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Financing & Cash flow are the biggest issues facing business today.
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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
Business Acquisition loans and financing for that existing business can come with spectacular success or spectacular failure. Whether you are looking at purchasing Gamestop ( temporarily not a good strategy!) or a pizza franchise, it's all about proper financing and planning with the info you need to help guarantee success. Let's dig in.
FINANCING YOUR BUSINESS VALUATION - THE DEBT VERSUS EQUITY CONSIDERATION
After the business owner/entrepreneur has made his or her ' valuation' decisions to buy an existing business, it's pretty well all about the financing. The amount you will need to borrow and the equity in the existing business combined with your own new personal investment- ( your ' down payment' ), will make the business's financial structure. Commercial lenders want to see some personal equity, the proverbial ' skin in the game' vis a vis shared risk!
WHAT ARE 2 KEY ISSUES IN CASH FLOW / DEBT REPAYMENT CONSIDERATION
At this point a couple of key issues immediately need to be considered when it comes to business loans for acquisitions :
The amount of debt the business can take on
The cash flow that is required to manage and repay that debt - allowing the business to thrive during normal operations and growth stages and having access to working capital
BANK FINANCING FOR MANAGEMENT BUYOUT AND BUSINESS PURCHASES IN CANADA
As we have said in the past, the normal ' go-to' for most business people for acquisition loans is our Canadian chartered banks - so knowing how and if they will support a bank loan for financing an existing business purchase is key. For the banks, we can pretty well say it's always about cash flow. An examination of the income statement and balance sheet is key here, as they will reveal the cash flow coverage the bank is looking for.
Business owners and their advisors need to ensure that this ' ratio' aligns with bank policies. The type of funding, for example, a term loan for business acquisition will dictate the loan amount and the amortization/term. Interest rates and your transaction's final financing structure will always boil down to the overall credit quality and business credit score of the business you want to buy.
CAN YOU USE A GOVERNMENT LOAN WHEN BUYING A BUSINESS
For smaller transactions in purchasing an existing business in Canada business owners /entrepreneurs should consider the Government of Canada Guaranteed Loan Program which is the equivalent of the U.S. ' SBA loan ' , and targeted for small businesses. This small business loan, commonly called the ' SBL LOAN' has attractive rates, flexible repayment terms and conditions, and a limited personal guarantee. If the purchase price exceeds government loan caps on the program an alternate structure and loan type must be considered. While U.S. SBA loans have considerable more financing power the Canadian program finances equipment, leasehold improvements, and real estate.
By the way, this program is also used significantly by thousands of businesses for a startup loan as well as financing franchises.
Talk to 7 Park Avenue Financial as a part of your ' business network' for application requirements for the government loan application and the loan terms that might require explanation for first time borrowers. As far as loan programs go the SBL loan is one of the best for business purchase loans.
An alternative to bank loans is the financing services provided by asset based lenders.
In the small business environment, business owners' personal credit history and credit score are key to successfully accessing funding.
WHAT IS CASH FLOW COVERAGE IN THE PURCHASE OF A BUSINESS WITH DEBT
As a business purchaser, you can run these numbers yourself, or with your accountant and advisor. Ensure that you have some wiggle room as banks, (as well as other lenders) typically use 1:25 as the magic number.
1.25? It's simply the number that shows that cash flow can cover the current year’s obligations for debt by at least 1.25 times.
Preparing a business plan and cash flow forecast that is ' real ' will also help guarantee success. Here you have got to be a bit of a magician as perfection revolves around ' selling' how cash flow historically, as well as current cash flow, and oh yes, future cash flow all align to make the numbers work
. For non-financial types, it's pretty well now the right time to get some analytical help from your Canadian business financing advisor or accountant. It's highly recommended to assess the amount of debt you are taking on very carefully, well in advance of talking to your financing options.
WHAT AT THOSE KEY ISSUES IN ACQUIRING A BUSINESS
Banks or other commercial lenders will also focus on the key business issues - be prepared to discuss and assess these:
Future financing that will needed - Capital assets might be required under equipment financing needs without depleting cash reserves.
Timing - ensure you leave enough time to focus on due diligence and for completing the application process in the type of funding you require for a business purchase loan/financing. Business acquisition loan options may come from traditional or alternative sources of funding.
Industry and operational risks - solid due diligence is required in assessing information from the target company - business banks statements, financial statements, tax returns, aged payables and receivables, fixed asset list, etc. The ability of the business to maintain a positive cash reserve going forward is also important. In some cases, real estate may be a key part of the transaction and that is typically ' carved out ' and financed separately via a bridge loan or commercial mortgage.
Seasonality and how it will impact financing needs
Management depth and experience
BALANCEING EQUITY / DEBT / CASH FLOW NEEDS
As it relates to financing, the success of any business is ensuring you have the right amount of equity and debt. That debt should come at an interest rate that still allows your transaction to work for ongoing business growth. That magical mix will allow you to attract and secure the financing you need for acquisition loans.
SELLER FINANCING?
In many cases, seller financing can make or break a transaction and the seller vendor take-back can potentially reduce the amount of debt the purchased is required to take on. A large amount of creativity can go into structured seller financing.
MANAGEMENT BUYOUT FUNDING
Many clients we meet at 7 Park Avenue Financial are looking to buy out the current owners of the business they are working in. These tend to be first-time potential owners of a business and are looking for financing options that would allow them to cobble together a solution that typically includes a term loan, operating line of credit, as well as a potential seller financing component.
Using a combination of external resources such as a Canadian business financing advisor such as 7 Park Avenue Financial as well as an accountant, lawyer, or appraiser allows potential ' MBO' candidates to successfully review and finalize a transaction. Even current staff, as well as suppliers, can provide valuable advice.
More often than not a transaction such as a management buyout will bring new debt to the balance sheet, requiring the attentional of management relative to potential future growth aspirations. Ensure you have a strong business plan that accurately presents the company both today and at a point in the future. 7 Park Avenue Financial business plans meet and exceed bank and commercial lender requirements.
CONCLUSION
Looking for great expertise to get a loan and complete your business acquisition loan needs with financing solutions that make sense for your transaction? Small business owners know that business acquisitions need specialized expertise. To help guarantee survival and ensure you have assessed those financing options properly seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your business acquisition needs.
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Stan Prokop
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