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HOW TO FINANCE AN ACQUISITION IN CANADA
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Acquisition finance in Canada. Whether the business environment is turbulent or going smoothly savvy business owners and managers are always looking for successful mergers and acquisitions opportunities with another company that... you guessed it... requires financing. Let's dig in.
TRADITIONAL AND ALTERNATIVE FUNDING SOLUTIONS FOR A BUYOUT AND ACQUISITION FINANCING SOLUTION
Should you buy an existing business? That your decision, this article from Forbes Magazine might help .. but we're here to help in that decision. In Canada, both traditional bank loans and alternative financing solutions lend themselves to a business acquisition or merger opportunity, therefore posing the question - ' How is this opportunity to be financed via a lender to ensure success ' and the right financing structure of term debt and operating finance.
Financing an acquisition involves specialized finance skills. Financing an acquisition can easily be called a combination of art and science when it comes to combinations of senior debt and cash flow financing solutions for ongoing business capital needs provided by banks or non-bank commercial lenders.
CREATIVITY AND EXPERTISE COUNT IN BUSINESS ACQUISITION FUNDING
When it comes to financing a takeover of a company in small to medium-sized acquisitions a tremendous amount of creativity on a transaction can come from innovative methods of seller financing in a business acquisition, thereby reducing the cost of capital in the merger or acquisition. Any form of seller financing obviously lowers the amount of external debt - traditional or alternative, that you are forced to take on. After you establish the value of the acquisition target the type of financing you require will usually become more evident around cash flow needs.
LARGE COMPANIES HAVE ACCESS TO MORE RESOURCES AND CAPITAL
Large corporations utilize private equity firms as an example for large complex transactions as well as the funding of publicly traded firms via acquisition through debt, bonds, etc, but those types of solutions are not available to the SME borrower who must perform due diligence with limited external assistance and must therefore address financing the balance sheet on their own as it relates to acquisition financing and taking on debt to acquire the target company. Valuation is also easier to determine for larger or public companies given access to resources around the availability of in-depth data on the target company or its stock.
ASSET SALE VERSUS SHARE SALE ( FINANCE A BUSINESS PURCHASE )
Here's one common challenge, we see all the time is that the seller has serious tax ramifications depending on the type of sale that is in motion. Only two real types of sale exist by the way - ' ASSET ' or ' SHARE '. Share sales in Canada are typically very impossible to finance, in that private companies offer no real liquidity event for the financier. Naturally with public companies that’s a bit of a different story. The seller, unfortunately, is usually very ' tax conscious ' on the outcome of the deal, which many times makes the going difficult to close successfully and properly.
SELLER'S FINANCING / VENDOR TAKE-BACK LOAN ( VTB )
We point out also that when a motivated seller is open to some sort of Vendor Take Back scenario that also can become a potentially good source of income for the seller based on the interest charged on the VTB. Vendor debt via the owner can be both a powerful and useful aid to the transition as it will stand behind senior debt.
WHAT AMOUNT OF OWNER EQUITY /DOWN PAYMENT IS REQUIRED ( EQUITY INVESTMENT = PROOF OF COMMITMENT )
Smaller transactions in Canada require a commitment from the purchaser in the form of some sort of buyer equity and equity financing down payment, etc. Anywhere in the range of 10- 50% is required... as the cash acquisition component, and yes, we agree that's quite a range! Business owners who have to invest their own capital in a deal source those funds from personal funds, savings, investments, etc.
Less money down on any deal is the ultimate double-edged sword on any acquisition finance deal. Leverage works for and against you, either propelling greater return on investment or significantly higher risk of failure based on too much debt - or the wrong debt.
Talk about a real double-edged sword! We point out also that lenders and other investors you may have lined up are generally ' impressed ' with an owner’s equity commitment to any deal. To paraphrase in the language of the people - you've got SKIN IN THE GAME! The vast majority of acquisitions in Canada typically come with a combination of debt, equity/ seller finance and cash flow finance combinations.
VENTURE CAPITAL AND PRIVATE EQUITY FIRMS CAN'T REALLY ASSIST THE SME PURCHASER
While many clients we talk to in the Small business and SME sector think they can approach ' VC's' and Private Equity groups for assistance they rarely can meet the rigorous demands of those two types of external finance. Suffice to say you'll be giving up significant equity also, which in general is highly undesirable at a point when you haven’t realized the true financial benefits and returns of a good merger or acquisition over the long term.
HAVE YOU CONSIDERED GOVERNMENT LOAN FINANCING
In the small and SME sectors of business in Canada, a great way to finance a business purchase is the government Small Business Loan - aka the ' SBL '.This is the ' all Canadian version of U.S. 'SBA ' loans. It offers tremendously attractive terms relative to what you are trying to accomplish and allows you to retain tremendous upside re your projected financial performance.
BANK LOANS VERSUS ASSET BASED LENDING ( FINANCING ACQUISITION WITH DEBT )
Two final very typical ways to accomplish financing acquisitions are to consider traditional bank financing and ABL (Asset-based lending), more of a leveraged buyout solution - aka ' lbo buyout '.
If you can meet some basic cash flow coverage and debt to equity ratios you're a solid potential candidate for well-priced acquisition finance with excellent and competitive interest rates in today's low-interest-rate environment.
Asset-based lenders will throw those ratios, generally speaking, out the window and simply focus on the assets you're acquiring and how they can be margined via term or operating solutions.
Any type of ' senior debt ' will be the bulk of your finance package. Mezzanine financing, also known as ' cash flow loans ' can provide additional flexibility to your transaction. The right capital structure will make for an easier transaction to finance and will position the company for growth.
CONSIDER THE POTENTIAL OF MEZZANINE FINANCING
Non balance sheet financing via Mezzanine finance solutions as a part of your financing structure require proof of strong cash flows given this type of financing is typically not senior debt and ranks behind other secured creditors in your transaction. Mezzanine financing is often called a hybrid type of funding and it requires strong company analysis of operating cash flows as a key to your due diligence. ' Mezz ' finance typically carries a higher interest rate as well. Acquisition financing lenders will demand good cash flows.
CONCLUSION
Acquisition Financing and Raising capital to buy a business via a merger or acquisition requires a team approach around strong financial management of the target company. Buying a requires potentially substantial cash resources and owners must also focus on the ongoing capital needs of the business after the acquisition - Proper acquisition financing leverages the assets of the target company to finance its purchase and provide essential working capital.
We will help you with your acquisition /buyout needs and our services also include preparation of business plans and cash flow projections around your financing options, as well as valuation analysis assistance if required.
If you need help on how to finance a business acquisition and want to avoid the tragedy of poorly executed business acquisition financing options when contemplating a merger or acquisition in the world of corporate finance talk to the 7 Park Avenue Financial team. Debt versus equity in m&a financing is the ultimate balancing act when raising capital for acquisitions and picking the best acquisition finance structures.
Make your goal to strive for a good grasp of acquisition finance basics, which can be sought via your accountant, lawyer, or 7 Park Avenue Financial, a trusted, credible and respected Canadian business financing advisor with a track record in financial acquisition and methods of financing mergers and acquisitions.
FAQ: FREQUENTLY ASKED QUESTIONS
* What is financing for mergers buyouts and acquisitions?
Acquisition financing is the funding a company uses specifically for the purpose of acquiring another company. By acquiring another company, a smaller company can increase the size of its operations and benefit from the economies of scale achieved through the purchase.
* How mergers and acquisitions are financed?
This is the most common way to finance mergers and acquisitions. If a company wishes to acquire or merge with another, it is to be assumed the company has good cash flows and a solid balance sheet. ...
* How is M&A financed?
M&A Financing can be in the form of publicly traded securities such as stocks, bonds and convertible securities. For private companies, it takes the form of a bank loan, a mezzanine cash flow loan and private equity funding for larger transactions
* What is the best way to finance the acquisition?
- Owner equity/cash The simplest way to finance a business acquisition is to use your own funds. ...
- Seller Financing/ Vendor Finance Another common way to finance an acquisition is to ask the seller to provide financing. ...
- Bank Loan. ...
- SBL Canada Small Business Loan. ...
- Leveraged Buyout via asset-based lending solutions
- Assuming the debt of the target company
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