Business Acquisition Financing: Solutions for Canadian Entrepreneurs | 7 Park Avenue Financial

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HOW TO FINANCE A BUSINESS ACQUISITION

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Everything You Need To Know About Acquisition Financing  

THE ACQUISITION BUSINESS PURCHASE  FINANCE CHALLENGE  

Buying a business in Canada is one way for an entrepreneur to improve operational capacity and grow sales and profits.

Let's dig in on the information you need for a loan to buy a business.

Funding Your Business Growth Journey  

Acquiring a business requires substantial capital that most entrepreneurs simply don't have readily available.

Every day without proper financing means watching valuable opportunities slip through your fingers while competitors gain market advantage.

Let the 7 Park Avenue Financial team show you how Business acquisition finance solutions provide tailored funding structures that align with your growth strategy, preserving cash flow while maximizing your acquisition potential.

An  Uncommon  Take On Acquisition Financing  

Leveraging seller earnouts/vendor debt can significantly reduce upfront capital requirements while aligning the previous owner's interests with your post-acquisition success metrics.

However, securing the capital to fund a business acquisition can be a significant challenge.

Business Acquisitions are often the fastest way to grow a business compared to an organic growth focus. The ability to expand into new geographies or markets with a competitive advantage is an attractive option for the entrepreneur.

The good news? There are numerous ways and strategies to employ based on factors such as the size of the business and the type of business lender you use for traditional bank financing or via alternative finance lenders.

The tried and true route that most business people focus on is a bank loan, but the hard reality is that the requirements of bank financing can be significant and an obstacle to closing a  transaction successfully, -

It is safe to say that typical bank requirements focus heavily on profitability, asset quality and size, and predictable sales revenues.

For companies that might not meet bank funding requirements for business acquisitions, numerous options in alternative financing are available—as well as, in some cases, a financing package via government-guaranteed loans for transactions around smaller companies.

Businesses in the technology and software area pose an additional problem as they are often lacking in hard assets -

Many firms have recurring revenues and valuable intellectual property or intangible assets. Always consider alternative lenders as viable alternatives to complete a business acquisition successfully.

CHOOSING THE RIGHT CAPITAL STRUCTURE

Identifying the proper capital structure for the potential business acquisition is one of the keys to unlocking growth and survival potential -

While owner equity is essential, debt is a cheaper way to fund business acquisitions. Few purchasers or businesses can close an ' all cash ' transaction.

Debt will most often come from a senior lender via a cash flow term loan or, in other cases, asset-backed financing. Subordinated debt/mezzanine financing solutions can often supplement the senior loan position.

When it comes to debt financing, the buyer's ability to present a thorough analysis of business finances will allow acquisition financing lenders to properly understand key issues around cash flows, profitability, and liabilities such as short-term and long-term debt.

The balance between debt and owner equity is a large challenge in acquiring businesses. In some cases, debt financing will be an attractive solution to the acquisition.

Smaller amounts of financing can often be facilitated relatively quickly - an example being Government SBL loans - 

These solutions allow full owner control and are often sourced locally in the business's geographic area. SBL loans also come with limited financial covenants.

THE BENEFITS OF BUYING A BUSINESS  

Most agree that financing a business purchase is one of the most effective means to implement the desired growth strategy.

As a buyer, your ability to acquire business resources and assets, as well as the competency of current employees or management, goes a long way toward a good growth strategy. Market domination and being a competitive player in an industry also contribute to business success.

In many cases, new markets are easier to access when infrastructure is in place with resources to meet the challenge. Financial gains can often be significant relative to the original return on investment.

In many cases, business purchases involve partners buying out their partners—or, in some cases, a management buyout might be considered. During expansion, the right business financing will keep a company strong and allow it to bridge short-term challenges in day-to-day operations.

HOW DOES ACQUISITION FINANCING WORK?  

Business lines of credit are a common choice in an acquisition financing strategy.

These are often in place behind a senior term loan. Both of these finance solutions help a company reach the required scale to run and profit and increase its overall size.

Candian banks are in a position to offer traditional acquisition term loans that  are specially constructed to facilitate the transaction -

Loans from  the alternative lender market  will satisfy firms that can meet bank requirements - It should be no secret that, in many cases, a higher interest rate will come with non-bank alternative lending when compared to bank rates, which are of course,e the lowest in Canada in terms of business funding,

Banks will focus on firms with some revenue predictability and firms that can demonstrate they have or will be able to grow earnings and generate cash flows to repay the acquisition loan. 

Any valuable assets of the business enhance the financing of the acquisition,  Firms that can demonstrate good quality receivable and a client base are highly desirable by bank lenders.

^{SOURCES OF BUSINESS FINANCING}   

The summary of sources for financing acquisitions and purchasing a business typically includes term financing secured by a company's assets or term finance solutions that focus on cash flow financing.

Traditional and alternative lenders will want to understand the dynamics of the business's industry sector, as well as cash flow trends and overall profit margins. Capital-intensive companies will often receive a stronger focus.

CASH FLOW FINANCING   

Businesses with significant assets are candidates for cash flow loans when the company can demonstrate the ability to service debt and cover other fixed charges in the business. 

Valuation becomes very important in acquisition financing under cash flow loan solutions.

The ability of the business to demonstrate management of assets and cash is key. In some cases, the business lender will view the current owner's transition arrangement as positive during the transition to new ownership.

In some instances interest or principal charges on cash flow loans might be deferred for some time - the amortization term can become an essential key to final success.

ASSET-BACKED LOANS / THE LEVERAGED BUYOUT VIA LEVERAGED ACQUISITION FINANCE

When a company can't demonstrate cash flows as the best option to fund a business purchase, buyers can focus on the business's specific assets. One term for this financing is  ' ABL '—asset-based lending!

Valuable business assets will include key balance sheet items such as accounts receivable,  inventories, and potential commercial real estate owned/occupied by the company. In some instances, a value may be placed on intellectual property or patents of business contracts.

If there is one key benefit of asset-backed financing,g it is that there is no major reliance on covenants and ratios often imposed by banks -

This flexibility might come at higher interest rates but provides valuable funding options for the business. Naturally, not all businesses can maintain steady cash flows and the cash levels required by a traditional bank lender.

Unlocking a business's assets becomes job # 1 in a leveraged financing solution to buy a business. Those targeted assets secure financing when cash flow can't provide the entire solution. Asset-backed financing solutions often require the purchaser to put in less owner equity via their personal or business capital.

THE BRIDGE LOAN SOLUTION  

Short-term bridge loans can often provide a faster financing solution until a proper long-term capital structure is established.

These short-term loans are often asset-based and provide a path back to traditional financing when time and circumstances allow.

 THE BUSINESS ACQUISITION PROCESS IN CANADA

Buying a business in Canada and doing the proper level of due diligence can be time-consuming without the assistance you might obtain from a Canadian Business Financing Advisor.

The steps in that process include sourcing the right business to buy relative to your experience and the amount of personal capital available. Assessing the true value of the target company is key, and it is important to know how to conduct the appropriate level of due diligence to ensure key areas are in order.

Business buyers can seek assistance from their accountant, lawyer, financial advisor, etc. Securing the proper financing level within the transaction's timeframes is key. Planning a post-acquisition strategy is also important, as is determining the role of the seller in post-transaction efforts.

HOW TO VALUE YOUR BUSINESS PURCHASE - SOME VALUATION METHODS TO  CONSIDER 

In many cases, the buyer can look at similar companies in the industry and what it might cost to start relative to a required   investment in r&d, sales efforts in building a customer base, and the borrowing costs around the purchase of assets, hiring of staff, etc,

It is acceptable to hire a company that provides business valuations to provide a professional value assessment to your lender/lenders. Their process is thorough and helps ensure a sound takeover strategy and justification. Public companies often use a price/sales ratio as a valuation metric.

Other areas to consider are the value and replacement value of key tangible assets such as fixed assets, inventories, commercial real estate, if applicable, etc.

Another valuable metric is to examine profits that may have fluctuated over the years. This will help you understand the true growth potential of the business in its industry.

Firms with contracts or recurring revenue streams are more valuable, and the buyer of a business will see areas for improvement in profit generation. In some cases, buyers will find themselves in the unfortunate position of competing bids, so determining maximum value and financing ability is key relative to projected returns.

One final issue is the consideration of share purchase vs asset purchase in business takeovers.

THE DUE DILIGENCE PROCESS   

Understanding the operations of a business requires access to key information on the target company in business acquisitions. Key issues to investigate and have access to include, but are not limited to:

Staffing

Technology infrastructure synergies

THE SELLER FINANCING ISSUE   

FINANCING THE BUSINESS ACQUISITION    

Banks and non-bank lenders usually provide a 5-year term loan for the acquisition purchase - in some cases, the amortization can be extended or refinanced.

Businesses with a solid credit history and the right combination of assets and cash flow are solid targets for financing. Newer startups can generally not be financed based on lack of track record, etc.

Buyers should be prepared to provide a detailed business plan that reflects conservative fiscal and financial projections regarding key areas such as profit potential, interest coverage around cash flows, and verification of their financial statements and credit history.

All transactions for business lenders will require a proper purchase and sale agreement.

SMALL BUSINESS GOVERNMENT LOANS FOR ACQUISITION FINANC ING  

Small business loans under the Canada Small Business financing program provide additional financing options for business purchases and for buyers of franchises required for certain sizes of businesses—in this case, with revenues under 10 million dollars, actual or projected.

These loans suit buyers of small businesses who can't qualify for higher down payments but can meet Industry Canada's program requirements regarding net worth, past income, and credit history and who can submit a detailed business plan for the purchase/acquisition deal.

A minimum credit score of 600+ is a key requirement around the limited personal guarantees required in the program for a successful acquisition.

7 Park Avenue Financial prepares detailed business plans for clients that meet and exceed bank, non-bank and government loan solutions for business acquisitions. BDC acquisition financing is also a consideration for some qualified buyers. BDC financing business loan solutions can often supplement financing for a typical financing package around the acquired company.

Let the 7 Park Avenue Financial team help you with the extensive application process around the acquired business target company.

KEY TAKEAWAYS    

Acquisition financing is business funding to buy a business

The ability to purchase a company can increase sales and benefit from economies of scale and new initiatives

The most common choices for acquiring a business are  bank loans, asset-based financing, or private equity

Other forms of acquisition financing include federally guaranteed government small business loans and owner/seller finance, which help with cash reserves.

Case Study: Benefits of Business Acquisition Financing  

When a Canadian manufacturer faced a strategic decision, business acquisition funding was needed. The company identified a competitor with complementary product lines and strong customer relationships but faced a $3.2 million acquisition price tag.

By structuring a strategic proper acquisition financing package that combined $1.8 million in asset-based senior debt, $800,000 in mezzanine financing, and a $600,000 seller note, the company completed the acquisition while maintaining crucial operating capital.

The results proved transformative: combined revenues increased by 68% while operating costs decreased by 23% through consolidated operations.

The acquisition financing structure allowed for comfortable debt service with a 1.6x coverage ratio and the loan was fully repaid within four years—one year ahead of projections. Without properly structured acquisition financing, this growth opportunity would have remained unrealized.

CONCLUSION

Acquisition funding may take various forms. Although there are several financing choices, the financing strategy must be specific to a smooth ownership transition.

Acquisition financing must also include costs and working capital requirements for operating the business once the transaction is completed and for your growth finance plans.

Call  7 Park Avenue Financial, a  trusted, credible, and experienced Canadian business financing advisor who can assist you with the acquisition funding process and help ensure business buyers understand all their potential financing methods for future growth potential.

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

Which is better when purchasing a company - debt or equity?

Debt Financing costs less than equity financing and does not dilute owner equity. The challenge of purchasing a business with debt is that it can be a challenge to service interest and principal payments - too much debt in a business will impact the company's access to business credit -

Companies exploring an acquisition with debt finance should focus on working with reputable traditional or alternative finance lenders. The ability to identify the best acquisition finance structure is key to determining the flexibility around buying a business. When purchasing a company with debt acquisition financing options, owners should be prepared to invest a minimum of 15-20% of owner equity. 

WHAT IS ACQUISITION FINANCE

Acquisition financing is the securing and use of business capital and how a company funds an acquisition or merger. Financing solutions include equity financing contributions, debt financing from acquisition financing lenders, and cash flow-based lending solutions. 

The challenge in buying a business is the buyer's ability to ensure the right mix of funding is available at a reasonable cost of capital from a bank or non-bank financing company.

The purchase of a business should focus on providing some level of flexibility to the buyers and allow for adaptability to different business and economic circumstances relative to the owner's goals in running and growing the business. Financing an acquisition with debt is a common method of business acquisition.

Various factors affect the ability of a buyer to fund a business purchase - those factors include but are not limited to valuation,  business financial strength and credit quality around future cash flow, and industry dynamics in that segment of the economy,