Business Acquisition Loan Financing Solutions To Acquire A Company

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Funding Your Business Acquisition

The right capital structure & financing will position a business purchase for continued growth and success. But how does acquisition financing work?

The wrong capital structure can lead to big trouble and challenges, so it's important for purchasers of a business of any size and in any industry to have a clear understanding of how their finances work.

Taking time upfront is often the best protection against risk during this acquisition process period?

When you purchase a company, it's important to consider how the current financing works and what mix will work best for your needs. At 7 Park Avenue Financial, we have experience in helping you acquire the target company in your focus in the small and medium-size sectors of the Canadian business landscape.

Maintaining flexibility is key when making an acquisition so that future growth can be planned accordingly - this starts with understanding the strengths and potential weaknesses of a business.

ESTABLISHING PRICE & VALUE

Knowing the value of your target firm will give you as a purchaser a strong sense of price and valuation based on financial statements and specific metrics of that industry, which these days may include intangible assets as well.

YOUR REQUIRED DOWN PAYMENT - THE EQUITY FINANCING COMPONENT IN YOUR DEAL

As a buyer, you need to be able to demonstrate your contribution as a percentage of the buying price when it comes to successful lender financing. These funds can come from any number of sources, such as surplus cash from savings, retirement accounts, home equity, or even a potential partnership situation.

A higher down payment reduces the amount to be borrowed and typical percentages vary by industry but are in the 15-30% range as a general rule.

For buyers of a business considering financing from traditional financial institutions such as banks, it is necessary to demonstrate a solid personal credit history as well as ensure you have a detailed business plan and the ability to provide the financial records of the business being considered for purchase and financing. 7 Park Avenue Financial prepares business plans that meet and exceed bank loan and commercial lender requirements.

Some other key aspects of your eligibility around the business purchase include being a Canadian citizen or permanent resident and acceptable personal financial history around personal assets, credit history, and the potential to offer any acceptable collateral or guarantee

SENIOR DEBT TERM LOANS - YOUR KEY FINANCE COMPONENT

Senior lenders provide loans that are secured on the assets and cash flows of the business purchase loan. Senior debt means lenders have a first charge on the business assets and other lenders in this category with banks include commercial finance companies that are non-bank in nature as well as asset-based lenders.

The senior lender will usually have more stringent repayment requirements, typically documented by covenants and financial ratios as part of the loan package and approval.

SELLER FINANCING / VENDOR DEBT

Buyers have the potential ability to finance their purchase with a seller finance/seller note component to the transaction. Seller financing is regarded generally as being easier and more flexible than other types of business acquisition funding. Buyers typically will be required to agree to a term that has a pay interest and installment payment component.

CAVEAT EMPTOR? What most buyers don’t consider is that almost all sellers require an unlimited personal guarantee of you as the purchaser - Also their conditions under the seller note might involve constant monitoring of the business and access to ongoing financial information of the business they are helping to finance - As a buyer, you may not necessarily want sellers involved in the company once you have full ownership.

Studies show that when no seller financing is involved a company will often generate more cash flow in the long run and will save the time to negotiate terms the seller might require to participate in your financing. Some banks and commercial lenders may also choose to view the seller finance component as additional debt on the balance sheet.

IS A MEZZANINE FINANCE SOLUTION REQUIRED TO FILL ANY FINANCING GAP

Mezzanine financing is a solid way to bridge any financing gap left when purchasing a business - it is a higher risk proposition for a lender as it is essentially a loan secured by cash flows only, and will come at higher rates - The key benefit is that repayment terms can be tailored to the cash flow of the business - so it's worth considering!

Loans for the purchase of small businesses can be arranged via the Canada Small Business Financing Program - these loans are federally guaranteed to participating lenders and financial institutions such as banks and some credit unions - They offer competitively low rates, minimum down payments, and flexible terms with limited personal guarantees. Talk to the 7 Park Avenue Financial team to determine if these ' SBL LOANS ' of funding from the business development bank might make sense for your business purchase.

FINANCING FUTURE OPERATIONS

Don't forget to also focus on operating funds when purchasing a business. There's no point in buying an existing company if you're not going to be able to operate it when you finance a business acquisition! Funding such as a business line of credit may be a necessity to consider.

It's common in a business purchase to use a mix of funding sources to finance your acquisition and that should include working capital and cash flow financing strategies and solutions.

ASSET BASED LENDERS

When bank financing can't be achieved an asset-based loan may provide both the acquisition loan as well as the ongoing financing required to run and grow the business in a leveraged buyout scenario of a company's assets

This type of borrowing, ie leveraged buyouts, allows businesses with good sales and fundamentals access to funds without significant upfront equity demanded by banks - it’s all based on assets and sales revenues.

Leveraging assets has the potential for a higher return on equity to the buyer, but it also carries significant risks if you overleverage. Asset-based loans are commonly secured by accounts receivable, inventory, machinery and equipment, and, if applicable, commercial real estate that might be owned by the company.

CONCLUSION - BUSINESS ACQUISITIONS IN CANADA

If you are focused on a successful business acquisition you need a solid plan and the ability to access the financing you need to get the right loan/ business loans to buy a business in Canada. Understanding qualifications is key.

The benefits of purchasing a company are well worth considering, including eliminating the start-up phase and having immediate access to clients and capacity that would otherwise take significant time to achieve in the business-building process. The ability to immediately make improvements and additions to the business means higher potential future profits and the ability to potentially tap new markets quickly.

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

Should a buyer of a business assume existing debt in the acquisition financing process?

The process of acquiring assets and assuming existing debt can be complicated but it is usually common for a buyer of a business to assume some liabilities. Approval of existing lenders is required to assume the rights and obligations of existing debt.

Assumption of debt is often a part of the payment to the seller, representing a portion of the purchase price.

What is a private equity firm?

Private equity firms raise money and invest in companies - They invest in both startups and operating companies. Mostly private-equity firms will receive a periodic management fee and share in the profits earned from each private-equity fund managed. Private equity firms typically focus on very large acquisition loans in their preferred industries. In general, smaller companies in Canada are not candidates for private equity firms.

What is a management buyout?

A management buyout is a type of transaction in which the company's managers purchase all assets and operations with lenders providing financing.

' 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

Business Acquisition Loan Financing | 7 Park Avenue Financial

Finance To Purchase An Existing Business / Business Acquisition Financing In Canada