YOUR COMPANY IS LOOKING FOR BUSINESS COMPANY ACQUISITION FINANCING SOLUTIONS!
BUSINESS FOR SALE? WE'VE GOT YOUR FINANCE OPTIONS FOR THAT AGREEMENT!
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Financing & Cash flow are the biggest issues facing businesses today
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CONTACT:
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South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
"Price is what you pay. Value is what you get." - Warren Buffett
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Business Acquisition Financing 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 Acquisition Finance Options: How To Finance A Business Acquisition
Buying a business in Canada may not be as challenging as you might think.
Although some maintain credit markets are ‘ tight, ‘transactions with the right fundamentals and homework still make a lot of sense when buying an existing business and are an attractive option for Canadian entrepreneurs.
Acquisition finance refers to funding mergers and acquisitions through various sources of capital, such as debt, equity, and mezzanine financing.
It emphasizes the importance of obtaining the right mix of financing tailored to a company's goals and of being flexible in adapting to different situations during the acquisition process.
It certainly beats the monumental journey of starting a business from scratch! So, let’s focus on how to get an acquisition loan to buy a business.
Unlocking Business Acquisition Success: From Financial Roadblocks to Strategic Solutions
Buying a business without proper financing can derail even the most promising opportunities.
Many Canadian entrepreneurs face rejection from traditional lenders, complex application processes, and stringent qualification requirements. Let the 7 Park Avenue Financial team help you understand and leverage various financing options - from Canadian government SBL loans to seller financing and mezzanine capital - buyers can structure deals that work for all parties.
UNDERSTANDING BUSINESS ACQUISITION FINANCING
What is Business Acquisition Financing?
Business acquisition financing refers to the process of securing capital to fund the purchase of another company.
This type of financing is essential for facilitating the acquisition of a business, enabling the acquiring company to expand its operations, increase its market share, and enhance its competitiveness.
Acquisition financing can be structured in various ways, including debt, equity, and mezzanine. Each method has unique advantages and considerations, making it crucial to choose the right approach based on the acquiring company's specific needs and circumstances.
Benefits and Risks of Business Acquisition Financing
Business acquisition financing offers several significant benefits. It allows companies to expand operations, enter new markets, and achieve economies of scale.
Acquiring another business can also give companies access to new technologies, intellectual property, and a broader customer base.
However, acquisition financing is not without risks. Potential challenges include financial losses if the acquisition does not perform as expected, integration difficulties, and cultural clashes between the acquiring and acquired companies.
Conducting thorough due diligence, developing a comprehensive integration plan, and establishing a clear and robust financing structure are essential to mitigating these risks.
Devoting the Right Amount of Time to Your Search
When searching for a business to acquire, dedicating the right amount of time to the process is crucial.
This involves conducting thorough research, analyzing financial statements, and evaluating the target company’s management team, products, and market position.
A well-planned search can help ensure a successful acquisition and minimize the risk of costly mistakes. By taking the time to understand the target company’s strengths and weaknesses, you can make informed decisions that will contribute to a successful acquisition.
DEVOTING THE RIGHT AMOUNT OF TIME TO YOUR SEARCH?
What are those key steps in buying a business? Three key points cannot be overlooked when buying business advice.
New entrepreneurs have already made most of the mistakes, so an acquisition business loan that is 'good to go' is optimal. Let's make sure we avoid some critical mistakes when buying a business.
Sometimes, you might buy out a family business or a partner via a management buyout financing strategy.
3 CRITICAL ISSUES IN ACQUIRING A BUSINESS
They are:
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Valuation—Overpaying is not our recommended strategy, and underpaying can, of course, reveal several issues... much later!
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Determining a business's value is a critical step in the acquisition process. This involves evaluating the company’s financial performance, market position, and growth potential.
The value of a business can be determined using various methods, including income, market, and asset-based approaches. A thorough valuation analysis can help ensure that the purchase price is fair and reasonable and that the acquisition is financially viable.
When determining the value of a business, it is essential to consider various factors, including:
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Revenue and profitability
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Growth potential
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Market trends and competition
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Management team and organizational structure
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Intellectual property and intangible assets
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Financial statements and accounting practices
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Using the right expertise and advisors to buy a business and evaluating the cost of purchasing a business—What were the owner's motivations to sell? A careful review of legal documents is essential.
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Understanding how those financials will take you to the right business acquisition finance strategy and create a profit-driven business with the right accounting and tax strategies.
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Companies often face a problem when choosing between debt financing and equity funding for acquisitions. While debt is usually viewed as cheaper, equity funding is considered when businesses wish to avoid debt and retain control.
In terms of financing options, acquirers can consider various alternatives, including:
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Debt financing involves borrowing funds from a lender to finance the acquisition. It can be structured as a term loan, revolving credit facility, or debt instrument.
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Equity financing involves issuing shares to investors to raise capital for the acquisition. Equity financing can be structured as a private placement, initial public offering (IPO), or other type of equity transaction.
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Mezzanine financing involves combining debt and equity financing to fund the acquisition. It can be structured as a subordinated loan, preferred stock, or hybrid instrument.
Acquirers can determine the optimal financing structure for their acquisition by carefully evaluating the benefits and risks of each financing option.
This strategic approach ensures that the acquisition is financially viable and positions the acquiring company for long-term success.
So, the business owner/ entrepreneur/ financial manager must know how to analyze the real value and earn the power of the business you're considering acquiring or merging with.
If, of course, that valuation process is accomplished by taking a hard look at those financial statements - either on your own, if you have some expertise or an expert business advisor in this area. What, in fact, are you buying?
A solid bet is to carefully review client lists, contracts, existing business assets, and certain conditions surrounding supplier relations.
UNDERSTANDING OPTIMAL FINANCING STRUCTURE
When you think of it, it comes down to assets of businesses or cash flow & profits. Equity investment raises capital for business acquisitions, allowing investors to become shareholders and potentially reducing the debt required.
The right level of cash flow analysis is critical to your due diligence. It is key to assess how you address cash flow gaps and ensure you have working capital accessibility to upgrade or replace new assets. The company might sometimes have some senior or other debt, such as leases and unsecured loans.
REPUTATION / COMPETITION ANALYSIS / BRANDING
What you can do with those ' assets' is equally important. Let's not forget how current customers will view the sale to a new owner. Maintaining the customer base and addressing supplier and vendor-related issues is key.
Sometimes, the business might handle a real estate component separately inside a holding company structure. Keep in mind such valuable assets as real estate. An appraisal might be either required or appropriate.
Sometimes, a new location or lease might be contemplated in your acquisition.
GOODWILL AND HARD ASSETS
It is vital to address the value of goodwill or intellectual property with your accountant and the need to identify net identifiable assets and their market value. In some cases, appraisals might suit your transaction as a requirement or strategy for financing the business purchase/transfer.
Intangible assets will always present a challenge when financing your transaction in an acquisition deal.
Remember that the value assigned to goodwill becomes a potential financing challenge when buying an existing business. Issues around existing and new employees must also be addressed. In some cases, it makes sense to identify a key employee via a reward system.
Addressing the quality of receivables and inventory is key for the reporting period you analyze. Ensuring solid asset turnover in a/r and inventory is essential - i.e. can collect its receivables within terms and how historical days sales outstanding look.
Assessing the need for a new or ' improved' line of credit is key to achieving a good working capital position, as access to business credit is a successful way to finance the acquisition.
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Who can assist you in the entire valuation and financing process?
It's all about getting access to the type of business and financing advisor with a financial management background who can help you get information, determine real value, and then structure and assist in financing the deal via proper strategic planning.
You're looking for someone to work with you, not for you - someone focused on what you are trying to achieve in buying a business correctly. Your due diligence will involve normalizing the financials and ensuring you understand how the current owner's discretionary income fits into your cash flow.
That whole process of assistance will pay off in dividends later only because you got a good value for the company you're buying, the deal was done with the right amount of confidentiality, and you put the right legal and financing structure in place to operate the business on a going-forward basis with the right amount of money.
Look at trends in operating ratios and sales and benchmark those against competitors. If the company wants to be adequately managed, it might need all-new capital and financing levels for the new business.
DETERMINING VALUATION
Many people avoid owning a business because they do no know the finances.
The cash flow statement is key to determining whether your company will be successful. It can tell you more about future revenues than any other document as you assess valuation and the need for a proper amount of equity financing.
Some people think accounting is boring, but you can't afford to know this when valuing a business. A good accountant will help explain these documents and produce some insight that might help make sure your final purchase price makes sense.
FINANCING THE BUSINESS PURCHASE
It is essential to finance the company's acquisition and operation. Create a list of key issues you want to explore and ensure you can tackle each.
Those issues include a complete understanding of your profits, working capital, and credit lines needed, as well as what those assets are worth and contribute.
Financing for a loan or loans to buy a business in Canada comes from various sources. In many cases, a ‘combo’ approach works.
Debt is often a more cost-effective option for financing acquisitions than equity. Types of debt available include senior debt and asset-backed financing, which offer advantages such as tax benefits and quicker access to funds for smaller acquisition amounts.
The solutions? They include:
Franchise Loans - Thinking about buying a franchise? Financing is readily accessible when purchasing a franchise with a proven and well-known business model.
Government-guaranteed small business loans (they are not as small as you think, and government financing to buy a small business is a great way to finance an acquisition. Government loans to buy a business come with attractive interest rates, flexible terms, and the ability to require additional fixed assets.
“The interest rate available on the Canada Small Business Financing Program is also competitive, and repayment can be made over typically 2-5 years.
This means that if you’re well-planned with your acquisition and repay the loan wisely, the loan will have covered its own expenses! This leaves more cash left behind, so your business benefits! Note that personal assets are not taken/collateralized on government loans.
On the other hand, a good personal credit score of the borrower/borrowers is required -
Bank loans / personal loans/business credit cards / conventional financing - cash flow financing term loans - a bank loan will come with financial covenants to ensure you have a vested interest in the proper financial management of the business.
Asset-based lines of credit - Accounts receivable /inventory/fixed asset financing business line of credit solutions - Solid solutions for a leveraged buyout or management buyout/buy-in - Leveraged buyouts are a solid method to fund acquisitions - ABL loans allow you to pay interest on only what you borrow as these loans fluctuate based on sales and a/r collections.
Equipment financing - Assessing new requirements to obtain fixed specific assets & technology financing while maintaining many buyers’ credit lines and financial cash reserves.
Mezzanine financing is an option for companies with significant gaps between the purchase price of equipment and money raised from other sources.
With a higher risk to lenders than senior debt, mezzanine loans typically carry a high interest rate but have flexible repayment terms that can be tailored to fit your business needs. They also come in handy when considering any expansion activities, such as renting or leasing new space, due to insufficient funds available through traditional means.
The vendor take-back strategies/seller financing: The seller is paid back over some time. When you have to finance an acquisition anytime, the seller can, at their option, participate more in your transaction (known as a vendor take-back). Seller finance will often decrease the term loan amount you require to fund the acquisition and help minimize a large down payment by the buyer.
Note that some banks and financial firms will also view this type of financing offer as debt on their balance sheet—but again, these things vary among lenders. The sellers usually secure VTB with either promissory notes or personal guarantees for them to uphold if anything goes wrong with your financing solution.
CRITICAL ISSUES IN A BUSINESS PURCHASE
So, here's a recap of our three critical issues in acquisition financing: valuation, using the right expertise and advisors for due diligence, and understanding how those financial statements will lead to the right business finance strategy with funding to buy a business. When traditional funding sources are insufficient, consider raising equity from investors as an alternative to using personal savings or loans.
The key to success is business owners' ability to ‘pick apart’ the financials during the due diligence process and implement a matching company acquisition financing deal.
While a fair price makes sense to both buyers and sellers, as a buyer, you want to know what level of financial success you can achieve with your management skills, sales and marketing, and relevant industry expertise.
DO YOU NEED A BUSINESS PLAN ALONG WITH OTHER KEY INFORMATION?
The state of your industry, product and service reputations, etc., are key to helping to finance and fund your transaction.
A company needs a plan to understand post-merger or acquisition integration. Here's where a good business plan makes sense—7 Park Avenue Financial business plans meet and exceed bank and commercial lender requirements. They are always a solid planning tool and can help identify the advantages of buying a business with the correct data behind your decision.
Let the 7 Park Avenue Financial team be your ' business partner ' in your acquisition and other funding options that may be available. Financing can be challenging for some people to crack and is often contingent on a good business plan and cash flow forecast.
KEY TAKEAWAYS
- Understanding debt-to-equity ratios fundamentally shapes acquisition financing success
- Mastering cash flow analysis determines lending possibilities dramatically
- Leveraging seller financing creates flexible deal structures effectively
- Implementing strategic due diligence prevents costly financing mistakes
- Recognizing various funding sources expands acquisition opportunities significantly
CONCLUSION - FINANCING BUSINESS ACQUISITIONS IN CANADA
We've shown that buying a small business in Canada can be challenging but also rewarding!
Careful preparation is key to buying a business, and entrepreneurs do this to achieve several goals. Focus on working with experts when addressing companies for sale.
Focus on buying a business that complements yours, but ensure you understand the business model and any hidden liabilities.
Ultimately, the purchase price will depend on a successful combination of down payment and purchaser equity, seller financing, bank financing, and a third-party commercial financing company—which typically might be an alternative lender.
Let our team get involved and help you overcome any mistakes and the risks of buying a business. Call for a free and open discussion about your needs.
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with acquiring finance to buy a small business in Canada's SME/SMB landscape.
FAQ: FREQUENTLY ASKED QUESTIONS
How much money do I need to buy a business?
Down payment or owner equity in a business purchase tends to vary between 10 to 40% based on various factors such as goodwill, identifiable assets, and what combination of seller financing and debt financing will allow the purchase to complete the transaction successfully. Circumstances vary based on the type of financing and whether traditional or alternative lenders complete the successful acquisition/transaction.
How do you get help to buy a business?
When buying a small business, it is best to get some professional and informal help. Work closely with multiple sources and advisors to complete your transaction efficiently. Ask your accountant, solicitor, partner, or friends about the situation.
You may be too close now that it's yours, so people whose opinions you trust can provide a fresh perspective on this tricky business deal. Talk to a firm experienced in Canadian Business Financing. In the U.S., a bank or SBA loan is a solid solution - in Canada, it's often a bank or Government SBL bank loan as a Canadian alternative under Industry Canada's program.
How do I determine the right mix of financing options for my acquisition?
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Start with a detailed valuation analysis.
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Consider your available capital
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Evaluate target company cash flow
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Research industry-specific financing norms
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Consult with financing specialists
What are the typical timeframes for securing acquisition financing?
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Pre-qualification: 1-2 weeks
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Initial application process: 2-3 weeks
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Due diligence period: 4-6 weeks
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Final approval: 2-3 weeks
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Closing process: 2-4 weeks
What documents are typically required for acquisition financing?
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Personal financial statements
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Business tax returns (3 years)
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Financial projections
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Business valuation report
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Purchase agreement draft
What happens if the acquisition financing falls through?
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Alternative funding sources can be explored.
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Deal terms can be renegotiated
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Seller financing may be increased
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The timeline can be extended
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Backup buyers may be considered
What ongoing obligations come with acquisition financing?
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Regular financial reporting
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Maintaining specified ratios
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Meeting payment schedules
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Adhering to loan covenants
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Regular lender communications
What role does leverage play in business acquisition financing?
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Enhances return on investment
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Increases purchasing power
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It affects cash flow requirements
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Impacts risk profile
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Determines deal structure
How do different financing sources work together?
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Senior debt provides base funding
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Mezzanine fills financing gaps
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Equity determines control levels
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Seller financing adds flexibility
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Working capital supports operations
What factors influence financing approval?
How long does business acquisition financing typically take to secure?
Business acquisition financing typically takes 60-90 days from application to funding, depending on the deal's complexity and chosen financing method.
What percentage down payment is typically required?
Most lenders require 10-30% down payment, with traditional banks typically expecting 25%, while alternative lenders may accept as little as 10%.
