YOU’RE LOOKING FOR FINANCING TO BUY A BUSINESS IN CANADA!
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Financing & Cash flow are the biggest issues facing businesses
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BUYING A BUSINESS IN CANADA
Buying a business in Canada is the alternative to growing your existing company ' organically ‘, or starting a business from scratch.
But how does the business owner/ entrepreneur avoid some of the mistakes and controversy that can arise out of the purchase in business acquisition financing? What are the real business assets worth? Is the business being sold by the owner or a business broker?
In some cases, you may be acquiring another business to merge into an existing one. Want to avoid the risks of buying your own business? Let's dig in!
THE ATTRACTION OF BUYING AN EXISTING BUSINESS
The attraction to buying a small business or a larger company has probably never been greater - whether it's finding a company that is (supposedly?) a great bargain or simply fulfilling the dream of entrepreneurial independence it’s all about potential success, and profits resulting from good marketing strategies and advertisings costs well spent.
VALUATION - HOW MUCH DO YOU PAY WHEN BUYING A BUSINESS / DUE DILIGENCE WHEN BUYING A BUSINESS
When analyzing the financial statements and cash flow statements of the business there are a number of items that might need to be adjusted - this process is known as 'normalizing' the financials. The goal is to determine the true earning power that arises out of an established customer base of existing customers via close examination of sales records and the fair market value of business assets.
Most business owners place emphasis on minimizing tax liabilities that might include high salaries for owners and families, above-market rents from owner-owned premises, auto expenses, etc.
The technical methods in which to analyze the value of a business include:
Multiples of earnings
Discounted Cash Flow
Other methods might include
Cost-based approaches on book value, asset value and liquidation values
Comparable market comparisons to competitors in the industry
Income approaches around discounted future earnings/cash flow etc
AVOID MISTAKES WHEN BUYING A BUSINESS IN CANADA - THE DEBT/EQUITY CHALLENGE
Financing the purchase of a business is the place where the error, challenge and controversy we have hinted at must be avoided. The reality is that not every bank or commercial finance entity (we’re speaking of debt financing or asset monetization, not ' EQUITY ‘) can always meet all the financing needs you require to complete a business purchase successfully. And that’s talking about capital via potential term loans to acquire, as well as ' working capital/cash flow' to operate and grow.
SOURCES OF FINANCING FOR BUYING A BUSINESS IN CANADA
How do you get a loan to finance a business acquisition - that one comes up often from new clients at 7 Park Avenue Financial. So what are those sources for business acquisition loans and the various ways to finance the purchase of the business you want to buy? In Canada, they might include:
Canadian chartered banks,
Commercial credit unions,
Commercial finance companies
Asset-based lenders - The focus is on existing assets of the business such as accounts receivables, fixed assets, inventories, intellectual property,
Government of Canada via an SBL /CSBF loan
Term loan via the Canadian government Crown corporation lending entity
A very solid route for the SME sector when it comes to acquisition finance is the above-mentioned SBL loan for small business owners on smaller transactions. If the business you're acquiring has less than 10 Million in revenues and has real assets it’s a great way to buy a business and finance a business at the same time. For a startup / new business via this government loan you need to provide some form of proof of business experience in that particular industry. This is term financing and will reflect payments per month typically over a 3-5 year term.
THE OWNER EQUITY/DOWN PAYMENT COMPONENT
While our focus is on loans and asset monetization for your business purchase don't also forget that there has to be some sort of buy equity, in effect your ' down payment ' for the purchase. While 100% financing might be possible in very unique circumstances never forget that banks and other lenders will want to see some of your personal funds into the transaction. That varies from anywhere between 10-50% depending on the quality and structure of the transaction.
The owner's personal credit score and net worth will often come into play in financing discussions for acquisitions.
Make sure to have a business plan that reflects your ability to repay loans with good cash flow projections is key. 7 Park Avenue Financial business plans meet and exceed lender requirements.
Your plan should reflect interest rate assumptions consistent with the overall credit quality of your financing package and equity. The purchase price for business acquisitions will often reflect the overall cost of financing and may depend on the type of business you are buying over the long term.
Equity capital is also risk capital and the purchaser should understand that; i.e. mortgaging the home might not be the optimal strategy! Suffice to say though that the amount you contribute to the transaction clearly is a strong measure of your commitment to the venture, and lenders respect that. Your goal is to emphasize a financing structure that makes sense to the commercial lender, so you may want to show some flexibility down the road to add additional financing where needed.
SELLER FINANCING ASSISTANCE MAKES DEALS HAPPEN
Vendor takebacks, aka ' Seller financing' can be a solid way to make a transaction happen. It allows you to put a final piece of the puzzle in place once you have lined up your other capital. The seller may wish to help you out in that manner not out of the goodness of their heart but to realize some tax benefits as well as allow a purchase to happen that otherwise may not have. Naturally, a large percentage of seller financing is optimal... for you... but not the seller!
When you are looking at a vendor take back in structuring a deal remember that there have to be some finance terms around the VTB. Quite often we see interest rates payable by the purchaser, on the VTB portion at or near current bank type rates.
Critical to understand is your ability to convince your lender that the Seller financing part of the deal is not be considered debt. That could throw certain ratios and covenants out of the whack which may not allow your lender or lenders to complete a deal.
In some cases, real estate might factor into your transaction - that can be handled as a stand-alone finance issue or bundled into your overall solutions. You want to be able to do the proper level of due diligence over a relatively short period of time so asset values are key.
Another challenge is your ability to assess the true value of the company's intangible assets which may come as part of your transaction - In many cases, individual asset prices might be better validated via a proper appraisal
SHARE SALES VERSUS ASSET SALES / WHAT TO LOOK FOR IN FINANCIAL STATEMENTS WHEN BUYING A BUSINESS
Remember also 'share ' sales are as readily financeable in the SME sector, and most owners will want to sell shares/stocks to minimize capital gains. so a total focus must be around an ' asset' based purchase, even if some of those assets are intangible!
By the way, that goes for existing franchises also in the booming Canadian franchise industry.
Putting the right financing in place when you're buying and financing a business in Canada is a key element of your future success. Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor with a proven track record who can assist you with purchase financing that makes sense for your individual prospective business acquisition and results in a successful business acquisition
FAQ: FREQUENTLY ASKED QUESTIONS /PEOPLE ALSO ASK/MORE INFORMATION
What do you pay for when buying a business?
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