YOUR COMPANY IS LOOKING FOR ACQUISITION FINANCE ASSISTANCE!
Business Acquisition Finance
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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EMAIL - sprokop@7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Searching for Buyout Financing in Canada? Along the way, you'll need info and assistance from acquisition finance firms or other institutions such as banks. Is there some proven information and strategies the Canadian business owner or financial manager must use to be successful in acquiring or merging with another firm? There are, of course, so let's dig in.
UNDERSTANDING THE OPERATING CYCLE OF THE TARGET COMPANY
On many occasions, we see that clients haven’t spent enough time on the overall ' financial nature ' of the business. By that in essence we mean an overview of the operating cycle of the business. The operating cycle? It's simply your ability to get a handle on the overall sales and seasonality cycle, the supplier and customer base, timing on how goods and services are delivered and the current overall financial structure of the business.
ENSURING YOUR HAVE A BUSINESS PLAN AND REASONABLE CASH PROJECTIONS
New funding that you require running the business must be part of the overall financial considerations. Even more simply speaking than that the lender or lenders want to know how they will be repaid. To demonstrate that you need strong, clear sales and profit and cash projections that might well be part of your business plan or strong executive summary. At 7 Park Avenue financial we prepare business plans and realistic projections for the transaction that meet and exceed lender expectations of this information.
FINANCING AN ACQUISITION WITH DEBT - ACQUISITION FINANCING LENDERS
The ability to demonstrate how your new and existing debt will be repaid which is done by demonstrating that your new balance sheet has the right amount of debt and that you've got borrowing power. In some cases, your transaction may be a part of a management buyout financing strategy. Current management teams in a company will often consider how to finance an acquisition via either a leveraged buyout or a combination of their own equity and traditional or alternative financing. Larger transactions outside the SME sector will sometimes involve private equity firms.
Mezzanine Financing - ie a cash flow term loan is another common method of funding a buyout. Companies must be able to demonstrate strong historical and current cash-generating ability . The interest rate will typically be a bit higher on a ' mezz ' transaction.
FINANCING THE BALANCE SHEET - BANKS AND ASSET BASED LENDERS
Borrowing power is of course based on the assets of the new business - which typically is accounts receivable, inventory, and fixed assets. Receivables when financed by a bank are typically margined at 75% borrowing power, and if you utilize an asset-based lender your borrowing power typically increases to 90%. Inventory and fixed asset financing is determined by the careful valuation of the overall marketability of the assets based on the opinion of the bank or your asset-based lender. Leveraged buyout financing is often best accomplished via asset-based lenders. Various types of bank loans are available to purchasers based on the overall credit quality of your transaction, although a ' typical ' transaction will often be a term loan combined with a revolving line of credit.
UNDERSTANDING WHAT LENDERS LOOK FOR IN ACQUISITION FINANCE
Other focuses of acquisition finance firms for buyout financing include management depth and experience, overall cash flow coverage and repayment ability, collateral asset quality, and the potential ability to grow sales and profits. No real mystery there!
THE RIGHT CAPITAL STRUCTURE
Buyout financing works best when you have a solid handle on what's known as the capital structure of the new business. The easy way to focus on this is to have a strong sense of what capital is available from you the new owner, traditional alternative lenders, and your suppliers/vendors. Using vendors as an example, just your ability to negotiate extended payment terms for an interim or permanent period is going to be a great source of cash flow. Acquisition finance structures will often vary depending on the type of industry.
THE ISSUE OF ' LEVERAGE '
Getting the right mix of short term and long term debt is also key. In a perfect world, you want to have the right amount of debt, aka ' leverage’. A great rule of thumb? Simply that your overall cash flow can comfortably cover off your debt payments and that overall debt doesn't exceed your shareholder equity by a relationship of 2:1.
Leveraged buyouts in acquisitions occur when a significant amount of debt is used to complete the transaction, with the assets of the company being used as the ' collateral ' for the loan/loans. This type of financing increases ' ROE ' - return on equity given the owner equity portion of the transaction is lower.
MONETIZING ASSETS IS KEY!
For companies in the SME sector, we'll often see the overall capital structure is different than that of larger corporations - i.e. current assets and liability percentages tend to be higher - allowing you to monetize assets for cash flow and working capital as opposed to relying on shareholder equity, which is often much higher in larger firms with a significant purchase price/valuation.
CONCLUSION
Companies in the SME sector in Canada don't often have all the resources that the ' big boys ' have when it comes to buyout financing. If you are looking for valuation and financing solutions and a financing structure for your transaction that makes sense seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with acquisition finance.
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Stan Prokop
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