YOUR COMPANY IS LOOKING FOR BUSINESS ACQUISITION LOAN SOLUTIONS!
HOW TO FINANCE A SMALL BUSINESS ACQUISITION
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Financing & Cash flow are the biggest issues facing business today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
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”
Business Acquisition Loan
Buying an existing company is an attractive option for many businesspeople/entrepreneurs. The right business acquisition loan and financing play a key role in the ultimate success of that decision. Let's dig in.
WHAT IS A BUSINESS ACQUISITION LOAN?
Business acquisition loans allow business owners/entrepreneurs to acquire an existing business. Sometimes, the company is a franchise, or the transaction is a partner or competitor’s buyout.
The types and amounts of loans will vary based on credit quality, current market rates, the size of the transaction and numerous other factors.
Credit unions, traditional banks, and online lenders offer competitive rates and flexible repayment terms for business acquisition loans.
Most people know the reasons for choosing the ‘ buy a business‘ strategy for business acquisitions: Circumstances around the purchase might make the business’s purchase value very attractive.
Additionally, most would agree it’s easier to grow than build a business from scratch, eliminating a lot of risk. In some cases, you might be considering buying out a business partner.
The downside? Solid, growing, and profitable businesses are rarely ‘ cheap .’ If any business came with ‘no risk,’ that would be rare. We’ve met many clients who have inherited numerous supplier/financial/employee issues that were not discovered in any due diligence process.
TRANSFORM YOUR BUSINESS DREAMS INTO REALITY
Purchasing an established business requires significant capital that most entrepreneurs don't have readily available. Without proper financing, valuable acquisition opportunities slip away while competitors secure market share.
Let the 7 Park Avenue Financial team show you how Business acquisition loans can provide structured funding solutions that match your acquisition goals while preserving your capital.
3 Uncommon Takes on Buying A Business
- Business acquisition loans can be strategically combined with seller financing to reduce overall borrowing costs
- Using acquisition financing can actually improve post-purchase cash flow compared to using all cash
- Lenders often prefer financing business acquisitions over startups due to established performance metrics
Did You Know?
- 78% of business acquisitions involve some form of financing
- SBA loans fund approximately 25% of small business acquisitions
- Average business acquisition loan amount: $350,000 - $5,000,000
- Typical down payment requirement: 10-30%
- Average approval time: 60-90 days
Definition of a Business Acquisition
A business acquisition is when one company or individual purchases a majority stake in another company’s shares, assets, or ownership interests.
This can involve acquiring an existing business, merging with another company, or purchasing a specific business unit or division. Business acquisitions can be structured in various ways, including asset purchases, stock purchases, or mergers, each offering unique strategic advantages.
Types of Business Acquisitions
There are several types of business acquisitions, each serving different strategic purposes:
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Horizontal Acquisition: This involves acquiring a company that operates in the same industry or market as the acquiring company. It helps expand market share and reduce competition.
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Vertical Acquisition: This type involves acquiring a company that operates in a different stage of the supply chain, providing complementary products or services. It can enhance operational efficiency and control over the supply chain.
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Conglomerate Acquisition: This is the acquisition of a company that operates in a completely different industry or market. It diversifies the acquiring company’s business interests and reduces risk.
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Strategic Acquisition: This type focuses on acquiring a company that offers strategic benefits, such as access to new markets, technologies, or intellectual property.
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Financial Acquisition: This involves acquiring a company primarily for monetary gain, such as increasing revenue or reducing costs through synergies.
Benefits of Business Acquisitions
Business acquisitions can offer numerous benefits to the acquiring company, including:
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Increased Market Share and Revenue Growth: Acquiring a competitor or a company in a related field can significantly boost market share and revenue.
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Access to New Markets, Technologies, and Products: Acquisitions can provide entry into new markets and access to innovative technologies and products.
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Improved Competitiveness and Market Position: A company can enhance its competitive edge by acquiring strategic assets or capabilities.
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Increased Efficiency and Cost Savings: Synergies from combining operations can lead to significant cost savings and improved efficiency.
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Enhanced Financial Performance and Shareholder Value: Successful acquisitions can lead to better financial performance and increased shareholder value.
VALUING THE BUSINESS PURCHASE PRICE
The purchase price of the business you are looking to purchase will almost always return to the valuation, and what type of financing can help complete the transaction successfully is crucial. A careful review of the financial statements regarding asset quality is key.
One example might be the quality of accounts receivable, which can often reveal other sales/inventory/service issues. Equipment financing can achieve any future assets you determine.
Equity investment can significantly impact the valuation and financing of the acquisition, as it reduces the required borrowing amount and signals financial commitment to lenders.
Other issues to look for in the financials are profit margins, sales history, expenses, and owner takeout. Knowing these numbers gives you significant leverage in making a final offer you are comfortable with and one that is ‘ financeable.’
Some interesting statistics on why businesses fail to exist. Click here to read an article on business failures from Forbes Magazine.
SELLER FINANCING
Not always, but on occasion, it’s an advantage to have the business's seller participate in the financing. How? Via the ‘ vtb ‘ (vendor take back) option. This eliminates the need for some of the required financing and can be a key part of many financing solutions. Seller financing often involves monthly payments, which can be a manageable way to finance the acquisition.
HOW TO DETERMINE THE RIGHT FINANCING STRUCTURE
Although it’s technically possible to purchase a business without owner equity financing and investment, this generally is not how things work.
Determining the optimal financing structure is crucial for a successful business acquisition. A commercial lender/bank will certainly prefer your financial participation via a down payment in the deal. Many transactions completed also have the owner occasionally putting up some ‘outside’ collateral.
Canadian banks typically finance acquisitions via term loans and additional working capital facilities such as a business credit line. Note that you rarely can get a business acquisition loan without a personal guarantee or a reasonable personal credit history.
Non-bank acquisitions are most often successfully financed via Asset Based Lending solutions. ‘ABL’ loans from non-bank business acquisition loan lenders come at a higher interest rate. Still, they can provide considerably more financing based on a higher borrowing margin for all business assets.
In some cases, real estate might be part of your transaction—that is typically handled separately within some holding company structure outside of the operating company, but that is not a hard and fast rule.
Ultimately, several financing combinations will be combined to complete your transaction.
Impact of Acquisition on Existing Business Operations
The acquisition of a new business can significantly impact the existing business operations of the acquiring company.
This can include changes to the company's organizational structure, management team, and business processes. The acquiring company must carefully plan and execute the integration of the new business to minimize disruptions and ensure a smooth ownership transition.
Effective planning helps align the new business with the existing operations, thereby maximizing the benefits of the acquisition.
Integrating the Acquired Business
Integrating the acquired business is a critical step in the acquisition process. This involves combining the two companies' operations, management, and culture to create a cohesive organization.
The acquiring company must develop a comprehensive integration plan that addresses key issues such as organizational structure, management team, business processes, and cultural alignment. Effective integration is essential to realizing the benefits of the acquisition and achieving long-term success.
A well-executed integration plan ensures that the combined entity operates efficiently and meets its strategic objectives.
WHAT TYPE OF INFORMATION IS NEED TO FINANCE A BUSINESS ACQUISITION AND ACQUIRE AND FINANCE AN EXISTING BUSINESS PROPERLY
The basics include a business plan, a breakdown of how the loan proceeds will be used, financial statements, and a cash flow statement. Remember that the business acquisition loan is often a ' term loan,' and you will likely need a business line of credit.
A business plan is required in all business acquisitions - 7 Park Avenue Financial business plans meet and exceed all banks' and commercial lenders' requirements. Borrowers need a respectable net worth, and you cannot successfully obtain this financing with a poor credit history.
GOVERNMENT LOANS - HOW TO FINANCE THE ACQUISITION OF A BUSINESS WITH THE SBL LOAN
Small transactions under 350k can often be completed under the Canadian Govt Small Business Loan program.
It emphasizes the business's assets and leaseholds and is not a cash or working capital loan - This business loan is a term loan. It comes with flexible repayment terms and an attractive interest rate relative to traditional business acquisition loan rates.
At 7 Park Avenue Financial, we think the Canada Small Business Financing Program vis its sponsor, Industry Canada, is one of the best methods to achieve business credit needs for financing for equipment, leasehold improvements, and real estate—those latter three asset categories are what are financeable under the program.
KEY TAKEAWAYS
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Understanding business valuation fundamentals drives successful loan applications.
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Proper due diligence documentation significantly impacts approval chances
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Strong cash flow projections determine loan qualification parameters
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Industry experience requirements influence lending decisions substantially
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Collateral structuring affects loan terms dramatically
CONCLUSION - BUSINESS ACQUISITION FINANCING
Focused on how to get a small business loan and to achieve the benefits of buying a business with the right business loans.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with the knowledge and that special ‘edge’ of expertise required to value and finance a business adequately.
Talk to our team about acquisition loans and your business acquisition loan financing options that will meet your business needs for your business purchase at business acquisition loan rates commensurate with the quality of your transaction.
FAQ
How long does the business acquisition loan approval process take? Business acquisition loans typically require 45-90 days for approval, and they involve business valuation, due diligence, and underwriting.
What collateral is required?
What percentage of a down payment is needed? Traditional business acquisition loans require 10-30% down payment, varying based on:
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Business Type
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Industry risk
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Financial history
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Buyer experience
What makes business acquisition loans advantageous for buyers?
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Preserves working capital
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Leverages existing business assets
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Provides tax advantages
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Maintains cash flow flexibility
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Enables larger purchases
How do acquisition loans improve business growth potential?
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Enables immediate market entry
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Preserves capital for operations
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Supports expansion plans
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Maintains emergency funds
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Provides operational flexibility
What financial advantages come with business acquisition financing?
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Tax-deductible interest
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Structured repayment terms
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Flexible collateral options
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Combined financing possibilities
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Competitive rates
How does the application process work?
What affects loan approval chances?
What determines business acquisition loan amounts?
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Business valuation
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Buyer qualifications
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Industry type
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Historical performance
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Available collateral
