How To Finance A Business Acquisition In Canada

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SECURING A BUSINESS ACQUISITION LOAN

There are many methods to becoming a business owner. One path is building a company from the startup phase, but this isn't always realistic or achievable for everyone.

A business acquisition loan is a type of financing designed to help you buy a business. Simple, right? But knowing the different types of financing and ensuring this is the right option for you is a challenge.

There are different types of loans and financing strategies you can consider to buy another business.

Many business owners are looking for the right exit strategy, so buying a business that has a level of profitability or leveraging an existing asset base can be the best decision for many entrepreneurs and experienced business people.

When Time Kills Deals: The Acquisition Financing Crisis

Every day you delay finding the right business acquisition lender, your competition gets closer to stealing your target company.

Private lenders promise speed but deliver crushing terms that destroy deal economics. Smart acquirers know the secret: specialized acquisition lenders who understand deal urgency and structure financing that actually works.

TYPES OF BUSINESS ACQUISITION LOANS

TERM LOANS / SENIOR DEBT

For buyers of a business that have good personal credit and if the target company has an overall good business credit score and financial standing, business acquisition term loans are often the best option for financing your business purchase.

These business loans are structured to suit the acquisition and are usually through traditional lenders such as Canadian banks, non-bank commercial finance companies, and asset-based lenders as well as government financial institutions.

This type of loan will typically come with more attractive payment terms tailored to the overall credit quality of your transaction, as well as fixed interest rates or variable rates based on market conditions.

GOVERNMENT LOANS

This is an Industry Canada program that can help with your business purchase financing needs and offers a loan that is designed to assist small businesses in acquiring new assets. Talk to the 7 Park Avenue Financial team to determine if this program is suitable for your business purchase.

The SBL Loan is perfect for those entrepreneurs who have trouble securing traditional funding. These loans are offered by different types of lending institutions such as banks and some business-oriented credit unions who are, in fact, traditional lenders but who have a federal guarantee on the loans they make under the program.

The government-owned business development bank is also a potential source of capital. Many small business owners utilize government loans for franchise financing.

Government loans are less expensive than other forms of alternative financing, and this type of financing is also structured as a term loan with monthly payments that are more manageable and tailored to your situation.

Borrowers need good credit scores and financial standing around their personal credit history when applying for a small business loan. In Canada, a good minimum credit score is 600+.

ASSET-BASED LENDING

Asset-based financing can be an excellent way to get your business purchase financing by utilizing the leveraging of the assets in a business. The business asset collateral will help secure the loan, where a bank lender will focus predominately on profits and cash flow.

SELLER FINANCING / VENDOR DEBT FROM THE CURRENT BUSINESS OWNER

Many business acquisitions often come with some financing provided by the seller of a business.

This type of loan is amortized over a certain period of time as agreed to by the buyer and seller and allows the buyer to pay this part of the acquisition through the cash flow of the business.

The main reasons buyers consider and negotiate seller financing is that repayment is clearly tied to the overall financial success of the business as well as, of course, the obvious benefit—less external lender financing is needed to close the transaction successfully.

Competitive interest rates are often a part of the seller finance structure and are often lower than market rates.

Finally, seller notes via the VTB can be very flexible during purchase negotiations, and convenient terms for both the buyer and seller can be arranged.

We should note, however, that the majority of sellers prefer to get paid in full for the sale of their business, but seller financing can often be a strong incentive to complete a sale.

Generally speaking, the vendor take-back/seller note portion of a business acquisition will be in the 10-20% range, but it varies by type and size of the deal.

HOW MUCH ACQUISITION FINANCING DO YOU NEED?

There are numerous key issues when determining the amount of financing you will need for your transaction, and buyers of a business have to determine the best way to access that capital.

Included in those decisions are the amount of your down payment/owner equity component as well as the amount of working capital financing that might be required to run and grow the business.

The ability to leverage the assets of a business will often assist the buyer in completing a transaction successfully.

While many prospective buyers of a business sometimes assume they can buy a business with "no money down," this is really not an applicable strategy in the Canadian business financing landscape.

BENEFITS OF ACQUIRING A BUSINESS

Access to capital makes buying a business an easier way to enter the world of business ownership despite the fact that entrepreneurship is a tough call in many situations.

It takes hard work, time commitment, and the right business funding to get your business purchase off the ground successfully.

Buying a business allows the entrepreneur and experienced business person to skip the startup phase of growing a company, which can be very stressful, to say the least.

Growing your company has never been easier with numerous ways to access capital via a properly structured business acquisition loan allowing you to expand and grow. Business acquisition loans often have extended terms over many years, and numerous financing options are currently available to the entrepreneur.

HOW TO VALUE YOUR ACQUISITION

Valuing a company is crucial for many reasons. How much an organization should be worth based on its performance and future prospects is key to a business transfer's success.

Choosing the right business valuation method can be difficult. There are many methods to choose from, and each may produce different results depending on your needs around the target company within diverse industries, but you absolutely need a good estimate of its worth and value.

Business valuations are crucial in your due diligence, and the process involves collecting and analyzing metrics around revenue, profits, or losses with an eye toward arriving at the estimated intrinsic value for your business. In that way, you can make informed decisions about its future and sales potential.

Valuing a business is more than just looking at the numbers. By using data from financial records, buyers can determine whether there's enough profit in a company to cover acquisition costs and debt obligations, as well as being able to determine what rate of growth will be generated over time.

Larger companies typically command larger valuations than their smaller counterparts because of greater revenue streams, as well as the potential to have better access to capital and well-developed products.

TYPES OF VALUATION

There are numerous ways that buyers use to determine the value of a business. In many cases, these are the methods used to value large public companies, but they still have relevance.

Methods include evaluating the quality and size of future cash flows and using multiples within the same industry to compare value.

In asset-intensive firms with fixed assets or commercial real estate, the book value and replacement value of assets must be viewed carefully. Different values can be assigned to different parameters within the company that help evaluate overall risk, including the value of intangible assets.

KEY STEPS IN OBTAINING AN ACQUISITION LOAN

The acquisition loan process can be an involved process, but there are ways to make it easier. Lenders need to evaluate both you and your prospective target company before deciding whether or not they'll give out any funds! Additionally, some business funders may only offer loans for certain industries.

You'll need to provide your personal credit history and full disclosure around the business financials as well. Your professional experience in any industry is important but might not be enough on its own—financial know-how or access to financial knowledge is key.

YOUR SOLID BUSINESS PLAN IS KEY!

It's a great way of highlighting your goals and maximizing chances for success around financing, as lenders want to know what type of industry the company operates in and how profitable the business can be.

7 Park Avenue Financial prepares business plans for our clients, and our focus is on cash flow and business finance fundamentals.

Our business plan for you will meet and exceed bank loan and other commercial lender requirements with a focus on potential growth and earnings. The business plan is a solid way of highlighting your goals and maximizing chances for success with lenders.

KEY ACQUISITION FINANCING DOCUMENTS REQUIRED

Proper documentation is key to any successful acquisition loan application in business acquisition funding.

Typically in business finances, a delay will occur because of a lack in the production of necessary documents.

You can expect a request for a variety of documents around the business purchase. These include personal and business tax returns, bank statements, historical and current financial statements, an agreement of purchase and sale, etc.

Other key data includes information on existing debt, cash flow projections, and applicable contracts and licenses.

Case Study

The Service Company Turnaround: When Banks See Risk, Smart Lenders See Opportunity

A Canadian business owner built his IT consulting firm into a $2.8 million revenue operation when he spotted the perfect acquisition target—a struggling software development company with $1.9 million in annual revenue but operational challenges that scared away other buyers.

Traditional banks immediately rejected his acquisition proposal. They saw declining profits, customer concentration issues, and management turnover as red flags. Even his long-term business banker, who had financed his equipment purchases for years, wouldn't touch the deal.

Owners spoke to 7 Park Avenue Financial, which specialized in this type of challenging transaction..

The final creative solution?: 65% acquisition financing at 13.2% interest, combined with 25% seller financing over five years, requiring only 10% cash down from buyer. The higher interest rate reflected the risk, but the structure preserved owners' working capital for the operational improvements he planned.

KEY TAKEAWAYS

CONCLUSION - BUSINESS ACQUISITION FINANCING

The biggest mistake business owners make when seeking acquisition financing isn't choosing the wrong business acquisition lender—it's waiting until they find the perfect deal before building those crucial lending relationships

The process of buying a business can be long and challenging. Want a better chance to be successful in buying a business?

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

Loan terms can vary depending on the type of financing you require and whether external collateral is required for a business purchase. Requirements for traditional bank loans vary between financial institutions and the amount of the purchase price.

Different lenders will require different documents, but many key essential requirements include personal credit score around your personal finances, personal bank statements, financial statements around the target firm being purchased, business experience, and type of collateral or personal assets offered in the purchase.

Business acquisition lenders require three years of tax returns, current financial statements, the acquisition target's financials, the purchase agreement, accounts receivable and accounts payable aging, details of the company's assets, ie equipment, etc personal financial statements, and a detailed business plan showing post-acquisition cash flow projections.

Business acquisition lenders rarely finance 100% of acquisition costs. Most require 10-30% down payment from the buyer as the ' equity investment ' / down payment, though they may combine with seller financing or Government SBL loans to minimize your cash requirement in raising equity in financing acquisitions in a typical financing package - In some cases mezzaning financing might be a part of your transaction

What competitive advantages do business acquisition lenders provide over traditional financing?

Business acquisition lender advantages include faster approvals, willingness to finance complex deal structures, industry expertise that helps structure optimal terms, and flexibility to modify terms as deals evolve during due diligence.

Business acquisition lenders often suggest creative structures combining debt, seller financing, and earn-outs that reduce your cash requirements while giving sellers attractive terms, creating win-win scenarios that traditional banks can't match.

What due diligence do business acquisition lenders perform on target companies?

Business acquisition lender due diligence includes financial analysis, industry research, management interviews, customer concentration review, and operational assessment to ensure the target company can support the proposed debt structure successfully.

Business acquisition lender underwriting analyzes target company cash flow, debt service coverage ratios, industry multiples, and buyer experience to determine maximum loan amounts and appropriate interest rates for each specific deal.

Citations / More Information

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR: Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Business Acquisition Lender Solutions for Canadian Companies | 7 Park Avenue Financial