How do you finance a business purchase?

Acquisiton through equity via personal financial resources / buyers own funds Government Small business loans to fund acquisitons of smaller businesses / franchises Seller financing contribution / earnouts Traditional bank loans / senior debt Equipment Financing Leveraging assets via asset based lender financing via leverage buyouts Assuming some of all of the debt of an existing business Family Offices Private equity firms for larger complex transactions or a tuck-in acquisition

How are most acquisitions financed?

Bank financing, business credit lines, and term loans for asset-based lenders and non-bank commercial finance companies are the most common choices for financing the purchase of a business under a purchase agreement. Larger firms might utilize a private equity firm to complete business acquisition loans when buying an existing business to maximize the optimal financing structure.

How To Get Financing For A Business Acquisition

YOU ARE LOOKING FOR BUSINESS ACQUISITION FINANCING / BUSINESS TRANSFER FUNDING

Call Now! - Direct Line - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

Everything You Need To Know About Acquisition Financing

THE ACQUISITION BUSINESS PURCHASE FINANCE CHALLENGE

Buying a business in Canada is one way in which the entrepreneur can improve operational capacity and grow sales and profits. Let's dig in on the information you need for a loan to buy a business.

But securing the capital to fund a business acquisition can be a significant challenge. Acquisitions are often the fastest way to grow a business versus organic growth focus. The ability to expand into new geographies or markets with a competitive advantage is an attractive option for the entrepreneur.

The good news? There are numerous ways and strategies to employ based on factors such as the size of the business and the type of business lender you use for traditional bank financing or via alternative finance lenders.

The tried and true route that most business people focus on is a bank loan, but the hard reality is that the requirements of bank financing can be significant and an obstacle to closing a transaction successfully, -

Safe to say that typical bank requirements focus heavily on profitability, asset quality and size, and predictable sales revenues. For companies that might not meet bank funding requirements for business acquisitions, numerous options in the alternative financing area is available - as well as in some cases a financing package via government-guaranteed loans.

Businesses in the technology and software area pose an additional problem as they are often lacking in hard assets - although many firms have recurring revenues and valuable intellectual property or intangible assets. Always consider alternative lenders as viable alternatives to complete a business acquisition successfully.

CHOOSING THE RIGHT CAPITAL STRUCTURE

Identifying the right capital structure for the potential business acquisition is one of the keys to unlocking growth and survival potential - While owner equity is important the fact is that debt is a cheaper way to fund business acquisitions. Very few purchasers or businesses can afford to close an ' all cash ' transaction.

Debt will most often come from a senior lender, via a cash flow term loan or in other cases and asset-backed financing. Subordinated debt/mezzanine financing solutions can often supplement the senior loan position.

When it comes to debt financing the ability of the buyer to present a thorough analysis of business finances will allow acquisition financing lenders to properly understand key issues around cash flows, profitability, and liabilities such as short-term and long-term debt.

It is the balance between debt and owner equity that is the large challenge in acquiring businesses, In some cases, debt financing will be an attractive solution to the acquisition. Smaller amounts of financing can often be facilitated relatively quickly - an example being Government SBL loans - These solutions allow for full owner control and are often sourced locally in the geographic area of the business. SBL loans also come with limited financial covenants.

THE BENEFITS OF BUYING A BUSINESS

Most agree that the financing of a business purchase is one of the most effective means to implement the desired growth strategy - As a buyer, your ability to acquire business resources and assets as well as the competency of current employees or management goes a long way to a good growth strategy. Market domination and being a competitive player in an industry go a long way to business success.

In many cases new markets are easier to access when infrastructure is in place with resources to meet the challenge - Financial gains can often be significant on your original return on investment.

In many cases, business purchases involve partners buyout out their partners - or in some cases, a management buyout might be under consideration. During times of expansion, the right business financing will keep a company strong and allow it to bridge short-term challenges in day-to-day operations.

HOW DOES ACQUISITION FINANCING WORK?

Business lines of credit are a common choice as part of an acquisition financing strategy. These are often in place behind a senior term loan - both of these finance solutions help a company reach the required scale to run and profit and increase the overall size of the business.

Candian banks are in a position to offer traditional acquisition term loans that are specially constructed to facilitate the transaction - Loans from the alternative lender market will satisfy firms that can meet bank requirements - It should be no secret that in many cases a higher interest rate will come with non-bank alternative lending when compared to bank rates which are of course the lowest in Canada in terms of business funding,

Banks will focus on some level of revenue predictability and firms that can demonstrate they have or will be able to grow earnings and generate cash flows to repay the acquisition loan - Any valuable assets of the business enhance the financing of the acquisition, Firms that can demonstrate good quality receivable and a client base are highly desirable by bank lenders.

^{SOURCES OF BUSINESS FINANCING}

The summary of sources for the financing acquisitions and the purchase of a business is typically term financing secured by a company's assets, or term finance solutions that focus on cash flow financing.

Traditional and alternative lenders will want to understand the dynamics of the industry sector the business operates in, as well as cash flow trends and overall profit margins - as well companies that are capital intensive will often receive a stronger focus.

CASH FLOW FINANCING

Businesses with significant assets are candidates for cash flow loans when the company can demonstrate the ability to service debt and cover other fixed charges in the business.

Valuation becomes very important in acquisition financing under cash flow loan solutions. The ability of the business to demonstrate management of assets and cash is key - in some cases, the current owner's transition arrangement will be viewed as positive by the business lender during the transition to new ownership.

In certain cases interest or principal charges on cash flow loans might be deferred for a period of time - the amortization term can become an important key to final success.

ASSET-BACKED LOANS / THE LEVERAGED BUYOUT VIA LEVERAGED ACQUISITION FINANCE

When a company can't demonstrate cash flows as the best option to fund a business purchase buyers can focus on the business's specific assets. One term for this financing is ' ABL ' - Asset-based lending!

Valuable assets of the business will include key balance sheet items such as accounts receivable, inventories, and potential commercial real estate owned/occupied by the company. In certain cases, a value may be placed on intellectual property or patents of contracts of the business.

If there is one key benefit of asset-backed financing it is that there is no major reliance on covenants and ratios often imposed by banks - This flexibility might come at higher interest rates but provides valuable funding options for the business. Naturally not all businesses can maintain steady cash flows and the levels of cash required by a traditional bank lender.

Unlocking the assets of a business becomes job # 1 in a leveraged financing solution to buy a business. Those targeted assets secure financing when cash flow can't provide the entire solution - As well asset-backed financing solutions will often require the purchaser to put in less owner equity via their personal or business capital.

THE BRIDGE LOAN SOLUTION

Short-term bridge loans can often provide a faster financing solution until a proper long-term capital structure can be put in place. These short terms loans are often asset based in nature and provide a road back to traditional financing when time and circumstances allow.

THE BUSINESS ACQUISITION PROCESS IN CANADA

The process of buying a business in Canada and doing the proper level of due diligence can be time-consuming without the assistance you might obtain from a Canadian Business Financing Advisor.

The steps in that process include sourcing the right business to buy relative to your experience and the amount of personal capital available - Assessing the true value of the target company is key and knowing how to conduct the appropriate level of due diligence to ensure key areas are in order is important.

Buyers of a business have the ability to get assistance from their accountant, lawyer, financial advisor, etc - The need to secure the proper level of financing within the timeframes of the transaction is key - Planning post-acquisition strategy is also important - as well as determining the role of the seller in post transaction efforts.

HOW TO VALUE YOUR BUSINESS PURCHASE - SOME VALUATION METHODS TO CONSIDER

In many cases, the buyer can look got similar companies in the industry and what it might cost to start relative to a required investment in r&d, sales efforts in building a customer base, and the borrowing costs around the purchase of assets, hiring of staff, etc,

It certainly is an acceptable strategy to hire a company that provides business valuations in order to provide a professional assessment of value to your lender/lenders - Their process is thorough and helps ensure a sound takeover strategy and justification. Public companies often use a price/sales ratio as a valuation metric.

Other areas to consider are the value and replacement value of key tangible assets such as fixed assets, inventories, commercial real estate if applicable, etc. Using a historical look at profits that may have fluctuated over the years is another valuable metric, That will help to understand the true growth potential of the business in the industry it operates in.

Firms that have contracts or recurring revenue streams are more valuable - and the buyer of a business will see areas to improve on in profit generation. In some cases, buyers will find them in the unfortunate place of competing bids so determining maximum value and financing ability is key relative to projected returns.

One final issue is share purchase vs asset purchase consideration in business takeovers.

THE DUE DILIGENCE PROCESS

Understanding the operations of a business requires access to key information on the target company in business acquisitions. Key issues to investigate and have access to include, but are not limited to:

THE SELLER FINANCING ISSUE

The issues of sellers/business owner continuing to be involved in transitions can be challenging for buyers of a business. In numerous cases, sellers stay on for a period of time, typically in the 1-2 year range to allow for smooth transitions into the new ownership and management of the business.

Seller finance participation is one other key way to help finance the entire business acquisition. This is often viewed as a creative financing strategy that lessens the down payment required by the buyer. Installment payments or some form of accrued interest are typical ways in which seller financing is structured.

A seller financing transaction component will often speed up the entire sales process - it sometimes can be an additional income stream for the seller - while at the same time providing a higher level of flexibility in funding the acquisition with banks or alternative lenders.

The ' earnout ' can sometimes be formulated around the future success of the business via certain financial goals around sales and profits. Earnouts make sense to the sellers as they appear to enhance the agreed-upon valuation of the business.

FINANCING THE BUSINESS ACQUISITION

Banks and non-bank lenders will usually provide a 5-year term loan for the acquisition purchase - in some cases the amortization can be long or refinanced. Businesses with a solid business credit history and who have the right combination of assets and cash flow are solid targets for financing. Newer startups can generally not be financed based on lack of track record, etc.

Buyers should be prepared to provide a detailed business plan that reflects conservative fiscal and financial projections that are sound around key areas such as profit potential, interest coverage around cash flows, and their own personal financial statements and verification of credit history.

All transactions for business lenders will require a proper agreement of purchase and sale.

SMALL BUSINESS GOVERNMENT LOANS FOR ACQUISITION FINANC ING

These loans suit buyers of small businesses who can't qualify for higher down payments but who can meet Industry Canada's requirements for the program around net worth, past income and credit history and who can submit a detailed business plan around the purchase.

A minimum credit score of 600+ is a key requirement around the limited personal guarantees required in the program. 7 Park Avenue Financial prepares detailed business plans for clients that meet and exceed bank, non-bank and government loan solutions for business acquisitions. Bdc acquisition financing is also a consideration for some qualified buyers. BDC financing business loan solutions can often supplement financing for a transaction.

Let the 7 Park Avenue Financial team help you with the extensive application process around the acquired business target company.

KEY TAKEAWAYS

The ability to purchase a company can increase sales and benefit from economies of scale and new initiatives

The most common choices for acquiring a business are bank loans, asset-based financing, or private equity

Other forms of acquisition financing include federally guaranteed Government Small Business Loans and owner/seller finance

CONCLUSION

Acquisition funding may take various forms. Although there are several financing choices, the financing strategy must be specific to the transaction. Acquisition financing must also include costs and working capital requirements for operating the business once the transaction is completed and for your growth finance plans.

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

Which is better when purchasing a company - debt or equity?

Debt Financing has a lower cost than equity financing and does not dilute owner equity. The challenge of purchasing a business with debt is that it can be a challenge to service interest and principal payments - too much debt in a business will impact the company's access to business credit -

Companies exploring an acquisition with debt finance should focus on working with reputable traditional or alternative finance lenders. The ability to identify the best acquisition finance structure is key to identifying the flexibility around buying a business - When purchasing a company with debt acquisition financing options owners should be prepared to invest a minimum of 15-20% of owner equity.

WHAT IS ACQUISITION FINANCE

Acquisition financing is the securing and use of business capital and how a company funds an acquisition or merger - Financing solutions are a mix of equity financing contributions, debt financing solutions from acquisition financing lenders, and cash flow-based lending solutions. The challenge in buying a business is the ability of the buyer to ensure the right mix of funding is available at a reasonable cost of capital from a bank or non-bank financing company.

The purchase of a business should focus on providing some level of flexibility to the buyers and should allow for adaptability to different business and economic circumstances relative to the owner's goals in running and growing the business. Financing an acquisition with debt is a common method of the purchase of a business.

There are various factors that affect the ability of a buyer to fund a business purchase - those factors include but are not limited to valuation, business financial strength and credit quality around future cash flow, and industry dynamics in that segment of the economy,

' 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 Acquisition In Canada | 7 Park Avenue Financial