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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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EMAIL - sprokop@7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
FINANCING A BUSINESS PURCHASE
A business purchase in Canada has to come with some acquisition financing options for entrepreneurs and business people.
For those options, the more, the merrier, and creativity are welcome. The right financing at terms, rates, and structures is the hidden connection to a successful acquisition. Let’s dig in.
DID YOU KNOW?
- 75% of business purchases involve some form of financing
- SBL loans fund approximately 40% of small business acquisitions
- Average business purchase finance terms range from 5-10 years
- Down payments typically range from 10-30% of the purchase price
- Seller financing is involved in 60-70% of small business sale
SBL
NK FINANCING: THE TYPICAL FIRST CHOICE
Financial institutions are often the first choice among purchasers of bank financing, but accessing this type of capital comes with specific criteria that sometimes cannot be met.
Small—to medium-sized marketplace firms are often underserved regarding acquisition finance options. We'll discuss some of those bank criteria later.
ALTERNATIVE FINANCING OPTIONS: EQUITY FINANCING
Seller Finance: Owner Participation in Business Financing
One of those options is ‘seller finance’, which allows the owner to participate in the actual business financing. Naturally, owners must be motivated and able to participate in such a transaction to attract a wider pool of potential buyers.
Cash Flow or Mezzanine Financing
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 business's cash flow, profit margins, and intangible assets to pay back the loan, which is typically 3-7 years in length.
It’s critical to demonstrate that the cash flows we require have been there historically, now, and in the future!
Asset-Based Lending: A Focus on the Balance Sheet and Intangible Assets
When seller and cash flow financing is not possible, asset-based lending is another solid source of purchase finance.
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. Remember that there must be enough specific assets left over to enable you to have operating working capital.
RECEIVABLES FINANCE: A STRONG ASSET FINANCING SUBSET
Receivables finance is the strongest and most common ‘subset’ of asset financing. A credit line against receivables provides solid liquidity.
A business's capital structure plays a crucial role in receivables finance, impacting its ability to secure loans and manage financial obligations over time.
STRUCTURING YOUR FINANCING PACKAGE
Achieving an Optimal Financing Structure
When structuring your financing package, it is essential to achieve an optimal financing structure that balances your business needs with lenders' and investors' requirements.
A well-structured financing package can help you secure the necessary funds to complete a business acquisition while minimizing costs and risks.
To achieve an optimal financing structure, consider the following factors:
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Cash flow: Ensure your business has a stable cash flow to service debt and meet financial obligations.
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Equity financing: Consider contributing significant equity to demonstrate your commitment to the business and reduce the debt required.
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Purchase price: Negotiate a fair purchase price that reflects the business's value and potential for growth.
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Existing business: Evaluate the financial performance and stability of the existing business, as well as its potential for growth and expansion.
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Business acquisition: Tailor the financing package to the specific needs of the business acquisition, including the purchase price, working capital requirements, and capital expenditures.
By carefully considering these factors, you can create a financing package that meets your business needs while minimizing costs and risks.
UNDERSTANDING BANK CRITERIA FOR BUYING A BUSINES
SBL
ck to those bank criteria we've mentioned already.
Although banks prefer larger mergers and acquisitions, they are willing to service mergers and acquisition transactions in the SME COMMERCIAL FINANCE area in the current competitive banking environment.
Financial Ratios and Covenants
Buyers should be well warned that certain financial ratios and covenants regarding cash flow, debt to equity, etc., will always be discussed with the bank.
You can almost pre-qualify 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.
Benefits of Properly Financed Transaction
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nks recognize that transactions financed properly help a new business become stronger and more successful. This includes eliminating other competition, achieving an economy of scale, and growing the business geographically or with new products and services.
A strong business plan with conservative clarity around growth, profits, and cash flow is evident here.
MANAGING CASH FLOW
Effective cash flow management is critical to the success of any business, particularly during a business acquisition. Here are some tips for managing cash flow:
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Monitor cash flow closely: Regularly review your business’s cash flow to identify areas for improvement and potential risks.
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Maintain a cash reserve: Keep a cash reserve on hand to meet unexpected expenses and ensure your business can continue operating smoothly.
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Manage accounts receivable and payable: Ensure that accounts receivable are collected promptly and that accounts payable are paid on time to maintain a healthy cash flow.
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Optimize working capital: Ensure that your business has sufficient working capital to meet its needs, but avoid over-investing in inventory or other assets that may not generate immediate returns.
By managing cash flow effectively, you can ensure your business remains financially stable and well-positioned for growth.
GOVERNMENT-SPONSORED FINANCING OPTIONS
Government-sponsored financing options can provide valuable support for businesses looking to acquire or expand their operations. Here are some options to consider:
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Canada Small Business Financing Loan: This government-sponsored loan program provides financing for small businesses, with 85% of the loan guaranteed by the Federal government.
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Business Development Bank of Canada (BDC): BDC offers a range of financing options for businesses, including loans, venture capital, and subordinate financing.
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Export Development Canada (EDC) provides financing and insurance solutions for businesses seeking to export their products or services.
These government-sponsored financing options can provide valuable support for businesses looking to acquire or expand their operations.
NEGOTIATING THE RIGHT PRICE AND VALUATION
Negotiating the right acquisition price is as important as properly funding your business. Many owners/managers/entrepreneurs will need help with the different valuation techniques employed by the ‘big boys’ on Bay Street.
3 Uncommon Takes:
- Seller financing combined with inventory-based lending can create more flexible purchase terms than traditional bank loans
- Strategic use of holding companies can optimize financing structures for tax efficiency and risk management
- Leveraging accounts receivable from the target business can supplement down payment requirements
KEY TAKEAWAYS
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Understanding debt-to-equity ratios drives optimal financing structures for sustainable business growth.
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Leveraging existing business assets creates stronger financing applications with reduced personal risk.
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Strategic negotiation of seller financing terms significantly impacts overall purchase costs.
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Proper valuation methodology directly influences lender confidence and financing terms.
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Cash flow analysis fundamentals determine realistic borrowing capacity and repayment structure.
CONCLUSION
Poorly informed purchasers about financing, valuation, and creative alternatives are almost certain to fail.
Are you looking for proven financing techniques in a business purchase?
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can help you ensure you are not in 'no man's land' when buying a business in Canada.
FAQ
How much down payment is typically required?
Financing a business purchase typically requires a 10-30% down payment, depending on the business type, industry, and qualifications.
What documentation do I need?
The required documentation includes personal financial statements, tax returns, a business plan, a purchase agreement, and detailed information about the target business.
What makes financing a business purchase different from traditional loans?
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Specialized structure based on business value
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Focus on future cash flow potential in financial statements
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Multiple financing sources can be combined
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More flexible terms are available
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Industry-specific considerations - ie intellectual property assets
How can buying a business protect your personal assets?
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Strategic use of corporate structures
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Asset-based lending options
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Limited personal guarantee requirements
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Separation of business and personal liability
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Risk mitigation strategies
What advantages does seller financing offer in business purchases?
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Reduced upfront capital requirements
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More flexible payment terms
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Seller remains invested in success
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Faster approval process
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Built-in transition support
How can you optimize your financing application for approval?
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Strong business plan development
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Clear financial projections
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Industry experience documentation
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Asset verification
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Credit profile preparation
What financing options exist beyond traditional bank loans?
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Goverment Small business loan programs
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Private equity partnerships
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Asset-based lending
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Mezzanine financing
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Equipment financing options
How long does the business purchase process typically take?
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Pre-approval: 1-2 weeks
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Due diligence: 4-6 weeks
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Final approval: 2-3 weeks
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Closing process: 1-2 weeks
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Total timeline: 8-13 weeks average
What are typical interest rates for business purchases?
How much can you typically finance for a business purchase?
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Up to 90% with Government SBL loans
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70-80% with traditional bank financing
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50-60% with asset-based lending
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Additional options through combined financing
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Based on business valuation and cash flow
What factors determine business purchase financing approval?
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Business cash flow history
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Industry experience and track record
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Personal credit score and assets
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Business valuation
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Market conditions