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Buyout And Acquisition Finance Solutions
What Is Acquisition Financing?
It's the capital required to buy another business, as simple as that. The purchase of a business will require external capital, namely business acquisition loans . That is the challenge of financing a takeover. Acquisition opportunities are available and ongoing in every industry.
Acquisition financing in Canada almost always involves validating the price you're going to pay to purchase a small/medium enterprise. One reason is that companies in the SME sector don't always have the same talent available to price real value. Business people should of course rely on their trusted advisors for professional help in that area, but this article will hopefully give them insight and advice into their challenge.
There are a number of reasons why a smaller company might purchase another firm, it could be to simply get 'scale ' as opposed to current organic growth in the company. Bank loans and alternative sources of financing for term debt and lines of credit are the common way to buy a business and finance it successfully.
Government loans and seller financing are other methods to complete a business purchase.
A successful acquisition loan will facilitate the purchase of another business. The type of financing you require will depend on whether the business is a start up, or a more well-established firm.
HOW DOES ACQUISITION FINANCING WORK?
The good news is there are numerous ways in which you can finance the purchase of a business. In the new economy both traditional and alternative financing sources are available. The ability to procure reasonable rates based on the overall credit quality of the transaction is important when putting your financial strategy in place. Flexible terms and reasonable financing costs will help propel the purchase towards higher sales and profits.
In the current environment many transactions do not meet the lending criteria of traditional Canadian chartered bank financing. Alternative lenders may well provide the solution you are looking for - the challenge is to ensure rates and flexibility match your business goals. Banks in Canada look for key metrics such as growing revenues, profits, and a clean balance sheet. Alternative lenders will often focus on hard assets, receivables, etc, versus the traditional cash flow demanded by the bank underwriters.
Government of Canada Small Business Loans should not be overlooked as a potential source of financing. For many acquisition targets in the SME enterprise area, as well as in the booming franchise sector the government guaranteed business loan is a perfect match.
Note though that the program is focused on 3 asset categories, equipment, real estate, and leasehold improvements. Down payments are at a minimum and the program has rates and loan flexibility repayment that rivals that of larger corporations. Entrepreneurs applying for this loan should ensure they have reasonable personal credit and net worth, which are key lending criteria for the program.
SELLER FINANCING / OWNER FINANCING
One method of business acquisition financing that brings substantial creativity to the process is the ' seller finance' strategy. This method of financing has the seller/sellers of the business providing a payment contribution to the total purchase price. Purchasers then make installment payments or in some cases' balloon payments ' on the seller financing portion, typically with favourable rates and flexibility. This finance strategy can sometimes be the missing piece that takes your transaction over the goal line!
The terms involved in financing a business you are buying can themselves be overwhelming to those who don't regularly work with
EBITDA, intangible assets, capitalization and discount rates, lbo financing mbo financing
We would point out that as technically overwhelming as some of those issues might be, there is even a whole additional layer of complexity around longer term issues down the road. These would include:
- Owner and management compensation
- Insurance planning
- Estate planning
- Exit strategy
With reference to our last point on ' exit strategy ' imagine the look on some purchasers' faces when they have not even completed the deal and are encouraged to talk about an ' exit strategy '!
At the heart of the matter around the final price paid for a business is the concept that both parties feel they have reached a fair deal. As we all know the buyers and sellers' perceptions of the same deal might vary greatly. Ultimately all the technical jargon around buying a business comes down to a term such as 'reasonable market value'.
As common sense as this may sound it also has its challenges since is it only a hypothetical value based on all the different financial elements related to the purchase of a business.
The most commonly used valuation of a business is known as the ' value of future earnings '... Accountants and financial advisors often project earnings out as far as ten years and try and then place some value and normalcy around those future profits. Our advice in this area is simply that owners should not focus solely on future earnings potential; there are other factors to be taken into consideration.
Some of those other factors of course include the true value of the current business assets, such as equipment, real estate, fixtures and leaseholds, etc. We can only say that as critical as those assets are they must be supported by the company's ability to generate the cash flow to support those assets and grow the business.
Buyers and sellers frequently disagree on the total purchase price, with all sorts of psychology kicking in around prices being set artificially high for negotiation purposes, the buyers focus on a low- ball offer, etc.
We would also point out the buy/sell challenge is accentuated when it relates to a ' service' firm as opposed to a product firm. Many experts agree that ultimately the valuation of the business was so far out of whack that this clouded any possible attempts to negotiate a fair price for buyer and seller.
The bottom line: buying or selling a small to medium enterprise has its challenges. If owners are aware of the key basics around the technical aspects of the matter they can successfully utilize third party assistance (accountant, lawyer, trusted financial advisor) to consummate a successful transaction.
Buyers and sellers must focus on tangible issues as well as all the intangibles that come into play in order to assist in a proper (and a successful) buy or sell. Methods to finance a purchase depending on the overall size and credit quality of the business.
LOANS TO BUY A BUSINESS IN CANADA / BUYOUT ACQUISITION FUNDING SOLUTIONS
Commonly used financing techniques in acquisitions and mergers include:
Asset Based Loans ( The assets of the target company can often help to finance the purchase )
Non bank asset based lines of credit
Govt Small Business Term Loan
Cash flow loans/ Mezzanine Debt
Traditional bank financing
Accounts Receivable Finance & Inventory Finance - financing working capital through a/r financing provides valuable cash flow for day to day operations and the ability to finance inventories helps accelerate the cash conversion cycle of the business
Sale leaseback strategies
Vendor take backs
Working capital needs also need to be addressed, proving that buyouts and acquisitions require specific solutions to facilitate your transaction.
If you're looking to successfully explore the key aspects of buying and selling a business seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of business acquisition success, who can assist you with buying or selling your business.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Click Here For 7 PARK AVENUE FINANCIAL website !
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
