Complete Guide On How To Buy A Business In Canada With Financing That Works

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It's true that there are several advantages to buying an established business, including a customer base and brand recognition.

Safe to say also that there can be significant costs associated with buying an existing independent business, so it's important to do your research first and ensure you have appropriate acquisition financing and post-closing financing required to run and grow the business.

There are also risks involved in buying a business! It is important to do your due diligence when researching a business purchase to make sure that all potential risks and liabilities have been accounted for.

When you buy an existing business, you acquire both the business as a structure and the business as a concept. Acquiring a proven business concept can save time, energy, and money.

Established businesses have a lower startup and operating costs - Initial operating costs are lower because many parts of the business have already been established

Customers will continue to make purchases under your ownership, providing a stable source of revenue and that is always a key factor in ensuring the success of your new venture.

WHY IS THE BUSINESS BEING SOLD?

The business may be sold for reasons such as poor health, family problems/divorce, running out of cash, personal financial difficulties, retirement, or partnership woes. Additionally, new opportunities may have arisen that the current owner does not have time to focus on the business, and thus a sale could be beneficial for all involved. Individual asset prices should in many cases be properly valued. If a depreciable property such as commercial real estate is involved mortgage refinancing might be required.

THE BUSINESS ACQUISITION FINANCING CHALLENGE

Securing funding for a startup can be difficult, as both banks and commercial finance companies have stipulations about time in business and revenue generation.

In the majority of cases, the amount you are able to invest of your own capital will determine the size of the company you can purchase .. and successfully finance. In some cases companies that are unprofitable can be acquired with less of a cash component and a higher seller note.

Buyers should be able to present a strong business plan to the main lender on the purchase - At 7 Park Avenue Financial, we prepare business acquisition business plans for our clients that meet and exceed bank and other finance firms'requirements.

PERSONAL GUARANTEES - While the personal guarantee is a standard required in the majority of situations purchasers should also understand that these are to some extent sometimes negotiable.

For smaller transactions government loans under the Canada Small Business Financing Program are one option for securing funding, though they come with their own set of requirements.

On the positive side banks, commercial finance firms ad alternative lenders are more likely to fund the purchase than if you were starting a new company. Why? Simply because there is a record of financial performance to measure past business performance and forecast future performance.

Naturally, lenders want to know about both you and the business that you want to buy as those two entirely independent histories are part of a final financing decision.

If traditional financing is the option you are focusing o personal credit history is important to lenders and buyers should have a good history of managing debt and be responsible with credit. Lenders will want information about your income, current business (if you have one), and any relevant experience to successfully run a business, or turn things around!

GOVERNMENT LOANS

As we have noted ' SBL loans ' under Industry Canada are often a viable option for small business owners when other lending options do not work.

Borrowers should know that the government itself does not make loans to small businesses, but instead guarantees loans from participating financial institutions - interest rates are typically favorable, and the criteria borrowers must meet are clearly laid out under the program - Talk to 7 Park Avenue FIacial to see if government small business loans are for you

To save time ad help guarantee financing success take the appropriate amount of time to ensure you have the information required for the type of loan you require - The financial health of any business you currently own, if that is the case, is also important to lenders - Ultimately your transaction will be financed by a bank, an asset-based lender, a mezzanine/cash flow lender, or some other form of finance firm such as a factoring company.

Short-term, long-term debt or both will be a part of your final capital structure - financing always comes from a final combination of owners, lenders, and creditors/suppliers.

At 7 Park Avenue Financial, we'll ensure you have a clear understanding of what you need before starting the loan financing process

As far as the target company you are looking to acquire it is important to demonstrate that the business has a healthy profit margin and positive cash flow to repay acquisition debt.
The income statement should show consistent growth over in the past, and it's critical to ensure
business tax returns are up to date and filed correctly - The focus should be on identifying the amount of capital you need and how cash flow will repay the loan - it's as simple as that.

The accounting will show what a company is worth on paper, while proper valuation in your due diligence process will be adjusted to show its normal worth in the real world.

At 7 Park Avenue Financial, we look through each and every item on financial statements to find a normalized economic level of expense. Normalizing the finances is a process, and should be carefully done by yourself or your advisor.

Working out a fair business valuation is essential for a successful sale. Negotiating and executing a letter of intent and sales agreement are key steps in the process as well as understanding the tax requirements and any consequences to ensure a smooth transaction.

Talk to 7 park about how a business is valued - The multiplier or market valuation method is one of the most widely used benchmarks for valuing a business and this method multiplies the sales or profits of a business by an industry averaged multiplier to calculate its value.

When you buy a business, you pay a set amount for the entire business - In some cases, the sale agreement sets out a price for each asset and a value for inventory. If applicable, an amount can be attributed to goodwill on the opening balance sheet post-acquisition.

When it comes to the Valuation of the business you're acquiring there should be concern and investigation that the sales numbers are accurate and profit margins are realistic and if there is an inventory component the inventories should not be overvalued.

Profit margins should typically be in the 20% range ad cash flows and current assets should be in shape to manage current liabilities.

THE OWNER EQUITY / DOWN PAYMENT CHALLENGE!

Most types of financing will require at least a 10% down payment on a purchase and of course, any new equity will reduce the amount you need to borrow! Borrowers should note that they may be required to put down more than 10% depending on the situation.

Collateral is something that can be used to help secure a loan as part of your overall financing package - Different types of collateral include the business you're purchasing, equipment, vehicles, real estate, inventory, and accounts receivables. It's important to know what type of collateral is required for your specific loan.

Although generally undesirable for most purchasers, personal assets can be used as collateral for a business loan, but beware of pledging an asset you wouldn't want to part with if the business fails.
The bottom line? Make sure you are comfortable with risking your personal belongings before using them as collateral.

SELLER FINANCING / VENDOR TAKE-BACK STRATEGY

Financing the purchase of an existing business can be easier if you can take advantage of seller financing. In seller financing, the current business owner offers the buyer a loan to cover a portion of the cost.

Typically, you will make a down payment in cash as soon as the deal is closed. Then, the seller’s loan covers the remaining amount, or a large amount, as well as of course the financing acquisition loan or loans themselves.

MANAGING BUSINESS PURCHASE RISK

Buying an existing business may save money in one area, but you may lose out in other areas. It’s important to have a full understanding of some of the potential disadvantages you face when buying a business. Some of these disadvantages and risks include things like not having control over the company, hidden liabilities, and difficulty obtaining credit for ongoing operations.

When buying an existing business, be prepared to learn a lot about the products and services sold, internal processes, employees, relations with suppliers and vendors, and the company's financials.
Allow significant amounts of time to learn all you need to know about the business before making any changes. Making rash decisions without a full understanding of how the business works can lead to disaster.

WILL THERE BE A NEED FOR NEW EQUIPMENT AND TECHNOLOGY?

If you find that existing outdated systems are too ingrained, you could have an expensive problem on your hands in eliminating them.

A NOTE ON 'DUE DILIGENCE

When buying a business, it is important to do your due diligence by researching all facets of the target business. This research should include financial information like the balance sheet, cash flow statement, schedules of business assets, and tax returns, as well as the human elements, such as the existing staff. You should also understand any other intangible factors that might affect a profitable business.

CONCLUSION

It's a good idea to formulate the value of the business you want to buy and your reasons for believing you can succeed is a lot of work but comes with significant benefits. Examining the business's past financial wins—and losses—and mapping out how you can ensure a profit and grow in the future is required when seeking a loan to buy an existing business. Speak to 7 Park Avenue Financial, a trusted, credible ad experienced Canadian business financing advisor who can assist you with acquisition loan needs.

FAQ: FREQUENTLY ASKED QUESTIONS

What is a share purchase?

There are two ways to purchase a corporation: share transfer or sale. The share transfer is the preferred option for the seller, as the buyer assumes all debts and obligations of the business.

' 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

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