How To Finance A Business Purchase In Canada

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FINANCING TO BUY A BUSINESS IN CANADA

Business purchase financing. When you or your firm has made the decision about buying an existing business in Canada you need some solid information around how to raise funds / source funding and finance your transaction.

WHY BUY A BUSINESS ?!

When it comes down to businesses that are fo sale why buy a business in the first place. Many clients we speak to are fortunate enough to have what we might call an ' inside track' on a company or business that would accept a favorable offer based on current situation.

Buying a business is an excellent way to get into the industry and take over from a company that is already established in that particular market. Experienced staff, customers ready for your services or product offerings as well as other assets are key in the business purchase decision.

KEY BENEFITS TO BUYING A BUSINESS

The obvious benefits around our ability to buy a business that is established already are simply the fact that there’s a revenue stream, a client base, and assets and locations that are already in place. That certainly beats a start-up scenario and all the work and challenges that go with that.

Is it easier to arrange funding for an established business versus an existing business via acquisition financing lenders? There's never a clear answer to that one, but many people do believe your chances of success are much higher when you buy an established concern, and if you're a lender looking at a transaction such as this it also means you're more positive than negative,.

WHAT IS THE OPTIMAL FINANCING STRUCTURE - BUSINESS LOANS TAILORED TO YOUR NEEDS WITH PAYMENTS STRUCTURED TO THE CASH FLOWS OF THE COMPANY

SELLER FINANCING / VENDOR FINANCING - business purchase financing has the ability to structure a financing deal with the owner remaining in a subordinate position via a VTB, i.e. a vendor take back. Naturally, the skills and expertise of the owner and current management team might also have a significant value to your own efforts to grow the business, at least for an interim period. Vendor take back financing can be integral to closing many transactions

FOCUS ON FINANCIAL DUE DILIGENCE

Naturally, cash flows and profits from the financial statements of an existing business are positive in the context that you can demonstrate immediate cash flows and profits to repay loan financing. In some cases, you might be purchasing a franchise and you will need the support of the franchisor to make that acquisition. Once again the ' branding ' and ' reputation' around that franchise is clearly positive as opposed to negative.

VALUATION - THE PURCHASE PRICE & YOUR LETTER OF INTENT TO PURCHASE

Valuation is a challenge when it comes to both purchase and financing when buying a business. A higher valuation will mean you might have to finance a goodwill component, which is difficult in an asset-based transaction. On the other side of the coin, we meet clients who are interested in buying a distressed business that has been trending down - valuation is cheap and they believe they can engineer a turnaround.

Easier said than done sometimes. Commercial loan / traditional bank loans can rarely fund this type of business purchase - another complication is the issue of valuing and funding any intangible assets & intellectual property that are more common these days

Valuations on the business and other financial records can be supplied by the owner, or you can arrange your own through a qualified advisor or appraiser. That's particularly important when it comes to an asset based business.

Key issues to consider in the valuation and financing of the business are the quality of the financials, revenue trends, cash flow generation - i.e. does the business use cash or throw off cash? ( The latter is better!) You or your accountant and advisor need to ' normalize ' the financials, making the assumptions on how the business costs will look after you take ownership.

FUNDING YOUR BUSINESS PURCHASE - ACQUISITION FINANCING /DEBT FINANCING/CASH FLOW FINANCING

Government Small Business Loan if it is a smaller transaction under 350K. The program promotes small business in the SME sector for Canadian economic development goals

No personal assets are pledged for the federal government SBL loan - Various guarantees and safety measures are built into the program for authorized financial institutions participating in the loan and repayment terms are flexible around monthly payments and the term loan structure that is utilized - A commitment from personal savings is required under the program and varies by participating institutions ( banks and credit unions )

Business loan interest rates to obtain financing will always vary based on numerous factors such as transaction size, overall credit quality, owner equity, etc. Most acquisitions will also need a working capital loan or line of credit to support ongoing working capital requirements and ongoing monthly expenses. A business Line of credit requires the borrower to pay interest only on funds that are drawn down under the credit facility

CONCLUSION - FUNDING BUSINESS ACQUISITIONS & BUYING A BUSINESS LOAN SOLUTIONS

Financing a business acquisition is not as challenging when you know the f best ways of obtaining funding. Talk to the 7 Park Avenue Financial team to discuss down payments, what financing is required and how will the entrepreneur protect himself or herself.

FAQ: FREQUENTLY ASKED QUESTIONS /PEOPLE ALSO ASK/ MORE INFORMATION

How do you finance a business purchase?

2. Canadian Government loans such as the Canada Small Business Financing Program for small businesses for buyers with a good personal credit score - a personal guarantee is required but limited under the program - Franchise finance is one solid utilization of the program

4. Conventional financing via traditional bank loan financing / Business Development Bank solutions

5. Assuming existing debt of the target company as part of the business acquisition loan strategy

6. Asset-based lenders using leveraged buyout strategies -leveraged buyouts usually involve the combination of seller financing and a bank or alternative financing loan. The use of the business's assets as collateral can be crucial in helping fund the acquisition when there are substantial assets

What are the three main types of financing for businesses?

' Canadian Business Financing With The Intelligent Use Of Experience '

Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil

Financing A Business Purchase | 7 Park Avenue Financial

BUSINESS ACQUISITION LOANS CANADA