YOU ARE LOOKING FOR ACQUISITION FINANCING TO BUY A BUSINESS
UNLOCK THE SECRETS OF BUSINESS ACQUISITION FINANCING
You've arrived at the right address! Welcome to 7 Park Avenue Financial
Financing & Cash flow are the biggest issues facing businesses today
Unaware / Dissatisfied with your financing options?
Call Now! - Direct Line - 416 319 5769
Email - sprokop@7parkavenuefinancial.com
Let's talk or arrange a meeting to discuss your needs
BUSINESS ACQUISITION FINANCE 101 ! WHAT YOU NEED TO KNOW TO GET FUNDED
LOANS TO BUY A BUSINESS IN CANADA
You or your company has made the decision to either merge or acquire another business.
What are some of the key issues in successfully completing acquisition financing and business loans for commercial entities in Canada? In certain circumstances, your business purchase might involve the taking over of a business already in family hands, versus the other end of the spectrum which would be a purchase of a competitor.
ESTABLISHING YOUR FINANCING NEEDS
How much money do you need to buy the business?
At a certain point, you will need to establish the amount of money required to buy the existing business and what will the optimal finance structure be - The valuation you place on the business will play a key in that, and the reality is that most buyers of a business will not have all the cash to buy the business outright from their own personal or company means.
While a small business might possibly be purchased for cash external commercial business loan financing will probably be needed. The ability to leverage financing in connection with buyer equity creates a positive return on equity scenario.
ESTABLISH THE RIGHT OPTIMAL FINANCING STRUCTURE
Successful acquisitions will have the right financing structure that allows for the purchase and financing in place for future growth needs and the funding of day-to-day operations.
WHERE TO FIND A BUSINESS TO BUY
Business owners/entrepreneurs are always focused on growth. It's critical that you establish a method to target the company you may wish to acquire. The ability to be proactive in your search as well as to have a formal strategy is key to successful acquisition finance.
The ability to buy and finance a business successfully is a proven way to grow clients and leverage the capacity of your business model - which translates into building your brand. Business owners that we speak to at 7 Park Avenue Financial tell us they have found firms to buy in different ways.
That candidate to buy might come from your own network of personal and professional contact; in some cases, business brokers who know the market well are a strong source of deal flow. Accountants and lawyers are also good referral sources. It's important to establish some exclusivity around a transaction you are considering from a competitive viewpoint. That can be established via non-disclosure agreements, a letter of intent, or an agreement of purchase and sale based on certain conditions, one of which might be... financing! Next comes the task of financing a business acquisition.
IDENTIFY BUSINESSES TO MATCH YOUR BUSINESS EXPERTISE AND INTERESTS
In many cases, acquisitions do not work out if the purchaser strays from his or her chosen industry. Staying in the industry you know provides a greater chance of success based on your industry experience, given that you have the ability to run a business in your particular industry.
Therefore picking a company you know in an industry you know well typically leads to a higher probability of success. Naturally investigating thoroughly the true financial and business position of the firm is critical in the decision to buy process. Financing the purchase of an existing business is always about the proper level of due diligence
ACHIEVING YOUR GROWTH OBJECTIVES BY PURCHASING A BUSINESS
While that increase in revenue and profits can come from organic growth it makes sense to achieve scale more quickly by utilizing a business purchase model. That economy of scale can often be a faster growth in sales and profits.
It's not always the case but many experts believe that a larger business enjoys numerous advantages, including more beneficial relationships with suppliers/pricing, etc. Certain types of your clientele might prefer dealing with a larger firm, as well of course the obvious ability for a larger business to attract higher-skilled employees. Naturally, a larger firm has more capability to expand into new markets and services.
A good place to start is simply to ensure you’ve got the right reasons or goals around a merger or acquisition. In some cases you wish to diversify your company, more often than not though it’s simply a case of growing both sales and profits, of course, is the term ‘opportunistic' a negative one?
We certainly don’t think so when it comes to legitimate business dealings, so in many cases, you simply have come across a firm or competitor that in your opinion is undervalued. The bottom line, it’s a bargain and you're focused on exploiting either undervalued assets or companies that are not performing well in certain market conditions.
VALUATION
In considering financing to buy a business, almost always, price becomes a key discussion point so experts caution when to know you have reached limits or criteria that would negate the sale.
On the other hand, just because a company is up for sale doesn’t mean the process will be any easier. Negotiations can break down, for instance, if the two parties disagree on the price. It is essential to set certain criteria and limits and be willing to walk away from the deal if certain conditions that are important to you are not met.
KEY POINT - The Bottom line on valuing a business purchase/business transfer? Poor pricing on a good company is often a 'bad acquisition'.
Don't forget also that acquisition financing and custom financing an acquisition is all about some even more common sense scenarios as identified above. It's often a classic opportunity to lower your operating costs as overheads in the new firm can be cut and other efficiencies can be extracted from the combined mix.
SOURCES OF FINANCING / ACQUISITION FINANCING LENDERS
Typically, but not always a term loan is the main source of financing and comes from the appropriate term lender / senior lender on your transaction. Commercial business loans might come from a Canadian chartered bank, or it may be a specialized commercial finance company in the traditional or alternative lending space.
BANK LOANS /SENIOR LENDER TERM LOANS
Bank loans are the most 'conventional financing ' in Canada when acquiring a business - Borrowers must understand that banks have strict credit and qualification requirements around the business purchase - often they might be focusing on businesses with substantial assets, as well as the need for the buyer to provide external outside collateral - Safe to say also that banks will place emphasis on management experience and personal credit history/ personal net worth etc.
In some transactions, your purchase may be completed by a cash flow loan based on the historical and projected cash flows of the target company. There is always the 'equity component' of the transaction, and this amount varies based on the overall credit quality and size of the purchase and will round out your business acquisition loan.
CASH FLOW FINANCING
In many cases, a business might not have the asset base from a viewpoint of 'tangible assets'. It is, therefore, necessary to demonstrate that cash flows have the ability to service your loan as well as covering off other fixed expenses. Good cash flow will allow you to obtain the most flexible terms possible for closing your transaction.
Cash flow financing, also called Mezzanine financing is a cash flow loan that will often help cover the gap when a senior term loan is unable to fund your entire transaction -
A common form of acquisition finance for well-established target firms is mezzanine financing. It helps out the need to avoid additional owner equity, and while more expensive, it is based solely on the quality of cash flow of the firm you are purchasing. Rates are typically higher due to the lack of fixed assets backing the loan. What are the types of acquisitions? We can summarize those into three areas, and in some cases, the type of acquisition you make will impact directly the type of financing and commercial business loans that you achieve.
From the lender's perspective, these are higher-risk loans but the financing is tailored to each transaction and structured around cash flow availability. It can be used in a combination of financing that might include the senior acquisition term loan and the owner equity and seller financing components.
SELLER FINANCING
Seller finance, also known as vendor takeback can often play a key role in business purchase finance - The ability to finance a portion of the purchase with the seller's cooperation from future proceeds of the business can play a key role in buying a business, Seller finance solutions are often structured as performance-based and can often lend credibility to the actual business potential and purchase price.
Naturally, the key value of seller finance is the ability to reduce the amount the buyer has to borrow externally and terms around seller financing are often very favourable when it comes to interest rates and amortizations. Some sellers are reluctant to fund a portion of the sale for the simple reason that they prefer all the funds from the sale of the business. When it comes to what amount is typically used as a seller funding component we tend to see anywhere in the range of 10-25%.
Seller financing can be a key aspect of your transaction and will sometimes 'make or break' your deal. This financing, also known as vendor take-back / 'VTB' can play a key role in business purchase success, especially if the seller is motivated and willing to participate.
ASSUMING THE DEBT OF THE TARGET BUSINESS
Buyers of a business also have the ability to assume the existing debt of the business - Those existing liabilities might include loans, leases, as well as commercial trade payables - In most cases, you will require prior approval of the lenders to assume or transfer the debt into the newly acquired business. In certain cases, accountants may wish to weigh in on tax consequences around debt assumption.
MAKING THE BUSINESS PURCHASE TRANSACTION SUCCESSFUL
Purchase prices are always dependent on reasonable valuations. There are numerous ways to value a company based on multiples of sales, profits, cash flows, the book value of assets, etc. The cash flow generation we have already mentioned is key, as it will ensure a proper understanding of the company's ability to handle debt and expand via new planned capital expenditures. It's important to know that your senior lender will also look at the quality of management based on business and industry experience.
Back to our three merger scenarios - they are as follows: friendly, hostile, and leveraged or management buyout. Many smaller companies are of course happy and content to be taken over; they fully realize the potential synergies. However, in certain cases, it gets somewhat ' ugly ' in that the management or owners of the firm you intend to buy or acquire simply are opposed to the idea.
Leveraged and management buyouts tend to be asset driven. The downside of a leveraged or management buyout is that if done improperly a large amount of debt can leverage your new firm negatively. There are numerous creative ways to fund acquisition financing in Canada and various acquisition financing structures should be investigated.
WHAT ARE METHODS OF FINANCING BUSINESS ACQUISITIONS
Financing methods include :
Asset-based lending,
Subordinate or mezzanine debt (i.e. unsecured loans based on historical and future cash flows) as well as a
Owner equity component.
ASSET-BASED LENDING - LEVERAGED BUYOUTS
Many business purchasers utilize their ability to leverage assets in financing the business purchase -Generally, speaking businesses with hard assets are easier to finance - Those assets typically have value and are excellent collateral for business acquisition loans. This is particularly true of asset-based lenders if your transaction requires alternative financing vs. traditional bank finance solutions such as a term loan.
That strategy also helps limit the amount of external financing required to fund the business purchase. Leveraging assets such as equipment, technology, commercial real estate and receivables and inventory can provide a significant amount of funding to help finance the acquisition
The challenge in a leveraged buyout / asset-backed financing acquisition is to ensure the company can meet the debt load associated with the transaction given that economic circumstances in the company's industry might change.
GOVERNMENT LOANS - THE CANADA SMALL BUSINESS FINANCING PROGRAM
One method of financing smaller business purchases in Canada is the government-guaranteed federal loan program - the Canada Small Business Financing Program sponsored by Industry Canada via Canadian banks.
The government does not lend the money directly but guarantees the loan to Canadian banks and credit unions that participate. SBL loans have flexible terms and financing structures, and in 2022 several major and positive changes were made to the program, all of which benefit the borrower. he loans still require a buyer equity component and the new loan cap is 1.1 Million dollars and applies to any business with under 10 Million in annual revenue.
Borrowers should have a good personal credit score and be prepared to present appropriate financial information around net worth, as well as having no tax arrears - As in all types of business financing business experience is preferred and required.
The crown corporation bdc also provides business purchase/business transfer financing.
.
The potential drawback to the loan is that the main collateral must be equipment, leaseholds, or real estate so borrowers should consult an experienced loan advisor familiar with the Gov't Guaranteed Loan. Under the program, the Canadian government shares the risk of the loan with the lender.
INDUSTRY STATISTIC - During the last 10 years, the government of Canada has underwritten almost 10 Billion dollars of small business loans, for over 63,000 companies! Target acquisitions must be for companies with less than 5 Million dollars in revenue. The program does not cover farms of non-profit types of companies. The government sponsor of the program is Industry Canada. The Canada Small Business Financing Program will not work for all acquisition needs but should be investigated as an option.
CHALLENGES IN BUSINESS ACQUISITION
Buying a business is all about planning and ensuring you have a strategy. As well as the risk of over payment and of obtaining a poor valuation, the purchaser will want to ensure he or she has a strategy of efficiently integrating the business to achieve maximum shareholder benefit.
Issues you want to address may include understanding the perceived or real weaknesses of the company in its chosen market. A business might have a wide variety of products and services so strategies must be implemented around pricing and service offerings. Your goal is of course to be a leader in your field and markets.
BUSINESS VALUATION
Valuation is an important aspect in the area of acquisition financing. Your valuation will have a direct impact on the business loans you enter into to complete the purchase.
In evaluating a final valuation or purchase price you will want to look at things like general financial operating activities - i.e. the financials. But don’t forget also that other factors such as new assets that might be required, working capital needs, etc. also will drive that final valuation number.
Valuing your acquisition target is always a key challenge, and there are several different ways to come up with an acceptable value.
When looking at the earnings and cash flows of the business buyers should ensure they analyze and remove non-recurring expenses and sales revenues associated with the previous owner so as to accurately reflect the future profit and cash potential of the business.
There are a number of ways for valuing business acquisitions including careful cash flow analysis as well as comparing the sale price to comparable firms and companies in the same industry if that information is available - At the same time, potential synergies must be examined that will bring future value into the business.
Key factors such as what industry you are in, as well as the size of the company and typical profit ranges, will come into play. Companies also recognize sales revenues and profits in different ways. It is absolutely critical to come up with and understand what 'normalized' financials will look like at the time of takeover/acquisition.
Typically buyers will want to focus on the value of the company as a 'going concern'. Buying distressed or turnaround situations is a whole different kettle of fish! So in normalizing the financials you must look carefully at the core revenues and the assets that produce those revenues. You should be strongly focused on future income potential. One-time events or expenses should always be discounted. For larger transactions, companies might choose professional business valuators.
At 7 Park Avenue Financial we want to be your key source for buying or selling your business - selling your company will often require either a valuation or business plan or probably both. Our goal is to ensure you have a financing structure that will allow for the proper sale, financing and growth of the business. Together with your accountant, lawyer, tax specialist, etc., we focus on a smooth transition to a completed purchase.
OWNER EQUITY - YOUR DOWN PAYMENT IN THE BUSINESS PURCHASE
Owner down payments is a part of all small and medium-sized business acquisitions in Canada. These equity injections are a condition of financing a business purchase transaction. The owner equity is separate from any seller contribution to the transaction via seller financing. Typical equity injection amounts will be in the 10-20% value of the purchase price. The amount will vary by lender, whether that is a bank or commercial finance company or alternative lender.
The ability to buy a business in Canada in a ' no money down ' scenario does not exist - Large transactions in Canada may include a private equity firm component, but that rarely applies in the SME sector Sellers will also tend to view no buyer equity offerrs in a negagtive manner.
FINANCING YOUR BUSINESS POST-ACQUISITION
Business buyers also need to focus on post-acquisition financing for the business - buying a company is half the battle, and moving forward is the other half!
Buyrs need to focus on funds needed to operate the business on a day-to-day basis so as not to run out of funds - the financing package you focus on should include financing for working capital, business lines of credit, and potentially lease financing for newly acquired assets - Careful planning in this area should include good cash flow projections and working capital solutions such as business lines of credit, factoring, short term working capital loans, tax credit financing, etc.
KEY TAKEAWAYS - OTHER CONSIDERATIONS FOR BUYING A BUSINESS
Business buyers have the ability to generate more sales and gain competitive advantages
The synergies of combining a business can be very positive
New technologies and intellectual property can be financed when they add value to buying a business
Acquisitions can provide entry into new markets
Retaining key employees is a key asset of any business
CONCLUSION - SECURING ACQUISITION FINANCING IN CANADA
As an entrepreneur you have a number of business financing options to buy a business - the right choice in financing depends on your specific business needs so that final finance is structured in a manner that creates a win-win for buyer and seller.
In summary, when contemplating acquisition financing and looking for a loan to buy a business in Canada look at issues such as the proper mix of debt and equity, cash flow analysis, and various areas of operational risk and reward.
If you want financial alternatives in financing your acquisition speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who will assist you in this exciting area of Canadian business finance.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How do you finance a business acquisition?
Buying a business is achieved in multiple ways through acquisition financing lenders such as banks and commercial finance firms. Banks offer unsecured business acquisition loans via general security agreements/GSA's over the business - Equity financing by the buyer will always be required - Intangible assets also have the ability to be acquired under the business purchase via a bank loan or government loans.
Valuation and analysis of financial statements are key to the purchase of small businesses and loan terms will vary via most lenders who participate in this type of financing. Alternative asset-based lenders focus on financing specific assets of a business. Government loans require a specific application process. Buyers should ensure the business has adequate cash reserves and ongoing access to working capital financing via lines of credit, business credit cards, or working capital loans - Banks will typically offer lower interest rates than non-bank lenders.
Click here for the business finance track record of 7 Park Avenue Financial
