Complete Guide & Tips To Buying And Financing A Business Purchase In Canada

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There are many questions when deciding to buy or expand your business, this information will help you find the answers and assist in guiding you through the process of purchasing a company and key issues to consider before focusing on external financing around a business sale.

Many buyers who seek to buy a company often underestimate the importance of raising the right amount and type of financing!

Businesses in unfamiliar fields are difficult to succeed with. Before choosing a business to buy, you should evaluate your skills and interests. You should choose one that matches these attributes to reduce the risk of failure and better achieve success.

THE CHALLENGE OF FINANCING A BUSINESS PURCHASE

If you want to finance a business purchase you'll need to also ensure your personal finances / personal assets are in good shape. That's a key point to address in advance of the decision to purchase a company. You want to acquire the right business and minimize the depletion of personal savings.

Looking for some additional assistance in financing your acquisition? When you purchase a business, there are many things to take into consideration. One of those factors is whether or not the seller will finance some portion (or all) of your purchase price via some form of debt repayment over time; this seller financing effectively lets them defer payment on the business purchase for an agreed-upon amount while still being able to access financing from other sources to complete the transaction.

As with any type deal,' seller note / vtb terms ' tend to be negotiable depending on how confident both parties feel about each other's ability in running the business post takeover. Vendor financing can be a great way to get the business up and running and can often help finance the ' goodwill' or ' intellectual property ' portion of your transaction.

"Seller debt" has many benefits over traditional bank loans with typically lower interest rates before they invest their own money into the transaction. The terms will depend largely upon your needs as well-

When financing a purchase, it is important to have an idea of what type of loan you will take out. A typical pro forma capital structure might be 30% cash equity, 20% seller note, and 50 percent bank or commercial finance firm financing via alternative lenders, etc.

When looking for a business to buy, focus on a business with stable profits and the following attributes as good sales volumes, a brand, and industry reputation and to be competitive in their industry.

Loans for business acquisitions come in many different forms, but after founder investment and loan from friends or family, it's likely that a business acquisition loan will be necessary - typically a term loan supported by cash flow. There are several types of lenders who specialize exclusively in providing these types of financing opportunities - understanding which financial institution is best for your deal is key when focusing on debt financing.

The Canadian Small Business Financing Program is a great way for banks in Canada to finance the purchase or improvement of small businesses via a bank loan in a term loan structure - namely firms with less than 10 Million in revenues. The program guarantees that you will get credit and very competitive interest rates for small business owners on smaller transactions with less of a reliance on equity financing when it comes to small business finance.

Venture capital firms are typically not the best sources for the SME sector to fund the purchase of an existing business.

FIGURE OUT THE POTEMKIN VILLAGE ISSUE!

Some potential problems could make the business less attractive than it initially seems. It is important to look for these problems and try to avoid them, because you may end up with many unplanned costs. Unforeseen issues with a business purchase can make the original deal less attractive. Due diligence will allow for research of these problems and avoid future costs.

There is a great analogy some business folks refer to as the ' Potemkin Village ' issue. In the 18th century, Prince Potemkin set up fake settlements to fool his lover Empress cassette during her journey through Russia.

After she passed away from injuries sustained when their carriage fell down an incline along with other passengers on board (to avoid being seen by anyone), he had these ostensible communities torn down and reassembled farther on towards where they were originally built so that no one would know what happened there initially - this act earned him praise as well as titles such “The Builder."

The bottom line - look for things in the acquisition target that might not be as they seem!!!

YOUR FINANCIAL DUE DILIGENCE

Have you ever considered the consequences if your business was suddenly and drastically reduced in size? Would losing a single customer or supplier devastate you? Does revenue come from market growth, price increases, new products? You don't want to operate an industry where it's easy for competitors to steal clients away with ease! Is there concentration concerns related to the business revenue around suppliers or the customer base?

Carefully examine business records such as the financial statements ( audited is preferred but not always available ) and tax returns from the last three years as well as interim statements in order to ensure their accuracy before making any decisions based on them and proceeding to acquire a business loan.

It is important to closely examine what is known as ' seller’s discretionary income ', as it may indicate unnecessary personal expenses or sweetheart deals that will end when the current owner sells. Look for one-time gains buried in operating Income - do these seem suspect? You should also take into consideration monthly sales numbers over a few years; if they're cyclical then maybe now isn't exactly their peak time Lastly spend a sufficient amount of time in normalizing the financials as to how they will look post your acquisition.

The aging of accounts receivable is an important indicator of the health and financial soundness of a company. Days sales outstanding (DSO) tells you how long it will take to collect what's been invoiced; while average daily revenue is also another good measure to examine. A lower DSO should reflect good collections and should be benchmarked against the terms that are offered to the client base. Conversely, DPO, or 'Days payable' measures how many days it takes for a payment to be made.

There are many different types of liens, including PPSA and tax lien certificates. These can be reflected in financial statement notes and potentially on the balance sheet as well but they also have an off-balance-sheet effect.

The key to successful integration is understanding what your acquisition will allow you to do. Look for synergy in the areas of products, services, and marketing/sales methods so they fit well together while being complementary or related aspects if possible! Marketing must also mesh with delivery systems such as production capacity; this ensures that staff from both firms can be integrated smoothly into existing operations without issue

TRANSITIONS AND NON COMPETE

In your business purchase strategy, it may also help if sellers agree not just on a non-compete agreement but with signing transition periods where they will still provide some assistance during this process.

You should identify any potential pitfalls in your business before it's too late. An experienced lawyer can help with this task by reviewing all legal documents, such as articles of incorporation or trademarks registration procedure for example-and asking them about their input on future contracts that may affect your new business if something goes wrong later down the line (i e change control provisions).

CONCLUSION

Let 7 Park Avenue Financial help you buy a business successfully - we're business professionals, a trusted, credible, and experienced Canadian business financing advisor and we'll help you with analyzing value, negotiating best terms, and most importantly.. closing the deal! We'll prepare a business plan that meets and exceeds the requirements of banks and other commercial lenders/alternative lenders and will help secure financing successfully with the right lending institution.

FAQ: FREQUENTLY ASKED QUESTIONS / MORE INFORMATION

What is a letter of intent?

The Letter of Intent outlines the terms for a purchase between two parties before finalizing it. When purchasing a business, you’ll sign an LOI and likely a Confidentiality Agreement to conduct your final due diligence prior to proposing final terms.

' 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

Guide To Financing And Buying A Business In Canada | 7 Park Avenue Financial