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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
A business purchase in Canada has to come with some acquisition financing options for entrepreneurs and business people. And for those options, the more, the merrier and creativity is certainly welcome. The right financing at terms, rates and structures is really the hidden connection to a successful purchase/acquisition. Let's dig in.
Bank financing is often the typical first choice among purchasers, but accessing this type of capital comes with certain criteria that sometimes can't be met. Firms in the small to medium-sized marketplace are often underserved when it comes to acquisition finance options. More about some of those bank criteria later.
So, those other options? One of those is ' seller finance' - allowing the owner to participate in the actual business financing. Naturally, owners must be both motivated and able to participate in such a transaction.
Cash flow or ‘mezzanine' type finance is another option when bank ' senior debt ' can't be arranged. It is, in effect, unsecured business financing, allowing you to rely on the cash flow and profit margins of the business to pay back the loan, which is typically 3-7 years in length. Here it's critical to demonstrate that those cash flows we require have been there historically, now, and in the future!
When both the seller or cash flow financing is not possible, another solid source of purchase finance is 'Asset-based lending.' This type of commercial lender will focus solely on the existing balance sheet of your business - and those assets of receivables, inventory, and fixed assets - as well as real estate, if applicable. Be mindful also that there must be enough assets left over to enable you to have operating working capital.
The strongest and most common ' subset ' of asset financing is Receivables finance. A credit line against receivables provides solid liquidity.
Back to those bank criteria, we've mentioned already. Although there is a lot of truth that banks prefer larger merger and acquisition activity, they are certainly willing in the current competitive banking environment to service merger and acquisition transactions in the SME COMMERCIAL FINANCE area.
Buyers should be well warned that certain financial ratios and covenants around cash flow, debt to equity, etc., will always be on the table with the bank. You can find almost pre-quality yourself by spending some time determining if cash flow of 1.25:1 and debt to equity of 3:1 are, in fact, achievable under your finance plan. Here owner equity, to some level, will again, almost always be required.
Banks recognize that transactions financed properly help the new business to be stronger and more successful. That includes being able to eliminate other competition, achieve economy of scale, and grow the business geographically or with new products and services. A strong business plan with conservative clarity around growth, profits and cash flow is clear here.
Being able to negotiate the right price is as important as funding your business properly - many owners/mgrs/entrepreneurs will need help in the different valuation techniques employed by those ' big boys' on Bay Street.
Poorly informed purchasers around financing, valuation, and creative alternatives are almost certain to fail. If you're looking for proven financing techniques in a business purchase, speak to 7 Park Avenue Financial, a trusted, credible and experienced Cdn business financing advisor who can help you ensure you are not in ' no man's land' when it comes to buying a business in Canada.
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Stan Prokop
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