Tax Credit Loans For SR&ED Credits In Canada: Finding Your Way In SR ED Financing

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FUNDING YOUR REFUNDABLE TAX CREDIT SR ED CLAIM IN CANADA

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing business today

ARE YOU UNAWARE OR   DISSATISFIED WITH YOUR CURRENT  BUSINESS  FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

 

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
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SR&ED FINANCING FOR R&D PROJECTS IN CANADA

 

 

SR&ED Debt Finance Loans In  Canada for SR&ED Tax Credits - Canada's R &D refundable credit system seems to pose challenges for some clients looking to monetize, via SR ED financing, their SR ED claims.

 

Does there have to be a problem? We don't think so.  Want to learn more about how you can fund your r&d and how sr&ed financing can revolutionize your r&d spending? Then let’s dig in!

 

 

 

UNDERSTANDING THE GOVERNMENT OF CANADA'S SR&ED PROGRAM  - HOW CAN SR&ED FINANCING HELP YOUR BUSINESS

 

Of course, SR&ED credits are available via the government's Scientific Research and Experimental Development Tax Credit program.  Although federal budgets in recent years have changed the program significantly from the viewpoint of streamlining the process, certain portions of the allowable refund were also cut back, i.e. capital expenditures relating to the actual R&D capital investments your company makes.

 

STRUGGLING TO FIND FUNDING FOR YOUR R&D 

 

The goal of  Industry Canada's SR&ED program is to reinforce the commitment of the government to support and motivate Canadian businesses to conduct r&d . That r&d  can come from many areas, including improving or inventing new products and processes or solving technical challenges in new or old technologies.

 

 

 

IS A SR&ED LOAN REALLY DEBT FINANCE? 

 

The term debt finance is really a misnomer, as no debt comes on the balance sheet when you monetize your sr ed claim via 7 Park Avenue Financial  - in effect you are financing an account receivable, with your client being the federal and provincial government - that receivable is turned into cash loan proceeds.

 

The irony of SR&ED is that many, in fact almost all banks don't recognize sr&ed receivables - they view your claim as an ' intangible asset ' or an unqualified asset  in many cases -  that might be partially understandable but certainly less so if your firm regularly files claims or has a claim prepared by a competent consultant - Larger SR&ED preparers are sometimes more than willing to provide opinion letters on the quality of the claim.

 

 

HOW CAN SRED FUNDING HELP YOUR BUSINESS 

Along the way, in the sr&ed process, your business is accruing  sr&ed  tax credits as you spend on materials and incur operating expenses on your r&d project/projects.  While Canada Revenue Agency has improved its commitment to review and audit ( if necessary)  claims the reality is that extended wait time can significantly impact a company's cash flow.

 

So how does the company secure funding for their claim while they are in the work and waiting process - The answer is sr&ed accrual loans which you can draw down regularly based on your cash flow needs and accrued spending.  That ' smoothing process' in your cash flow is a major financial benefit to any business, particularly early-stage firms, some of which are even in the pre-revenue stage.

 

Naturally monetizing your sred tax credit does not in any way dilute equity ownership - That allows the company to not have to take o more expensive financing that might be in the form of long-term debt or more expensive alternative financing such as short-term working capital loans, also known as  merchant cash advances/ 'mca's"

 

  

 

SR&ED FINANCING IS THE LOGICAL SOLUTION TO MORE EQUITY FINANCING - HERE'S WHY    

How does sred financing differ from other types of Canadian business financing? 

 Debt financing is almost always a lower cost of funding a business versus owners having to give up additional equity - Even though loans or credit lines have interest rates and financing costs, new equity holders have a claim on the ownership of the business and all future profits.  Payments on loans are tax deductible, and the reality is that many firms working on r&d do not have the financial strength to successfully receive additional business financing - In a red loan the collateral of the loan, which is just a short term loan, is.. the SR&ED claim itself!

 

Companies do not have to be profitable in order to qualify for sred funding, and no personal guarantees are required. If your firm qualified for sred tax credits you are eligible to finance your claim - SRED financing for international r&d qualifies if the work is performed and funded in Canada under CRA guidelines. Sred financing is different from other grant and loan programs because it is a monetization of an asset and brings no long-term debt to the balance sheet - A common misconception about sred financing is that it is expensive but it is a low-cost business financing in a number of ways - Talk to the 7 Park Avenue Financial team about why sr&ed financing makes sense.

Companies can get 75% of their filed or accrued claim and claims can be funded in a matter of a couple of weeks - Very basic company info is required to apply, including information on your business and the actual claim.

Are there any difference between SR&ED and other governmental funding options? The other similarly large government funding solution is the Canada Small Business Financing Program, which is a lump sum term loan program which funds equipment, leasehold improvements, technology needs, as well as new changes ot the program which includes working capital and lines of credit - Talk to the 7 Park Avenue Financial team about SBL loans.

 

 

WHO PREPARES  SRED CLAIMS? WHAT IS THE ROLE OF THE SR&ED CONSULTANT?

 

In Canada, the majority of tax credits/claims are prepared by independent consultants - they are known as ' sr&ed consultants'.These sr ed claims are filed, of course, in conjunction with your year-end tax return.   Retaining a good preparer for your claim is one part of the financing process of a claim. In the past couple of years, a lot of focus was placed on the way consultants bill and prepare claims - the majority of which are on a ' contingency' basis, which in hindsight probably caused some bad behaviour by a small few.

 

There are many advantages to using a sr&ed consultant - they are typically very experienced in your industry and can propose the right strategy on filing a claim and what supporting material and write-up will be required to support the claim approval - Sred claims are typically positioned uniquely to each firm and its work in research and development and claims will reflect payroll records and purchase invoices and proofs of payment from the company accounting records.

 

While some consultants charge regular fees for their time and work many works on a contingency basis at competitive rates which furhter enhances their belief around the approval and credibility of your claim - Canada revenue agency reviewers are aware of the role of sr&ed consultants.

Because of the nature of the breadth of  r&d in the Canadian economy, many consultants specialize in  certain industries such as software development, agriculture, manufacturing, oil and gas and multimedia/

 

We encourage all clients to consider whether they are eligible for the SR&ED  refundable tax credit and focus on filing the claim promptly as there are some deadlines in place under the program.

 

 

BILLIONS OF DOLLARS ARE REFUNDED TO CANADIAN BUSINESSES ANNUALLY UNDER SRED 

 

Refundable credits return billions of dollars to Canadian corporations each year.  Your ability to cash flow or monetize your claim makes the program complete in some way. Your company is in effect ' fast-tracking ' the cash flow return to your company by filing and financing your claim.

 

WHAT TYPE OF COMPANIES CAN APPLY FOR SR&ED

 

The majority of businesses in Canada that apply for s&ed are private firms, aka ' Canadian-controlled private corporations (CCPCs)", but even foreign-owned firms that do the r&d in Canada are eligible - Applicants can also be proprietorships and partnerships.

 

  

HOW DOES A SR&ED BRIDGE LOAN WORK?  

 

How then are the claims financed? It certainly doesn't have to be problematic if you have some expertise backing the process.  A simple business application starts the whole process - typical info needed here is a copy of your claim, information on who prepared it, as well as your business financials.

 

As you are accruing your spending and qualifying for sr&ed tax credits you have the ability to accelerate funding of your claim, smoothing out the cash flow process and continuing to not have to consider alternative equity or long-term debt finance solutions. Business owners and financial manager can plan their accrual loan advances as they forecast their cash flow needs - as an example, a company can choose to access funding on a quarterly basis for example.

 

 

WHAT IS THE COLLATERAL REQUIRED FOR A SR&ED BRIDGE LOAN?  SPOILER ALERT - IT'S  YOUR SR&ED CLAIM!

 

We note here that many firms that complete claims range from start-ups to firms that are still in the early stages of revenue. So it's important to understand that the key collateral under SR&ED financing is in fact, just the claim itself. In effect, you've created a (government) account receivable and are only financing /monetizing that specific A/R.

 

 

  

CONSIDER A SR&ED CREDIT LINE TO PRE-FUND YOUR CLAIM  

 

The newest trend in tax loans for SR&ED financing is the ability of your business to, in effect, pre-finance your claim - you are reimbursed for funds you are spending during your spending. That fast tracks the return of R&D capital even faster. Talk to the 7 Park Avenue Financial team about how the process to get sred funding has never been faster

 

 

 KEY TAKEAWAYS IN  SR&ED LOAN FINANCING   

 

Any business spending in r&d  is eligible to apply for sr&ed financing for their sr ed expenditures

Small businesses can apply for sr&ed refund also

Many firms applying for sred are startups or in pre-revenue, although medium size and larger firms also qualify for sr ed tax incentives

SR&ED loans are a financing option for the refundable tax credit

Almost every industry in Canada can qualify for r&d, including  IT and software development areas of the economy, biotech, manufacturing, oil and gas, and those focused on  the new economy such as carbon credits

 

 

  

  

 CONCLUSION  

 

     

Take your company to the next level by accessing sr&ed funding for r&d projects - Keep growing the value of your business and unlocking the full potential of your business's value!

 

  

Does your firm qualify for sr&ed finance? If your firm makes investments in research and development and if you're looking to avoid any ' problems ' associated with financing SRED CREDITS, seek out and speak to 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor at 7 Park Avenue Financial and let us help. Our specialty is helping you fund refundable tax credits -  The probable result is - Problems gone!

 

 FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION

 

 

What is the SR&ED Program In Canada

Formally called the  Scientific Research and Experimental Development (SR&ED) tax credit sr ed tax incentive for work done in the area of scientific or technological uncertainty delivers a refundable investment tax credit for companies who conduct research and perform basic research and systematic investigation for the purpose of scientific or technological advancement. In some cases, this might mean products for new or improved material during the tax year at which point eligible expenditures are filed by Canadian businesses under the reporting deadline. SR ED eligibility criteria are determined as set out by Canada Revenue Agency and there is income tax payable on the sr&ed claim.

 

Most companies will have third-party technical consultants called ' sred consultants' who determine eligible material costs as well as eligible salaries and subcontractor fees and overhead costs related specifically to the R&D project. There is a reporting deadline that is the same as the fiscal year tax filing. Canadian businesses can take advantage of SRED as well as other corporations that are foreign-owned.

 

Federal and provincial tax credits are combined under the Sr ed program to encourage Canadian businesses to perform r&d for innovation and advance scientific knowledge - Companies claiming Sr&ed must ensure their market research qualified for this tax incentive program and work is reviewed by financial reviewers at CRA under the income tax act in Canada. Companies that wish to finance sr&ed claims through commercial finance companies take advantage of non dilutive funding.

 

HOW CAN  A BUSINESS BENEFIT FROM SR&ED CREDITS

 

Companies performing r&d can claim a refundable investment tax credit for qualified sr ed projects and expenditures set out in the program via their sr ed project, regardless of whether the r&d was successful as a final outcome around the scientific knowledge the company was pursuing.

 

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

 

 

 

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

 

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

 

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

 

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

 

UNLOCKING THE DOOR TO BUSINESS OWNERSHIP WITH PROVEN FINANCE STRATEGIES

 

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

 

WHAT LENDERS CONSIDER  FOR A SUCCESSFUL BUSINESS PURCHASE

 

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

 

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



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



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



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



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



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



Inventory Financing



Tax Credit Financing

 

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

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

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

 

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

 

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



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



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



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

 

VALUATION

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

1. What working capital requirements will be post-acquisition

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

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

 

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

 

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

 

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

 

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

 

SELLER  FINANCING / VENDOR TAKE-BACK CONSIDERATIONS

 

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

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

 

SOME KEY RISKS IN  BUYING A BUSINESS

 

Purchasers  should consider :

 

Cash and financing need  to acquire new assets or technology

Sales fluctuations that will impact cash flows

Higher costs around staffing and infrastructure

Interest rate changes in the general economy

Post-acquisition strategies failing

Warranty and vendor/supplier representations

 

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

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



Owner Cash / Equity Financing  /  Dissolving Retirement accounts

External Financing

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



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



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



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

 

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

 

ASSET PURCHASE VERSUS SHARE PURCHASE

 

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

 

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

 

- Timing around due diligence

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

- The preference of lenders to utilize an asset sale financing

 

DUE DILIGENCE

 

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

 

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

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

 

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

 

CONCLUSION - THE BEST BUSINESS ACQUISITION LOAN FOR YOUR NEEDS
 

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

 

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

 

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

 

Can I finance the purchase of a business?

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

 

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

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

 

Do banks give loans to buy a business?

 

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

 

 

What is a business acquisition loan?

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

 

 

 

Guide to Acquisition Financing Via Commercial Business Loans In Canada

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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

The right combination of debt, equity and vendor financing can make a solid financing package

 

 

 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.  

 

 

 What is business acquisition loan? 

 

 

A business acquisition loan is a financing transaction that allows buyrs to purchase an existing business or even a franchise - Financing can be achieved via  equity financing, government loans, bank loans, or funding via commercial finance companies and alternative finance business lenders.

 

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How To Buy A Business With The Right Acquisition Financing

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

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

 

  

WHAT LENDERS CONSIDER

 

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



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



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



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



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



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



Inventory Financing



Tax Credit Financing

 

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



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

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

 

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



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



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



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

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

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



Owner Cash / Equity Financing  /  Dissolving Retirement accounts

External Financing

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



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



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



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

 

 

CONCLUSION - THE BEST BUSINESS ACQUISITION LOAN FOR YOUR NEEDS 
 

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

 

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION

Can I finance the purchase of a business?  

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

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

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

What is a business acquisition loan?

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

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

 

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

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

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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.


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

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

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