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Acquisition Financing In Canada - How To Finance A Business Acquisition
Buying A Business?  Buyout And Acquisition  Finance Solutions




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how to finance a business acquisition and business finance structures

Business acquisition financing of another company, done properly, plays a key role in helping to grow a business. profitably.




We're talking about the proper ' buy-side strategy in acquisition financing in the Canadian market,  whether that's m&a financing, or a management buyout or simply loans to buy a business in Canada. Let's get you to the goal line in your business buyer letter of intent to purchase a business and that final sale and purchase agreement.


In some cases, your purchase might be part of a succession planning process in transferring business ownership, as well as a management buyout. Let's dig in on business acquisitions and the various types of acquiring a company with alternatives suited to your specific needs! Think of it as your buying a business checklist from 7 Park Avenue Financial.




Acquisition finance is all about the different types of capital that can be sourced to buy a business, or in some cases merge with another. Funds can come from a variety of sources in Canada. Successful acquisitions and financing services will always have a plan attached to them given the potential complexity in any deal. In most cases one type of financing may not provide the total solution, so a ' cobbling' together of different financings will ultimately lead to a successful transaction.

In some cases established businesses might be looking for what is known as a tuck in or bolt on acquisition - considered for augmenting an existing business.


The question? What are the best sources of financing and business capital to complete your transaction based on financial flexibility and the cost of capital? In establishing the value of the target company the buyer can focus on the best acquisition financing solution.


financing solutions for an acquisition and  ways to finance a merger or acquisition




Sales of business are completed by either a share sale or an asset sale. Naturally for public companies a significant share transaction.  Cash may also be used to fund your transaction, often unlikely in the private sector and given potential deal size. The majority of firms are acquired through debt and the cash flow monetization of assets - and in some cases an acquisition bridge financing solution as a path to a full transaction.


Most transactions are a combination of senior debt via a term loan based on assets or cash flow financing ability, which typically is the bulk of the total solution and complemented by an operating credit line or unsecured mezzanine cash flow loan.


Mezzanine loans/mezzanine financing is very cash flow-based and historical and present cash flows are analyzed carefully given mezzanine finance is unsecured debt and ranks behind other secured lenders, meaning a higher risk level for the ' mezz ' lender.


Debt is also much less expensive than equity, a financial point not always contemplated by many business purchasers. Cash flow financing, also known as mezzanine finance might well include a smaller equity component. Mezzanine financing provides additional flexibility to your transaction.


Key elements of your analysis of acquisition include the profitability of the target firm, its overall cash flow potential, and the amount of debt the firm can manage post-acquisition.


When a transaction cannot be successfully completed on a 'cash flow ' basis the ability to put together a proper asset-based finance solution is key. Asset-based finance - ' ABL' used the key assets of the target company to complete the transaction.


Those assets include equipment, real estate, accounts receivable, and inventory.  A strong asset-based will always help in a transaction that carries more leverage than might be common.


Safe to say that as a potential purchaser of a business you need to focus on the financing of your deal and converting that purchase price into a successful transaction within the process of proper due diligence in m&a financing.


get a loan for buyouts and acquisitions




Why would you consider purchasing an existing business?  Reasons vary, but are not limited to:


- Growing revenues faster

- Expanding into new markets or geographies

- To eliminate some existing costs and therefore increase profits

-  capitalize on new technologies /products/clients



Naturally, firms can grow ' organically' via various means such as the introduction of new revenue sources, marketing strategies, and new clients - That takes time of course which is part of the appeal of buying another firm, allowing you to reach synergies and economies of scale. In some cases real estate acquisition loans can be a part of a transaction, requiring additional expertise.


Various key parts of the existing balance sheet can play a vital role in the financial acquisition of your purchase properly. A solid example of this is to table the issue of a  ' vendor take-back / seller note ' that can alleviate the amount of capital you have to either put in... or borrow.


Those elements will shape your final financing structure, as well as of course your own equity investment in the business. That becomes your proof of commitment to your bank or commercial business lender.


Naturally, not all sellers are ' motivated ' to stay in the deal but a fair vendor take-back note has 2 great advantages as an aid to financing the transition to new ownership  - reducing the amount you need to borrow, as well as enhancing some of the cash flow requirements that a lender might be concerned about.


It might be opportune to mention to a seller that in some cases a higher sale price can be achieved with a VTB type deal.


In transactions we have worked on the existing accounts receivable must be addressed. Putting some... or all of the existing A/R into the deal may offer certain advantages to you as a buyer.


So let's get to the ' nub ' of our issue -  Funds can come from a variety of sources!




The most commonly used and almost always successful (if done properly!) include these solutions from acquisition financing lenders ->


structuring a business acquisition deal




Government Business Loans ( The SBL Guarantee Loan now has a limit of $1,000.000.00 )   Remember though that this type of loan only finances equipment and leaseholds, so another form of financing may well be required to complete your transaction. Nonetheless, it's a classic small business loan for smaller companies with the help of the Government of Canada.

The interest rate and flexible payment terms are a key part of the success of this program which is utilized by thousands of entrepreneurs every year. Buying a franchise in Canada is a common use of the Canada Small Business Financing Program.


The vast majority of business purchases with government loans tend to be a small business or a franchise, given that the term loan portion of the transaction has a limit of 350k. A real estate component is often handled as separate entities to an operating business.


Bank Term Loans/ Revolver and lines of credit facilities - These are key elements of finance to buy a business - Receiving financing through your bank as the financing institution involves understanding the requirements of traditional bank loans to secure the funding you require via a bank financing term sheet. Canadian banks will of course place a strong emphasis on financial covenants and final debt ratios / EBITA calculations, etc.


Asset-based loans / leveraged buyouts:  These loans finance all, or parts of receivables, inventory, equipment, as well as providing revolving credit lines for the ongoing business. Asset-based lending via lender financing can help solve some of the traditional challenges of buyouts and acquisitions as an acquisition financing ' lbo model '. 


Utilizing ' ABL ' via leveraging assets is a solid method to maximize potential financing needed. Structured or  Leveraged acquisition finance via an asset finance solution can shorten the timeline in your transaction as alternative finance solutions tend to be arranged much more quickly although financing rates and fees can be higher than a bank solution.


Focusing on the true value of assets such as accounts receivable, inventories and equipment maximizes finance potential. Asset based lending is higher cost but can help you achieve business purchase success.

It's important to consider the share purchase vs asset purchase choice as there are positive and negative aspects to the transaction for both the buyer and seller depending on which type of deal closing is agreed upon.


Unsecured cash flow loans and Term Loans


Franchise Loans (Franchising is a huge part of the Canadian economy)


Let's not forget seller financing, also known as ' vendor take-back financing ', allowing the buyer to reduce the amount of financing required to complete the transaction.  A Properly crafted vendor take-back loan will reduce the amount you are required to finance and are a common way of engineering a successful deal when the seller agrees to participate in your transaction. In some cases, a creative earn-out payment with the seller might be able to be negotiated.


Questions to ask when buying a business should always include whether the seller would help with vendor finance.


At 7 Park Avenue Financial, we get a lot of inquiries around  100 percent acquisition financing on an acquisition deal,  which is generally not available in Canada as Canadian commercial lenders/banks, etc require your proof of personal commitment to the transaction.


That equity financing commitment will not be the lion's share of your transaction, but still varies based on a variety of factors including the type of transaction, industry, deal size, and overall perceived credit quality.  A potential solution might be a third-party investor or partner.


Large Canadian transactions might consider private equity firms, although this is rarely an option in the ' small business' SME/SMB company when it comes to a leveraged buyout.




Financing is often a factor in the proper preparation of a transaction.

If you're focused on obtaining financing and a commitment letter on the acquisition of a business and if you need expert advice on business acquisition and the right financing solutions, properly Speak to  7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with buying and financing a business properly with acquisition debt financing that makes sense. Grow your new business with proper financial solutions to make a successful acquisition.


We'll work closely with you to both finance an acquisition as well as to determine the best acquisition finance structure and the methods of valuation you might employ to complete your transaction and understand earnings quality to achieve your desired future growth strategy in financing acquisitions.


That final capital structure and recapitalization of the company is your key to entrepreneurial success. In many cases the more information you have the better prepared you will be to succeed with a loan to buy a business in Canada when financing a takeover.




What is acquisition financing?


Acquisition financing is business capital used for the purchase of another business. The financing provides the resources required to close a transaction between a buyer and seller on favourable terms for both parties.



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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