To Finance A Business Acquisition In Canada - The Best Ways
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. Let's dig in.
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
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.
SHARE PURCHASE VS 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?
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.
Oh, and by the way, 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
The Govt of Canada guaranteed ' Small Business Loan.'
Asset-based loans and lines of credit - utilized for leveraged buyouts and asset-intensive companies, thereby providing maximum leverage on assets for another company
Sale-leaseback strategies on owned assets
Unsecured cash flow term loans / Mezzanine Finance
Seller financing participation - i.e. the 'VTB.' / Vendor financing - establishing a creative earn with the seller will almost always help your transaction.
Buyer equity - equity financing vs debt financing must be balanced according to your goals and capability to successfully completethe 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 to buy out financing solutions.
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?
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)
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. 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.
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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.
Click here for the business finance track record of 7 Park Avenue Financial
