YOUR COMPANY IS LOOKING FOR ACQUISITION AND MERGER
FINANCING SOLUTIONS!
FINANCING THE VALUE OF A COMPANY
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Financing & Cash flow are the biggest issues facing business today
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Oakville, Ontario
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How to value a business when contemplating a company acquisition is one of the larger challenges in Acquisition finance. The bottom line, as we maintain, is there are some real ' highs and lows ' when it comes to buying a business and company valuation. Let's dig in.
ACCESSING VALUATION RESOURCES FOR SMALL AND MEDIUM-SIZED BUSINESSES IS A CHALLENGE
Larger corporations use some very sophisticated methods when it comes to value a company for acquisition. While small businesses and companies in the SME sector don't have those same resources the good news is that the same fundamentals apply and they are easier to understand and common sense than you think when it comes to future earnings, etc.
DETERMINING PROFITABILITY AND FUTURE CASH FLOWS
At the heart of the matter is the ability for you to understand the amount of profit and cash flow that any business acquisition can deliver. For smaller business acquisitions you want to ensure those profits are accompanied by your ability to take a reasonable salary or dividend out of the business if that is needed.
WHAT AMOUNT OF DEBT IS NEEDED? CAN ASSETS BE MONETIZED?
Remember also that if the acquisition has you taking on debt to complete the deal that debt must be retired in some manner. In many cases a solid company acquisition can be financed by monetizing the assets within the business - those assets typically might include receivables, inventory, and fixed assets such as equipment. Fixed assets should be viewed from a viewpoint of both market value and liquidation value.
THE ' MULTIPLE' EFFECT
Traditional valuation methods provide for the use of ' multiples'. That could be a multiple of sales or cash flow, a discounted cash flow modelling on the discount rate of future cash flows. They help to determine the value of a company. Larger firms might focus on ' ebitda' - earnings before interest and depreciation costs.
MONITOR BANK INFLOWS AND OUTFLOWS - HERE'S ONE WAY HOW!
Businesses that don't sell to clients on commercial credit terms have some unique challenges. Yes, cash is king, but only when it's reported and recorded properly! At 7 Park Avenue Financial we encourage our clients as part of many types of financing to obtain 3 months of bank statements for any company in the financing ' crosshairs’. That gives you a strong sense of inflows and outflows in the business you are looking at, i.e. help on the valuation method with a focus on cash, helping you determine the amount you are willing to pay for a business. Getting all the updated financial information you need such as financial statements, asset ageings, secured lenders, etc should be job 1
WATCH OUT FOR MURPHY'S LAW !
Murphy's Law (what can go wrong... will!) can play a key role when you want to know how to value a business and finance it. We suppose that's where some of the ' lows' come in that we've mentioned.
LENDER AND SUPPLIER RELATIONSHIPS
Current financing relationships with the business you are acquiring must be ' unwound' or redone in some manner. The same applies to key relationships that have been established with key suppliers/vendors.
FRANCHISE FINANCING
In some cases, business acquisition finance involves the purchase of an existing franchise. In that case, you must understand how franchise terms and royalties will affect your operating capital.
MONITOR ASSET TURNOVER
One of the best ways you can turnaround a business after purchasing it is by better managing operating and capital assets. That might include better receivable turnover, better inventory turns and refinancing existing assets via a sale-leaseback. A hard look at the companys assets is always key. The balance sheet accounts are always a point of key focus from a viewpoint of book value and actual market values.
CONCLUSION
There are different valuation methods based on the type of acquisition as well as the size of your transaction. So when it comes to how to value a company for acquisition always seek some professional help when it comes to business valuation. That might include help from your lawyer, accountant, or an experienced, credible Canadian business financing advisor; it’s all about reaching highs and avoiding the lows of company acquisitions in Canada.
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Stan Prokop
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