Business Acquisition Lenders: Powering Canadian Business Growth | 7 Park Avenue Financial

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YOU ARE LOOKING FOR ACQUISITION LOAN FINANCING TO BUY A BUSINESS IN CANADA 

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        Financing & Cash flow are the biggest issues facing business today

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BUSINESS ACQUISITION FINANCING CANADA

Struggling to finance your next big move? Discover how business acquisition lenders can turn your growth plans into reality.

"The biggest risk is not taking any risk. In a world that's changing quickly, the only strategy that is guaranteed to fail is not taking risks." - Mark Zuckerberg

7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Business  Acquisition Financing and working capital solutions  – Save time and focus on profits and business opportunities

7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”

Financing a Business Purchase: Business Acquisition Lenders

It is not uncommon for buyers of a business in Canada to investigate and take out business loans specifically so they can finance the acquisition of another company via business acquisition funding.

Successful business purchases involve finding the optimal financing structure to fund an acquisition loan to buy a business, with the help of lenders specializing in these types of loans.

Finding appropriate funding based on your unique situation might even mean that only banks aren’t always able to provide the financing you require. Fortunately, commercial financing companies, government loans, credit unions, and asset-based lenders offer the funding you need to buy a business faster than ever imagined possible.

 Key Statistics on Business Acquisition Lenders: What do you need to know!!

According to a 2023 survey, 62% of Canadian small business owners consider lack of financing a major barrier to growth through acquisition.

The average business acquisition loan size in Canada increased by 15% from 2022 to 2023.

Approximately 40% of business acquisitions in Canada involve some form of seller financing alongside traditional lender financing.

The approval rate for business acquisition loans from alternative lenders in Canada is about 20% higher than that of traditional banks.

In 2023, the average interest rate for business acquisition loans in Canada ranged from 6% to 12%, depending on the lender and borrower profile.

UNDERSTANDING THE BUSINESS ACQUISITION LOAN PROCESS FROM ACQUISITION FINANCING LENDERS

The key to getting a business acquisition loan is understanding what lenders are looking for in the requirements.

Lenders often look for equity investment, as it demonstrates financial commitment and reduces the need for borrowing. You must choose the best acquisition option, complete all of your due diligence best practices, and be prepared with documentation such as a business plan and supporting documents.

The best way is to understand how lenders evaluate qualifications so that when it comes down to choosing an option, you, as the buyer, will be as informed of the decision-making process as possible.

DO YOU QUALIFY FOR A BUSINESS LOAN TO BUY A COMPANY?

When you're getting a loan to buy a business for the purchase price, the process will be different than applying for other types of financing.

Before starting any negotiations with lenders or entering into any agreements, it is essential that they understand what qualifications are required and how different factors can affect the decision-making process.

Personal credit scores around your personal finances are taken into consideration when lenders decide whether or not to give you money.  It's important to understand that this issue is more important to some lenders, such as banks, than others, based on the emphasis on this issue.

The higher your score, the more likely traditional lenders are to approve your loan application and provide upfront funds for business acquisition costs.

Your personal credit score of 600 or above typically means your finances are in good shape from a personal perspective.

If you currently own and operate a  business, the  business credit score and financial analysis  around the company is determined by major factors such as payment history, amounts owed, length of time established in the industry/region, financial performance,

IT'S ALL ABOUT CASH FLOW!

The cash flow of the target acquisition tells you a lot about how it is doing financially and if it can support the debt from an acquisition. Most acquisitions are based around a term loan/ cash flow loan structure to facilitate the business purchase.

Your business's cash flow is a sign that finances are managed well, and profit margins can help support the acquisition.

If the target company faces cash flow issues, there will be challenges in accessing the acquisition loan. 

Bottom line? Acquisition loans are not a realistic way to save a struggling business. A business acquisition loan will not be approved if the current enterprise struggles financially and cannot be considered a viable turnaround candidate.

Your business's cash flow is a sign that you are managing your finances well, and having enough profit margin means it can handle an acquisition.

FINANCING THE BALANCE SHEET

Business acquisition loans involve purchasing a business and then using the assets and cash flows generated by those assets as collateral.

The value of the collateral of a business should be carefully analyzed,

In some cases, some assets may benefit from a formal appraisal of current market values or replacement values—the ability to demonstrate to lenders the value of assets, including intangible assets, is key to showing lenders what assets might be valuable enough to offer up as a guarantee if needed!

DO YOU NEED A SOLID BUSINESS PLAN (SPOILER ALERT - YES!)

A solid business plan is essential for a successful business acquisition.

It serves as a roadmap for the acquisition process, outlining the newly acquired business's goals, strategies, and financial projections. A well-crafted business plan helps to ensure a smooth ownership transition, identifies potential risks and opportunities, and provides a clear direction for the business's future.

When lenders evaluate your application for a business acquisition loan, they will scrutinize your business plan to assess the viability of your acquisition and post acquisition integration techniques.

Your plan should include detailed financial projections, market analysis, and a comprehensive strategy for integrating the new business. This demonstrates your preparedness and reassures lenders of your commitment to making the acquisition a success.

Moreover, a robust business plan can highlight potential synergies between your existing operations and the acquired business, showcasing how the acquisition will enhance overall performance. Addressing these critical elements can significantly improve your chances of securing the necessary financing and achieving a successful acquisition.

DO YOU NEED A SOLID  BUSINESS PLAN ( SPOILER ALERT - YES!)

When applying to obtain financing for a business loan, you will need to submit an in-depth business plan detailing the current strategy and plans of your company. This detailed explanation can help determine if any changes or additions are necessary before transitioning to your ownership.

A lender will look at all the information to ensure debt can be repaid. Information about new strategies you will have going forward is critical, and a professional plan will have accurate and conservative financial projections.

With a detailed business plan and future financial projections, you can ensure that your loan application is fully documented. The majority of lenders will often downgrade the projections, given that many entrepreneurs use unrealistic ' hockey stick'- type sales projections!

Our advice from here at  7 Park Avenue Financial is to make sure the numbers are on your side!

Remember also that a lender will consider how the work experience of future business owners contributes to a company's future success.

THE BUSINESS VALUATION PROCESS

To understand a company's value, you need to determine business valuation methods and  appropriate valuation measures around earnings before interest, taxes, depreciation, and amortization (EBITDA), plus any adjustments for non-recurring expenses or revenue. 

That latter process is called normalizing the financials. It allows you to showcase realistic post-acquisition costs for your expenses going forward.

The business valuation process starts by examining your company's tangible and intangible aspects as well as outside factors. This is done to determine an accurate price for buying a firm that will serve as the basis for loan approval within your industry.

Your lender might ask you to conduct a formal valuation of your business for them to determine an appropriate price.

The valuation information you provide will depend on the type of business and how it operates. For example, if your company sells goods online, providing financial statements from last year's tax return and bank statements might be sufficient to showcase its revenue streams and cash inflows.

Often, schedules of any current debt are required, as well as agings of accounts payable, accounts receivables, etc.

PREPARING FOR THE ACQUISITION

Preparing for a business acquisition requires careful planning and attention to detail.

It involves reviewing your credentials, gathering necessary documents, and evaluating the financial health of the target business. This preparation is crucial to ensure that you present a compelling case to lenders and facilitate a smooth acquisition process.

Start by conducting a thorough review of your own business and personal financial standing.

This includes assessing your credit scores, financial statements, and overall financial health. Understanding your financial position will help you determine the amount of financing you need and the type of loan that best suits your acquisition goals.

Next, gather all necessary documents lenders will require during the loan application process.

This includes business financial statements, credit reports, business licenses, identification documents, and any relevant intellectual property documents. Organizing and readily available these documents will streamline the application process and demonstrate your preparedness to potential lenders.

Reviewing Your Credentials and Gathering Documents

Before applying for a business acquisition loan, you must review your credentials and gather all necessary documents.

This includes:

• Business financial statements: Provide detailed financial statements, including balance sheets, income, and cash flow statements. These documents offer a comprehensive view of your business’s financial health and are critical for lenders to assess your ability to manage additional debt.

• Credit reports: Ensure your personal and business credit reports are up-to-date and accurate. Lenders will review these reports to evaluate your creditworthiness and financial responsibility.

• Business license: Verify your business license is current and in good standing. This demonstrates that your business is legally compliant and operational.

• Identification documents: Gather identification documents, such as passports, driver’s licenses, and business registration documents. These are necessary to verify your identity and the legitimacy of your business.

• Intellectual property documents: If applicable, provide documents related to intellectual property, such as patents, trademarks, and copyrights. These assets can add significant value to your business and may be considered by lenders as part of the collateral.

• Tax implications for  business  acquisitions

By having these documents in order, you can demonstrate your credibility and financial stability to potential lenders, increasing your chances of securing the necessary financing for your business acquisition.

Proper preparation facilitates a smoother loan application process and positions you as a serious and organized buyer, ready to take on the challenges of a new business venture.

UNDERSTANDING THE TYPES OF BUSINESS LOANS AVAILABLE FOR YOUR ACQUISITION NEEDS

Some key types of financing are typically used to successfully facilitate a business purchase in every transaction.

Traditional terms loans from banks and traditional financial institutions provide low interest rates and longer terms and amortizations.

A leveraged buyout is a financing strategy that uses debt to increase the potential return on investment.

This method allows buyers to make acquisitions with minimal personal capital by leveraging the target company's assets. While leveraged buyouts can offer significant rewards, they also come with substantial risks due to the high levels of debt involved.

Some purchases in the SME Commercial finance sector of the economy are funded by Government loans from Industry Canada’s Canada Small business financing program or successfully meeting BDC loan requirements via Canada’s crown corporation non-bricks-and-mortar bank, with loan payments structured to the purchase.

Seller financing will often fill the gap for businesses struggling to complete total financing of the acquisition price, while asset-based lenders and equipment finance companies can provide key financing for equipment, fixed assets, and technology finance needs, as well as business lines of credit and working capital bank loans for ongoing day-to-day operations.

HOW TO FINANCE A BUSINESS ACQUISITION - HOW DO BUSINESS ACQUISITION LOANS WORK?

THE ACQUISITION TERM LOAN - A traditional business term loan is a fixed interest rate and predictable monthly payments.

Term loans are the most common for business acquisition since they fit in well with the typical cost and the long-term nature of purchasing an existing business. However, bank lenders will have high standards for your business acquisition deal to fund your term loan with appropriate debt payments.

GOVERNMENT LOANS—The government offers small business loans and some of the lowest interest rates on financing your business as well as flexible collateral requirements. These are similar to SBA loans in the U.S.  from the Small Business Administration to get a business purchase completed.

And their long-term loans are perfect if you don’t qualify for a bank term loan. Many small business owners use the SBL loan to buy franchises based on more accessible qualifications.

THE SELLER FINANCE STRATEGY - Seller financing is a popular way to purchase businesses, and it can be used in conjunction with traditional commercial lending. 

The funds don’t usually cover the entire cost of buying your new business, but they may help you make up some ground to complete financing.

The seller financing option is a creative, novel way of getting business financing /business purchase credit. Seller financing is a great way to get your business up and running without taking on any more external debt than necessary.

EQUIPMENT FINANCING/REFINANCING ASSETS—Equipment loans are a great source of financing in business acquisitions. A small business equipment loan can be used for virtually any equipment need, from computers to production machinery to vehicles.

To ensure you are successful in putting forth the right loan package, you should be able to provide and demonstrate all the appropriate lender requirements - 

Here at  7 Park Avenue Financial, our loan packages prepared for clients include, but are not limited to:

Owner bios, personal credit histories, business bank statements and financial statements from a historical and interim perspective,  debt schedules, a business plan/marketing plan, substantiation of valuation,  collateral and cash flow descriptions and summaries, and appropriate legal and purchase contracts, including a letter of purchase or intent.

KEY TAKEAWAYS

• Understand lender criteria: Knowing what lenders look for saves time and increases approval chances.

• Focus on cash flow: Strong cash flow potential is crucial for loan approval as well as understanding Industry-specific acquisition trends

• Prepare comprehensive documentation: Well-organized financials expedite the lending process.

• Leverage industry expertise: Lenders with sector knowledge offer more tailored solutions.

• Negotiate favourable terms: Skillful negotiation can significantly impact long-term financial outcomes.

CONCLUSION: BUSINESS ACQUISITIONS / BUSINESS PURCHASE LOAN SOLUTIONS

When making a successful acquisition,  we've shown the right financing structure can be key.

A critical part of negotiating this optimal mix is understanding all options to determine what will work best for your company in the years ahead and how ownership will transition smoothly.

Call 7 Park Avenue Financial, your business partner and trusted, credible, and experienced Canadian business financing advisor. We will take the time to learn about your business acquisition needs and provide a finance solution tailored just for you.

Understanding the right financing structure for your company is important. You want to ensure you access the right combination of funds to allow for an easy ownership transition and position the business well in the years ahead.

FAQ: FREQUENTLY ASKED QUESTIONS

What type of loans and financing to buy a business in Canada can be used to buy an established business?

Numerous financial solutions can be accessed to facilitate a business purchase. More commonly used finance methods include competitive interest rates from traditional bank loans/term loans, government federal loans under the federal small business loan program, BDC loans, business credit union financing, seller notes from the current business owner, and asset-based lending solutions.

What is the required down payment/equity financing contribution required to buy a business?

You will  need  a down payment when purchasing an existing business. The percentage varies depending on various factors, including transaction size. Typically, 10% or 30% of the purchase amount will be required as your equity contribution.

What types of businesses do you typically finance for acquisitions?

We typically finance a wide range of businesses for acquisitions, including but not limited to, small and medium-sized enterprises (SMEs), franchises, service-based businesses, retail operations, manufacturing companies, and technology firms.

How much can I borrow for a business acquisition?

The amount you can borrow depends on several factors, such as the value of the acquired business, your financial profile, and the lender's specific guidelines. Generally, business acquisition loans range from $100,000 to several million dollars, depending on the transaction size.

What are interest rates and repayment terms?

Interest rates and repayment terms can vary based on the type of loan, your creditworthiness, and market conditions. Typical interest rates for business acquisition loans may range from 5% to 10%, with repayment terms usually spanning 5 to 10 years.

Are personal guarantees required for business acquisition loans?

Yes, most lenders require personal guarantees for business acquisition loans, especially if the borrower is a small business or if the company being acquired doesn't have a solid financial track record.

How long does the approval process usually take?

The approval process for a business acquisition loan can take anywhere from 30 to 90 days, depending on the complexity of the deal, the lender’s due diligence, and how quickly you can provide the required documentation.

What are the main advantages of using business acquisition lenders?

• Access to specialized financing tailored for acquisitions

• Potential for larger loan amounts compared to traditional financing

• Expert guidance throughout the acquisition process

• Flexible repayment terms suited to the acquired business's cash flow

• Opportunity to leverage assets of the target company

How can acquisition financing help accelerate business growth?

• Enables rapid expansion through strategic purchases

• Provides capital to acquire complementary businesses

• Allows for diversification into new markets or product lines

• Facilitates economies of scale and increased market share

• Supports the acquisition of valuable intellectual property or talent

What types of businesses can benefit most from acquisition financing?

• Companies with strong growth potential but limited capital

• Businesses looking to consolidate within their industry

• Entrepreneurs seeking to acquire and turn around underperforming companies

• Established firms aiming to diversify their revenue streams

• Succession planning for family-owned businesses

How does acquisition financing differ from traditional business loans?

• Typically offers higher loan amounts based on the target company's value

• Often includes more complex due diligence processes

• May have more flexible repayment terms aligned with acquisition goals

• Can incorporate seller financing or earn-out structures

• Frequently involves industry-specific expertise from lenders

What long-term benefits can result from using acquisition financing?

• Increased market competitiveness through strategic growth

• Potential for higher returns on investment compared to organic growth

• Opportunity to acquire established customer bases and revenue streams

• Ability to enter new markets quickly with reduced risk

• Enhanced operational efficiencies through synergies and economies of scale

Are there government programs that support business acquisition financing in Canada?

• The Business Development Bank of Canada (BDC) offers acquisition financing

• The Canada Small Business Financing Program can be used for certain acquisitions

• Some provincial programs provide support for specific industries or regions

• Government-backed loans often have more favourable terms but stricter criteria

How do lenders evaluate the risk of a business acquisition loan?

• Analyze historical and projected financial statements of both buyer and target.

• Assess the buyer's management experience and industry knowledge

• Evaluate the target company's market position and growth potential

• Consider the overall economic conditions and industry trends

• Review the proposed integration plan and potential synergies

What alternatives exist if traditional acquisition financing is not available?

• Seller financing or vendor take-back mortgages

• Mezzanine financing or subordinated debt

• Private equity or venture capital investment

• Crowdfunding or peer-to-peer lending platforms

• Joint ventures or strategic partnerships

How can a business owner prepare for the acquisition financing process?

• Develop a comprehensive business plan and acquisition strategy

• Prepare detailed financial projections for the combined entity

• Conduct thorough due diligence on the target company

• Assemble a team of advisors (lawyer, accountant, business broker)

• Improve personal and business credit scores

• Gather all necessary financial documents and business records

What factors do business acquisition lenders consider when evaluating a loan application?

• The financial health of both the acquiring and target companies

• Industry experience and track record of the acquiring management team

• Projected cash flow and debt service coverage of the combined entity

• Collateral and personal guarantees are available

• Overall market conditions and industry outlook

How do interest rates for business acquisition loans compare to other types of business financing?

• Generally higher than traditional term loans due to increased risk

• Often structured with variable rates tied to prime +

• This may include performance-based pricing that adjusts to business metrics

• Typically lower than unsecured financing options like credit cards or solutions  from online lenders

• Can vary significantly based on lender, deal structure, and borrower profile

What are some common mistakes to avoid when seeking business acquisition financing?

• Underestimating the importance of a solid business plan  in securing acquisition financing

• Failing to conduct thorough due diligence on the target company

• Overvaluing synergies or potential cost savings

• Neglecting to consider post-acquisition integration challenges

• Rushing the process and not exploring multiple financing options