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The Insider’s Guide to Financing Your Business Acquisition
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A Guide to Business Acquisition Financing
Introduction: The Rising Interest in Acquisition Financing
There's just a lot of interest these days, it seems, in acquisition financing to buy an existing business as a way for Canadian businesses to achieve various objectives. One way in which they can be successful is via an ABL finance business loan to finalize that objective.
Why Acquire Another Company? The Strategic Reasons Behind Business Acquisitions
Why do companies want to acquire each other? Of course, it's for a variety of reasons, including growing sales, becoming a market leader in their niche, cost reduction, or buying the 'secret sauce' technology of another firm.
Exploring Innovative Financing Solutions / The Allure of "No Money Down" Business Acquisition Loans
We're always on the lookout for new thoughts in Canadian business financing, so we were drawn to an article in one of the two leading Canadian business newspapers the other day which had the catchy title of buying a company with 'no money down'. The article was written by one of Canada's respected investment officers and fund managers.
Finding Bargains in Canadian Business
No money down to finance a business acquisition? And acquire a significant business at the same time. We were intrigued.
The essence of the article was that many 'bargains' are available in Canadian business - it’s a question of finding them! The article went on to say that the essence of such a search, once you have found a target firm, is to go back 50 years. Go back 50 years?!
Actually what the author meant was that at this point in your search it's time to call on Benjamin Graham, acknowledged as the father of value investing by almost all, including his prize teach pet student Warren Buffet.
The Value Investing Approach to Acquisition / The Focus on Net Working Capital
What's recommended by these 'gurus' is to look at ‘net working capital' - something we focus on a lot in our preachings. That figure is made up of receivables, inventories and any cash on hand.
The Debate on Asset Valuation
What about the other assets though? Essentially it's offered up that they don't matter. We think they do, but Mr. Graham and Buffett disagree with us ... the nerve!
Innovative structures for financing acquisitions often overlook the potential of leveraging future earnings as collateral. By projecting the acquired company's revenue growth, buyers can negotiate financing terms that align with expected cash flows, offering a dynamic repayment plan that adapts to the business's performance post-acquisition.
ABL Financing: A Superior Alternative for Acquisition Financing / Advantages of Asset-Based Lending (ABL)
So this is where we come in. Where the author of the article focuses on dealing with Canadian chartered banks or credit unions we prefer a faster better route, ABL finance.
Comprehensive Asset Inclusion
The beauty of ABL financing, via an asset-based line of credit, is that it can also include the fixed assets that seemed to have been discounted by Mr. Graham and Mr. Buffett.
Maximizing Asset Utilization
A true asset based line of credit encompasses our previously mentioned current asset accounts, as well as unencumbered fixed assets. And while the article we referenced focused on bank financing the reality is that acquisition financing via ABL finance provides a higher margin level on these assets. Typically those margins are 90% of receivables, significant inventory advances subject to appraisal/valuation, and financing for liquidation value of fixed assets.
Addressing the Needs of the SME Sector
More often than not firms in the SME sector that want to buy another business can generate no interest in Canada from 'private equity' or 'VC' firms for an acquisition deal, as those firms focus on larger transactions for a business owner.
What is seller financing?
Seller financing, aka ' vendor financing ' in a business acquisition is a financing arrangement where the seller of the business extends a loan to the buyer to cover part of the purchase price and help ensure a smooth ownership transition in existing businesses.
Instead of the buyer obtaining the entire purchase amount from a bank or another financial institution, the seller acts as the lender. The buyer repays the loan over time, usually with interest, according to terms agreed upon by both parties.
This type of financing is beneficial for both the buyer and the seller. For the buyer, it can simplify the financing process, offer more flexible terms than traditional loans, and potentially reduce the amount of initial capital required from a bank loan or other type of commercial financing.
For the seller, it can make the business more attractive to potential buyers, possibly result in a higher selling price, and provide an income stream from the interest on the loan.
Seller financing is often used when the buyer cannot secure sufficient financing from traditional lenders or when the seller is eager to facilitate the sale for reasons such as retirement, moving on to other ventures, or when market conditions make it difficult to sell the business outright.
The specific terms, such as the loan duration, interest rate, and repayment schedule, are negotiable and tailored to suit both the buyer's and the seller's needs.
Key Takeaways
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A crucial financing option that uses your company's assets as collateral. Understanding ABL can help you see how assets like inventory, receivables, and even fixed assets can unlock financing.
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Valuation and Due Diligence: Recognizing the importance of accurately valuing a target company around the purchase price and conducting thorough due diligence ensures you make informed decisions and negotiate the best terms.
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Deal Structure: Different structures, from leveraged buyouts to earn-outs, offer various ways to finance acquisitions, impacting both the immediate financial burden and long-term commitments.
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Cost of Capital: Grasping how the cost of different financing options versus raising equity affects your company’s profitability and cash flow is key to choosing the right financing mix.
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Negotiation of Terms: Understanding the negotiation process, including terms related to payment schedules, interest rates, and covenants, can significantly affect the feasibility and success of the acquisition.
Conclusion: Navigating Acquisition Financing with Expertise In Business Acquisition Loans
So, no money down? The jury might still be out on that one, but we do assure clients that an ABL loan is a great financing alternative when you are looking to purchase another firm for competitive reasons.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor when you want to further your acquisition finance objectives under the optimal financing structure for successful acquisition and financing structures
FAQ: FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION
How does business acquisition financing work?
Business acquisition finance involves securing funds to purchase another company, typically through loans, asset-based lending, or investor capital, enabling businesses to grow rapidly without depleting cash reserves.
What are the benefits of this type of financing to finance a business acquisition?
It allows the business owner to grow via a more rapid expansion, access to new markets, increased market share, and the acquisition of valuable assets or technology in the acquisition deal.
Franchise acquisition financing allows entrepreneurs to buy a new or existing franchise - often financed via the SBL loan program in Canada - That is the Canadian equivalent of the U.S. SBA program. . ( TBDC acquisition financing is also a potential solution, via Canada's crown corporation non-bricks and mortar bank for entrepreneurs.
Who can benefit from business acquisition financing?
Any business looking to expand through acquisitions, from small and medium enterprises (SMEs) to large corporations, can benefit from using acquisition financing lenders.
What types of assets can be used as collateral in ABL financing?
Assets such as receivables, inventory, and fixed assets can serve as collateral, providing a flexible financing solution for types of acquisition financing.
How do I start the process of securing acquisition financing?
Begin by evaluating your financial situation, understanding the value of the target company, and consulting with a financial advisor to explore your financing options.
What is the difference between asset-based lending and traditional loans?
Asset-based lending relies on the value of your company's assets as collateral, including in some cases intellectual property - so offering more flexibility and potentially easier qualification than traditional loans based on creditworthiness and financial history.
How can I ensure a smooth due diligence process?
Organize all financial documents, understand the target company's operational and financial performance thoroughly, and engage experts like accountants and lawyers for specialized evaluations.
What are the common pitfalls in business acquisition financings?
Underestimating the total cost of acquisition, failing to conduct thorough due diligence, and overleveraging are common pitfalls that can jeopardize the success of the acquisition.
What factors should I consider when choosing between different financing options?
Evaluate the cost of capital, repayment terms, the impact on cash flow, and how each option aligns with your strategic goals to choose the best financing route for your acquisition.
How does the negotiation of terms affect acquisition financing?
Effective negotiation can lead to more favourable terms in the financing structure, such as lower interest rates, flexible repayment schedules, and reduced covenants, making the financing more manageable and cost-effective.
Can I use business acquisition finance solutions for international acquisitions?
Yes, many financing options are available for a successful acquisition of an international firm, but it's crucial to consider additional factors like foreign exchange risk, cross-border legal complexities, and the international business environment.
What is mezzanine financing?
Mezzanine financing is a hybrid form of capital that sits between senior debt and equity in a company's capital structure, often used to finance the expansion of existing companies, acquisitions, buyouts, or significant capital projects. It is considered higher risk than senior debt but less risky than equity financing. Mezzanine financing typically comes with higher interest rates reflecting its increased risk level given that the collateral is in effect future cash flows.
