YOUR COMPANY IS LOOKING FOR BUSINESS ACQUISITION FINANCE SOLUTIONS!
BUYING A BUSINESS? HERE'S HOW YOU FINANCE A BUSINESS ACQUISITION
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Financing & Cash flow are the most significant issues facing businesses today.
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7 Park Avenue Financial
South Sheridan Executive Centre
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Oakville, Ontario
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ACQUISITION LOANS IN CANADA FOR A NEWLY ACQUIRED BUSINESS STRATEGY
"In the rapidly evolving Canadian market, the acquisition financing lender is the architect of business growth, offering strategic capital solutions for buying a business.
"Unlock the door to your business's potential with financing solutions designed to turn your ambitious visions around an acquisition target into reality.
7 Park Avenue Financial originates business financing solutions for Canadian businesses. We offer ACQUISITION FINANCING solutions that solve the issue of financing the acquired company. We save time and focus on profits and business opportunities.
INTRODUCTION
When successful, business acquisition financing in Canada requires that the transaction's finance component not be' built on sand' when looking at target companies.
Acquisition financing in Canada is key in shaping the country's business landscape, enabling companies to expand, innovate, and remain competitive.
Specialized lenders in this sector offer tailored financing solutions that empower businesses to pursue acquisitions, mergers, and leveraged buyouts, thereby driving growth in various industries. From traditional banks to non-bank commercial finance firms, including asset-based lenders.
This is an area of SME FINANCE in Canada where strength is needed, so let's open the wallet' on acquisitions acquired properly via a combination of senior debt and equity.
Larger companies often have a distinctive advantage, so we're focusing on smaller companies and mid-market transactions. Let's explore how to finance an acquisition for the many buyers contemplating buying a business and who will pursue debt financing.
WHAT IS ACQUISITION FINANCING?
It's a type of funding specifically designed to support the purchase or merger of businesses, a management buyout, and enable companies to grow and expand their operations strategically.
Acquisition finance is simply the sourcing of business capital to purchase another company. In traditional and alternative finance, successful acquisition financing via bank or non-bank lenders allows buyers to meet their purchase goals with resources and capital to complete a transaction.
Many businesses wish to avoid equity from a third-party investment source as that solution dilutes ownership versus a bank loan or commercial finance firm solution.
WHICH METHOD OF FINANCING A BUSINESS PURCHASE MAKES SENSE FOR YOUR ACQUISITION LOAN?
Business acquisitions come down to the purchase price of the target firm very quickly! There are numerous methods of acquiring a business and raising capital to finance the transaction and buy another company.
One of those less known to business folks is 'subordinated debt'—an unsecured cash flow loan. When financing a business for a specific acquisition price, it is necessary to determine which overall financing structure works best for all parties—of course, the seller, a lender/lender, and you, the buyer.
HOW DOES ACQUISITION FINANCING WORK?
Private equity and venture capital funding can facilitate more significant transactions in Canada, but those are not for most businesses in the SME/SMB sector. In some cases, acquiring firms may choose to remain separate entities.
THE CASH FLOW LOAN
While a cash flow loan / mezzanine financing is almost always more expensive than traditional bank term loans, it is more flexible. It can often carry much of the total funding needed to complete a deal. This loan ranks 2nd behind any secured debt; hence, it's 'subordinate' to the secured finance part of the transaction. Certain conditions around cash flow must be met.
UNSECURED BUSINESS ACQUISITION LOANS
In business credit, If the loan is 'unsecured,' how does the lender, i.e. a commercial finance company or a bank, view the chances of repayment? Here it's down to 2 words - 'CASH FLOW.' So if you're contemplating a cash flow loan as a part of your deal, it's safe to say you should spend some time on:
Past cash flow analysis via the financial statements
Present Cash Flow
Future projected cash flow (by the way - we've never met a projection we didn't like in an acquisition deal, said one of our mentors)
CASH FLOW FINANCING VERSUS ASSET FINANCING - WHICH ONE WORKS BEST FOR YOUR OPTIMAL FINANCING STRUCTURE
Why would owners/financial managers consider bank loans via a cash flow loan for business acquisition financing?
Because 100% secured asset financing might not be possible, the other alternative,' owner equity,' is less desirable because it's either unavailable from the owners or more dilutive.
Many business buyers focus on a leveraged buyout of the target company they are considering—here, it's all about the business's assets and financing them to the maximum within the cash flow capability to repay the loan. Client lists are also an important consideration.
Mezzanine debt financing can be added into capital structures to augment a final transaction, undoubtedly an alternative to equity financing.
Projected future cash flows and surplus cash from the acquiring company can also be utilized based on various structures.
VALUATION AND SELLER FINANCING
In business, owners/managers often find a situation where they can acquire another company, competitor, or strategic partner.
The valuation price on the deal might be more than the assets can support—especially if current owners do not wish to participate in the financing via some 'vendor takeback.' In recent times, intellectual property versus 'tangible assets' may be part of the valuation consideration. This creative financing reduces the need for personal loans or the collapsing of retirement accounts, other personal assets, etc.
In many cases, lender financing via a cash flow loan might not be a part of the required debt and other ratio covenants.
A seller financing company will almost always greatly help finance your transaction, and creativity abounds in creatively structuring the 'VTB. 'Your final structure will typically be a senior loan and a revolving credit facility supplemented by other secured or unsecured financing forms. Any vendor finance solutions that the seller agrees to lower your equity required to complete the deal since acquisitions involve upfront capital / down payment needs.
For more information on the risk of acquisition financing, click here for an article by the prestigious Harvard Business Review.
Other sources of capital available as a financing solution from finance firms for financing purchases for businesses with steady cash flow include:
Government Guaranteed Business Loans - In the U.S., a bank or SBA loan is a preferred financing solution for thousands of entrepreneurs via a traditional loan structure -
The Canadian version is, of course, our 'SBL LOAN', under the auspices of the government and participating financial institutions—a solid alternative to a personal loan.
This solution is a term loan structure with defined monthly payments. A common way to finance a franchise is to use this loan for small business acquisition funding for buyers with excellent personal credit histories.
Talk to the 7 Park Avenue Financial team for information on BDC Loan requirements for buying a business via financing from Canada's non-brick-and-mortar crown corporation bank, Business Development Bank.
THE ASSET-BACKED FINANCING SOLUTION / LBO FINANCING
Asset-based term loans/lines of credit/ accounts receivable factoring—The focus is on the company's assets on the business balance sheet and the ability to leverage those assets, which can maximize and provide financing. Sometimes, an appraisal might be valuable to a lender or the purchaser.
Financial covenants in asset-based lending, based on a solid balance sheet with assets, are often less restrictive than traditional financing regarding your final capital structure. ABL loans require that you pay interest only on the amount borrowed at any given time, i.e., a fluctuating balance on a business line of credit.
ABL financing is a solid way to help fund leveraged buyouts or a management buyout as part of a financing package.
Equipment Financing / Sale Leasebacks - purchase or refinancing of fixed assets, commercial real estate, or other technology and specific assets in capital requirements - etc
Receivables/Inventory Finance - short-term effective cash management & working capital financing solutions
Commercial real estate can be a vital component of transactions in several cases. It can be financed separately or within the transaction - many firms prefer to have the real estate in a holding company outside the operating company.
Interest rates on any business will factor in the transaction's overall credit quality and profit margins, deal size, the type of financing you choose, and general market conditions. Many industries are very favourable—some are out of favour! Others have challenges funding intangible assets.
External help and experience are almost always essential to finance the acquisition, including solutions that reflect a fair interest rate on the overall transaction.
Financing is often a factor of being prepared via a strong business plan, solid cash flow projections, etc.
7 Park Avenue Financial business plans meet and exceed the requirements of Canadian banks and other commercial and alternative lenders. A solid business plan is a crucial requirement when acquiring a business. Owners should generally be able to demonstrate a solid personal credit score.
Let the 7 Park Avenue Financial team work with you to determine which financing method will work for your business purchase and precisely what is required to access capital.
KEY TAKEAWAYS
Leverage Ratios: Essential in acquisition financing, leverage ratios determine the level of debt a company can assume relative to its equity. They are critical for lenders assessing a borrower's risk and impact the terms and availability of financing.
Due Diligence: This rigorous assessment by lenders involves evaluating the target company's financial, legal, and operational aspects. It's pivotal in identifying potential risks and ensuring the acquisition's viability.
Synergy Valuation: Understanding how the combined operations of two companies can create value beyond their capabilities is central. It justifies the acquisition's premium and influences financing terms.
Collateral Assessment: Lenders often require collateral as security for the loan. Assessing the quality and value of assets pledged is crucial in determining the loan amount and conditions.
Repayment Plans: Tailored to each acquisition, these plans outline how the borrower will settle the debt. Flexibility and clarity in these arrangements are vital to aligning lender expectations with the borrower's financial projections.
CONCLUSION - BUSINESS ACQUISITION FINANCING CANADA
Whether you encounter an opportunistic transaction or a sale of a business as part of the 'graying effect' of older business owners, successfully financing a transaction can make your firm more strategic and competitive in your industry.
Financing an acquisition can be challenging for many business people. When they want financing, small and middle-market businesses don't have access to a private equity firm.
What type of merger or acquisition loan makes sense for your business if you're going through the m&a process? In some instances, a cash payment is a crucial requirement to complete a transaction.
So whether it's about cash flow, assets, profits, or sales growth, consider seeking out and speaking to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your acquisition financing options and business loan needs and work closely as a long term third party with your vested interest in your unique needs around the business acquisition process.
We are a business partner you can trust with due diligence that counts!
FAQ: FREQUENTLY ASKED QUESTIONS / OTHER INFORMATION / PEOPLE ALSO ASK
Can you buy a business with no money?
In general, no money-down financing is available in Canada to control the interest purchase of a business. Seller financing can alleviate the equity down payment required to complete a transaction and leverage assets of the company being acquired regarding assets of business and ways to finance a business purchase.
What is business acquisition financing?
Acquisition financing is the capital to buy a business and achieve certain growth plans. The purchase price allows acquisitions to be completed for entrepreneurs without the capital to fund the business purchase fully upon credit approval.
How are acquisitions financed?
Acquisitions can be financed in many different ways. Buyers may use cash, debt financing, and mezzanine debt or cash flor financing via traditional financial institutions, commercial finance firms, alternative finance companies, and private equity firms. Business lenders have various criteria for financing acquisitions based on risk in different industries. Acquiring another business can be challenging and time-consuming - including when a combined company scenario exists.
Why is an acquisition of a company a financing opportunity?
There are many reasons why an acquisition of a company could be considered a business opportunity. Acquisition finance refers to the ability of a buyer to grow by acquiring a firm that might have additional resources and capabilities to dominate a particular niche market or sector. In some cases, international markets may be pursued versus a local geographic focus for more rapid growth.
Why do entrepreneurs or companies overpay for acquisitions?
There are many reasons why companies overpay for acquisitions. One of the most common is that they overestimate the growth an acquisition will have under its new ownership and cannot capitalize on potential synergies. There are finance and accounting challenges around determining the true intrinsic value of a business when buyers are not familiar with the proper financial approach to determining a valuation.
What are the risks of acquisition financing when buying a business?
Risk factors in buying a business with acquisiton financing include:
- Unsatisfactory due diligence around valuation and financial risk
- Overpaying for the company based on a poor valuation
- The inability to achieve synergies and integration in products, services, and staffing
How does working with an acquisition financing lender benefit my business?
Partnering with an acquisition financing lender offers tailored financial solutions to support strategic business acquisitions, enabling growth and competitive advantage.
What types of acquisitions do financing lenders typically support?
These lenders support a range of acquisitions, including mergers, buyouts, and purchasing new assets, tailored to enhance your business's market position.
Are there specific industries that benefit more from acquisition financing?
While beneficial across various sectors, businesses in rapidly consolidating or high-growth industries often gain significant advantages from acquisition financing.
How do I qualify for acquisition financing?
Qualification involves a thorough assessment of your business's financial health, the strategic value of the acquisition, and the potential for growth after the acquisition.
What are the typical terms and conditions of loans from an acquisition financing lender?
Terms vary widely but generally include considerations of interest rates, repayment schedules, and collateral requirements, all customized to the acquisition's specifics.
What is the difference between acquisition financing and traditional business loans?
Acquisition financing is specifically designed to fund purchasing another business or significant assets, offering more tailored terms than general business loans.
How do interest rates for acquisition financing compare to other types of loans?
Interest rates can vary based on risk, the financial health of the borrowing company, and the acquisition's expected value, but they often fall within a competitive range compared to other loan types.
Can acquisition financing be combined with other forms of financial support?
Yes, blending acquisition financing with equity financing or other debt instruments is expected to create a comprehensive funding strategy.
What role does due diligence play in acquisition financing?
Due diligence is critical. It allows lenders to assess the viability and risk of the proposed acquisition, ultimately influencing the financing decision.
How long does the acquisition financing process typically take?
The timeline can vary from a few weeks to several months, depending on the complexity of the acquisition and the thoroughness of the due diligence process.
Why is acquisition financing essential for business growth?
This financing allows businesses to pursue strategic acquisitions without depleting operational funds, facilitating growth and expansion in competitive markets.
How do lenders evaluate potential borrowers for acquisition financing?
Lenders assess borrowers based on financial health, the strategic fit of the acquisition, and the potential return on investment, ensuring the loan aligns with growth objectives.
