YOUR COMPANY IS LOOKING FOR ACQUISITION FINANCE ASSISTANCE!
MANAGEMENT BUYOUT FINANCING / LEVERAGED BUYOUT LBO
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Financing & Cash flow are the biggest issues facing business today
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Company business mergers or acquisitions have the ability to go in the wrong direction pretty quickly sometimes. What makes a financed leveraged buyout acquisition work, what are the risks, and what needs to be done right? The goal - ownership or controlling interest in the acquired company. Let's dig in.
THE NEED FOR FINANCING IN BUSINESS ACQUISITIONS
When structuring a deal to purchase the target company it helps when one company, the' buyer', has all cash and the seller wants all cash. Unfortunately the planets never really align on that one and top experts tell us that over 80% of all deals need some form of financing to close properly, even when the acquiring company is strong and established.
The reality is, and it’s often forgotten by Canadian business owners and managers contemplating a purchase of another company is that a solid financing proposal will often get a higher price for the seller. In some cases, it might be about taking a public company private or a private equity-type transaction.
The goal is simple - acquire another business using a larger than normal amount of borrowed funds to meet seller price on a transaction. Transactions in this type of deal typically involve firms that are asset intensive, with those same assets being key collateral for the loan or loans. In leveraged transactions, the relationship of debt to equity is significantly in favour of debt; allowing the acquirer to commit a lesser amount of capital to the transaction.
ALL CASH DEALS ARE NOT ALWAYS THE BEST DEAL!
Business people know that leverage is a two-edged sword. As such an all-cash deal often puts the purchaser at risk when things go wrong, providing a significant amount of stress for the borrower!
2 KEY ISSUES IN MERGERS/ACQUISITIONS
A couple of key issues quickly emerge in business mergers and acquisitions for the acquiring company or entrepreneur. One is that share sales are difficult to finance, and secondly, the buyer assumes all the risk of assets and liabilities in such a deal. Therefore assets financing in a business purchase is the preferred method for buyers of a business, especially in situations involving leveraged buyouts.
HOW CAN A BUSINESS PURCHASE BE FINANCED PROPERLY
What are some typical ways in which a business purchase can be accomplished successfully? One is borrowing against the inventory and receivables of the company being acquired. Typical bank margins on A/R are 75%... and inventory tends to be valued on a one of basis depending on the nature of the asset. It's important to note that if you use a non-bank lender in Canada, for example, an asset-based lender, you can achieve better borrowing power on a leveraged buyout on current assets, but probably a higher interest rate will come with that. It's all about financing the balance sheet and identifying the ability to repay borrowed money with cash flows.
Earn outs and vendor take backs are a great way to make a deal happen, and if the seller is agreeable an installment scenario is often a key part of making the final piece of the financial puzzle work and the seller company may be able to thus generate a potential higher selling price.
PRICE AND VALUATION
It's no secret to buyers, or sellers for that matter that a deal almost always comes down to price and valuation, and the differences therein! That's where the concept of an ' earn-out ' often works, making the deal contingent on what happens in the future. Numerous things can often go wrong relative to the loss of a major customer, product issues, and financial issues such as operating losses. Naturally, the purchase prices of a publicly traded company allow for a lot more valuation information, while the purchase price of a private firm requires significantly more due diligence on behalf of the buyer and his or her team.
3 OTHER ISSUES TO CONSIDER WHEN BUYING A COMPANY
What are some of the issues the buyer in a leveraged transaction should consider? They include :
Sales history,
Creditworthiness of client accounts receivable and inventory/ market share for products and services
Asset valuation of fixed assets
IMPORTANCE OF QUALITY OF FINANCIAL RECEIVABLES AND ASSET TURNOVER IMPORTANCE OF THE TARGET FIRM
When we meet with clients who wish to purchase a business we focus very quickly on the quality of financial statements of the target company in question. Issues such as asset turnover and examination of assets that already might be financed via leasing companies are key.
WHERE IS THE BEST SOLID ADVICE YOU NEED TO BUY A BUSINESS
Who can provide the business owner with the right amount of financing and business guidance in a leveraged deal? Those parties include appraisers, Canadian business financing advisors, your lawyer, accountant, potential board of directors, respected peers, etc.
The business owner’s ability to assess key issues such as gross margins, cash flow, and inventory turns will ultimately affect the size and type of financing you need - That is where experts come in to assist and advise the acquiring firm.
CONCLUSION
Business owners in the SME ( Small and medium sized companies ) economy are always reading about larger mergers and acquisitions in the business landscape. More and more financing options are available to SME business owners to ensure they have access to acquiring companies they might target for purchase. Financing by debt in a takeover allows if done properly for higher returns on return on equity and return on assets. The ability to then use those newly acquired assets to then enhance profits and cash flow is key to the successful purchase of a business.
All business purchasers want their proposed deal to move in the right direction. For company business mergers and purchases seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in a practical manner with leveraged financeable transactions in the SME sector in Canada for long term growth and success.
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Stan Prokop
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