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Considering buying a business in Canada? How to finance a business acquisition is a question clients always ask. When it comes to financing a small to medium-sized business, our clients quickly find they don't have the resources of those Bay Street guys, that high finance parlance of 'M&A' ... mergers and acquisitions. So, financing a takeover? Let's dig in.
FINANCING THE SME BUSINESS ACQUISITION
But it just might not be as complex as you think. Here's why. Of course, those larger transactions in Canada are handled by banks, merchant banks, public offerings, etc. But the biggest part of the Canadian economy is the small to medium enterprise area ('SME').. ' small business '. You guessed it...every day, these businesses are bought and sold successfully as part of an acquisition deal in completed transactions.
WHAT IS YOUR STRATEGY IN BUYING A BUSINESS
So what you need when buying another company is a 'strategy ' behind your transaction. There might be many reasons why you are considering such a deal; one might be simply diversification. That typically lowers your overall business risk.
In some cases, you might be benefiting from classic 'synergies,' for example, more branding of your products and services, additional product and service lines, etc. Financing an acquisition with debt, done properly, maximizes return on investment.
Proper due diligence is key - let the 7 Park Avenue Financial team help you take that proverbial 'deep dive' into the financial statements of the business when comes to asset valuation and overall financeability of your transaction. Key assets of the business must be evaluated around issues such as repair and maintenance, potential upgrading.
Here are some statistics on the breakdown of the Canadian SME economy, often noted as the backbone of business in Canada - Click here for the info .
WHY BUY A BUSINESS?
Numerous advantages come with buying a business. The ability to take over a company that is generating cash and profit ( hopefully !) certainly takes away the significant challenge of building a brand and reputation from scratch. Reputation is everything in today's competitive environment and the ability to buy into an employee and customer base is a positive motivator.
Naturally, that ' established base ' comes with a price that can be viewed as expensive as well as the task of taking on debt financing. Suffice to say that Canadian business banks and other commercial or alternative lenders are more comfortable with businesses that are established and have a track record as opposed to financing a start-up and waiting for ' organic growth'.
In many cases, you can lower costs and increase revenues - lowering costs and overheads while increasing revenues is a classic business merger and acquisition strategy.
In certain situations, say a manufacturing company, efficiencies can be realized. Unfortunately, this sometimes comes at a 'human cost ' as downsizing is common in this area of mergers and acquisitions.
Of course, not all businesses might be doing well if they are a target for an acquisition. Many undervalued or struggling companies in the current environment might have desirable selling prices.
THE ROLE OF SELLER FINANCING IN BUSINESS ACQUISITIONS
In some cases, the seller may wish to participate in the financing of your purchase as part of a merger of acquisition. This classic 'vendor takeback' strategy is a key way in which many businesses are financed, and that helps minimize the equity financing part of the deal in your overall sources of financing plan.
As part of your due diligence the ability to determine why a business if for sale is crucial - Currently, thousands of businesses are up for sale due to retirement and succession plans - but it's important to address issues such as profit, a business model that performs well, or the potential need for new assets.
The ability for the buyer and seller to get creative in structuring a seller finance component is unlimited - seller notes can be funded via staggered payments, above-market or below-market interest rates, and is a great way to include one more component in your overall financing structure.
In many cases, the need for a non-compete agreement needs to be addressed with the seller as a part of the letter of intent to purchase a business.
HOW TO FINANCE A BUSINESS ACQUISITION
Acquisition financing structures you might employ for a financing structure when buying a business and financing an acquisition including the potential need for a recapitalization
Asset-based loans - An asset focused leveraged finance solution that focuses on accounts receivable, inventory, and fixed asset and real estate financing - ABL Finance solutions are great ways to acquire a business
Term loans/lines of credit
Franchise loans
Cash Flow Loans - aka ' Mezzanine Loans '
Sale-leaseback strategies
Government business loans - The government loan to buy a business in Canada is a solid solution for smaller transactions and franchises
INTEREST RATES AND THE COST OF FINANCING
Interest rates will vary with the amount and type of financing you require, as well as the size of the transaction. While the interest rate is always important in any type of financing that must be balanced with access to capital versus the cost of capital.
Some entrepreneurs choose to buy a franchise as part of their ' existing business' purchase strategy. That comes with a proven business model and the guidance of the franchisor. Typically buyers will have a focused experienced and interest in the franchise they are buying into.
MANAGEMENT BUYOUTS
Often current management may wish to buy the company from the owners as part of an acquisition finance strategy. This is typically called an MBO...management buyout. They often put some new equity into the company, and in most cases, asset refinancing strategies are employed for such business acquisitions. Financing is often structured with an appropriate mix of debt and equity to facilitate the transaction, as well as a vendor take-back / seller note if possible.
CONCLUSION
Successfully buying a business and completing satisfactory financing with financing solutions is a unique area of business financing when it comes to acquisition financing lenders. Business owners must have a solid rationale and a strategy for contemplating these types of transactions.
Need help to finance a business acquisition? If you're looking for real-world expertise in buying a business or merging with one, seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor with a track record of success who can assist you with your needs. Let our team work closely with you and make it Job #1 to help intelligently structure and finance the acquisition as a third party with your goals in mind when it comes to options in financing.
FAQ: FREQUENTLY ASKED QUESTIONS AROUND BUSINESS PURCHASING
HOW DO YOU VALUE A BUSINESS
Business owners might choose to employ a qualified third party to help with the company valuation and financial health of the business. The focus is on how the business makes money as well as the overall health of the balance sheet. Different industries are valued in different ways - that might be multiples of earning, multiples of cash flow, the value of the assets of the business, and taking a hard look at those ' intangibles such as goodwill, contracts, customer lists, brand and reputation. Whether a business is capital intensive or services-based also reflects a different focus on valuation.
HOW DO YOU FINANCE A BUSINESS ACQUISITION
Business acquisitions are financed through owner equity, also referred to a down payment, and combinations of seller financing earnouts, leveraging the assets of a business, and combinations of bank term loans or asset-based solutions from alternative commercial lenders. Certain government loans such as the Canada Small Business Financing Program are excellent ways to fund an acquisition.
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