How To Achieve Business Acqusition Financing

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YOUR BUSINESS ACQUISITION LOAN

Business Acquisition Funding is sought by entrepreneurs, but often poorly understood. Proper financing is a key method in funding your acquisition plans to buy an existing business.... successfully!

The type of loan you require will depend on the target company's size, business model, and overall credit quality and often there is no one single best option for all businesses because each situation requires a unique approach.

The two most popular forms of financing for buying a business are a commercial finance company or bank financing which offers lower interest rates to complement owner equity. In other cases, mezzanine financing or asset-based lending will provide the capital you need to acquire the target company, albeit at higher rates but with the capital you need to close the acquisition.

In many cases, the financing will be a mix of asset finance and cash flow /line of credit solutions. A critical part in making your acquisition go smoothly and without any problems is negotiating an optimal capital structure with senior and other lenders in advance, allowing you to be positioned well when looking for further growth opportunities post-acquisition.

WHAT IS THE BEST FINANCING STRUCTURE FOR YOUR BUSINESS?

A critical part of making a successful acquisition is negotiating an optimal capitalization plan. and strategy - with enough funds available to run and grow sales revenues.

WHAT IS THE VALUE OF THE BUSINESS YOU ARE BUYING?

Many businesses are asset intensive so extensive due diligence must be undertaken around those tangible assets such as fixed assets/equipment, inventories, and in some cases commercial real estate . A key focus in valuation should always be a hard look at cash flows and depreciation policies - a good rule of thumb is to take a long-term average of cash flow. Examine profit margins and focus on areas of product and service improvement to improve those margins.

Buyers of a business will want to assess and remove any non-recurring costs as a part of their go forward plan in raising debt to fund the acquisition - allowing for further improvement in valuation concepts around 'EBITDA'

OWNER EQUITY / DOWN PAYMENT

In Canada, buyers will have to demonstrate, via a down payment contribution some percentage towards the buying price, and these funds can come from a variety of sources such as savings, investments, etc, or partner contributions.

Equity participation can be a powerful tool in lender negotiations, as well as reducing borrowing costs and showing commitment to success by the buyer while helping in securing more capital for growth and operations.

It should not be a secret that lenders feel more comfortable about making a deal with these involved parties because they know there will be a commitment by all parties. That equity also will assist in additional cash required if final outcomes fall short of expectations. Shareholders or partners can help back you in this regard. Bottom line? It is very hard to buy a business without a down payment or the ability to show additional funds available if required.

SOURCES OF FINANCING

The most common type of financing for small businesses is term debt in the form of a long-term loan, typically with a 5-year amortization being a common structure. Term loans are secured by assets and cash flows of the business

Term lending has many features that make it useful across industries; however, one key feature often overlooked by new business owners is that these loans come with covenants and the requirement of the business to maintain key financial ratios, as an example: debt to equity.

Borrowers should note that if an asset-based lending solution is utilized this type of financing is covenant light/covenant free and at the same time less reliance is placed on personal guarantees or outside collateral often required by more traditional financial institutions.

As we have noted sources of financing can be term or cash-flow-based.Term financing secured by assets (building, equipment, etc.) is one way to get access and approval for your business takeover while also providing security against risk factors for the lender.

Target acquisitions with less than perfect financials and credit history will often be backed up by a good business asset based when the focus cannot just be on the bottom line.

Accessing business credit will always be easier when profit and cash flow from operations demonstrate the ability to be successful in debt service obligations - given that transition periods in acquisitions can sometimes last longer than expected and can pose challenges for management when there is also a turnaround scenario!

IS A TURNAROUND OR DISTRESSED COMPANY FINANCEABLE?

Should I buy this business if it requires turnaround or if some level of distress exists? We get that one a lot here at 7 Park Avenue Financial.It all depends on the situation. If you're thinking about buying an existing company that's failing or being liquidated, then it might be worth considering because prices are extremely attractive at that point.

But turnarounds don't always work according to plan so make sure everything checks out before committing any money and capital as well as asking yourself how much time you have to effect the turnaround

Are the potential profits worth taking on some level of additional risk? What resources will you need via time/money, as well as the skill sets involved to be successful in turnaround management?

SENIOR DEBT FINANCING FOR YOUR ACQUISITION

The senior lender in an acquisition deal provides the funds that are used to purchase the business . This loan will have priority over any other debt because it's secured by those specific items, like accounts receivable or inventory - as well as typically a general security position over all present and future assets.

FINANCIAL COVENANTS- Senior lenders often set specific terms in the form of covenants and ratios. Maintaining certain debt ratios or fulfilling covenants such as being within specific limits in future investments are typical.

SELLER FINANCING /VENDOR TAKEBACKS

The seller will often, but not always! help finance the deal with what’s known as a vendor takeback or seller note. They agree to be paid part of the purchase price over a certain period of time at some agreed-upon rate of interest and payment.

Vendor Debt can come in many different sizes; sometimes it's based on how well a company does - This financing is outside the bank or other financing available and is valuable in business transitions.

One or both parties may want the vendor to stay involved in some capacity. The reason for this is that they are going to be motivated to make sure their business survives and continues thriving through any transitions.

The other compelling reason for a vendor to stay involved in the business is that they are going be motivated not just by their own financial interests, but also by ensuring it continues ongoing operations.

Vendor notes are a form of debt that has various conditions and favorable interest rates. Vendors are generally a good source of credit because they usually have fewer conditions and charge lower interest rates.

MEZZANINE FINANCE / CASH FLOW LOANS

Mezzanine financing has been shown to be a flexible option for companies in need of additional funds. This type of business funding carries higher interest rates than senior debt and comes with more stringent repayment terms but offers more flexibility and helps cover the gaps in your sources of financing to buy a business.

CONCLUSION / FINANCING ACQUISITIONS

Finding the right financing mix to buy a business can be difficult. The 7 Park Avenue Financial team understands that struggle and we want to help by providing you with a range of flexible options that will work for any acquisition needs.!

Business acquisitions require loan financing and your own investment. Loans can be asset-based (collateral) or cash flow-based traditional loan

If you want to take over a family business or prepare to buy an established company let the 7 Park Avenue Financial team help you succeed

We'll provide strategic advice and assistance that benefits you as the purchaser via a financing package that works for your needs

It can be challenging to understand how each type of loan works so it's important to find out what will work best before starting that journey.

FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION

How do you finance a business acquisition / how does acquisition financing work?

Government loans via a small business loan such as the Canada Small Business Financing Program

What is Acquisition Finance

Acquisition financing is the purchase of all or a majority of another company's shares or assets to gain ownership control of most or all of another company. - Purchasing more than 50% of a target firm's stock and other assets allows the buyer to make decisions around the future of the business.

Acquisition financing is the way in which a company funds a merger via various forms of capital and equity - larger transactions may involve the use of a private equity firm or specialized funding for intangible assets

What are the methods of financing a takeover?

Takeovers are established via various methods of commercial financing, including all-cash offers, share sales, debt financing, and cash flow finance solutions. In some cases, mezzanine financing will contribute to a final debt and equity financial structure.

' Canadian Business Financing With The Intelligent Use Of Experience '

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

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