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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
"The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into small manageable tasks, and starting on the first one." - Mark Twain
Unlock your business growth potential: Discover how business acquisition loans can turn your expansion dreams into reality.
BUSINESS ACQUISITION FINANCING
Business acquisition financing in Canada needs a better storyboard. Buyout finance opportunities exist all the time in the Canadian business landscape. Undoubtedly, buying a business and either growing it or turning it around is an exhilarating experience. What works and what doesn't for the would-be buyer/owner? From leveraged buyouts to traditional term loan financing, Let's dig in!
Having the Tools to Finance the Business Acquisition Loan Successfully
Proper acquisition finance around your target company purchase price should be done strategically - ensuring the right tools and agendas are in place to make the new business work under a proper financing structure. Finding the optimal financing structure is crucial for a smooth ownership transition and ensuring the growth of the newly acquired company while keeping personal finances stable.
If you’re an entrepreneur looking to buy a business or a current business owner looking for diversification and non-organic growth, which typically is driven by sales and profit motives, enhance the value of another business. If managed properly, revenues and profits will grow.
BUYING THE UNDERVALUED BUSINESS
Numerous clients come to us at 7 Park Avenue Financial in situations they feel are ‘ undervalued’. Some of those can become overvalued if not appropriately dissected. Most businesses in the SME sector in Canada tend to be purchased or bought in a somewhat ‘ friendly ‘ negotiation. SME is rarely a hostile takeover environment.
Focusing on your initial pricing and the value of the business you are considering will always come back to cash flow. That cash flow will result from how you manage the business relative to current assets (inventory and A/R) and the financing you need for current and future investments.
How does the purchaser/buyer create that ‘ storyboard’ we’ve discussed? It’s done by taking a close look at finance operations, including gross margins on sales, expenses, and asset turnover.
Business purchasers often go wrong when they don’t spend enough time on the required investment in new assets. That could be technology, plant equipment, vehicles, etc. All of those will require financing, which can typically be funded adequately via equipment financing. The cash flow required to make those payments must be considered in your cash flow analysis of the acquisition.
Sales in most companies always return to a working capital requirement. This is the balance between managing payables and vendors, collecting receivables, and purchasing inventory/goods.
Here’s a quick way to look at that. Let’s say a company has 100,000 dollars in current assets and 80,000 in current liabilities. That business has a working capital position of 20,000 dollars. Bottom line? Your business needs 20 cents of working capital for every dollar of sales. You need to project that out into your future sales growth. Keep your ‘ capital turnover cycle’ top of mind.
ANSWERING 3 KEY QUESTIONS IN BUYING A BUSINESS
What are those key storyboard questions you should be asking yourself? They include:
What debt levels are in place or needed?
What amount of owner equity needs to be in the business at purchase?
Are short-term solvency issues critical? What type of financing can be implemented to solve them?
What are the business acquisition loan requirements? Potential borrowers must meet criteria such as demonstrating a good credit history, providing sufficient documentation, and showing readiness with detailed financial projections. Understanding the business's value is also crucial to reassure lenders of the borrower's ability to repay the loan.
HOW IS WORKING CAPITAL FINANCED IN A BUSINESS ACQUISITIONS
They might include:
RECEIVABLE FINANCING
INVENTORY FINANCE
BANK OR NON BAN LINES OF COMMERCIAL CREDIT
Selecting different financing options can significantly affect your monthly payments. Choosing repayment terms that align with your cash flow projections is crucial to ensure manageable monthly payments and avoid financial strain.
Remember the maxim ‘ Growth penalizes Cash ‘ when planning an acquisition for growth IN the small business environment. That punishment can be brutal.
HOW DO YOU FINANCE A BUSINESS ACQUISITION WITH ACQUISITION FINANCING
Methods of acquiring a business in Canada through acquisition financing lenders include_
GOVERNMENT SBL LOANS - Flexible collateral requirements / loan payments
BRIDGE LOANS
ASSET-BASED LINES OF CREDIT - funding the assets of a business
BANK TERM LOANS / CREDIT UNION BUSINESS LOAN DEBT FINANCING / Mezzanine Financing
LEVERAGED BUYOUT FINANCING
PRIVATE EQUITY
SELLER FINANCE - vendor financing will always help finance a transaction
SBL GOVERNMENT loans are government-backed and offer competitive interest rates and flexible repayment periods. Small business loans are also available and flexible, catering to entrepreneurs looking to acquire or expand businesses. Online lenders provide quick approvals and flexible terms, though their interest rates are often higher compared to traditional banks.
KEY TAKEAWAYS
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Understand the lender’s criteria for approving acquisition loans
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Evaluate the target business’s financial health and growth potential
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Prepare a comprehensive business plan detailing post-acquisition strategies
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Familiarize yourself with various loan structures and their implications
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Assess your own creditworthiness and financial capacity for repayment
Three uncommon takes on BUSINESS ACQUISITION LOANS:
- Using Acquisition financing to finance partial acquisitions or minority stakes in companies
- Leveraging acquisition financing for cross-border business purchases to expand internationally
- Combining business financing for a business purchase with seller financing to create unique deal structures
CONCLUSION
Business acquisition loans empower entrepreneurs to transform their business landscape by providing the necessary capital to purchase established enterprises.
Call 7 Park Avenue Financial, a trusted, credible, experienced Canadian business financing advisor who can assist you with your buyout finance needs when you want to finance an acquisition.
FAQ
How can a business acquisition loan help me expand my company?
A business acquisition loan provides the necessary capital to purchase existing businesses, allowing you to expand your operations, customer base, and market share quickly.
What advantages does acquiring an established business offer compared to starting from scratch?
Acquiring an established business often involves existing customers, proven revenue streams, and operational systems, potentially reducing the time and risk of growing a new venture.
How might a business acquisition loan impact my company’s cash flow?
While a business acquisition loan requires regular repayments, the acquired business should generate additional revenue to cover these costs and potentially improve overall cash flow.
What long-term benefits can I expect from using a business acquisition loan?
Long-term benefits may include increased market share, economies of scale, access to new technologies or talent, and improved competitive positioning within your industry.
What types of collateral are typically required for a business acquisition loan?
Lenders often require collateral such as business assets, real estate, or personal guarantees. The requirements vary based on the loan amount and the lender’s policies.
How long does the business acquisition loan approval process usually take?
The approval process can take anywhere from a few weeks to several months, depending on the complexity of the deal, the lender’s requirements, and the thoroughness of your application.
Are there government-backed programs available for business acquisition loans in Canada?
Yes, the Canada Small Business Financing Program offers government-backed loans for business acquisitions, subject to certain eligibility criteria and loan limits.
What role does the seller play in the business acquisition loan process?
The seller of an existing business may be asked to provide financial records, assist with due diligence, and sometimes offer seller financing as part of the deal structure.
How can I improve my chances of getting approved for a business acquisition loan?
To improve your chances, maintain a strong credit score, prepare a detailed business plan, demonstrate industry experience, and have a solid down payment or additional collateral available.
What factors do lenders consider when evaluating a business acquisition loan application?
Lenders typically consider the borrower’s credit history, the financial performance of both the acquiring and target businesses, the industry outlook, and the proposed deal structure.
How does a business acquisition loan differ from other types of business financing?
Business acquisition loans are specifically designed for purchasing existing businesses or assets, often with longer repayment terms and potentially higher loan amounts than general business loans.
What are the potential risks associated with taking out a business acquisition loan?
Potential risks include overvaluing the target business, underestimating integration challenges, struggling with debt repayment if the acquired business underperforms, and potential damage to personal credit if the loan is personally guaranteed.
Can intellectual property be used as collateral for a business acquisition loan?
Yes, intellectual property can be used as collateral to secure a business acquisition loan funding. Some loans, including specific unsecured options, allow buyers to purchase intellectual property instead of traditional assets, making it an appealing choice for acquiring businesses or franchises.
What role do venture capital firms play in business acquisitions?
Venture capital firms can provide critical support for entrepreneurs aiming to purchase a business. Along with other sources like crowdfunding and private equity, venture capital firms offer alternative financing options and can be a valuable part of various funding strategies for business acquisitions.
ABOUT 7 PARK AVENUE FINANCIAL
7 Park Avenue Financial originates traditional and alternative financing and asset-based financial services providers that offer lease financing, cash flow and working capital financing, and business acquisition loans.
The company works closely with clients to develop key business strategies based on their unique needs. The company is committed to providing the highest level of customer service and innovation to help businesses succeed.
Combining our experience and solutions, we help our clients achieve profitable cash flow and debt financing and streamline the process with a full range of credit offerings.
