How do you buy an existing business?

A business owner can follow a series of steps to purchase an existing business. The 7 steps to buy a business include: Find a business, Value the ownership of that business (You'll need to get a lot of legal documentation from the current owner), Negotiate purchase price with the seller, Send Letter of Intent (LOI), Inspection & financing options for a planned purchase agreement, Due diligence, and finally Closing transaction. A confidentiality agreement will protect the seller so they can disclose confidential information to a buyer. Visit: https://www.7parkavenuefinancial.com

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INTRODUCTION

Businesses in the SME sector in Canada are recognized as the true engine of Canada's economy because they create most of the jobs.

While big corporations may have the lion's share of the headlines, small businesses are the true engine!

Starting a business from scratch can be tough because of existing competitors and new ones arriving all the time. This is why a business purchase/buying a company can be an attractive option for entrepreneurs.

Reduced risk in some aspects, a proven business model, and an existing customer base are some of the potential benefits that come with buying a small business in your search to find a business.

When buying or expanding a business, it is important to find out how to evaluate and finance the purchase, including asking why the business is for sale. Your first step is often to find a business that is worth the investment and has financial potential.

Breaking the Business Acquisition Financing Barrier

Traditional banks demand extensive documentation, perfect credit, and substantial down payments. Meanwhile, prime acquisition opportunities slip away while you struggle with lengthy approval processes.

Uncommon Takes on Commercial Loans to Buy a Business

WHAT IS THE VALUE OF THE BUSINESS YOU ARE BUYING? DETERMINING A FAIR PRICE!

Talk to 7 Park Avenue Financial and invest some time in understanding valuation multiples around the value of a business relative to the purchase price.

Valuation multiples of different businesses can be used to estimate their value as long as you know the metrics around the type of business you are considering.

The most experienced person in negotiations has more leverage when pricing needs to be set. This move into new ownership of a business will represent significant changes in the working environment of a company.

It is better to pay too much for a good business than to pay too little for one that will end up being bad!

The owner will have a different opinion of how much the business is worth than the buyer, and whoever has the most leverage when negotiating will be more likely to win. For sellers, it is an emotional process for the business owner because each party has different opinions on value.

As an example, fixed assets generally have a depreciated value and not their replacement cost from the balance sheet when it comes to the assets of the business.

Banks and other financial firms are interested in the value of a company being acquired, so they need to know how valuable it is and that they buyer can pay interest and the principal on the loan . It is crucial to have a valuation of the company being acquired in order for lenders to be able to calculate how much financing they will provide.

Valuation multiples are business metrics which you can use to calculate the value of a company. The company's asset, earnings, or sales value is typically the most common way to set a multiple.

In valuing a company, it's important to pick the right multiple for earnings or sales and make sure the benchmark is from companies in the industry with similar numbers.

The cash flow statement is a very important document for any purchaser to have access to.

The information it provides can give you insight into how much money has come in as well as going out, which will let potential buyers know whether or not there are enough funds available as needed.

A cash flow statement is a fundamental tool for understanding your company's finances. It will show you how much money has come in, as well as what is likely going out to be spent or saved for later this year!

The business may find it necessary to access financing on an intermittent basis in order to cover short-term cash crunches. This could be due, for example, to address resources needed such as inventory and other business needs.

The frequency at which businesses utilize funding secured outside of their operations is unpredictable but can happen multiple times per year depending upon what type and depth of financial structure exists in the company. Investment might be needed in new equipment that might help reduce expenses and boost production.

OUTSTANDING LOANS/DEBT

It's important to focus on existing loans and debt for any senior lenders and secured lenders. What is the pattern of repayment based on incoming cash flows, and how does that relate to your current level of financing projected?

Does it seem like there would ever be a need for more debt or equity finance in order to meet short-term financial goals? That's where proper due diligence around assets and liabilities pays off for business owners!

FINANCING SALES/ACCOUNTS RECEIVABLES

The level of accounts receivable is imperative to understanding your company's credit risk appetite and history. The percentage that is collected within 30 days, 60 days, or 90 days respectively speaks volumes about how much time it takes for the company to be paid back.

Don't be afraid to talk to an accountant or Canadian business financing advisor to ensure you have an accurate interpretation of current assets such as receivables and inventory, which are the most liquid assets on a balance sheet and represent cash flow and asset turnover.

NORMALIZING THE FINANCIALS/THE DISCRETIONARY INCOME ISSUE

Purchasers of an existing business should spend a significant amount of time normalizing the financial statements. Buyers will want to know what amount of funds are left over after all company expenses are covered under new ownership.

Look for patterns in the business that might reflect a sudden drop or increase or a problem with the data available. There are many ways to evaluate the financial records of a company. Among these is comparing operating ratios against industry averages and looking for anomalies in management or accounting.

REVIEWING KEY DOCUMENTS IN THE BUSINESS

Merging or purchasing a business will require more than just reviewing financial statements and financial performance of the target company—you'll need to consult with a lawyer as well.

It's important to understand the documents that come with your purchase of a small business, including issues around current employees, etc.

To ensure a successful transfer of ownership from the previous owner, be sure to gather all applicable documents. This includes physical assets like fixed assets/equipment and vehicles, as well as any commercial real estate that might be part of the sale.

Examine any deeds or mortgages, intellectual property that might be part of the purchase, and possible potential employee issues.

Buyers should be able to provide funders with information about the company they are targeting. This can include financial statements, past years' tax returns, and projections, as well as any significant upcoming changes in business operations or planned investments for future growth opportunities.

It also means sharing any significant coming changes expected to happen within this time period alongside what you plan on doing differently going forward—whether these relate directly to investment plans or R&D spending, etc.

A solid business plan is critical to a successful acquisition. 7 Park Avenue Financial business plans meet and exceed the requirements of banks and other commercial lenders.

FINANCING THE PURCHASE

When you're seeking finance to buy an existing business and to properly and successfully complete the business purchase, don't forget that there are many options available from banks, commercial finance companies, as well as asset-based lenders.

Government Loans - A small business can use a government-backed/guaranteed loan to finance an acquisition or expansion under the Canada Small Business Financing Program , intended to support economic development for SME's, and is one of the most popular financial solutions for smaller businesses. Intangible assets can also be funded, as well as leaseholds, making it one of the popular borrowing solutions for SME's.

The key benefit of using a government loan is that the government, through participating financial institutions such as a bank or credit union, incentivizes lenders to approve the loan by guaranteeing a large part of the facility, which is typically structured as a term loan. A good credit history for the borrower is required under the loan application.

Term Loans - A term loan from traditional financial institutions typically has a good interest rate and normal approval process, although many buyers find that bank loans are often much slower to be approved.

A term loan that utilizes the latest cash flow and projections can be a wise decision for business acquisitions that need funding. A term loan provides financing for a specified period of time, most often 5 years.

The main reason this type of loan works well in financing a business acquisition is that cash flow and earnings support the loan and can allow for potential expansion and growth.

Cash flow loans are often utilized to help businesses grow and should be used for projects that will improve the company's cash flow.

Business credit lines offer many benefits, including the ability to plan for seasonal cash flow gaps. They are especially useful when you need to cover working capital costs on an ongoing basis.

Additionally, credit lines can come at less cost than traditional loan options due to the fact that you are only paying for the facility portion that you use when financing current assets on balance sheets.

Vendor Financing - The "vendor take back," aka VTB/Seller Financing, is a secondary form of financing used for companies that are being bought by other firms. If you're planning to buy a business, the vendor is not just the person selling it to you.

Sellers can be your main source of financing for a transaction in the combination of debt and owner and cash flow financing under your final optimal financing structure.

Keep in mind that "vendor financing" is often seen as patient capital because it is not secured by the assets you are financing, and it typically often has an initial principal repayment postponement period.

Case Study: Commercial Loan Success

Solution: 7 Park Avenue Financial secured SBL Government commercial loan to buy a business with 15% down payment

Results: Buyer acquired the restaurant, maintained $150,000 working capital, and increased revenue 28% within 18 months. The commercial loan structure allowed immediate menu expansion and marketing investments that drove profitability.

KEY TAKEAWAYS

CONCLUSION

When you're buying an existing business, there is often less risk compared to starting a new business. Are you buying a company, making an acquisition, or thinking of buying a competitor?

In some cases, you might be part of current management and are looking for information on how to buy into a business.

FAQ: FREQUENTLY ASKED QUESTIONS/MORE INFORMATION

A confidentiality agreement will protect the seller so they can disclose confidential information to a buyer.

Buying a small business is the ultimate way to get into entrepreneurship. If you're successful, buying an already successful company will allow your new venture to be on solid footing. The attraction of buying an existing small business is that you can get into the industry quickly and easily. If it has already shown success, then there's no need for extensive training or unfamiliarity with processes—all these factors work toward making a transition smooth and less risk-averse! You can even register a business as a sole proprietorship if you choose.

It makes sense to buy the business assets of a company that owns the business or buy the business directly.

What is a business broker—how do you work with a business broker representing sellers?

Business brokers can help a buyer find the right type of business, keep negotiations civil and smart, and provide the necessary paperwork. They are usually paid a commission by the seller on a successful sale.

What documentation do I need for a commercial loan to buy a business? Commercial loan to buy a business applications require financial statements from both you and the target business, tax returns, business plans, and asset valuations. Lenders scrutinize the target company's cash flow history and your management experience.

How much down payment is required for a commercial loan to buy a business? Commercial loan to buy a business down payments typically range from 10-30% of the purchase price. The exact amount depends on the business type, your creditworthiness, and the lender's risk assessment.

What interest rates can I expect for a commercial loan to buy a business? Commercial loan to buy a business interest rates vary based on risk factors, but currently range from 6-12% for qualified borrowers. Your credit score, business experience, and the target company's financial health significantly impact your rate.

How long does approval take for a commercial loan to buy a business? Commercial loan to buy a business approval timelines range from 30-90 days depending on complexity. Working with experienced brokers like 7 Park Avenue Financial can expedite the process through pre-qualified lender networks.

Where can I find lenders for commercial loans to buy a business? Commercial loan to buy a business lenders include traditional banks, credit unions, SBL lenders, and alternative financing companies. Brokers like 7 Park Avenue Financial access multiple lending sources simultaneously.

Why do commercial loans to buy a business get rejected? Commercial loan to buy a business rejections typically stem from insufficient cash flow coverage, inadequate collateral, weak management experience, or poor target business performance. Proper preparation prevents most rejections.

How do lenders evaluate commercial loans to buy a business? Commercial loan to buy a business underwriting focuses on debt service coverage ratios, business cash flow stability, management experience, and industry outlook. Lenders want assurance the business can support loan payments.

Can I use a commercial loan to buy a business for franchise purchases? Commercial loan to buy a business programs often work excellently for franchise acquisitions. Franchises provide proven business models and ongoing support that lenders view favorably during underwriting.

Are there government programs for commercial loans to buy a business? Commercial loan to buy a business government programs include SBL loans and provincial programs in Canada. These options offer favorable terms but require additional documentation and longer processing times.

What role does business valuation play in commercial business loans to buy a business? Commercial loan to buy a business underwriting requires professional appraisals to ensure purchase prices align with fair market values under an approved credit limit for the acquisition loan. Overvalued acquisitions create higher risk and may result in loan rejections.

' Canadian Business Financing With The Intelligent Use Of Experience '

ABOUT THE AUTHOR: Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Commercial Loan to Buy a Business: Complete Canadian Guide | 7 Park Avenue Financial