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Business purchase finance in Canada. When it comes to acquisition financing for new or existing business the question of financial resources and strategy becomes, very quickly, top of mind. But how in fact do you pay for/ finance such an acquisition in Canada. Let's dig in.
We're of course assuming you have in fact identified your target already, having properly focused on value, price, and giving thought to all the legal , accounting, tax and oh yes, ' people issues' involved in your purpose. Those are important, but today we're focusing on financing that challenge.
Although it's certainly possible to purchase and finance a non incorporated proprietorship or partnership we'll focus today on financing a legal entity... i.e. the corporation.
If we had to sum up the key issues around the whole financing structure it would come down to:
Bank and Commercial financing debt and credit lines
Any financing the vendor is prepared to provide
Owner subordinated debt
The letters in T E A M are very appropriate here as they can also stand for - Together Everyone Achieve More. So it's highly recommended your team consist of your own partners and management, but also good advice from your lawyer, your accountant, your personal or corporate banker, and probably an experienced Canadian business financing advisor.
And it just might be that advisor can introduce you to even better/smarter lawyers, bankers, accountants, etc - After all, that's his or her business. Their advice is worth a million, but of course ultimately it's your call.
A solid place to start in your financing structure work is to simply take the balance sheet and divide all assets and liabilities into the following categories”
Intangible Assets (may or may not have value to your deal)
Creditor Debt - i.e. suppliers
Owners Investment /Equity
Just simplifying the balance sheet in this matter allows you at a visual glance to determine where money is going to come from, where it's coming from now, and how some of the relationships around that flow of funds changes.
By that last comment we're really focusing on the concept of what lenders call ' ratios'. We have always called them relationships. Quick example: The current business might have, for example 30% of long term debt. Under the final picture that number might change drastically - but if, in the case of long term debt it increases a lot your ability to either properly finance the purchase, or survival might be at risk!
It's safe to say also that those relationships we've talked about above are a little different for larger deals as opposed to buying a business in the franchise or SME sector. Your goal, along with your advisor team, is to sort out a financing package that addresses assets... and... CASH FLOW.
Never assume you will get the financing need based either just on assets, or just on cash flow. If you have a profitable company that’s growing quickly that can certainly help with a lot of the finance challenges. While growth sometimes hides some business weaknesses it usually does appease your lenders and bankers to a certain degree. Financing a slow growth company that has challenges might have made your offer price attractive, but you are certainly at risk when it comes to cash flow, debt, and asset replacement needs.
Can you avoid the ' Crisis' part of any acquisition financing? No guarantees for sure, but solid advice and analysis will eliminate a lot of that risk. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor for the business purchase finance you need.
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