Juggling Acquisition Finance Solutions? Financing A Business Purchase In Canada

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FOR AN ACQUISITION!

HOW TO FINANCE A BUSINESS ACQUISITION IN CANADA

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Oakville, Ontario
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FINANCING TO BUY A BUSINESS IN CANADA

 

  

Financing a business purchase in Canada often has the business person juggling various acquisition finance solutions. Which solution makes sense, and how do you access that capital properly? Let's dig in.

  

HOW DO YOU FINANCE A BUSINESS ACQUISITION 

 

Although bank financing will typically be the most sought-after business financing solution to buy a business in Canada numerous other financing solutions can provide more or additional capital to purchase a business, It's about ensuring you have the right business lender and focusing on the right amount of business acquisition financing suitable for your acquisition needs.

Aligning your strategy with the right amount of financing helps ensure long-term success - the optimal capital structure for your purchase should become job #!

 

That main tranche of financing, known as the ' senior debt ' of the business will typically have the lower cost of financing while other components to your financing will have different costs and structures and risks. Owner equity in a purchase will often be in the 15-20% range.

 

ASSESSING YOUR BUSINESS PURCHASE FINANCING  NEEDS

 

The ability to properly arrange your financing to match the  needs of the business purchase will revolve around:

 

- ensuring that the business has enough, and proper post-acquisition financing in terms of working capital and business lines of credit that will allow sales to grow

- Financing new assets and technology or repairs required to  business assets - in some cases leasehold improvements might be required

- Many business acquisitions revolve around management buyout scenarios -

 

- Refinancing strategy to restructure existing debt and creditor obligations

 

 

WHAT TYPE OF BUSINESS FUNDING SUPPORTS YOUR VALUATION / PURCHASE PRICE OF THE TARGET COMPANY

 

When you buy a business and consider financing a takeover, it's all about a proper valuation and moving forward with a source or sources of financing and loan terms that make sense for your acquisition price after you have performed an appropriate amount of due diligence.

 

LOOKING TO SECURE FUNDING FOR YOUR BUSINESS PURCHASE

 

In determining business value there are a number of 'common sense ' considerations  around valuing the business purchase

 

Financial statements of the business, both from a historical and interim perspective should be reviewed from a viewpoint of sales revenue growth,  profit, and operating cash flow - Every industry has different dynamics around supply and demand, key competition and how the company behaves in the overall general economy. 

 

The ability to determine growth potential will often be a key factor in the final price determinant when the buyer considers a purchase.

 

Asset-intensive businesses are dramatically different than service-based businesses - In many cases assets should be valued, potentially with the use of a third-party appraiser when considering key assets such as equipment and technology. In the new economy, many business valuations focus on intangible assets around patents, intellectual property, and the ability to generate recurring revenues.

There are a number of standard business formulas around valuation, including projection of cash flows and profits, or in some cases comparing valuations with other companies in the same industry if that information is available.   Replacement costs must be factored into any valuation decision as it relates to depreciation, etc.

 

  

PLAN YOUR BUSINESS CAPITAL STRUCTURE IN ADVANCE   

 

Suffice it to say, but often forgotten by many in business acquisitions, it’s critical to start assessing financing solutions for a business purchase well in advance of when funds are needed. The analog we could also use is getting '  pre-qualified ' for a home mortgage, which then gives the buyer both security and negotiating power when it comes to price, or in our case, ' valuation.' That final financing structure will dramatically affect the future growth strategy of the business.

 

MANAGEMENT & BUSINESS EXPERIENCE ARE REQUIRED!

 

Management depth and experience is also critical to your financing in a business acquisition loan search. Your lender/lenders, whether that is a bank or a commercial finance firm / asset-based lender, will want to know the ability you can demonstrate to properly manage and run their business - with their focus on getting repaid!

 

That goes for both traditional and alternative sources of capital, as both are used to finance a company's purchase. Whether it's leveraged buyouts or a management buyout, your ability to demonstrate business expertise to banks or commercial finance firms in your industry is key.

 

  

DEBT AND EQUITY COMBINATION  

 

Without getting too technical on some higher-level business concepts and jargon around ' debt ratios '  and financing acquisition with debt it needs to be clear that you understand the capital structure and debt and equity. Those latter two points are of course your 2 sources of finance to properly execute your transaction. It's critical to demonstrate in your business plan and projections of cash flows that repayment of debt can be addressed properly.

 

SOURCES OF DEBT FINANCING FOR YOUR ACQUISITION

 

Debt financing in your acquisition deal will come from commercial sources such as banks and finance companies. In the case of banks, many smaller transactions can be financed under the Government Small Business Loan's auspices. Major changes to the program, including removing previous borrowing limits, make this option, aka, the 'SBL ' very attractive. The Canada Small Business Financing program is our Canadian version of the popular U.S. ' sba loan' with an attractive interest rate and repayment flexibility combined.

 

THE EQUITY FINANCING COMPONENT - YOUR DOWN PAYMENT/PERSONAL INVESTMENT IN YOUR TRANSACTION

 

The other side of debt in your transaction is equity. Family, Angel, and private investors will demand ' shares’, diluting your own ownership. This then becomes the difficult balance act of sourcing the right amount of debt and equity. Naturally, if your own investment into the firm, along with debt will cover the transaction no ' dilution' of your investment will be required. Entrepreneurs invest from their savings, retirement accounts, or other sources of personal investment.

 

  

ASSET SALE OR SHARE SALE?  

 

By the way, ' share sales' are difficult, if not impossible to finance given the bank or finance company has no way to liquidate or monetize their loans. Going public is of course a whole different story.

In some cases real estate might be a key component of your deal - typically real estate is held in another company under some holding company scenario.

 

FUTURE FINANCING NEEDS POST-ACQUISITION!

 

While many owners focus on closing the acquisition, they sometimes forget to focus on the newly acquired business's working capital and cash flow requirements. That’s a recipe for failure with a proper focus on cash reserves on an ongoing basis for day-to-day funding needs.

 

7 WAYS TO FINANCE A BUSINESS ACQUISITION AND SUCCESSFULLY BUY A BUSINESS IN CANADA

 

As we have said the senior lender is a key focus of your acquisition strategy.

 

Debt financing from acquisition financing lenders  can come from:

 

Canadian chartered banks - bank loan, term loans, operating lines of credit -

 

When considering a bank term loan for the acquisition the senior lender will typically take the first position on all the assets of the business - bank interest rates offer the lowest interest rates in Canada.

 

Banks tend to be the ' go-to' for many business people/entrepreneurs looking to purchase another company. Bank loan approval will focus on key financial metrics in the business such as sales revenues, profits,  and cash flows required to pay down financing and fund day-to-day operations

 

Banks also place significant emphasis on the financial background of the buyer, including areas such as net worth, personal credit history,  and business experience. In certain cases, the bank will ask for external collateral as well as personal guarantees.

 

A solid business plan will usually be required - 7 Park Avenue Financial prepares business plans for clients that meet and exceed bank and commercial lender requirements,

Every industry has its own operating dynamics and the bank lender will focus on general industry conditions.

Many business people often express concern about the complications and delays that might come from a bank term loan acquisition so buyers of a business should be prepared typically for a total time commitment of several months when it comes to bank financing/loan approval.

 

Government Loans

 

The Canada Small business loan program is offered by Canadian banks and credit unions and can be used to facilitate a business purchase for small transactions in the  500k -1 Million dollar range

 

The government allows a participating financial institution such as a bank or business-oriented credit union to help small businesses finance or acquire a business venture with a limited personal guarantee and a smaller personal equity investment. It is a great way to purchase an independent business such as an existing business such as a franchise.

 

The credit report of the owner plays a key role in credit approval on government loans. The federal government loan guarantee eliminates the need for raising capital as many smaller businesses can't access angel investors or approaching firms who only wish to make significant investments. The program also finances real estate as an alternative to commercial mortgages and secured loans from traditional lenders- Guarantees and safety measures for the banks are in place under the program

 

Asset-based lending/leveraged buyout-

 

Acquisition financing via an asset-based lender will typically be a combination of a term loan and a revolving loan tied to the business's assets  - The revolving loan will fund current assets such as inventories and accounts receivables. Typical term loan structures from the bank and asset-based lenders will carry a 5-year amortization with potential refinancing/renewal flexibility.

Interest rates will vary based on considerations such as your transaction's overall credit quality, type of financing needed, amount of financing and repayment terms structure, the appraised value of the asset base on the balance sheet, etc.

 

Equipment Financing -

 

Equipment financing is used by 80% of  North American companies purchasing assets - All types of assets and technology can be financed under capital leases and equipment loans where the lessee chooses to own the assets at end of the lease term - Companies also have the ability to enter into operating leases which is a better method of using assets versus owning them.

 

Acquiring business assets through lease financing preserves existing credit facilities and helps a business maintain cash reserves.

 

Term acquisition loans from Canada's crown corp. bank -  bdc offers acquisition funding solutions for the business transfer of  ownership financing - Talk to 7 Park Avenue Financial about bdc loan requirements

 

Mezzanine Financing -

 

Mezzanine finance is cash flow financing for firms that do not have the amount of business assets to secure additional financing. Cash flow loans have higher interest rates as they are unsecured loans.

 

 

  

Mezzaning finance soltuions are cash flow loans that rank behind senior debt - so they will come at a higher interest rate / financg cost - They can complenent the capital structure of a businss and the financing focues on the cash flow generation ability of the company, as cash flow loans are unsecured . 

SELLER FINANCING

Financing the purchase of an existing business might include a seller financing component via the target firm. The seller finance/vendor takeback part of your transactions reduces the amount of debt you are required to take on, and, if properly structured, is viewed positively by banks and commercial lenders as part of a loan to buy a business. A lot of creativity can go into a seller's note to help fund a final transaction.

 

KEY TAKEAWAYS -

 

Often business purchase transactions will include a combination of different types of funding to form the optimal debt structure.

Purchasing a business is often considered a better strategy than the start p process and often offers more opportunities and less risk with additional flexibility.

Collateral and cash flow play a key role   in securing the right amount of business purchase financing

Government business loans can be utilized to fund the purchase of  a business

 

CONCLUSION

 

Acquisition financing requires a combination of the right financing structure and a cost of financing that makes sense for your transaction.

 

As potential business owners weigh their financing options traditional financial institutions as well as alternative finance firms offer a number of financing solutions based on term loans and lines of credit. Criteria for credit approval will vary based on the type of acquisition financing the lender chose, as well as the overall structure required to complete the purchase.

 

Talk to the 7 Park Avenue Financial team for information on what structuring and criteria work best for your business purchase. The right combination of debt and equity will properly support your new venture.

 

If you're focused on putting the proper' fix' in place for a financing strategy in financing a business purchase and are looking for ways to properly finance a purchase of a business seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can help you ‘juggle ‘ those solutions into a successful business acquisition with financing advisor expertise you need.

 

  

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

 

How do you finance a business purchase?

Acquisition debt financing used for buying an existing business / legal entity can come from a number of different lenders such as traditional financial institutions or alternative lenders as well as Government loans when trying to achieve the optimal financing structure - Seller financing for acquisition purposes can also be a component of the final finance structure but is less common in corporate mergers. Typical reasons to buy a business and gain control include market share and the ability to achieve economies of scale via the purchase of the target company.

 

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

Guide To Financing a Business Purchase When Buying A Business In Canada

 

 

 

FINANCING BUSINESS ACQUISITIONS IN CANADA - OVERVIEW OF TYPES OF FINANCING AVAILABLE FOR PURCHASING A BUSINESS

 

Buying a business in Canada via the right acquisition financing will often involve looking beyond the numbers when it comes to ensuring business purchase financing options are in place and that you are successful in the optimal financing structure when considering buying small businesses in Canada. Let's dig in!

 

HOW TO FINANCE BUYING A BUSINESS IN CANADA - DIFFERENT TYPES OF FINANCING AVAILABLE FOR A BUSINESS PURCHASE

 

When it comes to ' how do I finance a business purchase ' business loans to buy an existing business is not just all about negotiating the sale price -

 

UNLOCKING THE DOOR TO BUSINESS OWNERSHIP WITH PROVEN FINANCE STRATEGIES

 

It's also about the necessary funding solutions & understanding other financing options from potentially multiple sources of funding, and a financing package that must be put in place to ensure business survival and profitability via conventional financing and/or alternative financing. Let's dig in.

 

WHAT LENDERS CONSIDER  FOR A SUCCESSFUL BUSINESS PURCHASE

 

The pros, of course, call it ' due diligence, when it comes to considering a business investment loan and how to buy a business at the right purchase price.

 

On the other hand,  as well financing a business for sale is all about a pretty basic common sense premise: ensuring sales, inventory, accounts receivable and accounts payable are all reasonable, and that projected sales volumes make sense in the long term. The right business acquisition loans are an integral part of planning future growth to fund acquisitions.



Bottom line- the proper business purchase loan finance solutions tie together your plans for mgmt, mfg or delivering services, and marketing.



The essence of any business, large or small, is cash management. Working capital solutions and business financing rates must also be considered for effective ongoing operations.



A/R Financing/factoring -funding daily operational costs and maintaining adequate cash reserves



Bank Loan & revolving credit lines - repayment terms based on fluctuations in revolving credit facilities -A senior lender requires the loan to be paid off and has to meet financial covenants. A senior lender such as a bank requires the loan to be paid off in a relatively short period ( typically 5 years ) and will want you to meet certain financial covenants.



Non-bank asset-based lines of credit - applicable to leveraged buyout scenarios for firms with substantial assets - these loans come with a higher interest rate but can provide significantly more capital for your purchase



Inventory Financing



Tax Credit Financing

 

Business Credit Cards / Short Term Working Capital Loans - Certain conditions such as  good owner personal credit scores apply - these loans are readily accessible and are a term loan structure but come with a higher interest rate

DIFFERENT GOVERNMENT PROGRAMS AND INITIATIVES ARE AVAILABLE TO HELP IN THE ACQUISITION OF SMALL BUSINESSES IN CANADA

Small business govt guaranteed loans (maximum 1.1 Million $) Small Business Loans To Purchase A Business Can Often Come From The Government Of Canada Small Business Loan Program - In the U.S. the question is the same, ie bank or sba loan. The Canada Small Business Financing Program was somewhat modelled after its U.S.  counterpart.  The bdc small business loan interest rate is also very competitive.

 

The Canada Government Guaranteed Loan provides guarantees and safety measures to participating financial institutions when they lend money for a business purchase. Intangible assets and intellectual property can now be financed under the program but leasehold improvements and real estate continue to be part of the program - with financing now provided for working capital and lines of credit.

 

Banks and credit unions are the most popular type of financial institutions participating in the program. Monthly payments are based on competitive interest rates under a term loan structure.



Firms that are not profitable or that have ' challenged' balance sheets will not qualify for what we call ' traditional' finance. These types of companies can't comply with the financial ratios and collateral demanded by our Canadian chartered banks. Almost all businesses that sell on credit, large or small, need some sort of business credit line.



Numerous alternative financing solutions are in fact available - but at the same time, new owners/mgr must be able to address and talk to items such as gross margins, operating inefficiencies, etc.



At 7 Park Avenue Financial, we speak to many clients who wish to purchase a franchise business. That can be achieved via various financing programs, and might often include some ' seller financing ' when it comes to an overall finance strategy. That seller finance assistance in essence is another alternative capital that can allow the buyer to successfully complete the transaction. We also note that both new and used franchises can be purchased and financed.

 

VALUATION

 

As the buyer of a business job 1 revolves around your ability to accurately value the business from the viewpoint of a fair purchase price  -  Numerous factors will come into play when considering valuation:

 

Business buyers should focus on financial performance - which involves looking at the historical financial statements with a focus on sales growth and trends, profitability, and .. you guessed it - CASH FLOW.   The ability to determine cash flow generation within the business is a key metric and will be key to getting the business lender/bank onside with your purchase.

 

Every industry in Canada has its own  trends relative to general economic conditions as well as specific industry issues - Buyers will want to focus on long-term trends and the potential to grow the business based on the buyer strategy

Your ability to understand where the business lies in terms of competition and its ability to attract market share will require some potential external analyses as well as discussions with the seller

 

Businesses typically fall into two categories - asset-intensive businesses that require larger amounts of cash flow, or, on the other hand, service-based businesses - It is necessary to understand actual market values of key business assets that might include fixed assets/equipment, inventories, as well as intangible assets such as patents and intellectual property or a trademark. In some cases, it may be prudent for both the buyer and  seller to engage a professional appraisal service to determine the fair value or in some cases liquidation or replacement values

 

External buyers of a business will want to ensure that key management and key employees are in place  - in the case of a management buyout the current team will have a  solid understanding of the business already

 

One of the basic ways to value a business revolves around looking at a valuation multiple within the financial statements - buyers and compare the value of the company to actual earnings, or in other instances look at price to sales or price of a business relative to cash flow generated -  A good baseline for this type of analysis is to look at similar competitors in the industry if that information is available.

 

Buyers of a business without a strong financial background should rely on advice from business finance advisors, accountants, lawyers, bankers, or other experts in the industry.

 

Naturally, business values change over time, and also assume projections which may or may not come to pass around profits, growth, etc.  The goal in any business purchase is to ensure that the buyer will not overpay for the target acquisition - at that point, it's a combination of risk/reward analysis when placing value on the price of the target acquisitions. Focusing on the right due diligence will always significantly reduce the risk that comes with a potential business acquisition.

 

It will almost always come back to the cash flows of a business when the buyer is looking at what a fair market value price will be for the business purchase.  As a buyer focus on:

 

1. What working capital requirements will be post-acquisition

2. What amount of spending will be required on new assets or technology

3. What are the opportunities to grow in the industry?

 

Remember also that high cash flow projections around future performance also means a potentially higher purchase price - similar to real estate purchases ultimately the true value of the business is what a buyer will pay for the company which may not necessarily be reflected in all the financial factors and analysis around due diligence in the purchase. The importance of the transaction to the buyer will also drive the price and the perception of value in the negotiations around a fair price.

 

The operating results and the future operating potential play key factors in the final valuation and agreement of purchase and sale. In private transactions in the SME sector of the economy, buyers don't often have the luxury of publicly available information on competitors, etc - that is enjoyed by transactions for publicly listed companies.

 

The ability to negotiate a purchase from strength is often based on the buyer's perception of future synergy and potential. So the factors of the value of tangible assets, intangible assets such as the goodwill component and future synergies and potential all play factors in the purchase price.  

 

Buyers also are in a position to assess post-acquisition savings that might come from a merger-type transaction - but most experts agree that post-purchase considerations should be viewed separately from the basic value around current operations - As a buyer, you don't want to be in a position of having to address higher costs and lower post acquisition benefit!  Remember sellers don't need to be paid for post-acquisition perceive benefits and potential!!

 

SELLER  FINANCING / VENDOR TAKE-BACK CONSIDERATIONS

 

Most buyers prefer to have a seller finance component in the purchase - that is sometimes called an ' earnout '; at least fo a specific period of time  - They also would prefer to have an arrangement around the handling of any undiscussed issues and liabilities that might come up post-purchase.

Typically the buying of a business will be a combination of owner equity financing, debt, and the potential of seller financing.  More sophisticated transactions might include non-compete agreements with the sellers or employee contracts.  Those issues sometimes will be a consideration in valuation and purchase price.

 

SOME KEY RISKS IN  BUYING A BUSINESS

 

Purchasers  should consider :

 

Cash and financing need  to acquire new assets or technology

Sales fluctuations that will impact cash flows

Higher costs around staffing and infrastructure

Interest rate changes in the general economy

Post-acquisition strategies failing

Warranty and vendor/supplier representations

 

BUSINESS ACQUISITION FINANCING CANADA - HOW TO FINANCE THE PURCHASE OF A BUSINESS

Buying a business for ' all-cash ' is almost never the option available to purchasers. Top experts tell us that not even a 1/3 of businesses purchased are done via 100% financing. Unfortunately, sellers like/want cash! More often than not the final structure of your transaction will be:



Owner Cash / Equity Financing  /  Dissolving Retirement accounts

External Financing

Vendor  Note Take Back - Vendor Financing /Seller Financing (not always, but often) -



‘ABL ' (Asset Based Lending) is often a solid solution for a business financing strategy, often in the case of leveraged buyouts with a focus on ' assets'. These types of facilities allow you to borrow heavily against inventory, accounts receivable and equipment/fixed assets.



One legal/technical issue often becomes a critical point in acquisition financing. That is the issue of ‘asset sales' vs. 'share sales'. From a buyer's perspective, asset sales tend to make more sense - sellers focus on share and tax strategies for selling their businesses. This can often complicate financing as it relates to specific assets of the business and cash flows.



We've seen there are some critical issues that can make or break the success of financing a business purchase. Those issues include proper valuation pricing, debt load, working capital and cash flow financing challenges.  A solid business plan and proper cash flow projections are key to successful approval of financing -

 

7 Park Avenue Financial prepares business plans that meet and exceed bank and commercial lender requirements.

 

ASSET PURCHASE VERSUS SHARE PURCHASE

 

In an asset sale, buyers acquire specific assets of a business, versus a share sale where ownership is acquired .

 

Buyers and sellers of a business must agree on either an asset sale or a share sale agreement - Key issues around  share sales include

 

- Timing around due diligence

- How security is transferred to the lender in the share sale

- The preference of lenders to utilize an asset sale financing

 

DUE DILIGENCE

 

Buyers should allow for a  proper amount of time on the due diligence - when done properly this helps guarantee a successful transaction fo the buyer - Buyers can use their own resources or engage experienced professionals.   The best entrepreneurs and business people will look into all aspects of the business - that can come with both time and  potential costs,

 

Solid due diligence allows you to investigate potential problems in the business and identify the key strengths of the company - Banks and other commercial lenders will want to know you have completed appropriate pre-sale diligence around valuation and the issues that might need to be addressed around creating additional value after the purchase - Those issues include the need for upgrades t and potential capital for new assets and technology.  Proper searches must be done on secured lenders and any legal issues the target company might be involved in.

Financial statements must be obtained and reviewed from a historical and interim perspective.  Lenders will rely on your due diligence, as well as their own on issues such as asset liens, etc. Proper agings of accounts receivable, inventories and accounts payable must be provided for review. 

 

A business plan and financial projections are key to positive input from banks and commercial lenders.
 

 

CONCLUSION - THE BEST BUSINESS ACQUISITION LOAN FOR YOUR NEEDS
 

There are few people who can buy a business with cash and without borrowing money . If you're focused on a winning deal and financing a business purchase properly seek out and speak to 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor who can assist you with your funding needs for a successful acquisition.

 

Let the  7 Park Avenue Financial team help you master the art of business financing for your business purchase We'll show you the most efficient way to fund your acquisition with a higher percentage of success with financing options specifically designed to your business needs!

 

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

 

Can I finance the purchase of a business?

When someone is buying an existing business, they typically use a combination of their own money and external financing to become a business owner. Unsecured loans are available from banks and a government small business loan or a loan from a business Development bank is also a potential financial solution for acquiring a profitable business - Some borrowers view the application process as government and bank longs too time-consuming. The business transaction will typically be structured around long term loans and a business line of credit - in some cases vendor take back financing is also helpful and will require fewer personal assets to be pledged or provided as a guarantee.

 

How much down payment do you need for a business loan?

There is no set deposit amount for business loans, as each business is unique. 10% to 30% is a commonly used amount.

 

Do banks give loans to buy a business?

 

Banks offer the lowest financing costs and interest rates for all business loans, including acquisition loans . Banks   prefer to fund acquisitions of established businesses with revenue and profits and proper financial statements.

 

 

What is a business acquisition loan?

A business acquisition loan is a small business loan for financing the purchase of an existing business.  Financing typically covers the acquisition costs in the form of a term loan as well as potential working capital financing and business credit lines that might be required to fund day-to-day operations - Acquisition loans can be from banks, the government via various programs or government crown corporations, and commercial and alternative lenders. Mezzanine financing / cash flow financing can also be a component of financing in buying a business.

 

 

 

How To Buy A Business With The Right Acquisition Financing

Guide To Financing A Business Purchase In Canada - A Guide For Business Buyers

When it comes to ' how do I finance a business purchase ' business loans to buy an existing business is not just all about negotiating the sale price - in other words, it's also about the necessary funding solutions & understanding other financing options from potentially multiple sources of funding, and a financing package that must be put in place to ensure business survival and profitability via conventional financing and/or alternative financing. Let's dig in.

 

  

WHAT LENDERS CONSIDER

 

 
The pros, of course, call it ' due diligence, when it comes to considering a business investment loan and how to buy a business at the right purchase price - On the other hand,  as well financing a business for sale is all about a pretty basic common sense premise: ensuring sales, inventory, accounts receivable and accounts payable are all reasonable, and that projected sales volumes make sense in the long term. The right business acquisition loans are an integral part of planning future growth to fund acquisitions.



Bottom line- the proper business purchase loan finance solutions tie together your plans for mgmt, mfg or delivering services, and marketing.



The essence of any business, large or small, is cash management. Working capital solutions and business financing rates must also be considered for effective ongoing operations.



A/R Financing/factoring -funding daily operational costs and maintaining adequate cash reserves



Bank Loan & revolving credit lines - repayment terms based on fluctuations in revolving credit facilities -A senior lender requires the loan to be paid off and has to meet financial covenants. A senior lender such as a bank requires the loan to be paid off in a relatively short period ( typically 5 years ) and will want you to meet certain financial covenants.



Non-bank asset-based lines of credit - applicable to leveraged buyout scenarios for firms with substantial assets - these loans come with a higher interest rate but can provide significantly more capital for your purchase



Inventory Financing



Tax Credit Financing

 

Business Credit Cards / Short Term Working Capital Loans - Certain conditions such as  good owner personal credit scores apply - these loans are readily accessible and are a term loan structure but come with a higher interest rate



Small business govt guaranteed loans (maximum 1 Million $) Small Business Loans To Purchase A Business Can Often Come From The Government Of Canada Small Business Loan Program - In the U.S. the question is the same, ie bank or sba loan. The Canada Small Business Financing Program was somewhat modelled after its U.S.  counterpart.

The Canada Government Guaranteed Loan provides guarantees and safety measures to participating financial institutions when they lend money for a business purchase. Intangible assets and intellectual property cannot be financed under the program but leasehold improvements and real estate are part of the program for this business loan.

 

Banks and credit unions are the most popular type of financial institution participating in the program. Monthly payments are based on competitive interest rates under a term loan structure.



Firms that are not profitable or that have ' challenged' balance sheets will not qualify for what we call ' traditional' finance. These types of companies can't comply with the financial ratios and collateral demanded by our Canadian chartered banks. Almost all businesses that sell on credit, large or small, need some sort of business credit line.



Numerous alternative financing solutions are in fact available - but at the same time, new owners/mgr must be able to address and talk to items such as gross margins, operating inefficiencies, etc.



At 7 Park Avenue Financial, we speak to many clients who wish to purchase a franchise business. That can be achieved via various financing programs, and might often include some ' seller financing ' when it comes to an overall finance strategy. That seller finance assistance in essence is another alternative capital that can allow the buyer to successfully complete the transaction. We also note that both new and used franchises can be purchased and financed.
 

BUSINESS ACQUISITION FINANCING CANADA - HOW TO FINANCE THE PURCHASE OF A BUSINESS

Buying a business for ' all-cash ' is almost never the option available to purchasers. Top experts tell us that not even a 1/3 of businesses purchased are done via 100% financing. Unfortunately, sellers like/want cash! More often than not the final structure of your transaction will be:



Owner Cash / Equity Financing  /  Dissolving Retirement accounts

External Financing

Vendor  Note Take Back - Vendor Financing /Seller Financing (not always, but often) -



‘ABL ' (Asset Based Lending) is often a solid solution for a business financing strategy, often in the case of leveraged buyouts with a focus on ' assets'. These types of facilities allow you to borrow heavily against inventory, accounts receivable and equipment/fixed assets.



One legal/technical issue often becomes a critical point in acquisition financing. That is the issue of ‘asset sales' vs. 'share sales'. From a buyer's perspective asset sales tend to make more sense - sellers focus on share and tax strategies for selling their businesses. This can often complicate financing as it relates to specific assets of the business and cash flows.



We've seen there are some critical issues that can make or break the success of financing a business purchase. Those issues include proper valuation pricing, debt load, working capital and cash flow financing challenges.  A solid business plan and proper cash flow projections are key to successful approval of financing - 7 Park Avenue Financial prepares business plans that meet and exceed bank and commercial lender requirements.

 

 

CONCLUSION - THE BEST BUSINESS ACQUISITION LOAN FOR YOUR NEEDS 
 

There are few people who can buy a business with cash and without borrowing. If you're focused on a winning deal and financing a business purchase properly seek out and speak to 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor who can assist you with your funding needs for a successful acquisition. We'll show you the most efficient way to fund your acquisition with a higher percentage of success!

 

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION

Can I finance the purchase of a business?  

When someone purchases a business, they typically use a combination of their own funds and external financing.

How much down payment do you need for a business loan?

There is no set deposit amount for business loans, as each business is unique. 10% to 30% is a commonly used amount.

What is a business acquisition loan?

A business acquisition loan is a small business loan for financing the purchase of an existing business.
    

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

 

7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

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.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

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 

Financing a business purchase buying a business | 7 Park Avenue Financial

Guide To Financing a Business Purchase When Buying A Business In Canada | 7 Park Avenue Financial

Financing A Business Purchase In Canada - Acquisition Loans

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How To Purchase a Business With The Right Financing

Buying A Business ? Ways To Finance A Business Acquisition

Buying a business in Canada often provides a large opportunity for success. While many owners and financial managers may prefer the strategy of organic growth for sales/revenue and profit potential the attractiveness of not having to start a business cannot be discounted.


But financing the business purchase capital, i.e. putting your transaction together is another story. There are numerous options available to the entrepreneur/business person when seeking a business acquisition loan, In some cases your transaction may be a management buyout or the focus on financing a takeover.

Acquisition Finance Solutions

Ways You Can Finance The Purchase Of A Business

Bank loans (Secured and unsecured) - In some cases the actual cash flows of the business can be used to finance the entire business purchase. This can be augmented with either a fixed asset/equipment loan as well as a revolving business credit line.

The importance of financing ongoing operations post the acquisition can't be overemphasized. If new owners are unable to finance through their reserves then options such as a business operating line, a non bank business credit line, or simply a/r invoice financing should be considered. We recommend Confidential Receivable Financing as the optimum method of financing sales when traditional bank credit can't do the job.


Franchise loans - The booming franchise industry, which supports a huge part of the economy has niche finance programs available to acquire both 'new' and 'existing' franchises. Corporate stores owned by the franchisor can be financed, as well as existing franchisees that have chosen to sell.

Tip: Find out why they are selling. Financing the purchase of an existing business is very common in the world of franchise financing.


Asset based Loans - These ' ABL ' loans cover the financing of assets as well as cash flow needs, including the often required credit line. These loans are ' non bank ' in nature and often provide higher ' loan to value ' financing when typically required loan and debt ratios don't work. The asset based lender in effect becomes the equivalent of your senior lender, in the same manner as would Canadian chartered banks.

Asset based lenders certainly help when the transaction makes sense to have a higher leverage based on the quality and size of the asset base. Main asset categories are receivables, inventory, equipment and real estate.

Most business owners wish to maximize the leverage and therefore enhance their return on investment but many times don't consider the dangers of over leveraging when it comes to debt.

While traditional Canadian bank financing might be the obvious or ' go to ' choice for many buyers it should be no surprise that they place significant emphasis on personal guarantees, potential outside collateral, and are usually focus on firms with very strong cash flows, balance sheets, etc. Naturally the Canadian banks can offer the lowest interest rates but financing an acquisition might often be a challenge. Also it should be known that banks aren't proponents of 100% financing - they demand, and desire the proverbial ' skin in the game '!

Government Small Business Loans - aka the ' Canada Small Business Loan '. This is the quintessential small business loan in Canada, One great way to acquire a business if your business fits some basic criteria - i.e. financing required for equipment and leaseholds. Acquisition loan rates, as well as other terms and conditions, are very favourable under the Canadian ' SBL ' program, not to be confused with the U.S. equivalent, the ' SBA ' program from which the Canadian program was modelled.  Crown corporations also can potentially assist in your purchase .

While not necessarily a 'creative' strategy, Government guaranteed business loans have solid 'traditional' type rates, no penalty for prepayment options, terms and structures, as well as.. wait for it ... a very limited personal guarantee! Finally, some help from Ottawa, but we digress....

It comes as a surprise to many people that the government does not lend money directly under our Canadian small business financing program - instead it charters the banks to fund the deals under the bank's guidelines. The government provides a guarantee to the banks. Many clients of 7 Park Avenue Financial advise us they have seen the banks interpret those guidelines as they saw fitting.


We can’t over-emphasize the importance of ensuring you understand the financial position of the business you are looking to purchase/acquire. If the seller's motivation is not 100% clear in initial negotiations it may well become clearer when the financial position of the company is understood.

In some cases owners may be willing to provide a ' VTB ' - aka the vendor take back. They may often make or break the financing as long as the seller is willing to take a 2nd position to your financing, and, more importantly, that your lenders don't view the VTB as more ' debt '. Negotiations around the actual amount of the vendor take-back will often dramatically change the nature of the selling price - upward or downward. Seller financing, that vendor participation we are talking about is powerful because it gives you the leverage to minimize owner equity if there are challenges in that area, and sellers are often willing to participate in some creative structuring of the ' take back '.


It removes some of the challenges of conventional financing, and sellers are many times 'motivated' to get the transaction done. There is no real stated percentage of what a typical seller finance percentage might look like, it varies with respect to the circumstances around your transaction so don't forget also that 'seller financing' can be a key part of any successful transaction.


'Goodwill' is difficult to finance part of any transaction, and the easiest financings in business acquisition tend to be ' asset ' oriented, not ' share sale ' focused when you are looking for a loan to buy a business in Canada. That concept of ' goodwill ' is a key part of understanding business loan requirements and what is required to often cobble a transaction together with different types of finance. Buyers should understand that in many cases a ' cobbling together ' of sorts, i.e using multiple sources of financing will often make a transaction work successfully. That is where external expertise can be of great assistance.



Buying and financing that business purchase via a well thought out and executed finance strategy is a solid way to become a Canadian entrepreneur. Speak to a trusted, credible, and experienced Canadian business financing advisor to kick start your business purchase.





7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

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.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
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 finance executive 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

How Do You Finance A Business Purchase ?

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Sources Of Finance For Buying A Company In Canada

Buying a business in Canada is the goal of many entrepreneurs in Canada . The financing of that purchase requires some specialized skills when it comes to the strategies involved in acquiring an existing family business, or in some cases capitalizing on the unfortunate circumstances of firms that might be challenged in some manner. In some cases it's a solid way , versus organic growth, to grow revenues and profits via a merger/acquisition type scenario.


We at 7 Park Avenue Financial leave it up to our clients to identify the business opportunity they wish to explore from a purchase perspective. Our focus is on what comes next - ensuring you have access to solid a time worn financing strategies that will work for your success in a business acquisition.


Financing a Business Purchase In Canada

One part of the business finance puzzle that is often overlooked is known as the VTB .. AKA the ' vendor take back, if only for the reason that it minimizes the financing your are required to generate to close the transaction. That is not the only reason though! Another term for this strategy by the way is ' owner financing '. Anyway you look at it VTB's are a solid strategy that make it easier to access the other types of financing that you will need to complete the loan , which typically are term loans and business revolving credit lines.

We forgive business people for thinking that ' the bank ' is the only way to acquire financing to purchase a business. That's a logical thought, but of course there are a number of other options, some of them alternative in nature . However caution is required if you are unprepared to understand how a bank looks at financing - which can in some cases be an immediate road block.

Early on in the business acquisition cycle you must also agree with the seller as to whether the sale will be a purchase sale or an asset sale . This is a key accounting and legal type issue which is a separate subject in an of itself .

It should be noted that in the SME COMMERCIAL FINANCE area it is difficult to finance a ' share sale ' given that shares in small private companies are not liquid . So if financing is required in your purchase most owners are encouraged to choose the 'asset sale ' scenario. Naturally larger companies , public companies etc have a number of ways to finance purchases - they have much more access to capital . Those companies often consider share sales, and also are looking at numerous tax minimization strategies.

In looking at assets of the company you are focused on buying it's key to determine the value of those assets . In many cases in modern times some of those assets might even be ' intangible ', and might include patents, contracts, software, etc.
Tangible hard assets, typically the ' fixed assets ' on the balance sheet can easily be valued by appraisals from reliable and experienced third parties.


Goodwill is the excess dollar amount you're paying on top of the assets. Goodwill is typically difficult to finance, which is why our owner financing/vendor take back strategy is sometimes a good place to start. The sellers financing, often referred to as ' holding the note ‘can allow you to complete a purchase satisfactory to all parties.


Both banks and non bank commercial finance lenders view vendor take backs very positively. Since the seller of the business has a vested interest in making the purchase also successful you often can get very favorable, in fact below market financing rates from the owner or owners of the company being acquired.

Many smaller businesses in Canada, including franchises of new and existing locations can be financed with the assistance of the Canada Government Small Business Loan . The government guarantees a large part of the loan to your bank as long as you meet minimum requirements, which we at 7 Park Avenue Financial view as very reasonable .Owner financing can also be a part of the gov't loan . Many small and medium sized enterprises can utilize the Small Business Loan govt program to acquire a business. It works, as we have proved time and time again at 7 Park Avenue Financial.



A typical structure for financing a purchase when you’re buying a business in Canada is the down payment, debt financing, and the vendor take back/owner financing. This three piece solution to buying a company can also be complemented with a number of ' Alternative Finance ' strategies that might include:

A/R Financing

Non Bank Credit Lines

Equipment Finance Leases

Sale Leaseback strategies

Inventory Finance

Purchase Order Finance

Seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success when you're looking for assistance in structuring the best deal and financing for your business purchase.






7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com


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 .

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
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 finance executive 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