Guide to Business Acquisition Funding in Canada | 7 Park Avenue Financial

                                               

 

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The Canadian Dream: How to Secure Funding for Your Business Acquisition

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Winning Strategies: Business Acquisition Funding in the Canadian Landscape 

  

 

 

 

 

Introduction

  

 

Business acquisition finance in Canada serves as the financial lifeblood for entrepreneurs and investors seeking to acquire existing businesses and unlock new growth opportunities in a dynamic economic landscape.

 

While business acquisition funding in Canada is essential for economic growth and market expansion, some argue that it might inadvertently favour large corporations over small businesses, potentially stifling competition and limiting diversity within the Canadian business landscape -Here at  7 Park Avenue Financial, we focus on Small and Medium Enterprise ( SME) acquisitions for the business owner.

 

 

What Are Acquisition Loans & How Do They Work?  

 

Business Acquisitions are a solid method for business owners who want to grow companies and buy an established business, but who don't have the capital needed and need to find financing. The acquisition loan can be used in many different ways depending on what your needs and goals are  - from acquiring another company or its assets or technology.

 

Acquisition loans can be a great way for small business owners to expand current operations. There are many types of financing solutions available as well; from debt capital via conventional term lending down to new kids on the block such as revenue-based options and leveraged buyout financing via asset-based lending solutions.

 

An acquisition loan is an ideal option for companies that need to finance the purchase of a business!

 

  

VALUATION / PURCHASE PRICE CONSIDERATIONS  

 

The price of a business is often the first obstacle that stands between entrepreneurs and their goals. For many, haggling over prices can feel like an impossible task with so much complexity involved in determining what’s fair compensation for the purchase of a company.

It takes experienced insights into how the valuation of a company works. The future potential success of the acquisition will depend on financial information such as revenue growth rates, current financing structure, and future capital needed in the business.

 

Negotiations on price can often be complex and intense and full of back-and-forth around price during M&A negotiations. Deals are always more complicated than they appear on the surface.

 

Valuation is an essential part of the process when it comes to acquiring new businesses. There are different  ways you can go through the valuation process and  each has its pros and cons that must be considered before making any decisions on what valuation approach will work best for

 

In acquisition valuations, there is no one-size-fits-all all approach. However many people believe that an analysis based on multiple metrics provides the most accurate picture of value for any given Analyzing financial statements as well as qualitative information is key to the proper pricing of your transaction.

 

Typical circumstances have sellers agreeing to an offer of purchase subject to financial info and other documents that will help assess the true value of the company. Typical information reviewed in this regard includes historical and interim financials, tax returns, expenses that are discretionary and might not be recurring, location and leaseholds, employee agreements, client lists, a/r and a/p agings, supplier info, and gross margin analysis. In some cases, intellectual property value must be assessed.

 

Let the 7 Park Avenue Financial team help you with your valuation process!

  

 

DO YOU NEED A BUSINESS PLAN? ( SPOILER ALERT - YES YOU DO )  

 

A business plan is a document that tells the lender/lenders about the company's purchase, its goals, and strengths. It should be professionally written in prose-based report with financial information to illustrate any competitive edge.

 

Financial modelling is a deep-dive analysis that identifies critical variables, which when transformed properly provides insights on where future growth and profits will come from. The keys are found in analyzing past data and creating models based on rigorous exercises in forecasting.

 

7 Park Avenue Financial prepares business plans for our clients that meet and exceed financial institution bank and commercial lending requirements.

 

 

THE DOWN PAYMENT/ BUYER EQUITY FINANCING ISSUE 

 

The down payment on an acquisition loan can be as little as 15% of the total transaction value, and may typically be as high as 25% depending on circumstances. For example, government loans require only small equity injections.

 

 

  

WHAT ARE THE DIFFERENT  TYPES OF ACQUISITION LOANS TO BUY A BUSINESS  

 

There are essentially two basic sorts of business acquisition loans, asset-based versus cash flow.

 

Asset-based loans rely on the value of business collateral while cash flow-based ones don't necessarily require assets but focus on historical and present and future cash flows.

 

Asset-based loans are the most common form of a business acquisition loan. They're backed by assets, which may be anything from machinery to inventory and receivables or commercial real estate the target company might own.

 

Cash flow-based finance focuses on cash flows directly and future income and profit streams.

 

While there is no one specific type of acquisition loan for all businesses, several types can be used to acquire a company, and often financing solutions are cobbled together, including the challenge of financing goodwill and intangible assets.

 

When considering these choices it's key not just to look at what might work best now but also to ensure future needs will likely arise over time too

 

Government Loans  - Canada Small Business Financing Program loans offer great terms for borrowers with good credit for the purchases of small businesses  looking to finance a business acquisition, as well as franchises,  with tailored monthly payments structured to the business purchase

SBL  loans are business loans that are majority guaranteed by the government and offer better rates and lower down payments. The government business development bank is another crown government corporation that provides financing solutions when transactions are not high risk.

 

Conventional term loans -If you are looking for the best terms and good interest rates then this is often your best ' go-to loan '. With conventional loans from a bank and your ability to meet strong credit requirements, there's often no better option.

Conventional business bank term loans are best for those with solid, strong cash flow to service debt - buyers should note that this type of financing can be restrictive and harder to qualify for.

 

Asset-based acquisition financing - Asset-based loans can be a great way to unlock that liquidity and specific assets such as accounts receivable within a business to buy a company. These types of revolving financing structures and term loan/bridge loans provide financing relief.  SME and middle-market companies utilize asset-based loans to acquire a business and keep their day-to-day operations running smoothly via leveraged buyouts

 

Royalty / Revenue-based loans - -With a revenue-based loan, the repayment changes depending on how cash flow and recurring revenue a business can generate. This means that there are no fixed payments - The Lender takes a percent of your business's revenue until the loan is repaid with interest.

 

Summary - When you are buying an existing business,  there are numerous loan types for every situation, including a vendor note. Some offer lower interest rates and fewer fees, some provide longer repayment terms.

 

  

DO YOU QUALIFY FOR ACQUISITION FINANCING  

 

Qualifying for a business acquisition loan is in many ways the same as qualifying for any other type of bank loan or a loan from an ABL lender or commercial financing company, but you need to choose the right funding. There are several factors that lenders take into consideration when deciding whether or not they will approve a business acquisition.

 

Buyers should typically have a  minimum credit score in the 640  range to qualify for traditional or government financing. Non-bank alternative lenders place much less emphasis on established credit and perform some background checks but they are not the key to final approval. Down payments and equity injections by buyers will depend on the target business financials and overall business cash flow.

 

When applying for a loan, it's important to know the requirements and restrictions so you can avoid any future problems and assess other options

 

  

  

KEY BENEFITS OF BUSINESS ACQUISITION FUNDING    

 

Numerous benefits come from a properly structured acquisition including the ability to put in a lower amount of personal capital, flexible terms, and the ability to potentially access future financing to help grow sales revenues and the bottom line.

 

  

FUTURE POST-ACQUISITION BUSINESS CAPITAL NEEDS  

 

Purchasers of a business must ensure that they have raised the proper amount of financing for the acquisition as well as ensure the financing is in place to run the company and grow sales revenues. to both purchase and grow the company and facilitate short-term needs around working capital.

Companies can often raise additional funds through a mezzanine loan if they need post-acquisition financing to grow their business based on cash inflows.

  

 

Employee Stock Ownership Plans (ESOPs) for Acquisitions  

 

ESOPs are typically used for succession planning or as a way to incentivize and retain employees. However, an uncommon approach is to use ESOPs as a funding mechanism for business acquisitions.

 

In this scenario, employees have the opportunity to collectively buy the business they work for. The existing owner can gradually sell the business to employees through an ESOP, allowing them to become shareholders over time. This approach can be beneficial for business owners looking to exit while ensuring the business's continuity and rewarding loyal employees.

  

 

 

Key Takeaways  

 

 

 

CONCLUSION 

 

You can use acquisition financing to buy a business in Canada from existing owners. Let 7 Park Avenue Financial show you how several different types of financing will allow you to take advantage of buying a business in Canada via term loans, asset-based financing, and cash flow lending solutions that might include business lines of credit.

If traditional bank financing cannot be approved alternative non-bank lenders can often provide the solution for a financing and smooth ownership transition.

The bottom line? Acquiring a business takes expert knowledge of business financing techniques, and buyers should have experience in the sector of the business related to the acquisition of a target company.

 

 Talk to 7 Park Avenue Financial for assistance in structuring your acquisition deal, valuation, access to commercial lending tailored to your needs, and 7 Park Avenue Financial's ability to provide a business plan related to proper financial modelling and capital needs.

 

FAQ/FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

What is business acquisition funding, and how does acquisition finance work?

Business acquisition funding in Canada refers to the financial resources used to purchase existing businesses. It's vital because it allows entrepreneurs to tap into established markets and customer bases, accelerating their growth.



What funding options are available for a successful acquisition in Canada?

Various funding sources exist, including bank loans, credit unions, commercial lenders, asset-based lenders,  private equity, venture capital, seller financing, and government grants. Each has its pros and cons, depending on your unique situation or if you are an acquiring company.



How does the Canadian government support business acquisition financing?

The Canadian government offers programs and grants to facilitate business acquisitions, particularly in strategic sectors and for entrepreneurs with innovative ideas. These incentives can significantly reduce financial barriers and come at a good interest rate.



Are there tax incentives or advantages associated with business acquisition funding in Canada?

 

Yes, Canada provides tax incentives and deductions for certain business acquisition expenses, such as interest on loans or legal fees. Exploring these tax benefits can enhance your financing strategy.



Can I get funding to acquire a small, local business in Canada?

 

Absolutely, many financing options are available for acquiring small, local businesses. Explore loans, grants, mezzanine financing,  and investment opportunities tailored to your needs.



Are there industry-specific funding programs for business acquisitions in Canada?

Yes, some provinces offer industry-specific grants and incentives, particularly in sectors like technology, agriculture, and renewable energy.



How do I evaluate the financial health of a business I'm looking to acquire in Canada?

Conduct a thorough due diligence process, including financial audits and assessments, to evaluate the business's profitability, liabilities, and growth potential.



Are there any risks associated with business acquisition financing in Canada?

Yes, risks include taking on debt, potential economic downturns, and misjudging the value of the acquired business. Proper planning and professional advice can mitigate these risks.



What role does a business plan play in securing acquisition funding in Canada?

A well-crafted business plan is crucial as it outlines your strategy, financial projections, and how you'll use the funds. It's a key document for lenders and investors.



How much can you borrow to buy a business?


Business acquisition loan sizes will vary significantly based on different factors such as asset values, collateral, business cash flow, owner credit history, and experience, as well as the historical financial performance of the business - Loan terms for business acquisition loans can vary between 2-7 years.


What are the steps to get a loan to buy a business?


To get financing to buy a business purchasers should:

Locate an existing business to purchase and perform due diligence around  valuation

Create a realistic and solid business plan to demonstrate financial potential and loan repayment

Finalize and negotiate the final purchase price

Address acquisition financing needs to ensure a proper and optimal financing structure



What factors do banks and other commercial lenders look at in buyer eligibility?




Factors affecting final financing from a bank or credit union via  approval for low-interest rates and flexible funding around business acquisition loans/ bank loans  include, but may not be limited to:

Purchaser eligibility, including the ability to legally borrow in Canada / business experience

Personal finances around the personal owner's credit history and net worth

Current personal debt levels

External collateral available if required

Favorable credit score

Down payment/owner equity