Guide To Financing A Business Acquisition in Canada

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FINANCING A BUSINESS ACQUISITION GROWTH STRATEGY IN CANADA

The best way to make a smooth transition around the business acquisition process is by ensuring that you have the right capital structure in your business purchase. This will position you and protect both yourself as well as any lenders or others who may be involved with this transaction for longer-term success!

Understanding the right financing structure is crucial around finding a combination of funding that will allow a smooth ownership transition with success potential via the right financing package.

It's important that you find a way of combining all types of financing required to complete a business purchase - equity financing, debt, cash flow, and seller finance - Solid financing allows for expansion and growth opportunities down the line

VALUING YOUR TARGET ACQUISITION

The first step in financing a company is to determine its worth. There are numerous ways to calculate the value, one of which is analyzing EBITDA and taking out any non-recurring expenses - which is also known as ' normalizing the financials. At 7 Park Avenue Financial, we spend time with clients to accurately 're-do' the financials to reflect the new business ownership and financial operations.

As an example, a company that has 300k in earnings but is projected to grow might have an earnings multiple of 5 ( depending on the industry ) and would potentially sell for 1.5 Million dollars. Companies will often use a multiple of their EBITDA to determine the acquirer’s price based on the quality of financials and issues such as growth prospects.

WHAT AMOUNT OF DOWN PAYMENT REFLECTS A BUYERS COMMITMENT TO THE TRANSACTION

When a company or sole purchaser wants to buy another business, they often have to contribute money from their own funds - which is almost always the case in Canada.

There are a variety of ways that companies can use to finance their acquisitions including those buyer contributed funds, which might come from any surplus cash saved by the acquiring company or individual purchaser.

Equity participation is a key and critical way to make sure your business acquisition gets the financing it needs, while also demonstrating commitment from all shareholder/shareholders. .Equity participation is an important part of the acquisition process.

It constitutes a demonstration that shareholders are committed to making sure their business success and helps reduce borrowing needs by demonstrating financial responsibility, which in turn impresses banks, commercial finance companies, and asset-based lenders who will be more likely to offer loans at favorable terms.

THE CRITICAL PART OF YOUR FINANCE PACKAGE

A senior lender typically provides the main loan for the target company, typically a term loan structure that is secured - Not everyone has access to a private equity firm or ' family offices ' in Canada!

Borrowers should understand that this type of financing is typically more restrictive than other alternatives because it has specific requirements for monthly payments and financial covenants related not just company finances but also industry trends in order that payments can be made according to the terms of the loan under an optimal financing structure.

Senior lenders are often more restrictive about the terms of repayment and will require the company to fulfill other conditions such as maintaining financial covenants and financial ratios and spending limitations for new asses, etc. Cash flow financing is often added to a term loan structure.

SELLER FINANCING / VENDOR DEBT - AKA ' VENDOR TAKE-BACK '

A seller will sometimes provide a portion of the purchase price, with interest charges that are very flexible and tailored to the needs of the buyer and seller - This is solid assistance that can often make or break a deal if there are financing limitations and challenges.

The vendor takeback has the seller being compensated in some manner for a certain period of time. Many vendors offer a specific earn-out period, where the company pays back part of its debt with increased profitability as long as certain conditions are met.

The vendor of a note will usually be patient about demanding repayment. If a company has trouble repaying the loan, notes issued by a company to buyers will usually include few conditions and a lower than the market interest rate. Vendors are motivated to make sure the business survives if they are owed lots of money!

UNDERSTANDING MEZZANINE FINANCING / CASH FLOW FINANCING

Mezzanine financing is a potentially very solid strategy used to bridge gaps in between purchase prices and finance from other sources. The interest rates on this type of loan are typically higher than those for senior debt because it carries the additional risk associated with uncertainty about whether there will be enough revenue and cash flows generated over time.

Mezzanine Loan Interest Rates Are skewed toward firms who have the excellent cash flow to support the loan. Mezzanine financing is a popular way to bridge any gaps when there's not enough time or money for all three types of other business purchase credit - ie, debt, equity, owner commitment.

GOVERNMENT LOANS

Acquisition loans from banks can not always provide financial assistance in the form of loans for business acquisitions. However, there may still be an option available through certain programs such as the CSBFP - Canada Small Business financing program to purchase an existing company or start-up. Talk to the 7 Park Avenue Financial team about eligibility for the program, which is typically geared towards smaller purchases and franchise financing. The government has various guarantees and safety measures built into the program.

A Government crown corporation known as the Business Development Bank of Canada offers several long-term financing options depending on specific circumstances. The financing options specifically designed for the purchase of a business include long-term loans, cash flow loans, and equipment funding. They do not offer business lines of credit, but working capital term loans are also available.

ASSET BASED LOANS

The acquisition of a company with assets such as equipment/fixed assets, property, or inventory and accounts receivable can be financed through leveraged buyouts and asset-based lending solution. The company's substantial assets on the balance sheet and ongoing sales support for the loan.

The leveraged buyout is an acquisition structure that uses debt financing. Unlike other types of M&A, you require less capital to successfully complete the transaction; instead, the business's assets are used to fund their own purchase price through credit-based lending practices like those engaged upon by asset-based lending institutions today! ABL lender financing is one of the fastest-growing ways to fund a business purchase/business transfer of ownership.

FOCUS ON PROPER DUE DILIGENCE

The first step in due diligence for successful acquisitions should always be requesting financial statements or whatever other documents that might help in proper business valuation and assistance in avoiding high risk

This might include assets list & equipment; client base lists along with supplier info, etc. Lease terms, renewal options, and personal guarantees required are also critical to review. In some cases, specific assets such as commercial real estate or intellectual property/ intangible assets might be part of your transaction.

When buying a business, it's important to consider whether the purchase includes both assets and liabilities. These include any debts that may be incurred by a company in its past history or currently outstanding loans from other sources such as banks.

Consider post-acquisition financing needs of the acquired business for working capital which might include a line of credit. In some cases ' factoring ', aka Invoice financing is one of the most effective ways for businesses to improve their cash flow, and meet short-term needs and bigger goals.

EVALUATING FINANCING OPTIONS TO BUY A BUSINESS

It's safe to say that 100% Self-funding is rarely an option for when you require the cash to purchase a business, so seller financing and external bank, commercial finance company, or asset-based lender solutions are your 'go-to ' best options to cover the full purchase price.

CONCLUSION: ACQUISITION FINANCE / BUSINESS ACQUISITION FINANCING

Buying your own business in Canada gives you the opportunity to expand the business and potentially gain access to new markets and increased market share. You can even purchase a competitor or supplier under the right conditions.

For the uninformed buying and financing, a business in Canada can be an expensive and complicated process when it comes to a bank loan or other type of external funding, but it’s actually one of the most efficient ways to be successful and grow.

Being able not only to access new markets with an acquisition strategy but also to acquire competitors or suppliers' businesses can bring many benefits such as staff trained on their product/service positioning already and available for work - Talk to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor if you are focus on how does acquisition financing work and want assistance to fund acquisitions tailored to your needs in the most efficient way possible.

FAQ: FREQUENTLY ASKED QUESTIONS

Can I finance the purchase of a business?

When financing the purchase of an existing business, there are some important things to know. For example: often this type of investment has already been successful in past endeavors and can oftentimes be easier than a start-up.

An additional advantage is that lenders know exactly what they're going to get out of them: A company's past performance provides insight into how much equity will likely be required along with terms such as repayment schedule & interest rate. Large transactions are sometimes funded by private equity loans, in the U.S. a bank or sba loan is often used - while Canadian borrowers can utilize various government sources such as guaranteed federal loans. If one company is buying another company the combined company may have more appeal to lenders.

' 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

How To Finance A Business Acquisition | 7 Park Avenue Financial