Business Credit Line Needs ? ABL Is The Bank Alternative

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The business credit line in Canada. Clients we meet to can visualize it... they sometimes just can't access it - it's almost as if it’s an ancient art they haven’t quite perfected. As a result... cash flow and working capital challenges. Does it have to be that way? We think you know the answer already... it doesn't and here's why. Let's examine the ABL bank alternative.

Clients at 7 Park Avenue Financial find asset based lending is the perfect credit line when traditional financing is not a good alternative or an alternative at all! This type of business credit line has some cost benefits to is, as well as having a large amount of flexibility. Additionally you self manage the facility to a large degree with no intrusion required into your suppliers or clients. Many companies have a measure of seasonality to the business, so ABL, ' asset based lending ' addresses that very well as limits are quite flexible and can be adjusted to your needs. 

 

Alternative funding  via ABL  asset based loans is clearly becoming the bank alternative and is widely used in the United States where this type of business financing originated. Focusing on the liquidity of key current and fixed assets these credit facilities have become the business finance alternative for borrowing for operating facilities. Some business owners will be surprised to know that ABL LENDERS can also be banks, as these unites operate as smaller boutique financing lenders within the traditional banking system, both in the U.S. and certainly in Canada.

We can make the business case that ABL Lenders are more comfortable in lending to many firms when banks either won't or cannot simply because they are experts in collateral value and have the ability to adjust the line against the credit lines they have set. One expert has called it ' real-time ' lending!

Business credit lines via  ABL finance lending are attractive to Canadian businesses seeking financing for a variety of reasons in almost any economic time, pandemics included. In fact, asset based lenders for the most part continue to fund business which has significant value to firms looking to access cash flow or to achieve more financing than they could otherwise achieve through traditional sources. Even companies that are restructuring are able to source business credit line arrangements based on assets.

The ability to have a source of credit that is creative and flexible will almost always provide greater liquidity to your company, with less reliance on the banking covenant based lending championed by Canadian banks. That's the business lending that 7 Park Avenue Financial clients tell us they want. The trade-off to the typically higher cost of an ABL line is increased access to capital, notwithstanding your obligation to be in a position to report more regularly on asset values such as a/r and inventory, which most firms should be looking at anyway, right?

For this type of business credit line to be successful your company has to have the ability to create the usual management reports that highlight your asset accounts so that typically would be aged receivables, payables, and inventory lists. That allows you to successfully manage and access this creative way of financing your business.




Part of the challenge of those business credit lines is simply the fact that the majority of business owners and financial managers are fairly focused only on one solution - which is of course the commercial bank line of credit.



That is definitely one solution. The other (What? There's Another?!) is a non bank asset based credit line facility. Both facilities monetize your receivables and inventory... the difference then? ... The Asset based credit line often monetizes and equipment and real estate also; as part of your overall borrowing power. The big difference is the real key point here - lending is more generous in a non bank asset credit line. Receivables and inventory are margined more aggressively, and in bank scenarios rarely are your unencumbered fixed assets monetized into credit lines.

Why Should Your Company Consider An Asset Based Lending Business Credit Line?

Most small and medium-sized companies in Canada recognize that Canadian banks cannot meet all their borrowing needs. This might be for a variety of reasons which include profitability, an industry being ' out of favour ', or the actual financial results of a company which might not have the balance sheets and income statements they require to lend against, given the banks are both regulated and somewhat risk-averse relative their fiduciary responsibility to shareholders and depositors. It is a true irony of Canadian business that banks generally do not like a firm growing, for example at 25% per year, which then requires constant working capital needs.

Because non bank business credit lines have your borrowing against sales and assets there is not the concern of higher growth, which is in fact: Encouraged ! More cash availability than standard bank offerings is the cornerstone of borrowing against your sales and core assets. It's not about the financials, it's about sales/assets.

As we have noted the thousands of companies using asset based credit lines in Canada use it for different purposes. Some companies might be early stage, some might be in high growth mode, while other companies that are in fact bank worthy utilize it because rates in the case of high quality companies can be very competitive to low bank rates. Naturally, the current low rate environment for business borrowing in Canada is a plus for all borrowers. 

 

Some firms that are experienced a level of distress might be using the facility simply based on the amount of their assets that still qualify for borrowing under a credit facility. These companies might find themselves in the ' Special Loan ' category of the bank. This can be a stressful transitionary period on the road to business financial recovery - asset based financing works very well to correct the financing and allows a company to get back on track. 

At this point customers would already be reporting on their financial more often and assessing a workout plan that might get them back into traditional banking, or on the other hand, transition their senior lending facilities into asset based business credit lines. They might still well be 100% financeable with having to raise additional equity or outside collateral. It allows troubled firms to protect the company with a workout refinancing that makes sense, often paying out the bank in the process.



The options and financing flexibility alternative your firm now has allows you to successfully operate on a daily basis. As your revenues grow your receivables and inventory will always fluctuate relative to business grwoth and how you manage your current assets. Those daily changes drive the ABL credit line. Many firms that are in high growth / hyper-growth find they cannot satisfy traditional bank requirements, with the asset based facility focusing on your sales and assets, not financial statement ratios within your balance sheet or income statement.

By allowing your financing partner to properly assess asset values and growth potential, allows you to borrow effectively on the true market value of your sales and assets. As an example receivables are typically financed at 90% and inventories are margined based on the type of inventory your firm has. It should be noted that many industries are different when it comes to quality and type of assets, your facility will resemble the industry norms around types of assets. Both banks and asset based lending firms recognize specific aspects of your industry.

The two main sources of borrowing in this type of credit line are your receivables and inventory. They are the main drivers that determine the amount of your facility but there can easily be a fixed asset/equipment component to the borrowing for all the hard assets your firm owns.

The true strength of this type of revolving credit is that it can grow as your sales revenues and other assets grow - they in fact determine the amount of the credit line. There are some very simple formulas around how these assets are margined for lending. As your sales grow and you collect your receivables the ABL business credit line fluctuates, allowing you to borrow less .. and finance less, or, more importantly, borrow more if you need it!

We have referenced those other assets you can borrow against within your credit facility, with those two asset categories being equipment and, if applicable, real estate. Those amounts have a value assigned to them at the start of your facility working, which might include an outside appraisal to determine maximum borrowing power. Naturally these two categories of assets are typically not in Canadian chartered bank business credit facilities, so they highlight the benefit and flexibility of revolving ABL facilities.

Many companies that are unable to satisfy bank covenants, ratios, outside collateral etc find they can easily double their borrowing power using the high borrowing leverage of a/r, inventory, and equipment/real estate. That becomes the ABL business credit difference, a business finance solution that is tailored to your company's specific needs. Your credit line availability is calculated on an ongoing basis, allowing you to plan for your business cash flow needs - at the end of the day is ' quicker borrowing '.

Accounts receivable plays a major role in the asset based business credit line model. Your financing firm will focus on the type of receivables you have, average size, major account concentrations with any one customer, account contras with suppliers that might be in place, as well as your a/r days sales outstanding turnover and bad debt. 

 Businesses should also be prepared to demonstrate that CRA and provincial HST  is not in default, but borrowers in default will be happy to know that these type of debts are often paid out of the first advance in ABL business credit lines by  asset based lenders.

The use of your business credit line in Canada, whether it's a bank line of non bank in nature can be viewed as a ' replenishment ' of cash from funds your firm has invested in working capital and fixed asset accounts. That need becomes even more acute when your business is growing. The simple reason - you've got more sales tied up in still uncollected receivables, inventory, and the need for some fixed asset or technology replacement here and there!





Whether you disagree or not, all banks have very specific rules in Canada around business credit lines. Bank credit lines for start-ups or very new businesses in Canada essentially... Don't exist! That’s because of our strong banking system in Canada places a large emphasis on historical strong financial history, solid profits, and squeaky clean balance sheets. So while corporate credit risk at banks for the middle market companies in Canada at banks focuses on profit, cash flow generation and shareholder equity ABL  has a focus on asset turnover and turning business assets into cash. We can say that the shorter-term operating cycle of a business is what drives asset based loans.

Business owners if not familiar with The Cash Conversion Cycle would benefit from checking it out.It is really tied into the concept of cash flowing your working capital assets and how turnover affects liquidity and the need for more outside business credit. The continual revolving ability of a credit line works without your firm being tied to any type of installment and loan debt. Here the power of ABL kicks in because as sales revenues grow cash flow via the abl line increases and receivables and inventory are liquidated.

If your firm is offside on banking requirements it's still exceptionally very safe to say that you qualify for an asset based credit line from a non bank commercial finance firm. And that higher leverage and borrowing power is still there of course - it’s another major appeal of the ABL (Asset based Line)



By the way, if you are in fact 'off side' with your bank on their key metrics, ratios, covenants, and collateral issues the ABL line rides to the rescue more time than you think. So while your business may have temporarily stumbled the non bank asset based line of credit steps in to keep cash flowing and working capital working! Their are different credit types and credit risk and the asset finance underwriter is well positioned to take the time to understand your firms situation.



It's not pure roses and sunshine all the time with your business credit line. You should always be prepared to supply proper reporting and updates on your business assets, even more so with ABL type facilities which in some cases might even require due diligence visits, appraisals, etc.

There are several supplementary / complementary solutions to the asset based credit line - These can be used with or separate to your business credit line facilities in asset based finance .

One of these is Purchase Order Financing. This solution becomes extremely valuable if your firm is in a position to receive large orders or contracts that in the normal course of your business you would be unable to finance due to the working capital component of the transaction, namely having to pay suppliers, facilitate your order or service, and then wait for the collection of your receivable related to that order/contract. The financing works as follows - your supplier is paid directly by your P O financing firm asset based lender. The receivable that is attached to that order or contract can then be financed under your already in place asset based lending facility, or in some cases a separate P O Finance arrangement if you do not have either a bank credit line or an asset based line in place. Purchase order financing rates are  higher and your firm must have good gross margins to absorb the 2-4% fee on the order but can be invaluable to firms looking to grow larger with access to traditional finance,


If there is a bottom line here in corporate finance  its that the business owner/financial manager needs to understand both the alternative to credit lines, as well as the nuts and bolts of how and why they work best. That will lead to a better capital structure and a more guaranteed level of long term success.


If you want to consider revolving credit lines based solely on collateral value or new and replacement alternative credit facilities seek out and speak to a trusted, credible, and experienced Canadian business financing advisor. Your want a finance partner/advisor that has a solid knowledge of the ABL lending market and has the capabilities and expertise and track record of finance success to facilitate business credit line 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

Click Here For 7 PARK AVENUE FINANCIAL website !



7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.



Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced

business financing consultant

.

Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.


Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.






Stan Prokop
7 Park Avenue Financial/Copyright/2020

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Financing receivables can be a key ' igniter ' in your firm's search for business credit that works for your cash flow needs. Accounts receivable factoring and the cost of factoring in your search for business funding requires some special analysis and expertise.This method of financing can often ' unfreeze ' your working capital. Let's dig in and show you how to fix the business credit freeze.


How Does Factoring Invoices Function On A Day To Day Basis

The entire FACTORING process is the cash flowing of your receivables after your firm has provided either its goods or services to your client. There is a defined process that allows your company to receive funding on completion of your sale and the invoice to the client.

Factoring clients are best suited to these financial solutions when their business is growing and traditional capital is not available. In fact, while traditional financial institutions are focused on credit limits, annual reviews, etc factoring solutions are very flexible and limits can very easily be raised if your sales are growing. In fact business owners control their own limits based on their decisions as to how much of their receivables they wish to finance and when to submit those invoices for financing.

After your firm has invoiced your client you provide a copy of that invoice to the receivable finance firm you are utilizing . Many firms offer very different types of versions of what we could call ' traditional factoring' but essentially you will receive your funds withing a day or so of invoice submission .  The amount you receive on the face value of the invoice is typically  80-90% of the invoice amount . You receive the balance of the invoice when your client pays, at which time a fee of approx  1-2% is deducted as the ' factoring fee ' .

This latter point of a factoring fee must be stressed and understood when looking at this type of accounts receivable financing . Why ? Many business owners and financial managers view the factoring fee as an ' interest rate ' when in fact it is simply a cost of the service for providing the financing, A better way to think of it is that is a reduction in your gross margin of that 1-2% range that we expressed previously . This whole area is one of the largest misnomers around FACTORING and its true cost. Your true financing cost in factoring will revolve around the agreed upon fee charged, and your ability to negotiate the amount that will be advanced on each invoice. Those are two, but not all, of the  key drivers in calculating your cost of financing .

Why Does Factoring Work ?

Factoring works simply because it turns your sales into working capital, allowing you to accelerate cash flow via the financing of a/r.  Business owners will not be surprised to know that it takes typically anywhere from 30-90 days these days to collect your accounts, your stated payment terms notwithstanding!

It should be noted that the advance rates on each invoice tend to vary by industry - the trucking/freight and staffing industries are two examples of high users of this method of financing sales so the advance rates are quite high - that's a good thing ! It should be noted that some costs considered as ' miscellaneous ' by some such as account set up, bank lockbox fees, and credit checks can add up and should be considered in your total cost analysis.


Accessing the cash allows you to address the day operating cash needs of your business. If your company is in a position of either having to , or offering, extended payment terms for your suppliers and your have sufficient gross margins then FACTORING is a solid potential solution for your business.

In certain cases a business might be able to take advantage of taking on a new or larger client that previously was not able to be considered based on size and the working capital investment your firm would have to make in carrying a/r or funding additional inventory.

A firm having a large number of clients that generate a large number of invoices could utilize  FACTORING as a method to reduce the collection costs and investment in staff to facilitate financing.

A  key benefit of factoring is that it does not bring debt onto your balance sheet - it is not a loan ! Rather it is the monetization of what is typically your largest current asset - A/R. As we mentioned many firms are stalled in sales growth due to their inability to fund the working capital component of sales . The FACTOR solution allows you to take on those clients with ease .

Many firms experience what the pros call ' bulge finance needs ' ; this might be at times of the seasonality of the business , or other reasons . That's when the FACTORING solution makes sense.

Factoring is often viewed as a ' bridge ' to more traditional financing, typically Canadian banks . Being able to demonstrate a successful factor finance facility allows your company to build a track record in stability, thereby improving your commercial credit history .with one of them. In times of economic crisis, pandemics included alternative financing sources such as  AR Financing allow your firm to weather the storm .

Every business owner can relate to the constraints Canadian chartered banks come under  for the financing of business in a downturn -  Downturns might be company-specific or part of a general industry-specific or broad economic downturn. That situation tends to lead to a downward spiral in many firms as business credit tightens . FACTORING COMPANIES typically finance companies in good times and in less than good times.

Can Factoring Improve Profits?

Many businesses considering factoring finance tend to compare it to more traditional business finance solutions such as those services offered by banks. Many suppliers and vendors to your business offer early payment discounts  - one such common offering is' 2% net 10 days '. That allows you to deduct 2% of the suppliers invoice based on paying early. Firms that have incoming cash tied up in a/r are of course unable to take advantage of this discount . But factoring solutions allow you to take that discount, thereby lowering a very significant amount of the factoring fee! In some cases you can purchase in bulk allowing you to further lower your cost of goods , thereby improving margins. As we have noted firms that are constantly battling the cash flow challenges can rarely take advantage of the two examples we have outlined.

Factoring Costs Laid Bare!  Assessment of 3 Critical Facts In Invoice Finance

We have already mentioned the factoring fee, that is the actual charge by your commercial financing partner to finance invoices on an ongoing basis.  The decision on what that fee is becomes based on a number of factors assessed by your factoring firm. Those data points include  your clients overall industry profile, your own firm's general creditworthiness , and the amount of the facility you require.

The next key factor can be significantly  a cost significantly controlled by yourself,  namely your average DSO / collection period. So if you turn over your receivables more quickly that monthly factoring fee stays low, as the charge is based most often on a 30 day collection period. Therefore your costs would increase if your client paid in 60 days. Companies with good credit extension policies are a winner in the factoring game.

 Example Of Factoring Cost :
 Invoice Amount -  $ 20,000
 Factoring fee - 1.5% = $300
In the above example your firm would get 90% of the 20,000 as soon as you invoice, namely $18,000. 
The balance of $2000 less the $300 fee is paid to your immediately on payment by your client.
In the above example you have not incurred debt, become cash flow positive immediately on invoicing, and continue to maintain general creditworthiness with your suppliers, operating costs, etc.
 A  harsher reality of factoring solutions is the fact that many firms these days simply cannot  meet the demands of Canadian banks when it comes to accessing the business credit they need. Alternative finance solutions such as factoring and asset based lending allows your firm to leverage it's assets and sales revenue potential. Thousands of Canadian businesses utilize this method of cash flowing sales when they otherwise could not achieve. While in the majority of cases the factoring firm, or asset based lending firm becomes your ' senior lender ' these facilities also can be complementary to other business credit you have in place. It's all about your total exposure to your lenders versus the amount of  collateral you have in receivables and other assets.Trends now show that thousands of businesses in Canada find themselves unable to get the financing they need. Whether they are ' cut off ' or simply ' restricted' in getting capital into their firm the repercussions can be anywhere from being mild to severe, severe of course meaning closing your business.

So why is receivable finance funding different, and how does the business owner/manager asses the cost of factoring A/R into a sensible arrangemen

The essence of invoice discounting, aka ' factoring, aka ' invoice discounting ' is simply the ability to monetize sales directly into cash as you generate revenue. That in itself is a powerful statement. Where things go wrong is when your business locks itself into a facility that either costs too much, is unwieldy to operate, and simply doesn't mesh with your day to day operations. By the way, that absolutely doesn't have to be the case!

So if banks also margin receivables for cash flow for your business wouldn't Canada's chartered banks be the optimal solutions for cash flow finance. Well they would be that perfect solution if your business qualifies, and if you do qualify do you in fact have access to all the credit you need to grow the business when it comes to seasonality, large orders, cash flow bulges, slow paying clients, etc. The answer is that while our banks in Canada provide the best and most ' low cost ' solution the reality is that not everyone qualifies.

The short answer to bank versus non-bank funding in Canada, when it comes to A/R finance is that the bank bases its decision on your sales, profits, and balance sheet; Factoring, on the other hand, bases its finance formula only on your sales and the invoices generated from that revenue. Oh, and by the way, funding is in fact ' same day '. And it's only as complex as you want it to be, and the industry itself, unfortunately, does not always do a good job of explaining facilities; sometimes employing smoke and mirrors to hide costs and day to day facilitation of the financing. That's when you need clarity!




You have the ability to negotiate what is known as a  ' non recourse ' facility which allows you to transfer all the credit risk to your financing firm - albeit at a cost.

The key to a successful A/R finance program in Canada is your management of the program. The type of facility you enter into, as well as your ability to control what you finance and when is critical. And, as a kicker, our recommendation to clients is ' confidential ' facilities that allow you to bill and collect your own receivables in a manner that allows the competition to do only one thing - figure out where you are getting all that cash . Always keep in mind that the firm financing your receivables is typically more concerned with the overall quality of your customer based, so any firm that is perhaps facing financing challenges is not eliminated from being able to source funding. Knowing you have a strong underwriting partner to fund your sales is a key success factor in any business.

Finally, the concept of ' notification' and ' verification' should be high on the list of factoring due diligence. These two terms arise out of what we at 7 Park Avenue Financial call ' old school ' factoring, and involves occasional or constant verification of invoices with your clients.  At 7 Park Avenue Financial we tend to view this form of factoring as somewhat ' intrusive ', so our recommended and preferred solutions is Confidential Receivable Financing, allowing you to bill, and collect your accounts without any notification to clients, suppliers, etc. All the benefits, and less of the hassle!

Whether you're a start-up, medium-sized firm, or a large corporation, financing receivables can be a huge part of your business success. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor today who can assist you with the facility that makes the most sense for your unique 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

Click Here For 7 PARK AVENUE FINANCIAL website !



7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.



Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced

business financing consultant

.

Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.


Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.






Stan Prokop
7 Park Avenue Financial/Copyright/2020

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.





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

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

Click Here For 7 PARK AVENUE FINANCIAL website !



7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.



Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced

business financing consultant

.

Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.


Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.






Stan Prokop
7 Park Avenue Financial/Copyright/2020

How To Achieve Acquisition Financing Successfully In Canada

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How To Finance A Business Acquisition in Canada

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

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


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


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

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

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

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

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

Business Acquisition Loans In Canada / Types Of Business Acquisition Lenders

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

Senior Lender
Selling Financing component
Cash Flow Loan
Owner equity component

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


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

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

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

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



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




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


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

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

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




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

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

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



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


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


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


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


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

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


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


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





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

Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

http://www.7parkavenuefinancial.com

Click Here For 7 PARK AVENUE FINANCIAL website !



7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.



Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 - Completed in excess of 100 Million $ of financing for Canadian corporations.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR

Stan has had a successful career with some of the world’s largest and most successful corporations. He is an experienced

business financing consultant

.

Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.


Stan has over 40 years of business and financing experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in-depth, hands-on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.





Stan Prokop
7 Park Avenue Financial/Copyright/2020