BUYING A BUSINESS? NEED HELP ON FINANCING ?!
FINANCING YOUR PURCHASE PRICE / FUNDING TO PURCHASE YOUR OWN BUSINESS
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Financing & Cash flow are the biggest issues facing businesses today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
"Most people miss opportunity because it is dressed in overalls and looks like work." - Thomas Edison.
Are you tired of struggling to finance your business dreams? Discover how a loan to buy a business can turn you into an instant owner-operator!
How to Secure Financing to Buy a Business: A Guide to Finance a Business Acquisition in Canada
Buying a business? The success of that transaction can revolve around two key elements: valuation and business loan financing.
Frankly, knowing what your business is worth at any given time isn’t the worst thing, either. How can you ensure you are approaching valuation and financing correctly in your due diligence?
A good credit score is crucial for securing favourable loan terms, as it can significantly enhance your chances of both approval and obtaining better interest rates.
The business owner or manager might also want to remember that equity valuation doesn’t necessarily become a critical factor in debt financing - that’s when it’s all about the assets. However, just like how we might view our personal homes it’s always a good thing to know what things are worth!
Opportunity presents itself when purchasing an established company, with all the risks and rewards of owning a business.
LOOKING AT SOME KEY DATA POINTS / GATHERING THE REQUIRED DOCUMENTS
There are numerous, let’s call them ‘ data points ‘ when taking a look at value.
Assets play a key role, and it’s essential to consider both the cost of replacing them and their current estimated value, which often differs from ‘ book value ‘concerning the role of a deprecation policy.
Understanding the monthly payment obligations is crucial when evaluating the financial feasibility of a business acquisition.
ASSETS VERSUS BUSINESS PROFITS IN BUSINESS VALUATION & ACQUISITION FINANCE
If you're considering buying a business or even a franchise with little or no current profits, remember that the assets that will play a key role in your financing will be crucial.
Of course, it would be great to have data that allows you to compare other similar businesses. Still, in the SME (small to medium enterprise) sector, that type of information or data is not always possible—that type of information is usually received for companies that are either public or much larger.
VALUE OF THE BUSINESS VIA INCOME AND CASH FLOWS
Income and cash flow approaches are another way to approach valuation and financing.
Cash flow will play a role in your financing approval and assessing a business's value. Managing personal loan payments effectively is crucial for maintaining positive cash flow during the business acquisition.
As complicated as some valuation concepts might seem, there are really just a few basic key points that are considered —they are current and future profits, multiples of sales or cash flow, and the assets we’ve already discussed in those financial statements.
Those items will help develop true market value pricing on the true business value. Issues around non-recurring revenues should also be explored.
On very large transactions, employing a professional business accounting firm or business valuator might sometimes be recommended to determine the company's appraised value.
Using techniques such as discounted cash flow and other methods that might apply to a particular industry and type of business, a defendable purchase/sale price is determined.
In some cases, intellectual property / intangible assets may need to be valued, or in some cases, real estate assets of the target company.
A period of time should be allocated for this level of due diligence to allow for the proper valuation of comparable businesses.
A VALUATION EXAMPLE - BUSINESS PURCHASE FINANCING CANADA
Quick example: If you are told or determine that a business in this industry sells at or is valued at a multiple of 3, then a company you are looking at with 100k in net income would potentially be valued at 300k.
The financing challenge comes when there aren't enough assets to finance, and a large part of what you are paying, in effect, becomes ' goodwill ‘, which is generally not financeable for businesses that are small to medium-sized when it comes to a company's value.
When properly identified, tangible assets on the balance sheet will always bring solid value.
HOW TO FINANCE BUYING AN EXISTING BUSINESS
Acquiring an existing business can be a strategic move for entrepreneurs looking to expand their operations or enter a new market.
Financing this acquisition often involves securing a loan, which can be complex. Understanding the various financing options available is crucial to making an informed decision.
Choosing a fixed interest rate can provide predictable monthly payments, making it easier to manage the financial aspects of the business acquisition.
One common option is a term loan, which provides a lump sum of capital repaid over a set period with interest. This type of loan is often used for significant investments, such as purchasing a business.
Another option is a Government SBL loan, which is partially guaranteed by the Small Business Administration and typically offers favourable terms for borrowers.
GOVERNMENT OF CANADA SMALL BUSINESS FINANCING PROGRAM FOR PURCHASING A BUSINESS
We should mention that the Canada government Small Business Loan, aka the ' SBL ' is a very solid and recommended way to finance an asset acquisition. Limited personal funds are required for the purchase compared to bank financing.
We caution clients that the financing vehicle can only finance assets, leasehold improvements, and real estate, albeit at a competitive interest rate. The government does not directly lend money. Small business grants are not appropriate to consider when buying a business.
Participating banks and other financial institutions manage the program under the government guarantee. Various guarantees and safety measures are made to banks by the government for the program to be successful.
One piece of good news in that type of deal is that an updated appraisal of the assets and their current value might in fact help you get the full financing you need.
BUYING A FRANCHISE
This program typically provides franchise financing solutions for small business owners. Click here for more information on franchise finance solutions.
At 7 Park Avenue Financial, we prepare business plans and cash flow projections for all transactions of this type. Our business plans meet and exceed lender requirements for both traditional and non-traditional financing.
Buyers can also explore BDC loan requirements when buying a business. The business development bank is a government crown corporation financial institution.
IMPROPER FINANCING LEADS TO BUSINESS FAILURE - GETTING A LOAN TO BUY A BUSINESS IN CANADA
When poor or ' not enough' banking or financing arrangements aren't in place there is a greater chance of business failure, let alone your ability to grow or operate the business.
HOW ARE BUSINESS ACQUISITIONS FINANCED BY FINANCIAL INSTITUTIONS?
We think it's clear by now that an outside opinion on what you are paying and how you will finance buying a business might need some outside help, both in the valuation and the financing of assets.
Businesses can be acquired via Canadian bank loans, asset-based lending arrangements, and even monetizing current assets such as accounts receivable and inventory.
THE PROS AND CONS OF BUYING AN EXISTING BUSINESS
Buying a business can be advantageous, but it also comes with risks. Knowing the risks and how to manage them could make the process much more manageable.
The most significant downside to debt financing for your business acquisition is that you rely on outside capital and debt in addition to your other business expenses.
Three uncommon takes on funding to buying a business:
- Seller financing as a competitive advantage in negotiations
- Using intellectual property as collateral for higher loan amounts
- Leveraging business acquisition loans for strategic industry consolidation
KEY TAKEAWAYS
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Understanding business valuation techniques helps determine appropriate loan amounts.
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Analyzing historical financial statements reveals the true health of target companies.
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Recognizing industry-specific risk factors impacts loan terms and conditions.
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Identifying key assets and intellectual property influences collateral requirements.
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Evaluating management team strength affects lender confidence in business continuity.
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Assessing market position and growth potential guides loan repayment projections.
CONCLUSION - BUSINESS ACQUISITION FINANCING CANADA
Securing the right loan, such as unsecured loans, for buying a business can mean the difference between seizing a golden opportunity and watching it slip away.
When looking at financing the purchase of an existing business, new clients at 7 Park Avenue Financial often find companies for sale with the help of a business broker who sells a business on behalf of their client.
They usually have several small businesses and businesses for sale, sign out on several transactions, and are focused on marketing a business like a real estate agent would. Having the right team on your side is a good idea when valuing a company and financing.
Need to ensure you have the right team in place to finalize your purchase and get the right financing to buy a business -
Want to ensure you are using the proper valuation methods?
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor who can assist you with your business purchase and financing needs.
FAQ: FREQUENTLY ASKED QUESTIONS /PEOPLE ALSO ASK / MORE INFORMATION
How do you finance a business purchase?
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Personal savings / Personal finances for equity capital via purchaser down payment
Personal loans are a flexible financing option that can be tailored to individual financial circumstances, offering both fixed and variable interest rates.
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Government small business loans / traditional bank loans
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Seller Note / Vendor Takeback Financing
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Asset-based lending for leveraged buyouts and management buyouts when there is cash flow and substantial assets
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Assuming the debt of the target company
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Peer to Peer lending
What type of financing is best for a small business acquisition?
The best financing for purchase of business options for a small business acquisition are:
Equity Financing ( Your own money ) in combination with business purchase loans
Commercial bank loan
Government SBL loans
Asset Based Lending term loans/non-bank business credit lines on the business's assets
How long does it take to buy a business?
Based on experience at 7 Park Avenue Financial, business acquisitions for established businesses typically take 1-3 months, depending on the size of the company. Larger, more complex acquisitions take longer to complete, given the requirements around due diligence and financing. Venture capital firms and private investors are often involved in more significant deals.
What questions should you ask when buying a business?
Key areas to focus on when buying a business include
1. Reasons for buying the business
2. How will the business be successful
3. What type and amount of financing is required to buy the business
4. What is the value of the business
5. Can you get access to proper financial statements and other legal documents from the business owners that are required in business acquisitions
6. Does the company have intangible assets
What is the interest rate for seller financing for a business?
Seller finance is an arrangement and agreement between the business seller and the buyer. The seller provides financing to help the buyer complete the business acquisition. Buyers typically repay the financing at better than market rates and favourable terms.
What are the main advantages of using a loan to purchase an existing business?
Using a loan to buy an existing business allows you to acquire a proven business model, established customer base, and immediate cash flow. It can be less risky than starting from scratch and provides the opportunity to leverage existing assets and goodwill.
How can loans for buying a business help me grow faster than starting my own company?
Business oans for business acquisitions enable you to bypass the slow startup phase and focus on growth strategies immediately. You'll benefit from existing systems, employees, and market presence, accelerating your path to profitability and expansion.
Can a business acquisition loan for buying an established business help me enter industries with high barriers to entry?
These loans can provide substantial capital to enter industries with significant startup costs or regulatory requirements. Acquiring an established player can overcome many barriers to new entrants.
How do loans for buying a business impact my personal finances to borrow money compared to startup costs?
While you may need a personal guarantee, loans for buying a business often have more favourable terms than startup financing. The existing business's assets and cash flow can be collateral, potentially reducing your financial risk.
Are there tax benefits to using loans to buy a business?
Depending on the loan structure, interest payments may be tax-deductible. Additionally, acquiring an existing business can provide opportunities for tax-efficient asset allocation and depreciation strategies, potentially lowering your overall tax burden.
What types of businesses are typically eligible for acquisition loans?
Most profitable businesses with a solid financial history are eligible for acquisition loans. Lenders often prefer companies in stable industries with consistent cash flow, valuable assets, and strong market positions.
How long does obtaining a loan for buying a business usually take?
The timeline can vary but typically ranges from 60 to 120 days. Factors affecting the duration include the complexity of the business, the loan amount, and the lender's requirements for due diligence and documentation.
What role does the seller play in the loan process for buying their business?
Sellers often play a crucial role by providing detailed financial records, cooperating with due diligence processes, and sometimes offering seller financing as part of the deal structure to facilitate loan approval.
How do lenders determine the loan amount for a business acquisition?
To determine the appropriate loan amount, lenders consider the business's valuation, historical financial performance, projected cash flows, historical business bank accounts inflows, industry outlook, and the buyer's experience and creditworthiness.
What happens if the acquired business underperforms after the loan is secured?
If the business underperforms, you're still responsible for loan repayments. However, many lenders offer options like temporary payment adjustments or restructuring to help enterprises to through difficult periods, provided you communicate proactively.
What criteria do lenders use to evaluate loan applications for business acquisitions?
Lenders assess the business's financial health as a profitable business, its industry outlook, buyer's experience, and credit history. They analyze cash flow projections, collateral value, and the proposed purchase structure to determine loan viability and terms under the optimal financing structure.
How can I improve my chances of securing a loan to buy a business?
To increase approval odds, maintain a solid personal credit score, prepare a comprehensive business plan, contribute a significant down payment, and consider businesses with solid financials and growth potential. Professional guidance from accountants and lawyers can also strengthen your application.
What are the critical differences between Government SBL loans and conventional loans for business acquisitions?
Government SBL loans often offer lower down payments, longer repayment terms, and more flexible qualification criteria than conventional loans. However, they may have more stringent documentation requirements and longer processing times. Traditional loans can provide higher loan amounts and quicker approvals for well-qualified borrowers and established businesses.
