Financing Business Purchase Buyout Financing Loan | 7 Park Avenue Financial

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HOW TO FINANCE A BUSINESS ACQUISITION IN CANADA

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Financing & Cash flow are the  biggest issues facing businesses today

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 WAYS TO FINANCE A  BUSINESS PURCHASE OF AN EXISTING  BUSINESS  IN CANADA  

 

Financing a business purchase in Canada requires a strategy that doesn't have to be as hard as you think if you have the right information. 

 

What sometimes makes buyout financing or a loan strategy complicated for an independent business is the good news; there are a variety of options available that make sense to you the purchaser, and the owner!

 

 

 

BENEFITS OF A BUSINESS PURCHASE

 

 

Key advantages of  business acquisitions are that they are not necessarily always secured by hard collateral - while typical business asset categories  such as real estate, fixed assets,  etc are often part of loan collateral many types of financing are based on the cash flow of the businesses - in current times even intellectual property and intangible assets can be considered as part of loan collateral

 

Additionally, the business acquisition loan is often a long-term loan solution that allows the purchase to run and grow the business in early acquisition periods  -  Business assets around equipment and technology needs are usually financed with more long-term amortizations  - Government loans as a small business loan solution can actually include 10-year terms/amortization.

 

For favourable transactions, most business acquisition financing can be completed in a relatively short time if proper documentation is available and valuation is reasonable.

 

 

THE BASICS OF BUYING A BUSINESS

 

Business people and managers looking to orchestrate a management buyout or business acquisition want one thing:  A solid simple strategy for both valuation and financing!  The goal should be quite clear:   agreeing on price and value, and then rising the right mix of debt finance and owner-equity capital that suits the asset and capital base of the business going forward.

 

Of course, valuing the business is often the first and largest challenge. That is complicated by the size of the firm, whether it’s a service or an asset / product-based business, and whether the firm is a going concern, or heaven forbid, in dire straits.

 

KEY DOCUMENTATION REQUIRED FOR BUSINESS PURCHASE/BUSINESS TRANSFER 

 

It is critical to ensure necessary documentation is available from buyers as well as sellers, including key documentation required by business acquisition lenders such as banks and non-bank asset-based lenders and commercial finance companies.

 

Key documentation includes:

 

Applicable loan application forms for target lenders of  your purchase

Financing statements and tax returns for the target acquisition - includes balance sheet and incomes statements and year-end and interim statements that are available

Purchase and sale agreement and terms

Appropriate agings and schedules around fixed assets, accounts payable, receivables,

Personal net worth statement and business bios/ background of purchasers

Sales and cash flow projections/business plan

Appropriate business licenses and certifications

Sources and uses of acquisition proceeds including post-financing needs around working capital

 

 

 

FINANCING YOUR BUSINESS PURCHASE - VALUATION 

 

What should be a good starting point in valuation - no surprise to us, it's one of our favourite terms - ' CASH FLOW '! That means taking a look at what cash flow has been, and what it could be. That requires a solid handle on revenues and a proper forecast for those sales.

 

Business lenders for your purchase/business transfer financing want to know the valuation of the target business you are focused on acquiring - that worth must translate into the appropriate financing when reasonable and realistic.

That emphasis on valuation is key during the application and approval process,  and reasonable valuations translate into less risk for business lenders such as banks and other finance companies.

 

There are numerous accepted methods to value the business purchase - it might be a market-based value based on comparable private or public companies in your industry - Asset-based lenders around a more leveraged buyout via secured loans will focus on the liquidation value of the business's assets - Equally applicable are cash flow and income-based valuations based on future profits and cash flows in line with historical performance that will retire debt financing.

 

 

Asset valuation is a key around capital-intensive businesses. That naturally involves some method of appraisal of asset types such as equipment,  real estate if there is any attached to the sale, vehicles, and those all-important ' current assets ', Receivables and Inventory. 

 

We often find ourselves in the middle of a valuation issue when assisting clients with a business purchase - suffice to say there is occasionally a huge difference in value as placed by the owner or the purchaser. We're often reminded of the old saying that the best deal is often when both the purchaser and the seller feel they didn’t get the best deal!

 

Taking a good hard look at how the seller presents financial statements is key to financing a business purchase successfully. Here's where the majority of clients we speak to need some well-experienced assistance.

 

Areas of focus are:

 

Collectability of receivables

Revenue recognition policy on sales, contracts etc.

Lease obligations - (premises/equipment)

Fixed asset list value

One-time losses i.e. why/what happened

Owner/management compensation

 

With reference to the last point,  ' COMPENSATION' we see numerous cases where a hard look at current compensation can save thousands of dollars for the new owner/manager. And that includes the strategy of taking the previous owners' kids and family members off the payroll!

 

If we had to summarize an all-inclusive strategy in looking at the business financials we would say it involves simply a solid hard look at:

 

Debt

Liquidity

Profits

Assets

 

Easier said than done though, right? But a lot easier with some experienced assistance for an advisor, etc.

 

 TRADITIONAL BANK LOANS 

 

A Traditional bank loan is often the first choice or 'go-to ' for entrepreneurs looking to buy a business with help from their financial institution.  Term loans are long-term loans available from banks, business credit unions, and asset-backed lenders.

That lump sum type of loan is paid in fixed installments based on  fixed or variable interest rates -  term loans differ from revolving lines of credit which allow borrowers to draw down  based on pre-set credit limits for typical current asset categories such as accounts receivable and inventory -  The Canada Small Business Financing Program offers term loans under flexible structures,

In the majority of cases in Canada, borrowers will be required to provide a personal guarantee, which in some cases can be partially negotiated and limited.

 

  

 

KEY TAKEAWAY   

 

When it comes to actually finance the purchase this can be through bank term loans, asset based lending deals, unsecured cash flow loans, and even for smaller business purchases (under 350k) the Government SBL loan.

 

GOVERNMENT BUSINESS LOANS

 

For smaller transactions in Canada,' SBL' loans under the federal government loan guarantee program are solid methods of funding business purchases. They are available from multiple lenders, primarily banks and credit unions - Loan amortizations can be extended and recent changes to the program have increased loan limits and modified types of financing available very favourable.   Government loans also come with competitive interest rates at both fixed and variable structures.

Buyers of businesses must have good credit scores and personal financial history, and prepayment is also allowed without penalty under the program.

 

CONCLUSION - BUSINESS ACQUISITION LOAN SOLUTIONS

 

We've shown that business acquisition loans are accessible from a variety of lenders that allow for the acquisition and expansion of Canadian businesses, including franchises in the SME sector.

Numerous financing options revolve around both term loan and revolving credit structures, as well as asset-based financing around assets and capital asset and technology financing needs.  Buyers should focus on understanding all their options including a focus on the ability to repay and meeting  various key requirements from banks and business lenders,

 

Speak to 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor on assistance for financing a business purchase and a buyout financing loan / finance strategy... the right financing option that works!

 

  

FAQ FREQUENTLY ASKED QUESTIONS PEOPLE ALSO ASK MORE INFORMATION  

  

 

 What are the potential drawbacks of a business purchase?   

 

Numerous business risks come with a business acquisition loan  - Businesses that cannot meet cash flow and profit thresholds required by lenders might require additional personal collateral -  Potential business loans may find it difficult to meet financial requirements from traditional financial institutions.  In more difficult economic times interest rates may be increasing which can affect the profitability of a business.  The wrong type of optimal financing structure can portend risk if the borrower can't meet the guarantees and safety measures imposed by the lender.

Buyers of a  business must realize that numerous lenders,  most notably makes may impose covenants and restrictions on the growth and use of funds. Additional borrowing in the future might require additional collateral.

 

How do you finance a business purchase?

 

How does financing a purchase work?

  

 

What is a business acquisition loan?  

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