Business Purchase Finance And Takeover Financing Solutions In Canada

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Information on buyout financing in Canada, including due diligence and financing strategies to complete a successful acquisition and takeover financing.

How To Get A Loan To Buy A Business In Canada

Business purchase finance in Canada often requires some, shall we say ' deft ' takeover financing strategies when an acquisition is made. This might often include a management buyout scenario. Let's look at some of the acknowledged ' smart ' ways to buy and finance to buy an existing business. Let's dig in.

There are often great rewards when an existing business is purchased properly with the right underpinning of finance and mgmt skill - the challenge is the right loan to buy an established business.

WHY ARE YOU CONSIDERING BUYING A BUSINESS OR A COMPANY BUYOUT?

If it's an add on ( the pros often call it a ' bolt-on ' ) to your current business its obviously a solid mechanism to grow your customer base and that might even mean acquiring a competitor or a vendor with whom you do business with. When executed properly its a solid method of gaining market share, acquiring skilled staff and an infrastructure and business model that is already established. In today's Canadian business environment there is a huge transfer of wealth happening as employees consider management buy outs, businesses consider mergers and acquisitions and family successions are in full force.




Since the turn of the millennium, we have experienced the first ever large-scale transfer of businesses in Canadian history. No matter if we are talking about management buyouts, mergers/acquisitions or family successions, we have a lot more experience today than we did 15 years ago.


At 7 Park Avenue Financial we find many business purchase leads come from business brokers, real estate agents or even online listings of businesses for sale. A business purchase might also be the acquisition of a new or existing franchise.

Financing Options when Acquiring a Business - Business Acquisition Loans In Canada

Different sources of capital might be used to fund a merger or the acquisition of a target company. The overall solutions are known as your final ' capital structure '.In many cases a combination of sources of funding will ultimately lead to a successful transaction, so it's all about the right ' mix ' at appropriate terms, rates, and structure.


Certainly not rare, but typically uncommon is to use your own personal or company cash reserves to purchase a business outright - that is possible but more often than not external financing will be needed when financing acquisitions.

While it is often not considered in the early stages of business financing it will often become apparent that some form of seller financing/vendor finance is required to close the gap in your financing package. This component of your financing has numerous advantages.

Advantages of Seller Finance / VTB

Confirms sellers commitment to the new owner - viewed as a positive by commercial lenders

Assists purchaser in closing the gap in total financing required

Terms of seller financing are often flexible and creative and are sometimes referred to as an ' earn-out '


BANK FINANCING


Industry experts agree that Canadian chartered bank financing is typically available for only higher quality credits. Many larger businesses cannot be financed without the involvement of a bank of a commercial loan firm. Canadian banks place a high emphasis on reasonable personal credit history of the purchaser, industry experience, personal guarantees, and various borrowing covenants and ratios around their financing in the transaction.



Two sources of ' bank financing ' that are outside of chartered bank commercial loans are the Government Of Canada Small Business Loan program for transactions under 1 Million dollars, as well as the government's crown corporation, committed to entrepreneurs - Business Development Corporation.

These two solutions should be explored but have some specific requirements around how their business purchases are instructed. A recommended strategy for these two solutions is to work with an experienced business advisor to determine if one or both of these two ' government ' solutions will fit your business purchase plan. As a general comment we can say that both of these 2 ways to acquire a firm are very focused on hard assets such as land, buildings, fixed assets, qualifying leasehold improvements, etc.

Highly leveraged deals can also be financed successfully if the underlying assets are strong and you can demonstrate the acquisition will be able to generate cash flow to support the higher leverage in the transaction. Pure cash loans, called ' mezzanine loans ' are very focused on the past, present and future cash flows of the business. It is here where a detailed BUSINESS PLAN and cash flow projection are absolutely required. Because ' mezz ' deals are unsecured by assets it's all about the cash flow!



VALUATION

We're told by ' experts' that the financial markets are ' imperfect ' to some extent, and that's probably the case with valuing and then buying a company. Business valuations always come down to an analysis of profits, and in the valuation process your goal is to attempt to ' normalize earnings' to reflect how the new entity will perform in the future. Business valuators use what are called ' multiples ' of key data points such as profits of sales and they are critical when you considering how to buy a business in Canada.




From a ' valuation ' perspective there are of course several time tested ways to value the target firm. Naturally there are different motives for buying a business that is already doing well. (Or a business that needs to be repaired! which often presents an even greater opportunity, and risk)Those motives might be synergies, economies, faster growth, less competition, etc. Because a lot of valuation strategies are subject to opinion we've often focused more on the ' assets' in the business. Good mgmt can usually reverse any losses, grow the business, etc

Example of Multiple Valuation

If a firm generates 400,000 cash flow each year it is not uncommon in many industries for the business to sell at a 3 or 4 times multiple of that cash flow, thereby providing a potential selling price of $1,600,000.00 as an example of the 4x multiple. That suggested selling price must now constitute a financing package of your cash deposit, senior debt, operating debt, and potential seller financing.


It's the assets in the business that will allow mgmt to increases earning power if the true value of the assets is understood. In many cases a proper appraisal of assets may well be required or simply the right thing to do.



The ' hard ' assets in the business are typically equipment, technology hardware, vehicles. We also mustn’t forget leasehold improvements as a part of any firms potential asset mix.



The ' current assets ' in the business will be providing the takeover with the liquidity and asset turnover it needs to be successful. Understanding the quality and turnover of accounts receivable and inventories are key to successful takeover financing.



Note also that almost always intangible assets and goodwill are normally not financeable in the SME (small to medium enterprise) marketplace. Many firms invest in R&D, and in those cases SR&ED tax credits can be part of the financing plan. All the analysis you do in the context of what we have discussed is knowns as ' going concern ' due diligence, and may often require a final adjustment to an offer price to buy the business. All the valuation and diligence you perform will steer you to how to raise capital to buy a business.



Getting proper financial statements from the target firm is key to any financing takeover success, again keeping in mind all the ' subjectivity' that comes with every item on the balance sheet ( except cash !).

How To Acquire A Company - Acquisition Financing 101

What strategies are used to finance business purchases and mgmt buyouts in Canada? They include:

Bank Loans - When Canadian chartered banks are the senior lender in your transaction they will always require a total charge on all the assets of the company including current assets such as a/r and inventory as well as the fixed assets, including real estate.



Govt Small Business Loans (new limit = $1,000,000.00) - This program is one of two ' government sources ' of capital to purchase a business. Terms are flexible and competitive and the personal guarantee is limited. The government does not lend money directly under the program, which is administered by INDUSTRY CANADA. Instead, it guarantees a large portion of the loan to the bank who lend directly to fund your acquisition. The main requirements of the program are down payment, good credit history and industry experience in the business you are targetting to buy. The ' SBL ' loan is often the best way to complete a small business acquisition .



Asset based loans- Asset based credit lines are a key source of business purchase financing. They monetize the assets of the business into a loan which can be both term and operating in structure. The revolving portion of these facilities provided day to day working capital and are paid down as sales are generated and clients pay. ABL facilities are often key to a successful business purchase financing.


Sale leasebacks - Sale leaseback financing can generate cash on already owned and unencumbered assets

ABL Business Credit lines - these lines of credit are practical to the day to day running of the business and can combine all the assets of the company into one borrowing facility that margins receivables, inventory and equipment, as well as real estate if applicable.

Tax Credit Financing - SR&ED Tax Credits Can Be Monetized To Secure Cash Flow

A/R financing - Receivable financing is a component of asset based lending . The ability to finance business receivables is key to unlocking day to day working capital needs. The day to day cash flow needs of the business can be addressed by numerous forms of invoice financing. Our recommended solution to clients of 7 Park Avenue Financial is Confidential Receivable Financing, allowing you to to bill and collect your own receivables unlike the typical ' factoring ' model of invoice discounting.


Invoice financing is a term for arrangements that allow you to finance your business invoice receivables. It is mostly used by small businesses to improve working capital and cash flow position by meeting short-term liquidity needs. The two most used solutions are invoice discounting and factoring.

Unsecured Cash Flow Loans - Mezzanine financing

Franchise loans - Many franchises in Canada are financed under the Government Small Business ' B I L ' loan as well as a combination of equipment financing and business lines of credit.

DUE DILIGENCE

It's important to properly and quickly identify the documents and information you require to properly assess the purchase price. A typical package will include several years of financial statements and interims if available, corporate tax returns, premises lease, equipment lists, aged payable and receivables, copies of bank statements and details surrounding current secured lenders and their agreements/collateral held / covenants, etc.

The entire due diligence process should be considered with the assistance of your lawyer, accountant, and business financing advisor. Their advice can be invaluable on the overall success of your purchase. In the overall financial diligence, you should consider any cost-cutting or productivity improvements you can make to grow cash flow and profits.



It should be recognized that many business purchases might also involve assuming some of the debt the company has in place, and that new ' operating facilities' such as business credit lines will be often needed when you're considering all your acquisition financing options and structures



In many cases a combo of financing methods may well be required to ensure the right amount of debt and equity and cash flow and working capital needs to be required by the business and

Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in proper business purchase finance.



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







Stan Prokop
7 Park Avenue Financial/Copyright/2020

How To Achieve Acquisition Financing Successfully In Canada

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How To Finance A Business Acquisition in Canada

While the terms m&a financing and capital acquisitions conjures up visions of having to be a Bay Street / Wall Street heavyweight when it comes to sophisticated financial knowledge the reality is that financing to buy a business in the small to medium-sized sector of the Canadian business landscape actually requires a healthy element of ' do it yourself ' when it comes to acquisitions of competitors, synergistic companies, etc. The proper source of financing may often mean a number of appropriate solutions must be analyzed and investigated.

Companies consider financing a business acquisition because they want to increase revenues non organically or in some cases penetrate new geographical markets. So the right capital to fund a purchase and then operate the business is key.


Very few business owners can complete an all-cash deal, even in a good economic environment, much less a pandemic! Therefore financing buying a business with the proper and right type of debt allows you to not give up equity - that equity often called the most expensive form of financing. So if you have a good target company with understandable profit, sales and cash flow generation ability acquisition financing through borrowing is a recommended strategy.


Don't however underemphasize the importance of a solid external team to assist you with the expertise you need. Let's examine some solid ' need to know ' info that will help the Canadian business owner and financial manager address any acquisition successfully.

The goal of your purchase from a finance viewpoint is to ensure you have what is known as a ' capital structure ' in place that allows for a smooth takeover and continued growth of your target company. So from a business finance viewpoint, you want to focus on the right mix of debt and equity in the final structure that allows a firm to both operate and grow. The ' cobbling together ' of that right mix of finance leads to successful business acquisitions. In some cases you are integrating a business into the new business, which is even more of a challenge.

The value you are placing on the target acquisition is critical. It's that buying price that ensures you are paying for true value and worth. There are many different measures relating to a final valuation and financing an acquisition - typically revolving around sales, earnings, levels of depreciation, and a final calculation of what valuators call 'normalization' of the current earnings. This ' normalization process' takes out any expenses that won't incur in the future again, therefore providing a true ' earning power '.

Typical Acquisition Finance Structure / Financing The Purchase Of An Existing Business

Those measures of valuation we described are typically calculated as ' multiples' of the valuation points in question . Note that multiples vary in each industry allowing the purchaser to make an 'apples to apples' comparison of what he or she is buying. For example a company in a certain industry's sale price might be expressed as a ' 5 times multiple ' of current earnings before items such as depreciation which is a non-cash expense.

Business Acquisition Loans In Canada / Types Of Business Acquisition Lenders

A sample capital structure for financing acquisitions might look as follows:

Senior Lender
Selling Financing component
Cash Flow Loan
Owner equity component

As a buyer you need to determine what the potential earning power and sales revenues might be in future years, therefore allowing you to arrive at that ' multiple ' we have discussed. It is important to understand that lenders will always look very carefully at the ratio of debt and seller financing and owner equity to ensure they are in line with lender requirements.


Naturally the more a borrower puts in the less he or she has to borrow, which underwriters view as a buyer's commitment, or, in the language of the people 'skin in the game'!

The debt you incur in a transaction is usually a combination of senior debt which covers the main assets of the business and typically will include operating facilities for accounts receivable and inventory that arise out of future sales.

Today many business people consider asset-based lending, also known as asset-backed financing as a solid alternative to traditional Canadian chartered bank financing. By lending aggressively against equipment, receivables, inventory and real estate a transaction can often be completed to the approval of the purchaser.

Subsets of asset-based lending such as accounts receivable finance and inventory loans are key solutions to a final lending mix. The right a/r finance and inventory finance will ensure you have a handle on your ' cash conversion cycle ', namely the amount of time it takes a dollar to flow through your business, and we can assure you that timeline varies within different industries.



Revolving inventory loans, based on the value of the inventory, provide the cash to pay your suppliers. It takes time to convert the inventory into sales, use the value of this asset to help speed the process. Available in conjunction with accounts receivable financing or as a standalone retail inventory loan.




In some cases, even in a management buyout scenario a bank or commercial finance firm will consider a leveraged buyout, essentially used the assets of the target company as security for a loan/loan. Naturally, in these cases, assets must be strong, and there should be solid evidence of historical cash flow to support the much higher than usual leverage ratios.


Financing from a senior lender, either a bank or a commercial alternative finance firm, will bring you, the purchaser, into the world of ratios, covenants, and personal guarantees. A shorter-term loan will be less restrictive in nature. Lenders will typically investigate personal credit history and credit scores of the buyer to help them feel owners run their personal financial lives in a reasonable fashion.

At 7 Park Avenue Financial, we will always tend to investigate the ability to identify ' seller financing ' as a part of the acquisition finance strategy. The strategy can often make or break a deal, and is typically viewed positively by lenders. It is simply the sellers agreement to e apid a percentage of the acquisition price at a future point in time. The bottom line? Less borrowing is required. Structures of the seller finance, also known as ' VTB ' or vendor take-back can vary but often are in the 10-20% range and have various forms of creativity around payment terms. You might also hear this term is called ' earn out '. Three different ways to say the same thing!

There might be conditions tied to the earn-out, so in most cases a lower rate of interest that current market lending rates. It is the epitome of a ' motivated seller '. In many of the transactions we see at 7 Park Avenue Financial seller owner and or management stays on for an agreed upon amount of time to ensure a smooth transition.




The amount of proper financing that you can generate, internally and externally (mostly externally!) will ultimately play a large part in the size of the company with whom you might be acquiring, or merging. Here is where valuations come into play and anywhere from 30 - 50% of the final price that you agree on might in fact have to represent a cash type scenario.

In some cases there is a shortage of the total term loan to get a transaction approved and closed, so some for of ' mezzanine financing ' will have to be considered. That financing will cover the gap created between borrowing power, equity, and the sale price. Mezzanine financing is often unsecured, relying solely on future cash flow generation, so interest rates on cash flow loans are more expensive, but, again, similar to seller financing, can make or break a deal.

For smaller transactions in Canada many companies consider the Government of Canada Small Business Loan program as one of the methods of financing acquisitions.



Naturally there are a thousand stories in the naked city, as many firms are acquired simply for the reason that they are not profitable for the current ownership. This does bring up a very key point though, which is that if you are looking at acquiring a firm that is in trouble, losing money, losing market share/sales etc then in fact a lot less cash is required for the transaction. However at that point you'll obviously have other challenges to address.


If there is a solid piece of advice we can give to the Canadian business owner and financial manager it’s to start a financing strategy around your acquisition early on. That final capitalization of the proper amount of debt and equity is critical.


When contemplating bank financing for business acquisition financing in Canada a solid, realistic and succinct business plan is required. We see many plans from clients that are far less than ' succinct ' and therefore raise more questions than answers.


So what does one in fact have to demonstrate to the bank? A good start is how your firm will operate the business - so a good examination of the financials and any key issues around the seasonality of sales and cash flows, customer concentration, production, and credit terms are key.


If the business you are acquiring does in fact have challenges it's clearly a good time to demonstrate how you will implement controls and changes around those challenges.

At 7 Park Avenue Financial our due diligence process spends a good amount of time on assuming proper levels of sales and cash flow, often in conjunction with a business plan we prepare to support your transaction. Spending valuable time on structuring financing your an acquisition will lead to optimal performance going forward. The right amount of flexibility in your finance may be well required down the road.


Spend a lot of time considering the amount of leverage you will ultimately have when acquisitions are completed. It's tempting, of course, to become highly leverage but this is the classic double-edged sword of business financing, and don’t think that high leverage will guarantee higher returns to shareholders, as that debt you are now carrying can, in fact, become a day to day nightmare down the road if not managed or financed properly.


Business acquisition financing in Canada is about finding a solid opportunity, analyzing your transaction carefully, and closing with the best financing possible based on your industry profile of debt and overall capitalization. Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with acquisitions that make sense- financially!





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.





Stan Prokop
7 Park Avenue Financial/Copyright/2020