieves specific financial metrics or milestones. An earnout is used when the acquiring company wants to buy the target firm for a lower price, but the seller believes the valuation should be higher based on projected cash flow and profit margins.

In case of an earnout, both parties will agree to the transaction at the lower price, but the seller is guaranteed they will "earn" a portion of sales and profit after the acquisition is closed. The earnout period is typically between 1-3 years but can last up to five years.

 

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