YOUR COMPANY IS LOOKING FOR BUSINESS PURCHASE FINANCE SOLUTIONS!
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Financing & Cash flow are the most significant issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
CONTACT:
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
BUSINESS ACQUISITION FINANCING FOR AN EXISTING BUSINESS
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Business Purchase Finance and working capital solutions – Save time, and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
Business purchase financing in Canada requires ‘smart’ strategies to complete a transaction that makes sense for both the buyer and the seller.
Financing is a critical aspect of buying or selling a business, involving various strategies and options to bridge the financial gap between the buyer and seller. There are some proven winning tactics for effectively acquiring a business—even your competitor! Let’s dig in.
UNDERSTANDING BUSINESS ACQUISITION FINANCING
Business acquisition financing is a complex process that requires careful consideration of various factors to ensure a successful acquisition.
One of the primary elements to consider is the purchase price, which must be evaluated in conjunction with the target company’s financial statements and overall capital structure.
Understanding these components is crucial as they directly impact the financing structure and the terms you can secure from financial institutions.
A successful business acquisition hinges on selecting the optimal financing structure that aligns with your business goals and financial capacity.
This involves exploring different financing options and understanding how each can affect your cash flow and long-term financial health. By thoroughly analyzing these factors, you can make informed decisions ensuring a smooth and profitable acquisition.
FINANCING OPTIONS
When it comes to financing a business acquisition, there are several options available, each with its own set of advantages and considerations:
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Equity Financing: Equity financing involves investing personal funds or seeking investment from external sources, such as venture capitalists or private equity firms. This option can be beneficial as it does not require repayment like a loan, but it may dilute ownership and control of the business.
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Debt Financing: Debt financing involves borrowing funds from financial institutions, such as banks or credit unions, to finance the acquisition. This option typically requires collateral and a strong credit history but allows you to retain full business ownership. Interest rates and repayment terms are key factors to consider.
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Seller Financing: Seller financing involves the seller providing financing to the buyer, either in whole or in part, to facilitate the acquisition. This can be an attractive option as it often comes with more flexible terms and can reduce the need for external financing. However, it may also involve higher interest rates and a shorter repayment period.
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Government-Backed Financing: Government-backed financing options, such as the Canada Small Business Financing Loan, provide financing to small businesses with favourable terms and conditions. These loans often come with lower interest rates and longer repayment terms, making them an excellent option for small businesses looking to acquire another company.
YOUR OWNER EQUITY/DOWN PAYMENT CONTRIBUTION
Every entrepreneur has a different way of financing their company, with the most common being using some personal funds, which are always required in a transaction.
Assets such as retirement accounts, home equity, etc., help finance acquisitions.
Of course, valuation methods differ on that ultimate acquisition price, and valuing a business from both the seller’s and buyer’s perspective is an entire conversation for another day - suffice to say that good deals are completed when a fair acquisition price is agreed upon.
If one expectation is apparent in business purchase finance, there must be a reasonable debt and owner equity. As necessary is the fact that different types of finance will require more owner equity. When using bank financing, assuming a good owner equity/down payment level will arise is safe.
When buying a company with profit and financial challenges, the purchase price will more often than not be beautiful - the challenge being ‘ the turnaround required.
EVALUATING CASH FLOW AND FINANCIALS
Evaluating the cash flow and financials of the target business is a critical step in determining its value and potential for growth.
This process involves a detailed analysis of the company’s financial statements, including the balance sheet, income statement, and cash flow statement. Each of these documents provides insights into the business's financial health and operational efficiency.
A thorough evaluation of the financials helps identify potential risks and opportunities, enabling the buyer to make an informed decision.
For instance, analyzing the cash flow statement can reveal the company’s ability to generate cash and sustain operations, while the income statement provides a snapshot of profitability. By understanding these financial metrics, you can assess whether the business is a viable investment and how it aligns with your strategic objectives.
When you buy a business, the seller might offer to provide financing. This is often an attractive option for buyers who don't have all the capital in the form of a combination of debt and equity.
In many cases, sellers are willing to participate in selling the business to you. That's known as the 'VTB '—the vendor takeback—and can be a strategic part of your overall financing plan. Properly structured seller notes reduce the equity financing need for business buyers.
Caveat Emptor: While most banks or commercial finance companies view business purchase vendor take-backs as quasi-equity, in some cases, this might be considered to be in another form of debt - therefore subject to all those same capital/ debt-equity issues.
KEY ELEMENTS AROUND POSITIONING THE PURCHASE WITH LENDERS
Potential buyers need a solid business plan and operating strategy to buy a business and evaluate future business needs regarding lines of credit, leasehold improvements, and asset and technology business needs.
A clear overview of the industry (which hopefully is not ' out of favour' currently)
Ownership/mgmt experience
A financing plan for sales/ growth and profits
What then are the fundamental mechanisms used to finance a business purchase? Note also that some of the finance strategies listed below are often a combination of financings depending upon how complex or extensive your transaction is -
Business Purchase Finance Solutions: Exploring Seller Financing
Canadian chartered bank term loans - a bank can lend money under various structures such as term loans, operating credit lines, equipment and fixed assets, etc. -
Conventional financing, such as bank loans, offers the most attractive interest rates - a satisfactory credit score and personal credit history is required for traditional financing solutions.
Borrowers should be prepared to meet financial covenants and ratios required by a bank or traditional lender under senior debt facilities in your financing structure. On the other hand, bank financing is quite frequent in leveraged purchases; cash flows are strong.
Getting a conventional loan (e.g., a term loan) from a commercial bank to finance the acquisition of a company can be very difficult -
First and foremost, you need assets for collateral - You also need good personal credit, and banks want some evidence of success if there is any doubt about their ability to repay loans; having a solid track record within the industry speaks volumes about how successful one has been and making you less likely to default on debt.
Mezzanine financing / Cash Flow Loans
Asset-based term loans or non-bank business credit lines—accounts receivable/inventory/fixed asset financing—are alternative financing options for companies with substantial assets. They are suitable for leveraged buyouts, management buyouts, etc.
Leveraged buyouts are a common and helpful way to finance the purchase of an already-established business.
This technique, combined with seller financing, can make a transaction successful. Leveraging assets as collateral against loans makes them easier to obtain than if the loan was not secured.
Sale leasebacks / Equipment financing - acquire fixed assets.
Government of Canada Guaranteed Small Business Loans - Government loans provide guarantees and safety measures to a bank that is financing SBL loans in Canada from a sponsoring financial institution - This loan is for smaller transactions in Canada, unlike the U.S. ' SBA loan ' which is more widely associated with business acquisitions -
Certain conditions and requirements for government loans need to be understood - let the 7 Park Avenue Financial team walk you through the process.
The interest rate on government loans is desirable, as are the flexible payment terms.
Another type of government loan via the Business Development Bank of Canada offers several long-term financing options for business owners to purchase a company.
These include long-term loans based on the value of fixed assets such as land / real estate, buildings, equipment, or shares in an existing business and unsecured loans for intangible assets like intellectual property.
Short-term Working Capital Solutions / Business credit cards tailored to your needs for other small funding needs. These loans are usually paid off in a short period—typically under 12 months.
Accounts Receivable Financing - a/r finance via a third party
Sometimes, you must address how to obtain financing if intangible assets, such as intellectual property, client lists/contracts/goodwill, etc., will be part of your final finance structure. These issues must be appropriately reviewed with the business's financial statements in your due diligence.
FINANCING INTANGIBLE ASSETS
Intangible assets, such as intellectual property, patents, and trademarks, can be valuable in a business acquisition.
Financing these assets requires careful consideration of their value and potential for growth. Unlike tangible assets, intangible assets do not have a physical presence, making them more challenging to evaluate and finance.
To acquire these assets, buyers may need to seek specialized financing options, such as intellectual property financing.
This type of financing often involves a detailed assessment of the intangible assets’ market value and potential revenue generation. By securing the right funding for intangible assets, you can enhance the overall value of the acquisition and position the business for future success.
FOCUS ON DUE DILIGENCE
You should put in the necessary work to do your due diligence.
This includes requesting all of the seller's documentation and evaluating it properly (which means understanding what they have for financial statements, income tax returns, an inventory of assets/equipment related to specific assets, and client and supplier lists).
You also want to consider any other information that has a material impact on the business, either on the assets or liabilities side, such as licenses or patents.
ASSESSING FUTURE BUSINESS CAPITAL NEEDS FOR THE ACQUISITION
Addressing the future operational costs required to finance the business and maintain acceptable cash reserves is among other things.
Other options to consider when purchasing a new company include how much debt it has taken on upfront or financing its operations to keep everything running smoothly after the change of ownership.
You can finance your continuing operations through loans with banks, asset-based lenders, equipment lessors, and factoring companies that provide accounts receivable management services—all avenues are open now!
KEY TAKEAWAYS
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Understanding debt service coverage ratios determines loan qualification success.
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Leveraging seller financing creates flexible purchase structures
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Mastering business valuation fundamentals ensures fair purchase price
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Implementing strong due diligence protocols prevents costly mistakes
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Structuring working capital requirements sustains post-purchase operations
CONCLUSION
Are you looking to buy a company and want to ensure you have a winning finance strategy?
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you and provide guidance on the optimal financing structure for the purchase.
Let our team help you finance business purchase decisions for a successful acquisition. More information? Call, and let's get started on ways to finance buying that business and get you the best experience around that business you want to buy.
FAQ: FREQUENTLY ASKED QUESTIONS
IS BUYING A BUSINESS A GOOD IDEA?
Buying a business in Canada can be an efficient way to quickly grow your client base, increase your capacity, or gain access to new markets. You can even acquire the competitor's or supplier’s businesses. Doing so will reap various benefits: The product being sold has already been positioned on the market, and staff members are trained; suppliers have also been established, which means less time spent looking for them!
What makes funding a business purchase different from traditional loans?
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Specialized underwriting criteria
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Focus on business performance
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Multiple funding source options
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Flexible repayment structures
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Industry-specific considerations
How does the right business purchase finance strategy improve acquisition success?
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Provides leverage for negotiations
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Preserves working capital
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Enables larger acquisitions
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Reduces personal risk exposure
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Creates tax advantages
What financing options exist beyond traditional banks?
What credit score is needed for business purchase financing?
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Minimum of 680 is typically required
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Higher scores secure better terms
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Business credit was also evaluated
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Alternative options available
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Credit repair strategies accepted
How are interest rates determined?
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Market conditions influence rates
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Business risk assessment
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Industry factors considered
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Borrower qualifications matter
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Collateral quality impacts terms
What role does cash flow play in approval?
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Primary repayment source
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Minimum coverage ratios required
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Historical performance evaluated
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Projections carefully analyzed
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Industry benchmarks considered
