Management Buyout Financing: Step-by-Step Canadian Playbook

 

"Ready to own the business you've helped build?

 

Introduction

 

A management buyout can fail even when the company is profitable because lenders may reject the purchase structure, seller note, or buyer equity—not the business itself.

 

Drawing on experience arranging acquisition financing for Canadian companies, 7 Park Avenue Financial helps management teams combine senior debt, asset-based lending, equipment financing, seller financing, and subordinated capital into workable buyout structures.

 

 

Management Buyout Financing Options

 

B I M B O? Don’t panic… It’s not what you think! 

 

That’s the acronym that the finance folks use for what’s known as ‘Buy-in Management Buy-out’ for business owners and management contemplating purchasing their own or an existing company.

 

Who better to have the expertise to grow a business than the current management team?

 

Management Buyout Loan Financing: How Can You Fund an MBO?

 

Management buyout loan financing helps an existing management team purchase the company it already operates. The key question is whether the business can service the acquisition debt while retaining sufficient cash for payroll, suppliers, taxes, and growth.

 

You may know the business better than an outside buyer, but familiarity alone does not secure financing. Lenders still examine normalized cash flow, purchase price, management depth, customer concentration, collateral, buyer investment and the seller’s willingness to share risk.

 

For many managers, the process is personal. You may be putting savings at risk while negotiating with an owner who has also been your employer or mentor. A workable financing structure should protect the company’s operating stability—not merely produce enough money to close the sale.

 

 

Management teams run day-to-day operations, oversee strategic initiatives, and conduct long-term planning. Their ultimate goal is maximizing shareholder value.

 

The best way managers can monitor this single objective while focusing on all operational functions is to complete MBOs—buyouts—when companies need help turning around struggling assets or where potential growth opportunities are waiting just over the horizon.

 

Management buyout finance is crucial in this context as it provides the necessary funds and financial structure to facilitate a business's acquisition by its management team.

 

Let’s look at MBO 101 with a focus on helping the management buyout funding team of small and medium-sized businesses in Canada on how to finance a management buyout and who don’t necessarily have access to the resources to acquire the right expertise to correctly complete such a transaction on their own and reap the rewards -

 

Whether that goal is to acquire all or part of the business they are currently running.

 

Three Uncommon Takes On The Management Buyout!

 

 

1. Seller financing is still debt. A vendor take-back note increases leverage, and the senior lender may adjust pricing, covenants or advance rates accordingly.
2. Structure the entire financing stack together. Negotiating senior debt, mezzanine financing and the seller note in parallel helps prevent covenant conflicts and costly deal renegotiations.
3. “Insufficient equity” may hide a priority problem. Some management buyout loans are declined because the seller note’s subordination terms do not clearly protect the senior lender’s first-ranking position.

 

 

DID YOU KNOW?

 

• 70% of successful MBOs improve profitability within 2 years

• 85% of MBOs maintain key employee retention

• 65% of MBOs include some form of seller financing

 

PREPARING FOR A MANAGEMENT BUYOUT

 

Preparing for a management buyout requires careful planning and consideration. The management team must assess the feasibility of the buyout, conduct due diligence, and develop a comprehensive plan for the acquisition.

 

This includes evaluating the company’s financial health, identifying potential risks and challenges, and determining the best financing options.

 

A thorough analysis of the company’s cash flow, profitability, and market position is essential to ensure a viable buyout. The management team should also consider the impact on existing customers and employees, providing a smooth transition and continued business stability.

 

ADVANTAGES AND ISSUES AROUND THE MBO MANAGEMENT BUYOUT

 

Banks and non-bank commercial lenders view Management buyouts as good investment opportunities.

 

They often encourage the company to remain private to streamline operations and enhance its value.

 

Private equity firms are crucial in providing capital for management buyouts and supporting management teams.

 

MANAGEMENT BUYOUTS FOR THE SME/SMB SECTOR IN CANADA

 

We’re sure that hundreds, perhaps thousands, of businesspeople in Canada are contemplating purchasing their firm or one with which they have targeted or are associated.

 

Larger corporations have access to a wealth of talent, including lawyers and advisory firms, when they contemplate this deal.

 

In many cases, the existing management team may seek ownership from a parent company to transition the business to private status.

 

Typically, we open the business news page and see headlines announcing such purchases that have either been done behind closed doors or sometimes caught one of the parties off guard.

 

MANAGING A SMOOTH TRANSITION IN YOUR MBO

 

MBOs offer a smooth transition for businesses undergoing a change in ownership. Changes can be stressful, but a well-executed MBO keeps things running smoothly during this transition.

 

Understanding the different types of management buyout financing and assessing the associated risks and benefits is crucial for a successful business acquisition.

 

Employees are familiar with company operations from day one, so they’re more likely to feel at home right away rather than like an outsider or new hire with little experience in their new team or workplace culture.

 

With a staff-owned business, there’s no need to negotiate over price—due to insider knowledge, everyone knows what it would have been worth if sold externally.

 

Let’s focus on some core basics that small firms in Canada can focus on when it comes to a well-executed management team ‘management buyout or leveraged buy-in, with the right amount and type of debt financing and management buyout tax implications.

 

As a business person considering a buy-in management buyout, MBO initially focuses on two concepts: debt and equity.

 

Despite the negative connotations of ‘debt,’ you can still acquire a firm successfully by using either bank loans or other asset-based debt that use the company’s assets.

 

Just make sure, of course, that the right amount of due diligence is done to ensure you can meet any interest and loan payments out of the cash flows of the ongoing business! That can’t be overemphasized!

 

By using just a small amount of equity, either your own new equity or existing equity in the new business in the future, you can leverage a great transaction… as long as your new debt-to-equity ratio is still reasonable.

 

Debt-to-equity ratios vary by industry. A very typical debt-to-equity ratio for a manufacturing-type company is 2:1.

 

WORKING THROUGH DUE DILIGENCE AND THE FINANCING PROCESS

 

After a long day of working on the company, management plans what will happen once they have acquired it.

 

We need to consider where that money can come from (e.g., loans); whether the individual owners are willing to invest more in this opportunity; and who would be responsible for managing different aspects after purchase, such as identifying opportunities to grow profits over time while maintaining positive cash flow.

 

Conduct a thorough financial analysis, focusing on key issues such as cash flow.

 

Remember that if it is not profitable or has good potential for profitability, there will be difficulties with financing and repaying acquisition debt. It may take some time before profits can come through, so have strategies to compensate, such as cost-cutting/increasing productivity or growing revenues.

 

Managing debt load:

 

When you get overly aggressive on debt in the excitement of finalizing your transaction, you run the risk of a business failure. In a perfect world (and trust us, we at 7 Park Avenue Financial know it's not), you end up with a solid management team, a well-financed firm, and lots of potential for profit and growth via new synergies in owner/management.

 

In any business acquisition, management should plan how they will run the company from day one.

 

They need to identify all team members' tasks and responsibilities before making a final decision on whether buying is their best option. They should also build a financial model of the anticipated cost associated with acquiring the business.

 

STRUCTURING A MANAGEMENT BUYOUT

 

Structuring a management buyout involves creating a new special-purpose vehicle (SPV) to acquire the target business.

 

The SPV, also known as the holding company or ‘Newco’, receives the down payment from the MBO team, equity financing from private investors, debt financing from senior lenders, and mezzanine financing from secondary lenders.

 

The management team must also negotiate with the seller, conduct due diligence, and obtain the necessary financing to complete the acquisition. This multi-layered financing approach allows the management team to leverage multiple funding sources, balance risk, and ensure sufficient capital to support the buyout.

 

 VALUATION

 

When structuring a management buyout (MBO), business valuation and financial metrics determine the deal's price tag and whether lenders will back your management team.

 

Understanding these four core financial pillars helps you evaluate the company's true health and negotiate terms that protect post-acquisition operating cash flow.

 

Quality of Earnings 

 

A Quality of Earnings analysis evaluates the accuracy, sustainability, and source of a business’s historical earnings. Unlike a standard audit that verifies past bookkeeping accuracy, a QofE report strips away non-recurring revenue, one-time expenses, founder-specific perks, and skewed owner compensation.

 

• Why it matters for an MBO: Lenders and equity partners rely on the adjusted earnings figure (Normalized EBITDA) to verify that the target company can comfortably generate predictable ongoing cash flow to service acquisition debt after the founder steps away.

•  

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) measures a company's available cash flow relative to its annual principal and interest obligations. It is calculated by dividing annual net operating income (or Adjusted EBITDA) by total annual debt service.

 

PUTTING THE DEBT FINANCING PLAN IN PLACE

 

Financing an MBO management buyout structure is not always straightforward for a management team.

 

A strong business plan and realistic forecast are essential to obtaining the necessary funds to purchase a company. 7 Park Avenue Financial's business plans meet and exceed the requirements of banks and commercial lenders.

 

A business loan can be tailored to meet specific needs and offer flexibility in repayment terms during the acquisition process.

 

Focusing on assets and cash flow is key to securing financing with appropriate terms, such as interest rates or collateral requirements.

 

The optimal financing structure for a management buyout will vary depending on whether it’s just one bank or commercial lender participating, or several lenders on larger deals that offer more flexibility and funding.

 

Your transaction's financing will come from personal resources and equity financing, bank or non-bank commercial term loans or lines of credit, and potential seller financing, which often makes transactions more accessible to finance.

 

Buyers use the assets as collateral to obtain debt financing for asset-based lending solutions in their management buyout agreement.

 

Business people should also consider at an early stage how they will someday exit from the transaction.

 

They often see a huge return on the risk and capital they have invested in the future, but they need to understand how that will ultimately be monetized.

 

Why Isn’t a Seller Note “Free” Capital in a Management Buyout?

 

A seller note—or vendor take-back—is often viewed as inexpensive financing because it reduces the management team’s upfront cash contribution. However, the senior lender treats it as additional leverage and a potential competing claim on the company’s cash flow.

 

The lender evaluates whether the business can service both debts, whether seller payments can be postponed during financial stress, and whether the seller is legally subordinated to the senior facility. These risks can affect the senior loan’s interest rate, covenants, amortization, collateral requirements and maximum advance.

 

Therefore, a seller note does not eliminate financing risk; it reallocates it. Strong management buyout structures use clear subordination terms, payment standstills and realistic repayment schedules so the seller note strengthens—not weakens—the senior financing proposal.

 

THE SELLER FINANCING PERSPECTIVE

 

There are many reasons why a company would consider undergoing a management buyout. It may be because the business founder has decided to retire, or because the company is underperforming and needs change to survive.

 

Whatever the reason, a management buyout can have both positive and negative effects, depending on how the transaction is handled.

 

What Do Lenders Examine Before Financing an MBO?

 

Lenders usually assess the following seven areas:

 

1. Normalized earnings

   Reported profit is adjusted for owner compensation, one-time costs, personal expenses and non-recurring revenue. Adjustments must be documented and commercially reasonable.

2. Debt-service capacity

   The company must generate enough cash to make scheduled principal and interest payments after normal operating needs.

3. Management experience

   The buyers must demonstrate that they can manage sales, operations, finance and employees after the owner leaves.

4. Customer concentration

   Heavy dependence on one or two customers can reduce loan availability, even when the company is profitable.

5. Buyer investment

   Lenders normally expect management to contribute meaningful personal capital. The required amount depends on the transaction’s risk and available collateral.

6. Business collateral

   Receivables, inventory, equipment and real estate may support separate financing facilities. Goodwill generally requires repayment support from cash flow or seller financing.

7. Seller participation

   A vendor take-back loan, earnout or staged sale shows that the seller retains confidence in the company’s future performance.

 

 

How Much Debt Can the Business Safely Carry?

 

The purchase price and the financeable amount are not the same number. A lender starts with sustainable cash flow and works backward to determine affordable debt.

 

Why Is Working Capital Separate From the Purchase Price?

 

Acquisition financing pays the seller; working-capital financing keeps the company operating after closing. Treating both needs as one number is a common and expensive mistake.

A company can complete a profitable acquisition and still face a cash shortage immediately afterward

 

 

Case Study: Ontario Management Buyout

 

Challenge: A commercial printing company’s management buyout stalled because the senior lender rejected unclear subordination terms on a large vendor take-back note.

Solution: The financing was rebuilt using collateral-supported senior debt, mezzanine financing and a clearly subordinated seller note. All three layers were negotiated together to prevent covenant conflicts.

 

Result: The transaction closed in 68 days with a 15% management equity contribution. The seller received a structured payout, and all debt obligations have remained current.

 

 

KEY TAKEAWAYS

 

• Understanding business valuation fundamentals drives successful negotiations.

• Structuring the right mix of debt and equity creates optimal outcomes

• Maintaining strong cash flow supports debt service requirements

• Building a competent management team ensures operational continuity

• Developing comprehensive due diligence materials accelerates funding

 

 

CONCLUSION - MANAGEMENT BUYOUT MBO STRATEGIES

 

The key to a successful management buyout is having the buyer manage all critical functions, including sales, operations, research, and development.

 

This means that before the purchase occurs, there are no skeletons in any closets, which will open up more funding sources for debt financing and an overall new financing structure at the best achievable interest rates.

 

So, can a great BIMBO strategy work? It can be financed through a bank, an asset-based lender, or other alternative financing solutions.

 

Call 7 Park Avenue Financial. A trusted, credible and experienced Canadian business financing advisor for help with your BIMBO and management buyout options. Let's get started on helping management teams acquire that excellent business opportunity.

 

7  Park Avenue Financial originates management buyout financing

 

 

FAQ: FREQUENTLY ASKED QUESTIONS

 

 

What Can Cause an MBO Financing Application to Fail?

 

Common failure points include:

• The price is based on the seller’s expectations rather than supportable value.
• Proposed add-backs overstate normalized earnings.
• Management has little cash invested.
• The departing owner controls key customer relationships.
• One customer represents too much revenue or receivables.
• The business has CRA arrears or unremitted source deductions.
• The financing leaves no post-closing working capital.
• The seller refuses to provide financing or an earnout.
• Management roles have not been agreed upon.
• The buyers have no downside plan

 

 

 

 

 

What makes a management buyout different from a traditional business acquisition?

 

• Management teams have intimate knowledge of operations

• Lower risk profile due to operational expertise

• Smoother transition of ownership

• Existing relationships with suppliers and customers

• Better employee retention rates

 

 

How much equity / down payment  do I need for a management buyout?

 

• Typically 10-30% of the total purchase price

• Can vary based on business size and industry

• Personal assets may be considered

• Seller financing can reduce equity requirements

• Multiple funding sources often combined

 

 

What funding options are available for management buyouts?

 

• Traditional bank financing

• Private equity partnerships

• Seller financing

• Mezzanine debt

• Asset-based lending solutions

 

 

What long-term advantages does MBO funding provide?

• Creates perfect alignment between ownership and management

• Enables wealth creation opportunities

• Preserves company culture and values

• Maintains existing customer relationships

• Provides tax-efficient ownership transfer

 

 

 

Statistics

• Canadian MBO transactions commonly see management equity contributions in the 10-20% range, versus 30-40% for third-party acquisitions (industry-standard private equity benchmark)
• Mezzanine financing in mid-market Canadian deals typically carries all-in cost in the mid-teens to low-20% range once fees and any equity kicker are factored in
• Vendor take-backs commonly finance 10-30% of MBO purchase price in Canadian small and mid-market transactions

 

Citations

 

 

Harvard Business Review. "Making Management Buyouts Work." Harvard Business School Publishing. https://www.hbr.org

Business Development Bank of Canada. "Guide to Management Buyouts for Canadian Businesses." BDC Publications. https://www.bdc.ca

7 Park Avenue Financial,"Employee to Owner: Management Buyout Success StrategiesManagement / Buyout Financing Options".https://www.7parkavenuefinancial.com/management-buyout-acquisition-funding-buyouts.html

Canadian Federation of Independent Business. "Succession Planning and Management Buyouts: Canadian SME Survey Results." CFIB Research. https://www.cfib-fcei.ca

Medium/Prokop/7 Park Avenue  Financial."Management Buyout Funding In Canada: How To Properly Address Your Buy Out Finance Opportunity".https://medium.com/@stanprokop/management-buyout-funding-in-canada-how-to-properly-address-your-buy-out-finance-opportunity-ade193ae5d9b

Deloitte Canada. "Management Buyout Trends in Canada." https://www.deloitte.ca

 

Buying a Company?  B I M B O Strategies

Buyouts And Your Formula For Management Buyout And Successful Acquisition Funding In Canada Funding For A Management Buyout

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Management buyout financing and acquisition funding are all about successfully engineering and executing on the finance solution - and we can pretty well guarantee our clients that ' one size doesn't fit all '! Let's dig in.

WHAT IS A BUYOUT? HOW DO BUYOUTS WORK?

These opportunities also aren't always coming up so the ability to buy a firm you're associated with or to capitalize on a business opportunity is often associated with the right timing. Funding for a management buyout is  one of the more common methods of owners exiting a business. Never have the words ' skilled management team ' meant more when it comes to the management buyout and purchase of a business. Both the resources of the company and capitalizing on leverage in a positive manner, allows you to use company assets as a portion of the collateral. Seller financing and external funding will often complete the transaction.


Most of the time, the management team takes full control and ownership, using their expertise to grow the business. An MBO/LMBO acquisition, which can be sizable, is usually funded by a mix of personal investors, external financiers and the seller, thereby completing this financing for control by management.

Lenders are often very comfortable with management buyouts " MBO's " given current management is experienced and understands the true operations of the company. An ' MBI ' (management buy-in )is not dissimilar, its simply the purchase of a company, often by external managers in the same industry.



Buyouts done well should be focused on a smooth transition to the new owner/owners. Numerous advantages come out of management buy outs, even when they are leveraged, as clearly new owners have already managed the company - that clearly reduces risk and the risk of employee departure would seem to be significantly reduced. In most cases the buyout can be a low key manner with less risk of being a concern to suppliers, unsecured lenders, and, most importantly, customers!


There should be careful planning around a logical process to move forward with the sale. First and foremost a proper business valuation must be considered and agreed upon in the context of a new shareholder agreement if there is more than one buyer. Now is the time to be thinking about and assessing who a logical ' senior lender ' might be on your transaction. It is essential to know your business financing and new capital structure will not impede growth plans in the newly acquired entity. Knowing you will have financial support on the transaction is obviously key.

A proper timeline should also be established, as in some cases there is an earn-out agreement between the owner and the new buyers. Whether non-financial business folks like it or not there has to be consideration given to issues such as taxes and related succession issues.

New buyers, having been management or closely aligned to the firm should be able to determine future profit generation and what type of financing will be needed for working capital and cash flow needs in the company buyout . This may well be the time to consider some form of downsizing of employees, assets, etc., as regrettable as those latter two issues might be. It is easy for your deal to get ' stuck ' on a myriad of non-financial matters relating to staff, clients, go-forward strategies, and of course the ever-important ' valuation '.

BUSINESS VALUATION / WHAT IS THE BUSINESS WORTH?

Purchasers need expert help if they are not qualified to come up with a problem valuation on the management buyout. Suffice to say that business owners always have a figure on what they think their business is worth! They tend to have some ideas on the value of your company target in the business valuation process.

Valuing the business can be explained as a combination of art and science as many experts say, let alone the human nature aspect of optimism of current owners. There are several ways in which you can tackle the job of addressing the value and the financing of that value - here also is the time to consider a help of an experienced Canadian business financing advisor . Formal business valuations can also be purchased - they are costly but certainly might make sense on larger transactions.

Business valuations will always take into consideration some basic issues - they might include profit generation, future growth potential, and the overall asset mix on the balance sheet.

Different outcomes arise based on the method of value you are looking at. If the business is currently generating good profits and solid return on equity those value measures are on top of the level of actual fixed assets. Your cash flow forecast as it relates to past results should be fundamental in your analysis. Having access to historical financial statements is key, as that allows for a ' smoothing ' of sales and earnings. In business, the past is not always predictive of the future.

The concept of using ' multiples ' is another reliable way of determining value. Key financial areas such as ' EBITDA ', sales, and cash flow can all be analyzed to determine a range in which a final cost can be substantiated.

EXAMPLE - Some industries are valued based on a multiple of sales - that number might be 2 . So a company doing 3 Million in revenue might include a value of 6 Million in its final valuation assessment. The key is to ensure you are comparing business multiples in the same industry! Here publicly available date may be very beneficial.

Hard assets play a key value in the final valuation summary. Many industries, as opposed to service industries, are very capital intensive. Businesses with high asset values sometimes generate lower returns on equity due to the nature of the company. In some cases appraisals might well be undertaken to determine actual market and liquidation value, and there will sometimes be major differences in these two numbers.



Every business based on its financing structure can handle only so much debt - a typical rule of thumb in many industries is that a debt to equity ratio of 2:1 is optimal. Still, every industry is different as some might be very capital intensive. The amount of debt your firm carries as well as how it finances cash flow will ultimately affect sales volume growth and the potential for the firm to grow substantially.

As initial planning of the takeover proceeds a business plan should be developed, which has uses for both the owners from a planning perspective, but more so for lenders. Cash flow growth should be realistic and conservative - this is not a marketing document of the time for a ' hockey stick' growth curve for sales projections.

At 7 Park Avenue Financial our business plans for clients include management overview, industry overviews, cash flow projections, and many other vital aspects of what lenders are looking for in a plan. Those details ensure acquisition funding success.

In some cases in a shareholder buyout  the owner might agree to a seller financing aspect to the transaction - this is usually well received by lenders who now know the seller has confidence in the management team to take the company forward successfully.



In some cases you might be looking at purchasing a franchise directly from the franchisor, or perhaps a current owner who wishes to sell. The Canadian franchise industry can only be called explosive and it plays a vital role in the economy of Canada. The ability to 'partner' with a franchisor successfully helps guarantee a good acquisition. Some very specialized financing can help complete such a purchase.



Let's examine some practical tips and strategies for getting ' unstuck ' on a transaction such as this.



Obtaining seller financials is key to any sort of management buy out or leveraged buyout. Key point: Many alternative finance solutions are available to buy a business, but they rely on a decent level of financial transparency on how the company is doing, what the actual value of assets is, etc. The ability to distinguish between internal and external financials, as well as obtaining current interim financials is critical. At 7 Park Avenue Financial we have seen examples whereby senior lenders insisted on seller financing as a part of the owner exit strategy  to show all parties have a commitment to the deal.


Purchasers and your financiers will want a proper representation of specific assets and liabilities on the balance sheet. Great care should be taken in qualifying key assets such as accounts receivable... from a simple point... are they collectible?!



Naturally there is no guarantee that any existing or future A/R item will in fact be collectible, and no one is going to guarantee that for you. Some reliable credit checks on the quality of the A/R base is highly in order, as well as looking at historical payment trends of the client base. You also want to ensure there is no right of set off against the receivables, and it is certainly not uncommon for us to see the A/R as often the most significant asset on the balance sheet.



An excellent strategy for Purchasers contemplating a leveraged management buyout funding is to make some sort of agreement on the ability to ' rejig ' the final price subject to A/R collectability. Naturally, owners of the company might be reluctant to do that.



Is there anything trickier than ' inventory ' with respect to classifying quality and the actual value of inventory, which might, of course, be raw materials, work in process, or finished goods. Make a solid effort to quantify the quality of the inventory you are purchasing for issues such as obsolescence.



Plant and equipment should always be appraised in some manner on funding a management buy in. This quite frankly protects all parties, and we urge clients to complete an appraisal that includes some component of fair market value, orderly liquidation value, and forced liquidation. Those numbers will vary significantly in any appraisal and play a key role in the way in which assets are financing in a real management buyout. It goes without saying of course that the purchaser should ultimately be comfortable with the quality and condition of the fixed assets on the balance sheet they are contemplating financing.



Don't forget also to look at any leases or contracts that might be in place via the current business owner. You will want to make sure these are assignable to yourself in the event of a completed sale.

How Then Is Acquisition Finance Most Commonly Achieved in Canada? Financing Management Requires Specialized Financing Expertise

Purchasers have a variety of options to consider for successful management buy outs. They should be expected to also ensure there is a personal equity component in the transaction, which typically might be in the 20% range, although that percentage varies greatly, especially when the deal presumes high leverage. That personal investment is viewed positively by your lenders, hence the popular saying ' skin in the game '. Some owners might well consider refinancing or selling some personal assets to augment the owner equity.

Naturally bank loans are very commonly the first ' go to ' by many purchasers, but alternative financing solutions are becoming extremely popular, given the rise of non-bank asset based lending solutions in Canada. Banks of course have the lowest cost financing re interest rates, which are at historic lows. In smaller transactions one key lender might be involved while on larger deals financing might need to be 'cobbled together ' with more than 1 funding source.

We have previously referenced vendor take backs, ' VTB's'. This ' seller finance ' strategy is highly flexible and can often be structured creatively re payback terms, rates, etc. The essence of seller financing is its ability to reduce the cost purchasers must pay for the business. Depending on how the deal is structured it also gives the seller some input until the VTB is terminated via final payout.

ESOP'S, namely employee ownership plans might also be a financing consideration for more sophisticated sales on larger firms.

Mezzanine financingis a natural complement to any senior lending facility and can bridge the financing gap. If a business can demonstrate good cash flow mezzanine debt finance should always be considered.The key benefit of mezzanine funding is that it will allow your other external lenders to consider more financing participation in your deal, especially when it comes to lbo financing where leverage is higher .

Some companies may wish to look at public market financing,or as an alternative, private equity but purchasers should recognize that these methods are time consuming and dilute ownership.


If there is a bottom line in management buyouts it's merely to ensure you consider all aspects of commercial business financing that might be available. It is critical for management to assess how operations will be funded on an ongoing daily basis.

HOW TO FINANCE A MANAGEMENT BUYOUT

Govt guaranteed loans - The Candian Government Small Business Loan program is an excellent way for smaller firms to be acquired, including franchise finance opportunities.



Asset Based Lenders - (' ABL ' ) These commercial finance firms offer day to day funding for operations and are non-bank in nature. Solutions include a/r financing to address the working capital financing component of the collection of your receivables. Solutions could consist of traditional ' factoring ', but at 7 Park Avenue Financial our recommended solutions include Confidential Receivable Financing, allowing you to bill and collect your accounts without a third party intrusion.  'ABL' is excellent when it comes to a  leveraged management buyout. Business worth is not always the same as asset worth, and ABL expertise has a high value.

Inventories can also be financed as a part of an asset based line of credit solution that allows your firm to combine the financing power of a/r, inventory, and equipment into one borrowing facility. In almost all cases this delivers more cash flow than a bank facility, but is more expensive.

Purchase Order Financing has risen in popularity as more firms experiencing large new orders and contracts that otherwise might not be financeable is now possible. Direct payment to your suppliers is facilitated through this process.


Private Equity Funding- Private Equity funds typically raise money from large investors and acquire stakes in firms with a focus on improving operations through cost cutting and effective management. In Canada private equity deals tend to be for substantial transactions outside the normal MBO process


Canadian Commercial Chartered Banks - Banks are the ' go to ' for many businesses due to their attractive rates and tremendous capability in financial offerings. Many firms are unable to access bank financing because the banks have precise requirements around collateral and overall business qualifications required to get funding, including personal guarantees, outside collateral, and solid personal credit history.


Business Development Corporation Term Loans - The Government Of Canada's Crown Corporation non - bricks and mortar bank provides term loan financing for business acquisitions. Their subordinate financing solutions are very complementary to a deal.

SUMMARY OF BUSINESS FINANCE SOLUTIONS FOR A MANAGEMENT BUYOUT

At the end of the day funding for the purchase by management will depend on size of your deal, the reputation of the company in its industry, as well as the assets and cash flow that will propel the company forward.


Buyouts are becoming more popular these days due to generational succession. The current management of many firms is a logical way to ensure a company's history and reputation will continue. Even a leveraged buyout where a large portion of the company assets can be collateral when financed properly can guarantee the business moving forward.

Well executed mgmt. buyouts have a focus on future profitability and ensuring the right amount of financial leverage is being used. If financing costs will eat up all the cash flow productivity and sales growth might be impaired. Otherwise major cost-cutting will have to be initiated, never a good sign. Doing the right amount of financial analysis and utilizing outside help on cash and debt financing needs is vital.

Companies that are distressed or financially challenged can still be financed, but they are often only able to achieve financing via alternative finance means. Whether the company is doing well or is not still requires the new owners to ensure that too much debt is not taken on and operating financing on a day to day basis is fully available.



An excellent transaction occurs when you have a company that is both profitable and has key assets that are financeable, i.e. the receivables, inventory, and equipment we highlighted earlier. That isn't always the case, and as we noted, every business and industry is different. Speak to a trusted, credible, and experienced Canadian business financing advisor for assistance in funding the purchase and successfully completing your buy-in via leveraged funding.





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Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

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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.

' 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

Buying And Financing A Business Acquisition . Loans To Finance Existing Businesses

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INFORMATION ABOUT BUSINESS ACQUISITION FINANCING - BUYING AND FINANCING A BUSINESS IN CANADA

Buying and financing a business acquisition is one of the major challenges of firms in the SME (Small and medium enterprise) sector in Canada.
Unlike the big boys who have access and funds available to hire expensive talent to complete the transaction the Canadian SME business owner and financial manager has the desire to complete a transaction , but needs help and information they traditionally don't have immediate access to .

Naturally acquisitions can be completed via an all cash purchase, the reality is that most businesses don' have the capital to complete a deal in that manner. And another thing, completing a transaction without acquisition loans and funding doesn't make perfect sense all the time because you are not taking advantage of leverage and return on investment.

So what information is in fact required as you are contemplating buying that firm? Is there in fact a ' short list ' of information? A great start would be some basics such as a business plan or executive summary which profiles the transaction.

Other critical data are the financial statements of the firm you are acquiring, some cash flow analysis, and most importantly, some financial modeling around the future profitability and cash flow generation of the combined business.

It’s those cash flows of course that will repay your business acquisition loans and financing!

A key concept around your deal is the equity component in the transaction. There has to be some reasonable equity in the combined firm, and that can come from your firm, the assets of the firm you are acquiring, or potentially some new equity and ownership participation.

So what can go wrong in a transaction like this? Well without the assistance or information we have spoken of, lots!

Timing is always a key component of your deal. The closing of your transaction can be driven by external deadlines, the deadlines imposed by the seller, or your own commitments to closing. Bottom line, leave enough time - it’s as simple as that.

A lot of transactions we look at have some huge ' gaps ' of missing information. To complete a proper purchase and financing a business acquisition properly with the right amount of loans, debt, etc requires all the missing pieces in the financial puzzle to be on the table.

So how can the acquisition be financed? There are some great and innovative strategies you can utilize to complete a deal successfully. They include and asset based lending scenario which monetizes the assets of the sellers firm. Smaller transactions under 350k can be efficiently handled via the Canadian CSBF loan program which has solid rates, terms and structures.

Business people need to remember also that you need to borrow enough to not only acquire the business, but to ensure you have the working capital and access to liquidity to grow the firm.

There are some great reasons to consider buying and financing a business. Some typical reasons include diversification, the ability to grow sales and reduce costs on a synergistic basis, and in some cases you just might have discovered a ' jewel in the barn ' - the type of firm that is undervalued or has a motivated seller.

Your key goals are to analyze the operating activities of the firm to be acquired, ensure you have a financing plan in place, and, as we said ensure you have the capital ready to ensure proper cash flow and replacement and upgrade of any needed assets.

Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your business acquisition loans and financing needs.






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

Acquisition Funding In Canada : Financing The Management Buyout Via Specialized Finance

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One Size Fits All Financing Doesn’t Work In Mgmt Buyouts & Acquisition Finance

OVERVIEW – Information on management buyouts in Canada. Acquisition funding via a leveraged or traditional finance solution requires addressing several key issues

Management buyout financing and acquisition funding is all about successfully engineering the executing on the finance solution - and we can pretty well guarantee our clients that ' one size doesn't fit all '! Let's dig in.

These opportunities also aren't always coming up so the ability to buy a firm you're associated with, or to capitalize on a business opportunity is often associated with the right timing.

It's also very easy to get ' stuck ' on a transaction such as this, as a myriad of non financial issues also come up - employees, customers, strategies, valuation, and on it goes ..

In some cases you might be looking at purchasing a franchise directly from the franchisor, or perhaps a current owner who wishes to sell. The Canadian franchise industry can only be called explosive and it plays a key role in the economy of Canada. The ability to 'partner' with a franchisor successfully helps guarantee a good acquisition. Some very specialized financing can help complete such an acquisition.



Let's examine some practical tips and strategies for getting ' unstuck ' on a transaction such as this.

Obtaining seller financials is key to any sort of mgmt buy out or leveraged buyout. Key point : Many alternative finance solutions are available to buy a business, but they really on a decent level of financial transparency on how the business is doing, what the actual value of assets is, etc. The ability to distinguish between internal and external financials, as well as obtaining current interim financials is key.


Purchasers and your financiers will want a proper representation of specific assets and liabilities on the balance sheet. Great care should be taken in qualifying key assets such as accounts receivable... from a simple point... are they collectible?!


Naturally there is no guarantee that any existing or future A/R item will in fact be collectible, and no one is going to guarantee that for you. Some solid credit checks on the quality of the A/R base is highly in order, as well as looking at historical payment trends of the client base. You also want to ensure there is no right of set off against the receivables, and it certainly not uncommon for us to see the A/R as often the largest asset on the balance sheet.

A great strategy for Purchasers contemplating a leveraged management buyout funding is to make some sort of agreement on the ability to ' rejig ' the final price subject to A/R collectability. Naturally owners of the company might be reluctant to do that.

Is there anything trickier than ' inventory ' with respect to classifying quality and true value of inventory, which might of course be raw materials, work in process, or finished goods. Make a solid effort to quantify the quality of the inventory you are purchasing with respect to issues such as obsolescence.

Plant and equipment should always be appraised in some manner on funding a management buys in. This quite frankly protects all parties, and we urge clients to complete an appraisal that includes some component of fair market value, orderly liquidation value, and forced liquidation. Those numbers will vary significantly in any appraisal and play a key role in the way in which assets are financing in a real management buyout. It goes without saying of course that the purchaser should ultimately be comfortable with the quality and condition of the fixed assets on the balance sheet they are contemplating financing.

Don't forget also to look any leases or contracts that might be in place via the current business owner. You will want to make sure these are assignable to yourself in the event of a completed sale.

How then is acquisition financing most commonly achieved in Canada.
Solutions include:

Govt guaranteed loans

Asset based lenders

Private equity funding

Canadian commercial chartered banks

Business Development Corp term loans


A great transaction occurs when you have a company that is both profitable and has key assets that are financeable, i.e. the receivables, inventory and equipment we highlighted earlier. That isn't always the case, and as we noted, every business and industry is different .Speak to a trusted, credible and experienced Canadian business financing advisor for assistance in successfully completing you buy in via a leveraged funding.


Stan Prokop - founder of 7 Park Avenue Financial –
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years - Completed in excess of 100 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing. Info & Contact Details :
http://www.7parkavenuefinancial.com


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

Direct Line = 416 319 5769

Office = 905 829 2653


Email = sprokop@7parkavenuefinancial.com

' 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