Business Acquisition Buyout Financing Purchase | 7 Park Avenue Financial

 

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How to Finance A Business Acquisition

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BUSINESS ACQUISITION LOANS IN CANADA 

 

 

 

Talk about capital expenditure! We're discussing Canadian finance to purchase an existing business via business acquisition buyout financing in Canada and what purchase loans are available for funding this type of transaction – primarily for small to medium enterprises in Canada.

 

Most entrepreneurs and business owners know that the acquisition of another business is a solid way to achieve growth objectives when done successfully - But how does the buyer navigate the business acquisition loan process?

 

It's common sense that purchasing a business that has sales, profits, a recognized brand and infrastructure has obvious benefits. But the optimal finance structure to achieve that purchase is a challenge and business lenders want to be able to recognize the financial stability and potential in the target business. So as a buyer, you must take specific actions to evaluate the business and ensure you have access to proper financial statements as well as other additional requirements.

 

  

WHAT IS A BUSINESS ACQUISITION LOAN  

 

Business acquisitions involve the financing designed specifically for the purchase of a business - in some cases, the business could be a franchise as well. In some cases sales of a business involve partnership share sales - in almost all cases it's about financing for entrepreneurs who are looking to independently grow a business,  and required the right financing to achieve that goal.

 

 

THE CHALLENGE OF BUYING AND FINANCING A BUSINESS IN CANADA

 

Financing for your business purchase is almost never easy  - as banks and finance firms are looking for proof of viability - Certain orderly steps are required prior to putting a loan package together and usually demand extensive negotiations with seller and business lenders participating in the transaction. Knowing what the requirements are is key to success.

 

Naturally, as a Canadian business owner or financial manager, business acquisitions and acquisition and financing challenges must be handled in a manner that properly positions your firm for future success and profits.  The simple reality is that typically merger and acquisition transactions of this nature involve significant amounts of capital relative to the size of your current firm.

 

Naturally, it's all about cash in financing acquisitions  - the simple financial model is, of course, your firm's ability to ensure future cash flows receive exceed the purchase price.  In reality, the only way in which you should consider paying a significant premium is when there is a strong case for putting the two firms together for significant improvement in both.

 

  

WHAT TYPE OF LOANS ARE INVOLVED IN BUYING A BUSINESS  

 

There  are several common solutions for the types of loans that can be accessed to fund a business  purchase  - They of course depend on the type and size of acquisition the buyer is considering 

 

Government loans can facilitate business purchases for smaller transactions - The Canada Small Business Financing Program is a solid option for some business buyers - The federal government funds these transactions with the participation of financial institutions such as banks and credit unions - with the government of Canada guaranteeing the majority of the loan.

 

Traditional term loans offered by banks are the most traditional type of business financing - they require good financial statements that reflect profits and acceptable balance sheets - Rates are very competitive and payment terms are often tailored to the purchase - Business purchasers should be able to demonstrate business experience and an acceptable credit score and personal net worth - A business plan that reflects a proper valuation of the purchase will help maximize funding approval as banks want to understand project growth rates and repayment ability.  Business acquisiton loan rates from banks are among the lowest in Canada.

 

Asset-based lenders and other firms such as factoring companies and equipment financing firms make up the balance of the acquisition funding landscape.

 

  

WHAT ARE THE KEY BUSINESS ACQUISITION LOAN REQUIREMENTS FOR YOUR   LOAN PACKAGE /APPLICATION  

 

Buyers of a business should be prepared to have  proper documentation and backup in place for the business lender - Careful upfront preparation of documents will help speed up consideration and approval

 

Key documents will include:

 

Personal resume and financial information around credit history, business experience and net worth

Bank statements of the business

An executed  agreement of purchase and sale between the buyer and the seller

Financial statements should include an interim financial statement if available, and a proper schedule of existing, debt, accounts payable,  accounts receivable, inventory lists, etc

A business plan which reflects the cash flow and sales projections

Miscellaneous information such as articles of incorporation, premises lease, contracts and licences of the business, etc

  

 

 

  BUSINESS ACQUISITION LOAN  DOWN PAYMENT REQUIREMENTS / YOUR EQUITY FINANCING  COMPONENT

 

  

Your own money in financing transactions on the target company demonstrates your commitment to making the acquisition work. The equity contribution lowers borrowing requirements and demonstrates a commitment on behalf of the buyer under your financial deposit -

In certain cases, surplus cash that the acquiring company has maintained may become a part of the transaction.

Buyers may also choose to potentially locate a business partner to help complete an acquisition deal when acquisitions require more equity than what might be available to acquire the target firm.

 

 

 

HOW TO FINANCE A BUSINESS ACQUISITION 

 

A critical part of making a successful acquisition is negotiating an optimal financing structure. You want a financing mix that will allow for a smooth ownership transition and position your company for more growth in the future.

 

The right mix of financing will make financing an acquisition smoother and position your company for more growth. A critical part of making an optimal decision is negotiating a financial structure that makes sense.

 

Different types of capital structures come with pros/cons.

 

Analyzing the business's current cash flow and future financial obligations will help you decide what financing structure is best for the acquisition. A business might need long-term debt, equity or a mixture of both to ensure it will succeed.

Understanding all of these variables at once can be complex.

 

 

  

THE SENIOR LOAN NEGOTIATION  

 

Senior debt is the main component of your financing package. Senior lenders provide loans that are secured on a company's assets. While specific assets may not fully secure them, these debts can be called "senior" because senior creditors have the first claim to those receivables, inventory, or other business property and assets.

Financial covenants are key in traditional bank loan structures when the focus is on debt-to-equity relationships and other key financial metrics.

Senior lenders such as banks or commercial lenders/alternative lenders will typically fund a multiple cash flow based on a term of typically 5 years for a traditional loan structure/capital structure.

 

LEVERAGED BUYOUTS

 

A leveraged buyout is a great way to acquire businesses without paying for the entire transaction. The buyer borrows money from asset-based lenders using the assets of the company as collateral. Typical assets are accounts receivable, inventory,  fixed assets/equipment, and real estate.

Your final acquisition finance structure not only has to fit the context of the deal but also must be flexible enough for it to change with time. If this is achieved, adaptability and cost are grounded in the cash-flow generating capacity of an organization's assets.

In some cases, financing for a real estate component of the deal is required. It is typically handled separately, sometimes in the form of a holding company via separate entities legally.

It is key to consider funding and valuation around goodwill or intangible assets at the opposite end of the asset spectrum. More and more are a part of the ' new economy.

 

GOVERNMENT LOANS

 

For smaller transactions, government loans for small businesses are an option. The Canada Small Business Financing Program government, the guaranteed loan comes with a long checklist in the application process before approval. Still, it is a solid option for small transactions, franchise financing being a good example.

Interest rates for loans are competitive and attractive, and the business loan interest rates on the program are benchmarked against Canadian prime rates. Like a bank loan, the business loan carries an amortization typically on a 5-year term loan structure depending on the repayment plan chosen.

 

New/improved!  Recent changes to the Government Small Business Loan Program include a higher borrowing limit of 1.1M$,  as well as the inclusion of working capital and credit line facilities. Additionally, new 'soft costs ' such as goodwill, franchise fees, and intellectual property may be funded under the program

 

Larger companies would typically not use government loans to due the loan amount caps under the program.

 

  

ESTABLISHING THE VALUE OF THE PURCHASE - KEY VALUATION POINTS TO CONSIDER  

 

Establish the value of your target before you can start arranging to finance. Issues in financial analysis such as profitability as measured by earnings before interest taxes, depreciation and amortization (EBITDA) should be considered. At 7 Park Avenue Financial, we work with clients to normalize those cash flows to reflect true future cash flow and earnings- eliminating non-recurring expenses or revenue that are one-time issues in the current business.

 

Control Premium is a common term in the valuation area, and it refers to what you are willing to pay more than the business's fair market value.

Establishing the worth of the acquisition is key when attempting loans for acquiring companies because it provides lenders with insights into repayment ability based on projected profits in order to meet obligations on loan payments over agreed-upon terms.

 

A company's acquisition price can be negotiated by agreeing to a multiple of its normalized earnings that reflect its dependability in terms of profits and growth prospects. 

An example: A company generating 300k of earnings might sell for a 'multiple' of 4 to 5 times earnings, suggesting a final purchase price range of 1.5 Million $.

A final financing structure and a common way of financing and acquisition could look like this as an example:

 

Owner Equity

Senior debt term loan

Seller Financing Note/ Promissory note

Potential mezzanine financing/ cash flow loans - Supplemental cash flow financing is often used to ' fill the gap'  but comes with a higher interest rate premium.

 

Don't forget to consider the key issues around an asset sale or a share sale- remembering that you take on assets, liabilities, and future potential risks in a share sale.

FACTORS DETERMINING BUSINESS ACQUISITION SUCCESS

Risk appetite - the high risk may warrant more equity in order to compensate if something goes wrong; low risk would mean less investment needed since there isn't as much potential downside (or reward): risk tolerance - someone who has historically been able to accept risks.

 

Assessing exactly what other types of financing are needed for working capital for future growth, such as cash management and lines of credit and equipment financing for future asset and technology needs, is always a key consideration for buyers.

 

DIVERSIFICATION IS KEY - UNDERSTANDING YOUR INDUSTRY

 

Another consideration that business owners must also make to provide financing before contemplating purchase loans is 'diversification' and the dangers of taking your firm into an unrelated business. Diversification for its own sake clearly might not be an optimal strategy.

 

So just when a business acquisition is related to your industry, and when is it not?  The experts are quite clear on that - if you have markets and clients that are similar or utilize technology or science that is also similar, you're clearly acquiring or buying into a related industry.  When Canadian business owners and financial managers buy into a similar industry they clearly have a better idea of cash flows and the basic business model - that's a good thing.

 

 THE MANAGEMENT TEAM 

 

In a perfect world, you wish to acquire or retain a strong management team when contemplating an acquisition. This certainly makes business acquisition buyout financing less difficult. At the end of the day, we can probably all agree that your skills as the acquirer are potentially more critical than those of the business you are acquiring.  It's your challenge, of course, to make the synergies, profits, and sales stay positive.

 

SELLER FINANCING / VENDOR TAKEBACK

In many acquisitions, a vendor will help finance the deal by agreeing to be paid over time. Also known as an  ' earnout,'  it's a creative way to finance an acquisition. Suppose the seller agrees and is cooperative. The seller benefits from the transaction fees being contingent on their company's ongoing success, and it also works best when considering a sale anyway. It's certainly a good way to keep the transaction process moving much more quickly.

 

A vendor note is a type of debt taken on by the seller to help finance an acquisition. This could be that this money will be repaid over time with interest based on what performance looks like for the company during repayment (i.e., increasing when EBITDA goes up and decreasing as profits go down).

 

Vendor debt is a useful tool for the buyer because it usually comes with few conditions and favourable interest costs. If the vendor stays involved in some capacity after closing, they are more likely to be patient when demanding repayment from you should your company run into difficulty.

 

  

TALK TO 7 PARK AVENUE FINANCIAL ABOUT OUR BUSINESS ACQUISITION  

 

Do you really need an investment or merchant banker or professional deal maker to complete successful proper purchase loans in small and medium-sized business acquisitions?

 

When it comes to how to get a business acquisition loan in Canada, we'll go against the grain and say not always - we think that with the assistance of an advisor, you're in a position to identify a financing objective and execute on a purchase loan and financing alternative that makes sense for all parties via short term and long term goals.

 

  

KEY BENEFITS OF A BUSINESS ACQUISITION LOAN   

 

Acquisition loan financing that is done successfully offers significant advantages to the business owner/entrepreneur. Aside from the obvious reality of owning a business, most business owners would agree it is very challenging to start a business from scratch. The ability to bypass the startup timeframe of a business allows the owner to focus on growth and eliminates startup stress!

Expansion plans can usually be facilitated more quickly and fewer funds are needed when startup  acquisition costs are eliminated.

 

Loan amortizations around buying a business often have generous repayment timelines which eliminate financing pressures, allowing the buyer to focus on growth.

 

 

 

CONCLUSION - BUSINESS ACQUISITION LOANS

 

Buying a business is not easy. It takes time and money to find the right company, and negotiate a deal that meets the expectations of both parties. Fortunately, several financing options are available for buyers in Canada who might not have enough cash on hand or want to minimize their risk during the acquisition process.

So, contemplating an acquisition in the small to medium-sized marketplace in Canada? Want some assistance on pricing on a business being acquired, lending services, areas of risk, and the best way to finance the acquisition?

 

Business acquisition financing is an important consideration for any business owner. It can be difficult to find the necessary funding, but it doesn't have to be. There are a variety of ways you can go about acquiring money for your business and the  7 Park Avenue Financial team is here to help with that process. 

 

We're here not only to help you find the right type of capital but also to explore all avenues available so you don't waste time and resources on something that won't work!

 

Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who will assist you with your objectives. When it comes to getting a loan to buy a business in Canada .. let's get started to work closely on your transaction!

 

 FAQ: FREQUENTLY ASKED QUESTIONS 

 

How does acquisition financing work?

Entrepreneurs and smaller companies get multiple benefits from acquiring other companies via various types of capital. One of those benefits of acquiring a new business includes business synergies and economies of scale. The buy-side must review different options to finance their purchase to acquire another company, including secured loans, private equity funds, mezzanine lending, or even asset-backed lending solutions.

 

What is a business acquisition loan?

 

 

 

 

 

 

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