All Aboard The Acquisition Finance Mergers Acquisitions Financing Train!
Avoiding The Canadian Tragedy Of Poorly Executed Acquisition Financing
Acquisition finance in Canada. Whether the business environment is turbulent or going smoothly savvy business owners and managers are always looking for successful mergers and acquisitions opportunities with another company that... you guessed it... requires financing. Let's dig in.
In Canada, both traditional bank loans and alternative financing solutions lend themselves to a business or merger opportunity, therefore posing the question - ' How is this opportunity to be financed to ensure success ' and the right financing structure of term debt and operating finance. Financing an acquisition involves specialized finance skills.
In small to medium-sized acquisitions a tremendous amount of creativity on a transaction can come from innovative methods of seller financing, thereby reducing the cost of capital in the acquisition. Any form of seller financing obviously lowers the amount of external debt - traditional or alternative, that you are forced to take on.
Large corporations utilize private equity firms as an example for large complex transactions as well as the funding of publicly traded firms, but those types of solutions are not available to the SME borrower who must perform due diligence with limited external assistance and must therefore address financing the balance sheet on their own.
Here's one common challenge, we see all the time is that the seller has serious tax ramifications depending on the type of sale that is in motion. Only two real types of sale exist by the way - ' ASSET ' or ' SHARE '. Share sales in Canada are typically very impossible to finance, in that private companies offer no real liquidity event for the financier. Naturally with public companies that’s a bit of a different story. The seller, unfortunately, is usually very ' tax conscious ' on the outcome of the deal, which many times makes the going difficult to close successfully and properly.
We point out also that when a motivated seller is open to some sort of Vendor Take Back scenario that also can become a potentially good source of income for the seller based on the interest charged on the VTB.
Smaller transactions in Canada require a commitment from the purchaser in the form of some sort of buyer equity, down payment, etc. Anywhere in the range of 10- 50% is required... and that's quite a range! Business owners who have to invest their own capital in a deal source those funds from personal funds, savings, investments, etc.
Less money down on any deal is the ultimate double-edged sword on any acquisition finance deal. Leverage works for and against you, either propelling greater return on investment or significantly higher risk of failure based on too much debt - or the wrong debt.
Talk about a real double-edged sword! We point out also that lenders and other investors you may have lined up are generally ' impressed ' with an owner’s equity commitment to any deal. To paraphrase in the language of the people - you've got SKIN IN THE GAME! The vast majority of acquisitions in Canada typically come with a combination of debt, equity/ seller finance and cash flow finance combinations.
While many clients we talk to in the Small business and SME sector think they can approach ' VC's' and Private Equity groups for assistance they rarely can meet the rigorous demands of those two types of external finance. Suffice to say you'll be giving up significant equity also, which in general is highly undesirable at a point when you haven’t realized the true financial benefits and returns of a good merger or acquisition over the long term.
In the small and SME sectors of business in Canada, a great way to finance a business purchase is the government Small Business Loan - aka the ' SBL '.This is the ' all Canadian version of U.S. 'SBA ' loans. It offers tremendously attractive terms relative to what you are trying to accomplish and allows you to retain tremendous upside re your projected financial performance.
Two final very typical ways to accomplish financing acquisitions are to consider traditional bank financing and ABL (Asset-based lending). If you can meet some basic cash flow coverage and debt to equity ratios you're a solid potential candidate for well-priced acquisition finance with excellent and competitive interest rates in today's low-interest-rate environment. Asset-based lenders will throw those ratios, generally speaking, out the window and simply focus on the assets you're acquiring and how they can be margined via term or operating solutions.
Avoid the tragedy of poorly executed business acquisition financing options when contemplating a merger or acquisition in the world of corporate finance. Strive for a good grasp of acquisition financing basics, which can be sought via your accountant, lawyer, or a trusted, credible and respected Canadian business financing advisor with a track record.
7 Park Avenue Financial :
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.
Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced
business financing consultant
.Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
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