BUYING A BUSINESS? NEED HELP ON VALUATION AND FINANCING ?!
FINANCING YOUR PURCHASE PRICE / FUNDING TO PURCHASE A BUSINESS
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Financing & Cash flow are the biggest issues facing businesses today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
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HOW TO FINANCE A BUSINESS ACQUISITION IN CANADA
Buying a business? The success of that transaction can revolve around 2 key elements, valuation, and business loan financing. Frankly, knowing what your business is worth at any given time isn’t the worst thing also. How exactly can you make sure you are approaching valuation and financing properly in your ' due diligence?
The business owner or manager might also want to remember that equity valuation doesn't necessarily become a key factor in debt financing - that's when it's all about the assets. However, just like how we might view our personal homes it’s always a good thing to know what things are worth!
Opportunity presents itself in purchasing an established company with all its risks and rewards in owning your own business.
LOOKING AT SOME KEY DATA POINTS / GATHERING THE REQUIRED DOCUMENTS
There are numerous, let's call them ' data points ' when it comes to taking a look at value. Assets play a key role, and it's important to look at both the cost of replacing them as well as their current estimated value, which often differs from ' book value ' with respect to the role of a deprecation policy.
ASSETS VERSUS BUSINESS PROFITS IN BUSINESS VALUATION & ACQUISITION FINANCE
In fact, if you're looking at buying a business or even a franchise that might possibly have little or no current profits keep in mind that it becomes all about the assets that will play a key role in your financing. It would be great of course to have data that allows you to compare other similar businesses, but in the SME (small to medium enterprise) sector that type of info or data is not always possible - that type of information is usually received for companies that are either public or much larger.
VALUE OF THE BUSINESS VIA INCOME AND CASH FLOWS
Another way to approach valuation and then financing is by using income and cash flow approaches. At the end of the day, it's in fact that cash flow that is going to play a role in your financing approval and the assessment of the value of a business.
As complicated as some valuation concepts might seem there are really just a few basic key points that are looked at - they are current and future profits, multiples of sales or cash flow and the assets we've talked about already in those financial statements. Those items will help develop true market value pricing on the true business value. Issues around non-recurring revenues should also be explored.
On very large transactions it might sometimes be recommended that you employ a professional business accounting firm or business valuator to determine the proper appraised value of the company.
Using such techniques as discounted cash flow as well as other methods that might apply to a particular industry and type of business a defendable purchase/sale price is determined. In some cases, intellectual property / intangible assets may need to be valued, or in some cases real estate assets of the target company. A period of time should be allocated for this level of due diligence in allowing for proper valuation in comparable businesses.
A VALUATION EXAMPLE - BUSINESS PURCHASE FINANCING CANADA
Quick example. If you are told or determine that business in this industry sells at, or is valued at a multiple of 3 then a company you are looking at with 100k in net income would be potentially valued at 300k. The financing challenge comes when there aren't enough assets to finance and a large part of what you are paying in effect becomes ' goodwill ‘, which is generally not financeable for businesses that are small to medium-sized when it comes to a company's value. Tangible assets on the balance sheet will always bring solid value when properly identified.
HOW TO FINANCE BUYING AN EXISTING BUSINESS
GOVERNMENT OF CANADA SMALL BUSINESS FINANCING PROGRAM FOR PURCHASING A BUSINESS
We should mention that the Canada government Small Business Loan, aka the ' SBL ' is in fact a very solid and recommended way to finance an asset acquisition, but we caution clients to understand that the financing vehicle is only able to finance assets and leasehold improvements and real estate, albeit at a competitive interest rate. The government itself does not directly lend money.
Participating financial institutions manage the program under the government guarantee. Various guarantees and safety measures are made to banks by the government for the program to be successful.
One piece of good news in that type of deal is that an updated appraisal of the assets and their current value might in fact help you get the full financing you need.
BUYING A FRANCHISE
Franchise financing solutions for small business owners are a typical use of this program. Click here for more information on franchise finance solutions.
At 7 Park Avenue Financial, we prepare business plans and cash flow projections for all transactions of this type and the business plan we prepare meets and exceeds lender requirements for both traditional and non-traditional financing.
Buyers can also explore BDC loan requirements for buying a business. The business development bank is a government crown corporation financial institution.
IMPROPER FINANCING LEADS TO BUSINESS FAILURE - GETTING A LOAN TO BUY A BUSINESS IN CANADA
When poor or ' not enough' banking or financing arrangements aren't in place there is a greater chance of business failure, let alone your ability to grow or operate the business.
HOW ARE BUSINESS ACQUISITIONS FINANCED?
We think it's clear by now that an outside opinion on what you are paying and how you will finance buying a business might well need some outside help, both in the valuation and the financing of assets. Businesses can be acquired via Canadian bank loans; asset-based lending arrangements, and even monetizing current assets such as accounts receivable and inventory.
THE PROS AND CONS OF BUYING AN EXISTING BUSINESS
Buying a business can be an advantageous decision, but it also comes with risks. Knowing what those risks are and how to manage them could make the process much more manageable.
The most significant downside to debt financing for your business acquisition is that you are relying on outside capital and debt in addition to your other business expenses.
CONCLUSION - BUSINESS ACQUISITION FINANCING CANADA
When looking at financing the purchase of an existing business any new clients at 7 Park Avenue Financial have often found companies for sale with the help of a business broker who is selling a business on behalf of their client. They usually have a number of small businesses and business for sale signs out on a number of transactions and are focused on marketing a business in the same manner as a real estate agent would operate. It's a good idea in valuing a business and financing to have the right team on your side.
Need to ensure you got the right team in place to finalize your purchase and get the right financing to buy a business - Want to ensure you are using the proper valuation methods? Seek out and speak to a trusted, credible, and experienced Canadian business financing advisor who can assist you with your business purchase and financing needs.
FAQ: FREQUENTLY ASKED QUESTIONS /PEOPLE ALSO ASK / MORE INFORMATION
How do you finance a business purchase?
1. Personal savings / Personal finances for equity capital via purchaser down payment
2. Government small business loans / traditional bank loans
3. Seller Note / Vendor takeback financing
4. Asset-based lending for leveraged buyouts and management buyout when there is cash flow and substantial assets
5. Assuming the debt of the target company
6. Peer to Peer lending
What type of financing is best for a small business acquisition?
The best financing for purchase of a business options for a small business acquisition are:
Equity Financing ( Your own money ) in combination with business purchase loans
Commercial bank loan
Government SBL loans
Asset Based Lending term loans/non-bank business credit lines on the business's assets
How long does it take to buy a business?
Based on experience at 7 Park Avenue Financial business acquisitions for established businesses typically take 1-3 months depending on the size of the business. Larger more complex acquisitions take longer to complete given the requirements around due diligence and financing. Venture capital firms and private investors are often involved in larger deals.
What questions should you ask when buying a business?
Key areas to focus on when buying a business include
1. Reasons for buying the business
2. How will the business be successful
3. What type and amount of financing is required to buy the business
4. What is the value of the business
5. Can you get access to proper financial statements and other legal documents from the business owners that are required in business acquisitions
6. Does the company have intangible assets
What is seller financing for a business?
Seller finance is a financing arrangement and agreement between the business seller who provides some form of financing to help the buyer complete the business acquisition. Buyers repay the financing which is typically at better than market rates and favorable terms.
