Business Purchase Acquisition Finance | 7 Park Avenue Financial

 

Tweet

YOU ARE  LOOKING FOR BUSINESS PURCHASE SOLUTIONS!

FINANCING FOR BUYING A BUSINESS IN CANADA / HOW TO FINANCE A BUSINESS ACQUISITION

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing businesses today

ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8

 

BUSINESS ACQUISITION FINANCING IN CANADA 

 

Business purchase decisions. Knock Knock - Who's There?  Opportunity !  ...  to buy an existing business!  The ability to control or buy a business requires, though, acquisition finance funding. 

 

There are numerous types of business acquisition loans with it comes to buying a business in Canada - It's important for buyers to understand requirements, repayment,  financing costs and overall eligibility from traditional or alternative lenders.

 

 

Buying a business with the right financing in place helps guarantee sales and profit growth,  and businesses in the SME segment of the economy rarely have all the ' cash ' they need to buy a company. And it's not always about sales price! The solutions?  Let's dig in.

 

 

  

WHY BUY A BUSINESS?  

 

Clients we meet have varied reasons to buy a business. In some cases, it might simply even be the purchase of an existing franchise, a true turnkey business - rightfully or wrongfully, some consider that decision as ' buying a job. 'We'll let the pundits weigh in on that argument.

 

For some additional insights here is a great article by Forbes Magazine on buying a business and acquisition finance. It is safe to say that more and more business owners are looking for exit strategies thereby creating thousands of opportunities in Canada.

 

At 7 Park Avenue Financial, we're fond of a quote, also in Forbes, by columnist Fleming Meeks, who noted, quite severely, that:

 

' buying a business can destroy your ego, ruin your marriage, wipe out your bank account and be the most exhilarating thing that can ever happen to you '...  Wow!

 

 

WHY BUY A BUSINESS IN CANADA? BUSINESS SALE CONSIDERATIONS 

 

In other cases, it allows the owner to :

 

Speed up growth plans around the current  business activity of the company

 

Expand into the U.S. or internationally

 

Have the ability to capitalize on special technologies or new marketing strategies

 

 

  

DO YOU HAVE A PLAN TO BUY A BUSINESS

   

 

All of those translate into the need to have a 'plan' to show that financing will allow those sales and profits as you prepare for your letter of intent with the current owner/owners.

 

 

 

  

CAN YOU BUY A BUSINESS IN CANADA WITH NO MONEY DOWN OR NO OWNER  EQUITY?   

 

One myth of acquisition finance is that 100% financing is available to small business owners as purchasers of a business. That is very, very rarely the case.  Another myth is that business purchases are geared towards specific industries when any business can be acquired. In the SME sector, it is more difficult to finance a service business's acquisition in Canada as there are rarely assets to support the transaction.

 

In some cases, the buyer might have to address the issue of valuation around intangible assets - today's new economy revolves heavily around service and technology-based businesses.

 

The benefit of owner equity investment in a business makes the overall business less risky and eliminates the amount of debt and financing costs the buyer must take on. However long-term growth may in some cases be partially stifled given a lower amount of debt financing.

 

 

 

ASSETS AND VALUATION METHODS  - HOW IS A BUSINESS VALUED? 

 

Your ability to establish valuation on your target company is key to overall acquisition success. Knowing what the company is worth is all about profits and the ability of the buyer to analyze and ' normalize ' the financials so it properly reflects future financial performance. 

 

A common method used by many buyers is putting a multiple on cash flow or profits based on other companies in the industry.

 

 

HOW DO YOU HANDLE ' GOODWILL ' IN YOUR BUSINESS PURCHASE VALUATION AND FINANCING STRATEGY 

 

Intangible assets on the balance sheet such as ' goodwill ' are part of the overall valuation process. From an accounting point of view, that process involves your agreed-upon purchase price of the business and addressing the mix of hard assets versus the goodwill component on the balance sheet. 

 

It is always a challenge for non-financial business people to address goodwill or items such as intelletual property, as there is a fair amount of subjectivity around handling it- as well as the fact that there are a number of issues inside the goodwill amount on the balance sheet.  To demonstrate how difficult that challenge might be keep in mind that key parts of ' goodwill ' might include:

 

Brand

Client lists

Domain name on the internet

Licenses / Copyrights

Processes/patents

Reputation in the industry

 

As a general rule goodwill can't be financed as part of a business purchase loan so the focus will always revert back to operating cash flows to satisfy the business debt.

 

Balance sheets in today's world of business don't necessarily reflect the balance sheet of previous times - Many intangible assets may be a key part of the value of the business - that might include customer lists,   contracts and supplier relationships - Items such as these are all part of your overall valuation process - along with of course the branding and goodwill associated with the business.

 

While traditional financial institutions will always fund tangible assets in a business such as real estate, equipment, etc other key assets in today's economy might be brands, patents, and developed software for example - These can pose a challenge in your financing plan.

Safe to say that employee issues must be addressed also -  So as we have seen traditional valuation techniques will not always be applicable in your analysis.  In the new economy, many businesses are online, again posing valuation challenges.

 

 HOW DO ENTREPRENEURS  FIND A BUSINESS TO BUY? 

 

Searching for and selecting a business can be challenging, if only because there is no public marketplace unlike the stock market for public companies where valuation and choices are more clearly defined. As a result, the selection process can be time-consuming, and expensive, and include a healthy dose of frustration due to the ' inefficiencies ' of the SME marketplace in an acquisition deal.

 

The work involving ' looking under the hood ' for your due diligence might not always reveal the true pros and cons of that particular business. Will the acquisition allow you to accumulate wealth or drain resources?! Let the  7 Park Avenue Financial team improve your chances of success and remove random elements of risk.

 

  

DOES YOUR PURCHASE COME WITH A BUSINESS PARTNER?  

 

Potentially you may have a business partner, which required an appropriate partnership agreement.   In some situations, you might be involved in buying out a partner.

 

For more info on what is a partnership agreement click  here

 

  

 IS BRIDGE FINANCING THE SOLUTION?   

 

In numerous cases, the type of financing you need to buy a business might be a temporary ' bridge ' solution to a longer-term' full-time' finance solution.  That could be termed ' transition' financing towards a business transfer of ownership via a formal business purchase agreement.

 

WHAT ARE THE METHODS OF FINANCING A BUSINESS PURCHASE IN CANADA

 

Here it's important to ' buttonhole ' the types of financing you will need to complete an agreed-upon purchase price and dollar value of the target company for your acquisition. That comes in various forms around the business's assets and the need to focus on the company's cash flows. Solid due diligence is required on both the balance sheet and income statement of the target company. In some cases, financing might involve the transfer of business ownership to a family member.

 

THE BUSINESS ACQUISITION TERM LOAN

 

The most conventional loan to buy a business is a term loan structure from traditional financial institutions such as a bank. These loans are ' lump sum ' loans with a set amortization period, typically 5 years and sometimes more. The Canada Small business Program, which is a federally guaranteed loan allows entrepreneurs to buy and finance small acquisitions, including franchise financing.

 

These loans are known as ' senior debt ' and typically provide all, or certainly most of the funding you need to buy a business. Commonly these loans secure all the assets of the business, both specific and future assets - That ' first charge ' senior position typically covers balance sheet assets such as cash, accounts receivable, inventories, and commercial real estate. Term loan approvals are carefully tied to the overall valuation of the business.

 

Senior lenders, most commonly financial institutions such as banks will insist on certain covenants and they will place restrictions on certain business practices such as equity withdrawal as an example. Certain ratios on the balance sheet will typically also be part of the purchase agreement financing from the financing company/bank. The debt-to-equity ratio is the most common financial covenant.

 

 

WHAT ARE KEY BUSINESS PURCHASE DOCUMENTS

 

Ensure you have Current year income statements, balance sheets,  accounts receivable and payable schedules, and cash flow projections covered in your business plan - 7 Park Avenue Financial business plans meet and exceed lender requirements.

 

A copy of your purchase agreement is required before any formal discussions around financing needs. Borrowers should also consider the amount of money and type of financing they will require post-purchase, as well as any personal income tax issues around their acquisition.

 

As the owner of the  ' new business,' you should make sure you've got at a minimum a small advisory team around the law, accounting, and financing advisor roles. It's that team that can help you develop questions to ask about buying a business in Canada and address issues such as federal vs provincial incorporation, commercial leases, etc. that will help approve financing when properly addressed.

 

ASSET SALE OR SHARE SALE

 

As one expert has put it so well " Buyers prefer to buy assets and sellers prefer to sell stock "!  There are different types of business purchases when it comes to tax and legal issues.

Businesses can be acquired under an asset sale or a share sale - When a purchase executes a share sale agreement, ownership of the business passes to the purchaser, including liabilities. In asset sales, only identified assets are purchased, with sellers typically responsible for liabilities, some of which might come at a future point in time. For tax purposes around asset versus share, sale, talk to your accountant or lawyer.

 

 

Cash flow term loans

 

Asset financing

 

Working Capital 

 

 

Other areas to be considered in buying a business include the amount of debt already in the company you are looking to acquire. In many cases, this debt or other facilities will need to be ' taken out' or reworked somehow. Buyers should also be forward-looking and consider the amount of future capital expenses that might be required for new assets.

 

 

  

SELLER FINANCING CREATES A WIN / WIN SOLUTION   

 

Many transactions we see have some form of ' seller finance' involved, having the owner participate in the financing by taking some form of a ' note.' That might be a ' lump sum' arrangement at some future point in time or any creative finance solution and payment schedule that meets buyer and seller needs.

 

These earnout scenarios make the ways to finance an acquisition more creative, and most sellers will have already considered this as a potentially viable option and is prepared to be flexible on earnout terms - This method of financing allows the seller to partially leave the business and benefit in the medium and short term based on the success of the business.

 

  

CANADIAN BUSINESS FINANCING SOLUTIONS  

 

 

The actual financial solutions that will allow you to complete proper financing include:

 

A/R Financing

 

Inventory Finance

 

Working Capital Term Loans

 

Tax Credit Monetization Financing

 

Government  Guaranteed Business Loans   - Government' SBL  Loans ' can be used as a flexible financing solution for business acquisitions - These loans are guaranteed by the Government of Canada and have competitive interest rates and attractive repayment terms and amortizations.  Another favourable feature is the lower owner equity component required - which varies by the financial institution. A minimum credit score in the 650 range is required. Talk to the 7 Park Avenue Financial team about how we can make that application and approval process quicker!

 

In 2022 Industry Canada made significant positive changes to the program, which both increased maximum borrowing to 1.1M $, as well as included new financing categories around intangible assets, franchise fees, working capital and lines of credit.

 

 

PO/Contract financing

 

Sales royalty financing

 

Mezzanine Financing  - Mezzanine finance solutions are cash flow-based loans that can often cover any missing gaps in the planned optimal finance structure. Collateral for these loans are the cash flows of the business and financing  often tailored  to the client's needs

 

Asset-based business credit lines - revolving facilities that allow you to borrow against receivables, inventory and equipment - ie the company's assets.  Alternative lenders are a viable alternative when the government or traditional bank loans don't make sense or, more realistically, are not available - Asset-based lenders will often take on more risk in a leveraged buyout but that is commensurate with interest rates they charge which are typically higher. Asset values in the business drive up financing potential.

 

 

Equipment Leasing/ Sale Leasebacks

 

 

 KEY TAKEAWAYS - 

 

Focus on proper valuation and careful  review of financial statements of the business - ensure cash flows can meet debt obligations in the acquisition - Prepare conservative cash flow projections and profit projections

 

Depending on the type of loan and lender you use for your business acquisition, there may be different eligibility requirements. However, there are some specific things that are required for any business acquisition loan application.

Be prepared to execute a proper purchase and sale agreement accompanied by a letter of intent

Have an acceptable business plan available for your senior lender that will demonstrate the history of the business, future plans and predictions and highlight management experience and depth

Ensure that owner equity /down payment or external collateral is properly identified and substantiated

 

CONCLUSION - SUCCESSFULLY BUYING A BUSINESS IN CANADA

 

Don't let the challenge of the steps in buying a business in Canada be overwhelming - issues such as asset versus share sales, confidentiality agreements, asset valuations, documents, non-competes, legal opinions, etc can feel insurmountable - let the 7 Park Avenue Financial team help.

In reality, it's a very defined process including selecting your target purchase, valuing the transaction, and moving toward your offer and due diligence. The financing of your transaction becomes job 1 at that point!

 

Acquisition funding can take many different forms, depending on the particular situation of the target company and buyer - Focus on financing options that are specific to your deal - and ensure that post-acquisition financing is in place that demonstrates access to working capital and cash flow via solutions such as a line of credit. The optimal capital structure makes acquiring a business more achievable and successful and will allow for growth when financing acquisitions.

 

If you're looking to 'cash in' on a business, purchase opportunity, speak to 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor who can assist you with the right mix of financing to accomplish your goals as a business owner of a newly acquired business.

 

We'll be with you all along the way, from the business purchase offer letter and letter of intent to the business purchase term sheet to legal closing!

 

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

 

What is the best way of financing the acquisition?

Click here for the business finance track record of 7 Park Avenue Financial