7 Ways To Finance A Business Acquisition in 2023

YOU ARE LOOKING TO BUY A BUSINESS!

HERE IS YOUR INSIDE INFORMATION ON FINANCING A BUSINESS ACQUISITION IN CANADA

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SMALL BUSINESS ACQUISITION FINANCING IN CANADA

Acquire a company? That’s one way to beat the ‘organic growth ‘path to business success, and it can be a proven strategy ... when done properly. How then does the owner/entrepreneur successfully finance a business acquisition?

Some experience in the area helps - given that different sources of finance in this area demand different approval criteria for successful advantages of acquisition to eliminate financing risk in financing an acquisition. Let's dig in.

INTRODUCTION

Acquiring a business provides business owners and entrepreneurs with opportunities for growth and expansion. However, financing such an acquisition is a crucial aspect that requires careful consideration to eliminate acquisition risk around the target company. Understanding the different methods of acquisition financing will provide buyers of a business with the opportunity to acquire a company successfully.

UNDERSTANDING ACQUISITION FUNDING / FINANCING

Acquisition finance is all about the business capital you need to fund the purchase of a business. It provides the immediate resources you need to complete the acquisition and commence operations and benefit from areas such as the economy of scale.

WHY BUY AN ESTABLISHED BUSINESS?

The ability to buy a company with a working and successful business model can't be overestimated - employees, existing assets and a revenue base are all good things! ' Time to market is virtually eliminated, via an established client base, given that building a brand and market share takes time!

Existing cash flows make it more feasible to attract additional financing to grow the business. These days it is all about the supply chain in your industry, so an existing network of suppliers, vendors and systems and processes is more than invaluable!

For more info from the Harvard Business Review on those ' rules ' and benefits to acquiring a business, click here for the article. We particularly like HBR's rule # 5 on how to acquire a business with a loan - don't buy a failing business!

WHAT FINANCING STRUCTURE WILL MAKE YOUR TRANSACTION WORK?

When buying/acquiring a business or merging your business into another (That’s the 'M ' in m&a), it’s important to visualize the company's ultimate structure. While it's preferable that your target business has little or no debt, strong cash flow, and valuable assets, the reality is that's not always going to be the case. Therefore different types of acquisition financing are required to shore up the overall ' business valuation' of the target company in connection with your process of due diligence and a better guarantee of being successful with acquisition financing lenders.

FOCUS ON THE FINANCIAL STATEMENTS AND DUE DILIGENCE

As we have said in the past, financial statements don't provide a ' magic number ' for value, but properly completed (and available), they should show you the business's cash flow situation. Again, the past is not the future, so careful examination of future financial potential is key in a financial acquisition.

Prior to pursuing closing a business acquisition buyer should focus on a proper level of due diligence which will typically involve a solid analysis of the target business and close examination of financial documents such as a business credit report, the financial statements / federal income tax returns, quality of assets, liabilities and areas around sales and marketing such as market position and growth potential. Solid due diligence = informed decision-making.

It is often appropriate to seek the advice and guidance of a trusted business finance advisor such as 7 Park Avenue Financial, as well as your accountant or lawyer - all of whom can provide expertise in evaluating risk and financing options, and terms of sale, and ensure an optimal financial structure is achieved.

SHARE PURCHASE VERSUS ASSET PURCHASE?

Buyers must also determine if they are buying the ' shares' of the business or the ' assets.' There's a big difference in tax obligations here, and this is where it's best to consult your lawyer or external accountant. Sellers need to consider the fact that there is no real ' market ' for private company shares. The buying and selling of businesses rely then on proven ' formulas' for valuing a business.

HOW ARE BUSINESSES VALUED?

Different industries are valued in different ways - Valuation may be done on income, market comparables, and valuation of assets. etc. Prospective purchasers should focus on gross and net income and what adjustments might be needed to make those numbers make sense in the acquisition -

Smaller businesses need to be looked at differently as they typically generate only small profits. Numerous adjustments must be made to ' normalize ' the financials. That process will provide a more accurate picture of cash flow and profit.

Those valuations typically include giving a multiple to cash flow, profits, sales, or some combination of those. In some cases, it's all about the business's assets,' so both a buyer and seller would benefit from a third-party independent appraisal of any assets on the balance sheet if required. While sellers will maintain an overall ' glossy ' outlook on assets... it's buyer beware when it comes to sellers' risk.

On larger, more complex transactions, a 'fairness opinion' will help a transaction - that type of solution to value is much less rate in the SME/SMB marketplace for acquisitions and buyouts.

Example: Specialized assets will require additional due diligence. A good example of that might be intellectual property. Additionally, real estate might often be a part of your transaction. That can be addressed in several ways - as that type of asset is typically, but not always, held in a separate holding company as part of a long-term owner strategy.

The quality of the financials and the business's performance historically dictate what type of financing you will need to complete a transaction when financing an acquisition with debt. Poor profits, high levels of debt, and other operational deficiencies will dictate finance solutions. Ultimately understanding the working capital and assets is key. Remember also that in the small to medium enterprise area, ' Goodwill ' is rarely, if ever, financeable on that balance sheet.

The ability to ' sell yourself ' as a manager with skills is key.

7 WAYS TO FINANCE A BUSINESS PURCHASE IN CANADA

Let's get back to our actual financing options when acquiring a business and those sources of funding.

They include:

Canadian chartered banks - Bank loans and lines of credit from traditional financial institutions such as credit unions and banks can offer the ability to secure loans and lines of credit for acquisition financing at favourable rates via cash flow lending solutions. Purchasers seeking bank financing must meet strict loan criteria and the ability to demonstrate sales revenues, profits, and an asset base of collateral. Owners should be able to demonstrate a minimum credit score in the 650 range via a personal credit report.

The Government of Canada guaranteed ' Small Business Loan.' The government of Canada's federal loan guarantee program can finance business acquisitions under 1 Million dollars. It provides financing for purchasing an existing business with low down payment requirements and offers competitive interest rates and flexible repayment terms under a term loan structure.

Similar to bank financing borrowers must meet traditional loan requirements around net worth, personal credit score, business and income history, etc. Many franchises are financed under these government small business loans via this program in Canada, and changes to the Government SBL program in 2022 increased loan size and type of financing available. The program is similar to the U.S. SBA loan and variable-rate loans are also offered, as well as a limited personal guarantee.

Asset-based loans and lines of credit - are utilized for leveraged buyouts and asset-intensive companies, thereby providing maximum leverage on assets for the existing company

Sale-leaseback strategies on owned assets with loan payments around tailored cash flow needs

Unsecured cash flow term loans / Mezzanine Finance

Seller financing participation - i.e. the 'VTB.' / Vendor financing and seller financing in a business sale. Establishing a creative earn with the seller will almost always help your transaction. This type of finance contributes to the buyer's down payment and benefits both buyer and seller as it brings some financial flexibility into the transaction and reduces borrowing costs around the buyer purchasing the existing business outright.

Buyer equity - equity financing vs debt financing must be balanced according to your goals and capability to successfully complete the transaction.

One or more often, a combination of these finance solutions will help finalize a financing structure that works best for your purchase. The interest rate on any debt financing will vary based on deal size and type of financing. A business plan for financing will almost always be required to effectively present your transaction most positively. 7 Park Avenue Financial business plans meet and exceed bank and commercial lender requirements.

Taken into consideration also must be the financing for equipment that might be needed to grow the business - that is most often accomplished via effective equipment leasing to conserve working capital.

While larger deals might be able to secure private equity or a public listing for financial success, the real meat and bones of the small to the mid-market area of acquisitions rely on those 7 strategies ( or combinations of them ) that we highlighted above. Many firms are also acquired via a management buyout - Click here for information on buyout financing solutions.

POST ACQUISITION FINANCING

Buyers of a business should ensure they have solid post-acquisition financing in play with a realistic plan to ensure financial viability s the newly acquired business moves forward - This includes lines of credit, lease financing of new asses and technology, and good financial management and cash flow and cost controls.

BALANCING THE ADVANTAGES AND DISADVANTAGES OF BUSINESS ACQUISITION

Most of the advantages of buying an already established business are obvious, most notably, eliminating the challenge of starting a business from scratch. However, there are also some potential risks and disadvantages, such as the costs associated with the value placed on assets, brand, goodwill, proprietary technology, etc. If you as a buyer have limited expertise in the target company industry, the learning curve can be steep - As one of our mentors once said, ' tuition is costly in the school of experience'!

Other issues to contend with are the potential inability to address employee issues or properly assess future financing needs. We all hate surprises, and the surprise around potential product/service and client issues can be a major challenge. In the technology environment, reinvestment in outdated assets can prove to be a financial burden.

Naturally, with a proper level of due diligence, the vast majority of issues can be addressed in the early stages of preparing your offer to purchase.

CONCLUSION - NEED TO FINANCE AN ACQUISITION?

Acquisition finance should be viewed as strategic planning around the various financing options available, ensuring the business is best positioned for a successful acquisition. Focusing on due diligence and getting the right advice on purchase considerations is key and will help maximize the benefits of the

If you're looking for expert help and real-world financial solutions to buying a business, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you in your business acquisition finance needs. When it comes to finance a small business acquisition, let our team help you finance the purchase of an existing business.

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

How Do You Finance A Business Acquisition

After a potential purchaser establishes a value on the target company they wish to buy, a value/purchase price must be established around the amount needed for a business acquisition loan.

The most common way to establish value is the ability of the company new generate profit. A common formula is ' EBITDA' - which is calculated by earnings before interest, taxes and depreciation. An industry multiple is then put on that number.

Why is Goodwill An Asset?

Goodwill on the balance sheet of a company is the amount over the value of tangible assets of the business. It is viewed as an asset because its benefits are long-term and extend beyond the financial statements period. Components of goodwill might be brand value, client lists, propriety technology etc. There is often a challenge in financing goodwill in business acquisition loans based on the fact it is an intangible asset.

What are the common options for acquisition financing?

The common options for acquisition financing include traditional bank loans, lines of credit, private lenders, Small Business acquisition loans under the Canada Small Business Financing Program, debt security (such as issuing bonds for larger transactions ), and owner financing.

What factors should I consider when choosing an acquisition financing method?

When choosing an acquisition financing method, consider factors such as interest rates, repayment terms, collateral requirements, eligibility criteria, associated fees, and the financial stability of the acquiring and target businesses.

How can due diligence impact the success of a business acquisition?

Due diligence plays a crucial role in the success of business loans in acquisitions. It involves conducting a thorough analysis of the target business, including its financials, assets, liabilities, market position, and growth potential. Effective due diligence helps mitigate risks, make informed decisions, and assess the viability of the financing arrangement.

What are some best practices for managing finances after acquiring a business?

After acquiring a business, it is essential to create a realistic repayment plan, manage cash flow effectively, control costs, and integrate the acquired business's operations seamlessly. Seeking professional advice from financial advisors, negotiating favourable terms, and implementing sound financial management practices are also recommended.

Click here for the business finance track record of 7 Park Avenue Financial

Friday, June 16, 2023