Guide To Business Purchase Acquisition Financing Loan Solutions

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Different types of financing are available to purchase a business - Let's ensure you are up to speed on business purchase loans and how buyers of a business can find the right acquisition financing for their needs - we'll also throw in some valuable tips around the right financing package!

HOW DOES ACQUISITION FINANCING WORK?

The process of buying a business can be difficult, but it doesn't need to feel overwhelming when you know how to acquire the fight financing via external lender financing.

The different types of finance available will ultimately come down to a combination of debt and equity funding and what types of debt are accessible in your situation and work best - Key factors are how much money can be raised in combination with your equity down payment.

THE RIGHT FINANCING MIX!

Getting the right financing mix is necessary to ensure a smooth ownership transition and business success in future years with the optimal financing structure around your purchase.

ESTABLISHING THE VALUE OF YOUR TARGET ACQUISITION

When it comes to how to value the company the valuation process is all about collecting and analyzing key metrics such as revenue, profits & losses, cash flow, and risk factors like competition from other companies in similar fields.

Your goal is to determine what potential return on investment (ROI) you from the investment and if the purchase is worth considering before committing to financing. The ability to calculate ' EBITDA' around earnings and cash flow is a solid first step.

An acquisition price is typically negotiated by agreeing to a multiple of the company’s normalized EBITDA that reflects profits and growth.

THE DUE DILIGENCE PROCESS!

Due diligence is essential when purchasing a company because it allows you to investigate the business thoroughly and identify any red flags before committing your equity financing and debt commitment - Ensure you receive full financial disclosure from sellers in order to identify any hidden problems in the finances or business fundamentals.

Due diligence is an essential part of any acquisition and your goal is to determine if the financials align with reality before making your final commitment in an agreement of purchase and sale. Financial disclosure will prove whether or not your transaction makes sense!

Your due diligence will include details on how your company will be structured, what assets the company has, the quality of earnings in the financial statements, turnover around accounts receivables, and any miscellaneous issues around areas such as intangible assets / intellectual property, contracts with employees or other organizations, and confirmation of taxes being paid and up to date.

YOUR DOWN PAYMENT /EQUITY INVESTMENT IS YOUR PROOF OF COMMITMENT TO THE PURCHASE

As the potential new owner, your equity shows you are committed to the success of the acquisition through your financial contribution. This is typically a percentage of the buying price that comes from buyer savings, personal investments, lines of credit, etc - The amount of equity you put into the business lowers the funds you are required to borrow to complete the acquisition and shows to lenders your commitment to making the buying of the business succeed.

THE ACQUISITION TERM LOAN

A senior lender is typically providing the majority of the loan for the purchase of a business - the lender is secured by all the assets of the company as well as current and future cash flows.

Senior debt is a type of loan that takes priority over other types of financing that might be required to complete your purchase. Acquisition term loans are typically 3-5 years from an amortization perspective and can have either fixed or variable interest rates.

To reduce repayment risk these loans often utilize collateral such as assets and intangibles and might even include real estate owned by the business.

BUSINESS LOAN COVENANTS

Senior lenders such as banks will often have restrictive repayment terms around the financing which might reflect a shorter-term as well as financial covenants and the maintenance of other loan conditions such as debt and cash flow ratios.

In many cases senior debt can be extended to companies that have fewer hard assets available as collateral - therefore the facility is structured based on cash flow and future revenue expectations.

So if your transaction is ' asset-light ' it can still be structured around cash flows and projected future income based on historical norms. Business lenders focus on the ability of the company to pay back a loan from cash inflows and profits to firms that have the right combination of debt and equity.

CASH FLOW LOANS / CASH FLOW FINANCE

For well-established businesses certain business acquisition loans can include a capital repayment holiday to allow the purchase to gain momentum. Mezzanine financing/cash flow financing is often a part of many acquisitions - it comes with higher risk to a business lender and might include higher interest rates or an equity kicker of some form.

Mezzanine/cash flow finance business loans are subordinate to senior lenders but are always available to companies that exhibit good management, a track record of profits, and the ability to generate cash flow. The Business Development Bank is one good source of mezzanine funding. In some cases, a private equity firm might provide financing on larger transactions on a target company. Small business acquisition loans can often be accomplished via a government-guaranteed loan via the federal government Canada Small Business Financing Program which comes with competitive interest rates. Small business acquisition financing for franchises is often funded through the government SBL loan.

ASSET-BASED LENDING ACQUISITION SOLUTIONS

Asset-based lending is the most popular alternative to bank financing for funding a business acquisition via the concept of a leveraged buyout around the purchase price. Business purchasers use assets of a company as collateral and pay interest which fluctuates with the amount of financing drawn down.

Asset-based lenders are prepared to take on more risk than traditional banks and can provide higher advances on receivables, inventory, and fixed assets that include machinery or commercial real estate. property. Interest rates from asset lenders vary based on a number of factors including quality and size of loan collateral, but in many cases advances on assets can be as high as 80-90%

Asset-based lending has become increasingly popular because it provides access to funds that might otherwise not exist through a bank loan from traditional financial institutions that are regulated, such as Canadian banks.

Leveraged buyouts usually involve combinations of seller financing and bank loan or commercial financing structures.

This method of generating acquisition capital may be popular when access through traditional lending facilities is not available - it's very effective for businesses in need of funds because the loans are tailored specifically toward specific needs--depending on the type of industry and the amount of financing required.

The business credit score and personal finances around credit score/ personal assets, and credit history of the buyer are less important to 'ABL lenders' for someone looking to buy a business via an asset-based business line of credit facility.

SELLER FINANCING / OWNER FINANCING

The seller may help the buyer pay for their purchase by giving them a vendor note in many business acquisitions in combination with acquisition financing lenders.

Many acquisitions for the financing of an existing business will use vendor notes, where the seller agrees to be paid as part of a purchase over time - this helps the buyer pay for the purchase through acquisition loans with monthly payments tailored to the transaction.

CONCLUSION - BUSINESS ACQUISITION LOANS

Growth through acquisition is a faster, more cost-effective, and often less risky option for the entrepreneur.

It's no secret that trying to start, or grow a business organically can be expensive with no guarantee of success - But buying and acquiring another company allows a business person to immediately access competitive advantages such as eliminating competition and increasing market penetration more quickly - it's a key edge.

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

How do you finance a business acquisition?

What happens to debt in an acquisition?

In some cases a purchaser will take on certain debt or other liabilities in buying a business - In the case of a share sale these may not always be known at the time of sale - so the buyer should focus on an asst sale knowing they might be responsible for other debt post-acquisition. Many business purchases have the buyer assuming debt as part of the acquisition price - with the approval of existing lender/lenders.

How do you treat debt in an acquisition of a target company?

The assumption of acquisition debt will often include borrowings that exist in short-term working capital loans, revolving credit facilities, or leasing of business assets. Most borrowers focus on reducing acquisition debt or restructuring based on existing cash flows. Large transactions in the public sector might include the issuance of bonds.

' 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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