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HOW TO FINANCE AN ACQUISITION IN CANADA / BUYOUT AND ACQUISITION FINANCE SOLUTIONS
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WHAT IS ACQUISITION FINANCING?
Acquisition financing is the method of financing in how a company funds a merger or acquisition when financing a purchase with debt.
In Business Acquisition finance it's the capital required to buy another company, as simple as that. The purchase of a business will require external money when buying another business. All cash transactions are rare in acquiring small and medium-sized private companies.
INTRODUCTION
Acquisition financing is a strategic tool for growth that business buyers employ to make significant leaps toward their objectives. This can include :
Buying out a rival competitor
Branching out into new territories,
Investing in new or state-of-the-art technologies.
Buying a business is a way for companies to harness external funding sources and mobilize necessary capital to capitalize on strategic opportunities, propelling them to a whole new level of operational capacity.
Purchasing a business can result in an expanded market share. Moreover, it leads to economies of scale, allowing a company to increase efficiency and reduce costs when its operations expand.
With an effective financing plan, businesses can source the necessary resources to withstand financial challenges and continue sailing toward their goals.
Acquisition financing isn't a one-size-fits-all solution. Each company's situation is unique, and the optimal financing strategy will vary. Depending on the company's value, creditworthiness, and market conditions, it may involve borrowing (debt), selling shares (equity), or a combination of both. The key is to tailor the financing and capital structures to suit the company's needs and provide enough flexibility to adapt to varying scenarios.
UNDERSTANDING THE TYPES OF ACQUISITION FINANCE
Acquisition financing can take several forms, each uniquely crafted to cater to the specific needs of businesses aiming to scale through acquisitions.
The main types are debt financing, equity financing, and hybrid financing.
Debt Financing: This is your traditional loan structure—it's about borrowing money from external sources like banks or other financial institutions and commercial finance companies to fund an acquisition which may include assuming the target company's debt.
BUSINESS ACQUISITION FINANCING CANADA
That is the challenge of financing a takeover in a merger or acquisition. These days more and more Acquisition opportunities are available and ongoing in every industry. Successful acquisition financing provides financial resources to complete the transaction - given there are different types of acquisition.
In some cases, you might be considering a management buyout, or, alternately, a merger of equals and perhaps a bolt-on, aka ' tuck in ' acquisition to broaden your firm's market scope further and accentuate accretive value in an acquired business.
VALUATION IN A COMPANY ACQUISITION - SHARE PURCHASE VERSUS ASSET PURCHASE
Acquisition financing in Canada almost always involves validating the price you'll pay to purchase a small/medium enterprise when acquiring companies.
DUE DILIGENCE ON THE VALUATION IS KEY
One reason is that companies in the SME sector don't always have the same talent available to price real value. Business people should rely on their trusted advisors for professional help in that area, focusing on a strong balance sheet structure, understanding the net asset value of the business, steady cash flow generation, profit margins and other key insights and advice.
There are several reasons why a smaller company might purchase another firm; it could be to get 'scale' instead of current organic growth in the company. Bank loans and alternative financing sources for term debt and lines of credit are the common way to buy a business and finance it successfully.
CONSIDER GOVERNMENT-GUARANTEED LOANS FOR SMALLER TRANSACTIONS
Government loans and seller financing are other methods to complete and finance 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 company is a start-up or a more well-established firm.
HOW DOES ACQUISITION FINANCING WORK? WHAT ARE THE WAYS TO FINANCE A MERGER OR ACQUISITION?
The good news is there are numerous ways to finance the purchase of a business when financing an acquisition with debt and your owner equity injection. In the new economy, traditional and alternative financing sources are available via the right acquisition financing lenders.
The ability to procure reasonable rates based on the transaction's overall credit quality is important when putting your financial strategy in place. Flexible terms and reasonable financing costs will help propel the purchase toward higher sales and profits.
HOW DO YOU FINANCE A COMPANY ACQUISITION
Many transactions do not meet the lending criteria of traditional Canadian chartered bank financing in the current environment. Alternative funders, particularly acquisition financing lenders, may provide the solution you are looking for - the challenge is ensuring 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 often focus on hard assets, accounts receivable, etc., versus the bank underwriters' traditional cash flow. Bank acquisition financing is a solution for a term acquisition loan if bank lending criteria can be met.
THE CANADA SMALL BUSINESS FINANCING PROGRAM
Government of Canada Small Business Loans should not be overlooked as a potential source of financing. The government-guaranteed business loan perfectly matches many acquisition targets in the SME enterprise area and the booming franchise sector.
The government-guaranteed loans typically are not larger than 1.1M dollars, limiting the size of many acquisitions done in this manner. Franchise financing is often complete with these ' SBL LOANS ', and requires a lower personal capital investment for the purchase of the target company.
The program focuses on three asset categories, equipment, real estate, and leasehold improvements. Down payments are minimal, and the program has rates and loan flexibility repayment that rival larger corporations. Entrepreneurs applying for this loan should ensure they have good personal credit and net worth, which are key lending criteria for the program and their ' down payment' represents the equity financing portion of the transaction.
KEY POINT - In 2022, the government of Canada substantially increased the program, including a new loan cap of 1.1M dollars, and added several new financing structures, including credit lines, working capital, goodwill financing, and intellectual property as a part of the financing package in this offering.
SELLER FINANCING / VENDOR TAKEBACK FINANCING
One method of business acquisition financing that brings substantial creativity to the process is the 'seller finance' strategy. Financing is often greatly enhanced if there is a seller finance/vendor takeback type component to your transaction and a potential earn-out payment to the owner/seller.
This financing method 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
CONSIDER THESE LONG-TERM ISSUES
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
Regarding 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'!
ADDRESSING THE PURCHASE PRICE AND FINANCIAL DUE DILIGENCE WHEN FINANCING THE PURCHASE OF AN EXISTING BUSINESS
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 for a smooth ownership transition.
As we all know, the buyers' and business owners'/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 it is only a hypothetical value based on all the different financial elements related to a business's purchase.
The most commonly used business valuation is the 'value of future earnings..., one type of valuation multiplier. 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 that owners should not focus solely on future earnings potential; other factors should be considered.
VALUING ASSETS OF BUSINESS ACQUISITIONS
Of course, some other factors 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.
COVENANTS AND RATIOS
The business must meet any financial covenants imposed or required by lenders, typically in the areas of debt to equity, etc. These financial covenants are usually associated with traditional bank loan / senior debt financing.
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 buyer's focus on a low-ball offer, etc.
We would also point out that the buy/sell challenge is accentuated when it relates to a ' service' firm instead of a product firm. Many experts agree that the business's valuation was so far out of whack that this clouded any possible attempts to negotiate a fair price for buyer and seller.
WILL THIRD-PARTY EXPERTISE HELP YOUR TRANSACTION
The bottom line: buying or selling a small to medium enterprise has its challenges. If owners know 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 and all the intangibles that come into play to assist in a proper (and successful) buy or sell. Methods to finance a purchase depending on the business's overall size and credit quality and the post-acquisition integration plan.
LOANS TO BUY A BUSINESS IN CANADA / BUYOUT ACQUISITION FUNDING SOLUTIONS
Various types of financing are available to complete a buyout. Commonly used financing techniques in acquisitions and mergers and successful acquisition finance structures include:
Asset-Based Loans (The target company's assets can often help finance the purchase via leveraging a company's assets ) These facilities work well with a leveraged buyout.
Non-bank asset-based lines of credit / asset-backed financing via asset-based finance companies
Government Small Business Term Loan / Small business acquisition financing
Cash flow Financing loans / Mezzanine Financing
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
Mezzanine Finance / Mezzanine Loans
Vendor takebacks - They are often the final component that brings a transaction together to buy a business - often reducing the need for additional debt from Canadian financing companies - The acquiring company will often benefit from the expertise of the seller for a defined period of time in an owner financing scenario
In some cases, business owners/entrepreneurs may wish to partner with a third-party investor or a strategic partner who then assumes partial ownership in a combined company
CASE STUDY
Company Y, a business rooted in manufacturing, had a vision. It aspired to branch out its product portfolio and venture into uncharted markets. To fulfill this objective, it needed a plan, a strategy to equip it with the necessary resources and capabilities. That's where acquisition financing came into play.
With a well-thought-out combination of debt and equity financing, Company Y set its sights on a complementary business operating in a different industry. Why this business? It had three key attributes that Company Y found compelling: new distribution channels, additional manufacturing capabilities, and an enlarged customer base.
The transaction was about strategically leveraging acquisition financing to unlock synergies and drive growth. By acquiring the new business, Company Y gained access to a broader network of distribution channels. This meant that Company Y could now reach more customers and penetrate new markets more effectively, increasing sales and revenue.. and profits!
Next, the additional manufacturing capabilities acquired in the deal were like adding more engines to Company Y's production vehicle. This led to increased productivity and, importantly, allowed Company Y to create a wider variety of products. This diversity in product offerings, in turn, catered to a larger segment of customers, thereby further expanding Company Y's market share.
Let's not forget about the expanded customer base, either. The acquired company came with its own set of loyal customers. So, Company Y retained its existing customer base and inherited a new one. This amplified customer base was a powerful tool for Company Y to increase its market presence and enhance its competitiveness.
BENEFITS OF ACQUISITION FINANCING
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Market Share Boost: Acquisition financing can supercharge your market presence. How? By enabling the purchase of competitors or businesses that complement your own. This opens doors to a larger customer base, potentially leading to increased sales and a stronger standing in the market.
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Diversification and Growth: It allows businesses to branch out and explore new territories. Acquisition financing can help buy companies in different industries or geographical areas, reducing reliance on one market or product, and unveiling new avenues for growth.
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Knowledge and Resource Acquisition: When you buy a business, you're getting the company and gaining access to its talent and resources. This can be a game-changer, especially to break into new sectors or amplify capabilities.
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Cost Savings and Synergies: Two businesses coming together can mean duplicate roles being eliminated, operations streamlined, and shared resources optimally utilized, all leading to potential cost savings, increased efficiency, and improved profit margins.
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Competitive Edge: Keeping up with the competition is key in the business world. Acquisition financing can help you stay ahead of the curve, respond swiftly to market trends, adopt cutting-edge technologies, or access new distribution channels.
Acquisition financing is not just a trending practice—it's a proven growth strategy. It provides immediate funding to acquire resources, expand market presence, and secure a competitive edge. It paves the way for the exploration of new markets by acquiring new resources and capabilities. It often leads to financial growth, enabling companies to fulfill shareholder expectations for expansion and returns.
CONCLUSION - LOANS TO BUY A BUSINESS / METHODS OF ACQUISITION
In the dynamic business world, acquisition financing is a robust tool that can supercharge growth, bolster market share, and sharpen competitive edge. It offers businesses a ticket to tap into external funds via debt, equity, or a blend of both, opening the gates to strategic opportunities, a wider product range, and exploration of fresh markets.
However, remember that acquisition financing isn't a decision to be made on a whim—it calls for meticulous planning, strategic alignment, and exhaustive due diligence.
It's imperative to assess your business's financial readiness, foster relationships with prospective lenders or investors, and navigate the maze of legal and regulatory mandates.
The choice of acquisition financing method is just one piece of the puzzle. Picking a credible and fitting lender is equally crucial.
You'll want to partner with a business financing partner who's accessible, open in communication, and offers a straightforward application process. The prime contenders are those that showcase efficiency and flexibility, especially those offering diverse acquisition finance structures.
Financing an acquisition/financing a takeover requires specific expertise in an acquisition deal if you're looking to successfully explore the key aspects of buying and selling a business for acquisition finance solutions.
If you need a loan to buy a business and achieve success in takeover financing in Canada speak to 7 Park Avenue Financial, 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.
Whether you are buying a business in Ontario or any other part of Canada let our team make your transaction successful with term sheet and business purchase loans tailored to your specific needs. We'll help you complete that 'buying an existing business checklist'!
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
What is acquisition financing?
Acquisition finance refers to the method buyers use to obtain financing in the acquisition of target companies. A small business can increase revenues and benefit from the economy of scale in purchasing another business.
Larger transactions might involve private equity firms where a strategic partner of the private equity firm might assist in financing a business purchase. Larger public firms might consider a stock swap/share swap.
What are Key Considerations Before Pursuing Acquisition Financing
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Strategic Alignment: First and foremost, check that the target acquisition gels with your strategic objectives. This involves conducting comprehensive due diligence and evaluating the fit of cultures, operations, and goals. This careful planning helps to lessen potential risks and boost acquisition success probability.
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Financial Health: Lenders and investors will peel back the layers of your business's financial standing. So, a healthy economic history, robust cash flow, and a believable growth strategy are crucial. Demonstrating these traits can build confidence among potential lenders and investors.
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Valuation and Deal-making: Accurate valuation of the target acquisition and skillful negotiation are pivotal in acquiring financing. It can be helpful to bring in professionals like valuation experts or M&A advisors to ensure a fair price tag and enhance negotiation success chances.
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Legal and Regulatory Compliance: Navigating the often intricate web of legal and regulatory requirements is a must. Seek legal advice and make sure you comply with all applicable laws, regulations, and sector-specific demands. Ignoring these could result in costly hold-ups or even a halted acquisition process.
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Integration Planning: A thought-out integration plan is a key part of acquisition financing. Create a detailed blueprint that covers cultural merging, organizational structure, and operational synergies. This can pave the way for a smooth transition and successful post-acquisition integration.
What are the Steps to Secure Acquisition Financing
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Evaluate Financing Needs: Start by gauging the financial needs of the acquisition, covering purchase price, working capital requirements, and potential integration expenses. This assessment will help decide the financing amount needed and the most suitable structure.
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Discover Funding Sources: Investigate various funding avenues like banks, private equity firms, venture capitalists, or government-supported financing programs. Aim to identify potential lenders or investors with a background in your sector or your type of acquisition.
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Craft a Detailed Business Plan: An all-encompassing business plan is a must when hunting for acquisition financing. The plan should spell out the strategic logic behind the acquisition, the financial forecasts, and the anticipated ROI. It should also address possible risks and risk-mitigation tactics.
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Foster Relationships: Nurture relationships with prospective lenders or investors. Participate in industry events, network actively, and engage in conversations to foster connections and spotlight your business's unique selling proposition. Solid relationships can improve the odds of securing financing and getting favourable terms.
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File Financing Applications: After pinpointing potential funding sources, submit thorough financing applications. Include all required documents, like financial statements, tax returns, legal contracts, and business plans. Be ready to furnish extra details and answer queries from prospective lenders or investors.
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Negotiate Terms and Finalize the Deal: If your financing applications get the green light, scrutinize the terms and conditions of the financing offers. Bargain for favourable terms, including interest rates, repayment plans, and any covenants or conditions. Once the terms are finalized, move ahead with deal closure, ensuring all legal and regulatory requirements are fulfilled.
What are Common Challenges in Acquisition Financing and How Does the Business Buyer Overcome Them
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Financing Accessibility: Acquisition financing can be tough to secure, especially for smaller or younger businesses. Counter this by exploring alternative financings like government grants, crowdfunding, or strategic partnerships to pursue debt financing. Also, bolstering your business's financial health and demonstrating growth prospects can enhance your financing chances for an optimal financing structure for types of acquisition financing.
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Valuation Disagreements: Valuing the target acquisition can be subjective and lead to disputes between buyer and seller. Enlist professional valuation experts to help determine a fair valuation reflecting industry norms and market conditions. Effective negotiation skills are also key to arriving at a mutually satisfactory valuation.
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Integration Obstacles: Merging two businesses post-acquisition can throw up significant challenges. Craft a detailed integration plan to tame integration risks and involve key stakeholders from both organizations. Delineating roles and responsibilities, effective communication, and early addressing of cultural differences can facilitate a seamless integration process.
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Regulatory Roadblocks: Acquisitions can be subject to varying regulatory approvals, depending on industry and location. Conducting in-depth due diligence and understanding the regulatory landscape before launching into an acquisition is vital. Engage legal counsel to ensure you align with all relevant laws and regulations.
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Economic Volatility: Economic downturns or market instability can influence financing availability and acquisition success. To sail through difficult economic conditions, nurture strong relationships with lenders or investors, and consider contingency plans or alternative financing options. A solid business strategy and financial robustness can help withstand economic turbulence.
How Does The Busines Buyer Work With Acquisition Financing Professionals
While deciding on the right acquisition financing method is crucial, selecting a reputable and suitable lender is equally critical. Look for a lender known for its accessibility, communicative nature, and simple application process. Key attributes include efficiency and flexibility—those lenders who offer variable acquisition finance structures are often advantageous. Don't forget the due diligence in the lender selection process to ensure you secure a lender that suits your needs and avoids potential failure.
Regarding company growth strategies in business acquisition financing, acquisition finance is a solid option for a business owner . With its numerous benefits, including access to new resources, entry to different markets, financial growth opportunities, acquisition financing
How does a business choose the right lender for acquisition financing?
Choosing the right lender for financing acquisitions involves researching and considering factors such as the lender's reputation, accessibility, communicativeness, efficiency, and flexibility in offering variable acquisition finance structures. A thorough due diligence process ensures that the chosen lender aligns with the business's needs and goals.
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