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FINANCE TO PURCHASE AN EXISTING BUSINESS - UNDERSTANDING BUSINESS PURCHASE FINANCING
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HOW TO FUND BUSINESS ACQUISITIONS IN CANADA
An entrepreneur is someone who jumps off a cliff and builds a plane on the way down." - Reid Hoffman, Co-founder of LinkedIn
How to finance buying an existing business venture in Canada.. without making critical mistakes! That's an issue that often comes up with new clients at 7 Park Avenue Financial who are looking to purchase an existing company.
BUSINESS PURCHASE FINANCING OPTIONS
The process of financing the purchase of an existing business or acquiring controlling interest comes with various financing options - While some buyers pursue private equity or venture capital the reality is that 99% of the time the funding of the business purchase is done via traditional financial institutions such as banks, commercial finance companies, and asset-based lenders.
Each of these options has specific advantages and disadvantages around the business purchase agreement - Talk to the 7 Park Avenue Financial team about which funding solution suits your needs and financial circumstances.
More and more Canadian business owners and managers are looking toward executing and financing a business purchase acquisition. Buying a company, even a competitor has become one way to succeed in a growth strategy for successful business buyers.
But when you buy a firm are there some secrets to both not overpaying as well as some solid advice on how to finance the acquisition for the business owner /entrepreneur? We think there are.
Naturally, the big guys execute acquisitions, leveraged buyouts and mergers almost every day, all day. Valuations, currency, and business politics and competition play a huge role in determining the success of those deals for many buyers, which we read about every day.
UNDERSTANDING BUSINESS PURCHASE FINANCING
Few people know all the multiple sources in funding acquisitions - But how about your transaction in the small to medium-size (SME) sector in Canada? How do you access the cash and finance mechanisms that make a transaction work?
Many clients we speak to are looking to maximize what they feel are ' undervalued' firms, in some cases the company you may be looking at might be in dire straits.
Naturally, there are reasons why your acquisition target is undervalued, or in those dire straits, we talk about. The reality is that more often than not it’s not just the price or value that you have agreed on, but the post-sale cash flow and operations of the acquisition that will make or break your deal.
WHAT ARE MY FINANCE OPTIONS WHEN BUYING A BUSINESS IN CANADA
That's a question we get a lot at 7 Park Avenue Financial - and we have answers! In most cases, more than one type of financing will be required to complete your transaction. Your own equity component - the ' down payment ' is often a key part of the financing puzzle.
UNDERSTANDING THE DIFFERENCE BETWEEN DEBT FINANCING AND OWNER EQUITY FINANCING FOR BUSINESS PURCHASES
It is of course rare that any business is acquired for ' all-cash ', and certainly, the size of the target company will dictate that. Equity financing required will always be a key discussion point in your transaction.
Sometimes overlooked is the ' VTB ' or seller financing component. That often can make or break a transaction depending on the seller's desire to participate in the transaction to help complete it. It's a great incentive for potential lenders also, as both the buyer and seller are clearly indicating their commitment to the proverbial ' skin in the game'.
There is no set amount for what that vendor financing/ seller financing portion might be - it will relate directly back to financing available and your own equity in the transaction.
KEY FINANCING OPTIONS FOR YOUR BUSINESS PURCHASE
Traditional bank financing via unsecured loans or a bank loan/term loan structure/business credit cards, etc - Many entrepreneurs access retirement accounts to help fund their equity position in the purchase.
Asset-based lending loans - the alternative to conventional commercial lending and financing in Canada - Leveraged buyout solutions often employ "ABL financing" when substantial assets / specific assets are part of your transaction - ABL loans come with higher interest rates but they get the job done!
Government of Canada Small Business Loan Program - The ' SBL' - (in the U.S. it is bank loans or SBA Loan ) The Canada Small Business Financing Program allows banks to lend money and provide loan financing to those that might not otherwise qualify for traditional lending with guarantees and safety measures supplied to banks via the federal government long term fixed /variable rate loan.
Funding fixed assets and leasehold improvements are the cornerstones of the Canada small business loans program - However in 2022 numerous enhancements were made to the program that included additional types of financing around franchise fees, working capital financing, and business credit lines.
On the other hand, it's important to note that certain conditions such as personal credit are key aspects of government loan programs to access the competitive interest rate offered under the program.
A minimum credit score in the 600+ range demonstrating good personal credit is required for a business credit history. The personal guarantee is also very limited under the program. Competitive interest rates around fixed and variable financing flexibility are also in the program.
Monthly payments can be tailored to your timing needs under the repayment terms of the program - Talk to the 7 Park Avenue Financial team about which financial institution might assist in your funding needs for smaller acquisitions
Let the 7 Park Avenue Financial team talk to you about which financial institution might assist in your funding needs for smaller acquisitions of existing businesses.
Cash flow mezzanine loans/mortgage loans & solutions for real property owner-occupied businesses
Ongoing funding of the business will be required via business lines of credit or access to alternative financing solutions such as factoring/receivable finance, purchase order financing, equipment leasing, etc.
We should note that intangible assets or intellectual property might be a part of buying a business and provide an additional funding challenge to the buyer of a business. Maintaining decent cash reserves to run and grow your business is key.
BUSINESS VALUATION - DON'T OVERPAY WHEN BUYING A BUSINESS!
Where can things many times go wrong is simply when you don't spend enough time on the financials or the careful financing of the purchase. And boy are you committing a grave mortal sin when you overpay for a deal.
The concept of overpaying and then not being able to execute on your overall strategy now puts you in... You guessed it... dire straits. Ensuring you have the right purchase price is job 1 in your due diligence.
So what are the key areas of ' sinning ' when you buy a firm, from a financial and financing perspective? Naturally, as we have said, valuation is important, as well as a careful study of what you could call ' risk areas'.
WHAT IS DUE DILIGENCE AND WHY IS IT IMPORTANT IN BUSINESS PURCHASE TRANSFER FINANCING
The due diligence process is important as it allows the buyer of a business to research and analyze various aspects of the business as well as the ability to review potential risks in the transaction around liabilities that may exist in the business now or in the future
HOW DO I PREPARE A BUSINESS PLAN AND FINANCIAL PROJECTIONS FOR THE PURCHASE OF A BUSINESS?
To prepare the required business plan and financial projections associated with a business purchase buyers should ensure appropriate research is done around the market of the industry as well as analysis of the historical and projected financial position of the business. 7 Park Avenue Financial prepares business plans for our clients that meet and exceed bank and commercial lender requirements.
BUSINESS ACQUISITION LOANS
Financing the transaction must have you taking a hard look at profits, cash and working capital, and how your final balance sheet will look in your consideration in buying a business. It's very important to focus on what cash flow the new company will generate. This is when your new ' economies of scale kick in.
3 KEY ASPECTS OF FUNDING TO BUY A BUSINESS
Three other key areas of focus are :
Total new sales growth,
What assets are needed in the new combined entity
How working capital and operational costs will be financed. This includes growth in receivables, inventories, etc, in other words, your ' current assets'.
Those issues are key in any small business. Occasionally there might be a real estate component in your transaction, which requires other special consideration - issues such as an appraisal, or setting up a separate legal company to hold the real estate will often arise.
Term loans are a part of the actual business financing equation a commercial mortgage separately from the operating business might well be required to complete the business funding.
Some small businesses might have a healthy component of intangible assets on the balance sheet, and normally these intangibles such as ' goodwill ' cannot be financed unless the target company has a very strong cash flow and a good brand name/reputation and operating history.
The assets of the business, those ' hard assets' are commonly the key component of financing your transaction- as well as of course the cash flows and revenue generation issues based on good client lists.
A solid business plan for financing is always required for your acquisition - 7 Park Avenue Financial business plans we prepare for clients meet and exceed bank and commercial lender requirements and focus on the analysis of financial statements and cash flows to support the financing.
Don't get caught in other misconceptions - the concept of 'diversifying ' can sometimes turn into a fiasco. Diversifying into a completely different industry can bring both danger and financial risk. And don't think you can rely totally on the acquired management team to totally achieve your goals. That is up to you and your team!
If you are thinking of buying a company or considering a merger acquisition or a management buyout getting the right financing in place is key to finalizing a successful transaction- for more information about the most efficient and quick way to fund your purchase in a short period of time talk to 7 Park Avenue Financial.
CONCLUSION - SUCCESSFUL BUSINESS ACQUISITION FUNDING
Medium size and small businesses want to see and are looking for the optimal financing structure for your business purchase. There you have it, some pitfalls... to avoid when you buy a company through some sort of merger or acquisition process.
Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor for tips and solutions to fund acquisitions around buying and financing a small business in Canada with a financing structure that makes sense to your type of business and is viable in the shortest period of time with other types of financing.
FAQ: FREQUENTLY ASKED QUESTIONS/ PEOPLE ALSO ASK / MORE INFORMATION
What is business purchase financing?
Business purchase financing allows a buyer of a company to obtain funding to purchase the assets or shares of an existing business. Funding to buy a business can come from numerous sources that include a bank loan, asset-based lending solutions, and cash flow financing via mezzanine finance - Larger transactions might include the participation of venture capitalists or private equity firms.
How do I determine which financing option is best for my business?
The buyer of a business can determine the best financing options by considering the size of the business as well as the characteristics of the industry and long-term goals associated with the purchase. It is often beneficial to utilize the experience of business financing advisors, lawyers and accountants and trusted friends.
What is the best way to finance a small business?
Many business owners are faced with the question of how to finance their small businesses. There are many different options for financing a small business, including debt financing via banks, angel investors and loans from friends and family. Which is the best option? The answer largely depends on your individual needs and what you're looking for in terms of time frame, interest rates, risk level and more.
What are some of the methods for financing a purchase?
If you're looking to purchase a business, there are some options available. One option is financing the purchase through traditional lending institutions like banks or credit unions. Another option is obtaining an SBL loan which will require approval under the Canada Small Business Financing Program.
The third type of financing for a business purchase would be using your own funds - As well there are also other methods such as leasing or franchising that can be viable options depending on what you're looking for in terms of risk, time commitment, and financial obligations.
What are the pros and cons of bank loans for business financing?
Accessing bank loans to buy a business is often the ' go-to' option for funding business purchases. Bank financing provides a source of predictable and stable funding via various term loans and unsecured loan finance solutions - However, bank loans can be challenging to access if the business purchase doe snot meet the criteria for bank approval - as buyers must demonstrate potential collateral for the transaction - which the target company must demonstrate a solid balance sheet, profitability, and the ability to generate cash flow to retire bank debt.
What are two types of finance for growth?
If you're a business owner and want to grow, it's important to understand the different types of finance that are available - owner equity investment financing and debt financing when it comes to a business acquisition loan. If your company has been around for a while and has assets that can be used as collateral against any potential default on repayment of the loan then taking out a secured loan would make sense
At any stage of business growth, it's crucial to have the right finance in place when it comes to finance a business acquisition. Whether you're just starting out or looking to take your business to the next level, options such as factoring and working capital loans can help your company grow and facilitate business expansion financing.
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