How To Finance A Business Acquisition : Funding Strategy | 7 Park Avenue Financial

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YOU ARE LOOKING FOR SOLUTIONS TO FINANCING A BUSINESS PURCHASE!

BUY AN EXISTING BUSINESS! -    UPDATED 04/29/25

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South Sheridan Executive Centre
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Oakville, Ontario
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Direct Line = 416 319 5769

Email = sprokop@7parkavenuefinancial.com

  

  

BUSINESS ACQUISITION LOAN  FINANCING     

 

 

 

Acquisition finance is a method for businesses and entrepreneurs of all sizes to manage the risks of buying a business and the business transfer of ownership.

  

 

Bridging the Acquisition Financing Gap  

 

The challenge of financing a business acquisition keeps many qualified Canadian entrepreneurs from pursuing valuable opportunities.

 

Without proper funding strategies, promising deals slip away, and growth ambitions remain unfulfilled.

 

 

Let the 7 Park Avenue Financial team show you how, with careful planning and knowledge of today's diverse financing landscape, you can structure an acquisition deal that aligns with your capabilities while satisfying seller requirements.

 

 

 

  

WHAT IS ACQUISITION FINANCING   

 

Acquisition financing is a type of capital used to acquire another business. It provides purchasers with financial resources to make transactions happen faster. In some cases, a merger or acquisition may lead to a combined company after a target company has been identified.

 

Bank loans, commercial finance companies, family offices, and asset-based lenders are all common acquisition choices. The government, under its federal loan guarantee program, offers loans to entrepreneurs who need help buying and funding a business. A private equity firm might be utilized for larger, more sophisticated transactions.

 

 

Acquisition loans come in many different forms, but can be broken down into two main areas:

 

Term loans and bridge loans/cash flow loans - financing the balance sheet and cash flows

 

Working capital and asset financing for the  future growth strategy

 

Let's explore some top methods of buying a business when acquiring a business and it's assets so that you know what options will work best according to your needs in areas such as leveraged buyouts.

 

 

Asset-backed financing solutions are often the best way to acquire a business. Asset-backed loans are a solid solution when you're looking at financing an acquisition.

 

 

Lines of credit will also assist you, depending on your specific needs and the nature/time duration of your needs.

 

Turnarounds with maximum flexibility around your financing acquisition needs can also be a key advantage.

 

 

 

 

 

 

WHY ARE YOU BUYING THE BUSINESS?  

 

The decision to grow through acquisition may seem like a more risk-free option, but it comes at a price.

 

Suppose you're looking for an affordable strategy to help your company expand quickly. In that case, you might consider purchasing another business instead of trying to do so organically or from a start-up mode.

 

Acquiring the right business affordably at the right valuation can save time and allow you to increase existing market penetration.

 

So, the challenge of growing a business organically appeals to business buyers. Also, buying a competitor successfully is much faster, cheaper, and less risky than trying to do so alone. It also means that there will be no overlap between services or products.

 

Finally, acquisition solutions offer significant savings due to the expense of developing new goods and services versus purchasing already manufactured items or existing services, while gaining market share over time.

  

 

KEY BENEFITS OF BUYING A BUSINESS  

 

In a world where competition is fierce and speed matters more than ever, an acquisition allows quick growth.

 

You can quickly access markets your competitors would otherwise take years to reach; establish yourself as being able in those areas by delivering on promises promptly and efficiently.

 

Business acquisitions may allow you to quickly gain access to new markets and products and an established client base of existing customers. However, this might take years, if not decades, based on competition and the challenges to your particular barrier to market entry in your industry.

 

 

  

ESTABLISHING PURCHASE PRICE / VALUATION  

 

Valuing the target business is more than just looking at the numbers.

 

The market-based value of a company comes from analysis around services or products -  and includes factors like industry size/growth potential; economic volatility (elevated risk); the number of employees and the client base.

 

The market value of a company has become increasingly important in today’s business world. When a business acquisition occurs, buyers and sellers must accurately understand what each side places on value.

 

  

  

PURCHASERS DOWN PAYMENT  

  

 

Your equity investment is proof of your commitment to the transaction.

Buyers will contribute a percentage of the buying price, and these funds can come from various sources. Of course, the equity participation lowers the amount buyers need to borrow to demonstrate shareholders' commitment.t

 

 

 

DUE DILIGENCE

 

 

Due diligence is required when you're considering buying a company. It allows for thorough investigation and validation of sellers' claims to identify any red flags before they become future problems.

 

 

The due diligence process is crucial for a successful acquisition. For example, private equity firms conduct extensive due diligence on larger transactions.

 

 

Potential buyers should ensure full financial and business disclosure before acquiring a company. As a buyer, you need time to investigate what has been claimed by sellers to identify any red flags that might be present with your potential purchase transaction-  including non recurring expenses

 "You can't take shortcuts when doing due diligence," which allows you to test the deal's validity.

 

Buyers planning to purchase businesses must scrutinize their financial statements extensively before buying a company to avoid potential issues.

 

Focus on the idea that due diligence is the process of conducting thorough research on an entity to ensure its legitimacy, and that no one will be surprised when lender financing occurs.

 

This includes details about legal structure, assets, financial statements, income, and cash flow analysis, and potential intellectual property and existing contracts with employees or the client base.

 

  

  

 

  

KEY ELEMENTS OF FINANCING YOUR ACQUISITION FOR AN OPTIMAL FINANCING STRUCTURE     

 

 

  

The decision to finance a business acquisition will impact your company's future success.

 

The three main financing options for a typical financing package are debt financing, ownership contribution,  and a potential combination of asset and cash flow funding.

 

 

Unless you can pay cash for your acquisition, the deal will involve some form of debt or equity.

 

  

THE DEBT VERSUS EQUITY CONUNDRUM!  

 

Banks, commercial lenders, and asset-based lenders are only entitled to repayment loans, not an ownership stake in profits!

 

That financing does not cause dilution to the owners’ equity position in your business.

 

A lender has only limited rights under loan agreements, such as with a  bank loan and its financial covenants, which is usually tied up with specific obligations on their part.

 

Of course, they can demand repayment at any time under certain conditions, but remember that as a buyer, servicing debt repayments could be one of your most significant cash flow burdens on an ongoing basis, and the type of financing you utilize can be a significant financial burden on the business.

 

 

 

   

 

 

SENIOR DEBT / TERM LOANS - Senior debt is a type of loan that takes priority over other types and can be used to finance the main acquisition value. It is secured by collateral and cash flow, or both.

 

As noted, senior debt financing is not limited to companies with significant assets. In fact, lenders will often use an entity’s cash flow (or EBITDA) as collateral for loans and extend loans based on cash flow streams.

 

Cash flow-based facilities  (or EBITDA loans ) can also be the main component of your financing based on proven and historically reliable revenue streams from all areas, including sales/revenue generation.

 

Loans are typically determined as a multiple of cash flows, depending on the financial health and track record of success in this type of business. The right company will have strong management and profitability and sustainable cash flows that exceed expectations, demonstrating its qualification for business funding.

 

Loan sizes vary based on industry and other factors, such as assets and cash flows.

 

MEZZANINE ' CASH FLOW LOANS'  -

 

Mezzanine loans fill a sometimes existing gap between debt and equity. Mezzanine finance is a complex area of business financing, but it can be useful for business purchasers looking to make acquisitions. Sometimes, Interest-only debt offers additional flexibility when equity financing is limited.

 

Mezzanine financing is often used in high-risk scenarios, but it's an attractive option because it can be provided to make approval and repayment more manageable than other debt structures, such as additional senior debt or more equity/owner funding.

 

ASSET-BASED FINANCING / ' ABL' LENDING -

 

Asset-based Lending, aka 'ABL,'  has become one of the most popular alternatives to traditional bank financing for funding a business acquisition via a leveraged buyout for the business's substantial assets.

 

With ABL, you can use the target company's assets as collateral and borrow money against that versus conventional finance options. This type of borrowing often comes at higher rates because there is more risk associated with the transaction.

 

Asset-based lending has been proven to be one of the most effective methods for generating acquisition capital, especially if your transaction isn't strong enough with traditional lenders. ABL lenders make advances at rates as high as 90% against various types of property, such as inventory, fixed assets of equipment, plant, and machinery, accounts receivable, etc.- i.e., businesses' assets and sales.

 

 

Asset-based financing in a business purchase is a good option for businesses with strong asset bases, good management systems, and controls.

 

 

VENDOR FINANCING / SELLER FINANCING NOTES  - Vendor debt can be a useful aid to the transition. The seller agrees to help finance part of  your acquisition with what's known as vendor takeback or notes.

 

A seller may sometimes want to have some decisions in the future of the acquired business - buyer beware!

 

 

GOVERNMENT LOANS

 

Government loans for smaller companies, under the Canada Small Business Financing program are an option for small business owners to fund acquisitions. 

 

This program, sponsored by Industry Canada, offers business owners loans with competitive rates and terms and limited personal guarantees.

 

SBL loans have some basic qualifications and guidelines. Borrowers can get up to $1,000,000 to cover most (or part) of the purchase of the business. As a borrower under the program, you need a good personal credit score of 600+, the ability to make a down payment, a solid business plan, and the ability to demonstrate some level of business experience in your financing plan and financing structure strategies.

The program has various guarantees and safety measures for participating lenders who fund specific assets.

 

 

   

 Case Study: The Benefits of How to Finance a Business Acquisition

   

 

When a buyer identified an  Engineering Firm as the perfect acquisition target to expand his existing operations, he faced a significant financing challenge. The $4.8 million purchase price exceeded what traditional lenders would finance based on tangible assets alone.

 

Challenge: Company value consisted primarily of customer relationships, specialized expertise, and ongoing contracts—intangible assets that traditional lenders hesitated to finance.

 

Solution: The buyer worked with a specialized acquisition advisor to create a multi-layered financing strategy:

• A primary loan through BDC covering 50% of the purchase price

• Seller financing structured with performance incentives covering 30%

• Equipment-specific asset-based loan for 10%

• Personal equity investment of just 10%

 

 

  

 CONCLUSION   

 

The best way to successfully acquire another business is with the help of an experienced expert.

 

We've seen it all before and can guide you through any legal implications, tax considerations, or how to restructure your new acquisition effectively for maximum return on investment and the right financing solution.

 

 

Successful business acquisitions are often difficult. Seek professional advice from an expert with experience, and let our team customize business financing to your needs.

 

Talk to the 7 Park Avenue Financial team, a trusted, credible, experienced Canadian business financing advisor.  

 

  

 

FREQUENTLY ASKED QUESTIONS/PEOPLE ALSO ASK / MORE INFORMATION  

 

What is a stalking horse bid?

Stalking horse processes are a way to sell distressed assets. The first bidder finds the floor price, and then other bidders come in as needed for an open market structure with potential buyers being allowed access at each stage of the bidding process until finally ending up with one winner.

 

What is Goodwill

 

Goodwill is the value associated with a company's name and reputation in excess of the value of its assets. It can be challenging to finance in many transactions.

 

What financing options exist for acquiring a business beyond conventional bank loans?

Financing options beyond conventional bank loans include seller financing, mezzanine debt, equity partnerships,, asset-based financing, and leveraged buyouts. Each option serves different acquisition scenarios and comes with unique advantages:

• Seller financing creates flexibility with deferred payment structures
• Government SBL  loans offer longer repayment terms with lower down payments
• Private equity partnerships provide capital without immediate repayment pressure
• Mezzanine financing bridges gaps between senior debt and equity requirements

 

How much of my own capital will I need to invest when financing a business acquisition?

Down payment requirements for business acquisitions typically range from 10% to 30% of the purchase price, depending on several factors:

• Industry stability affects lender confidence and required equity contribution
• Business cash flow history determines debt service capability
• Asset composition impacts collateral value and lender security
• Your personal financial profile and credit history influence down payment requirements
• Acquisition structure (asset vs. stock purchase) affects financing parameters

 

Why do acquisition financing structures often combine multiple funding sources?

Acquisition financing structures often combine multiple funding sources to:

• Bridge valuation gaps between buyer financial capacity and seller price expectations
• Distribute risk appropriately among stakeholders
• Optimize capital structure for post-acquisition operations
• Accommodate different security positions and return requirements
• Address timing differences in capital availability
• Create flexibility for future refinancing or restructuring options

 

How are acquisition loans typically structured in terms of repayment schedules?

Acquisition loan repayment structures typically follow these patterns:

• Term loans generally range from 5-10 years depending on asset life
• Amortization schedules often extend beyond loan terms with balloon payments
• Seasonal businesses may qualify for variable payment structures
• Interest-only periods frequently cover initial transition phases (3-12 months)
• Step-up payment structures allow for gradual increase in payment obligations
• Covenant requirements adjust through different phases of the acquisition lifecycle

 

How can I demonstrate to lenders that the acquisition target can support the proposed debt?

Demonstrating debt serviceability to lenders requires:

• Historical financial performance analysis with normalized adjustments
• Detailed cash flow projections with clear assumptions
• Stress-tested scenarios showing margin of safety in debt coverage
• Integration plan outlining operational synergies and efficiencies
• Customer concentration analysis and retention strategies
• Management transition plan with continuity provisions
• Competitive landscape assessment and differentiation strategy

What documents do lenders require for acquisition financing applications?

Lender documentation requirements for acquisition financing typically include:

• Personal financial statements from all principals (>20% ownership) - Should demonstrate a good fixed charge coverage ratio
• Three years of personal and business tax returns
• Business valuation or purchase agreement with price allocation
• Detailed business plan with growth projections
• Historical and projected financial statements of acquisition target
• Current debt schedule and proposed capital structure
• Collateral assessment and appraisals
• Management team resumes and experience summary
• Customer and supplier concentration analysis

 

Why do some acquisition deals use seller financing, and what terms are typical?

Seller financing in acquisition deals serves several purposes:

• Bridges gaps between buyer resources and purchase price
• Demonstrates seller confidence in business sustainability
• Creates tax advantages through installment sales treatment
• Facilitates deals when traditional financing is limited
• Typical terms include 3-7 year repayment periods
• Interest rates generally range from prime plus 2-4%
• Security positions usually subordinate to senior lenders
• Performance conditions may adjust payment obligations
• Seller involvement periods often align with financing duration
• Some buyers might not have accetable level of personal assets

 

 

How does proper acquisition financing structure impact post-purchase cash flow?

Proper acquisition financing structure dramatically impacts post-purchase cash flow by:

• Aligning repayment obligations with business revenue cycles
• Creating adequate debt service coverage ratios for operational stability
• Preserving working capital for growth initiatives
• Establishing appropriate covenant structures that allow operational flexibility
• Reducing personal financial pressure during transition periods

 

What advantages do specialized acquisition lenders offer compared to traditional banks / traditional financial institutions?

Specialized acquisition lenders offer significant advantages, including:

• Deeper industry knowledge for accurate business valuation
• Faster approval processes tailored to acquisition timelines
• More flexible debt structures accommodating business seasonality
• Higher comfort with goodwill and intangible asset financing
• Greater experience with complex transaction structures
• More realistic approaches to growth projections and transitional performance

 

Why might combining multiple financing sources strengthen an acquisition deal?

Combining multiple financing sources strengthens acquisition deals by:

• Creating optimal capital stack with appropriate risk-return alignment
• Accessing specialized expertise from different capital providers
• Reducing dependence on any single financing source
• Achieving more favorable blended cost of capital
• Establishing relationships with diverse financial partners for future growth
• Creating flexibility for post-acquisition capital structure adjustments for a smooth owernship transition

 

 

Statistics on Business Acquisition Financing

1. According to the Business Development Bank of Canada (BDC), approximately 76% of business acquisitions involve some form of seller financing.

2. The Canadian Federation of Independent Business reports that 41% of small business owners plan to exit their businesses within the next five years, creating significant acquisition opportunities.

3. Industry statistics show that acquisition deals with earnout components have a 23% higher completion rate than those with fixed prices only.

4. BDC data indicates that businesses with acquisition financing structures that include at least 25% equity investment demonstrate 34% better long-term performance.

5. According to a PwC study, 67% of failed acquisition deals cite financing structure problems as a primary cause.

6. Statistics Canada reports that medium-sized business acquisitions (between $2-10M) average 4.2 different financing sources within their capital structure.

7. Industry research shows companies using specialized acquisition lenders close deals 37% faster than those relying solely on traditional bank financing.

 

 

 

Citations / More Information

 

1. Business Development Bank of Canada. (2023). "Guide to Financing Business Acquisitions in Canada." BDC Business Resource Center, 45-62. https://www.bdc.ca

2. Thompson, R. & Williams, S. (2024). "Creative Financing Strategies for Canadian Business Acquisitions." Journal of Business Valuation and Financial Analysis, 18(3), 112-128. https://jbvfa.ca

3. Canadian Federation of Independent Business. (2023). "Business Transition Financing Report: 2023 Edition." CFIB Research Publications, 24-36. https://www.cfib-fcei.ca

4. Ernst & Young. (2024). "Canadian M&A Financing Trends: Midmarket Focus." EY Financial Advisory Services, Annual Report, 18-29. https://www.ey.com/en_ca

5. PricewaterhouseCoopers. (2023). "Tax Implications of Business Acquisition Financing Structures in Canada." PwC Tax Insights, 42-53. https://www.pwc.com/ca/en

6. Deloitte Canada. (2024). "Alternative Financing Sources for Canadian Business Acquisitions." Deloitte Private Company Services, Research Report, 31-47. https://www2.deloitte.com/ca/en