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BUSINESS ACQUISITIONS IN CANADA
INTRODUCTION
Admit it. You've thought about it. We probably all have. Just imagine a company purchase of a legendary Canadian tech company or a merger or acquisition with your firm of one of Canada's iconic firms that perhaps has fallen in dire straits. But how do you finance a business acquisition?
Business Acquisition Loan can make growth opportunities within reach. For entrepreneurs navigating the complexities of business acquisition financing, this specialized loan solution offers a pathway to acquiring existing businesses.
IT ALWAYS COMES BACK TO VALUATION FOR A SUCCESSFUL ACQUISITION
Here's the reality though that might surprise you in the world of financing mergers and acquisitions. Whether you have focused on a Canadian major corporation purchase, or at the other end of the spectrum a local pizza joint as an existing business the key issues are probably still the same. What is the value of the business, and how do you finance it? And when you think about it even a great company that you overpay for can be financially disappointing.
The good news is that there are numerous ways to value a company and even more methods of financing - There is an even more proper way to match the financing of that purchase with the appropriate acquisition financing when it comes to corporate finance solutions for short-term or long-term business needs.
When it comes to purchasing a business it’s about laying down the odds on future cash flows. The other reality of course is if you or your firm are suited to buy this business, vis a vis experience, management, etc.
The challenge of buying a business in the SME (small to medium enterprise) sector is in some ways more dangerous than your purchase of a Canadian iconic brand, failing or otherwise. That’s because when it’s a larger corporation it allows you to bring in the usual army of accountants, investment advisors, business valuators, consultants (heaven forbid!)... Etc.
THERE ARE DIFFERENT WAYS TO VALUE A COMPANY WHEN CONSIDERING A PURCHASE PRICE
Typically the financing of a firm is based on your valuation method, which might be an asset-based transaction, a cash flow transaction, or an equity transaction. In certain cases, real estate might also be a component of your transaction that has to be reviewed and financed in the context of your transaction. Real estate financing is typically handled via a separate term loan or commercial mortgage more long-term in nature, while acquisition loans tend to be in the 5-year range.
ASSET SALE VERSUS SHARE SALE - WHICH IS MORE DIFFICULT TO FINANCE?
The challenge of financing an equity transaction is significant. That's because they are hard to finance. After all, there is no liquidity exit for the lender - whether it's conventional financing or non-bank alternative financing from a commercial lender. Case in point - we recently met and spoke with a 40% owner in what could be considered a major Canadian private corporation.
While the equity is worth millions of dollars financing of that equity is in fact as close to impossible as one could get. Liquidity is key when it comes to share sales - asset sales are easier to finance. For larger private deals a private equity partner might be the best solution for your needs - smaller transactions are often helped via a seller financing component as all acquisitions involve a new owner equity down payment. Transactions are often 'win-win' when a seller agrees to participate in the financing, which can often be structured in various creative ways.
In some cases, the Canada Small Business Financing Program government loan, our Canadian version of the U.S. SBA loan ' can be utilized for smaller transactions. For the smaller end of the deal spectrum, the program can provide financing up to 1 Million dollars in certain conditions. A common way for many franchises to be financed in Canada is this same program. On the other hand, the program only funds assets and leaseholds, which must be understood in terms of the transaction in question.
UNDERSTAND THE TRUE VALUE OF CURRENT ASSETS AND FIXED ASSETS ON THE BALANCE SHEET
Asset-based financing is much easier to achieve. But, don't forget that if you improperly value those accounts receivable, inventories, and equipment you might find that there is a lot of tuition to be paid in the school of book value! In fairness sometimes the true asset value of a transaction far exceeds book value - that’s a good thing if you have focused on an asset-based lending solution.
' ABL ' solutions place little emphasis on personal assets - they focus on the business assets to deliver a financing structure backed by liquid and hard assets of the company being acquired - most importantly when a leveraged buyout is contemplated as part of a line of credit solution. Leveraged buyouts demand a hard focus on asset valuation.
For more information on various types of asset-based lending solutions talk to the 7 Park Avenue Financial team.
FINANCING GOODWILL IS MORE THAN A CHALLENGE!
Goodwill, like equity, is very hard to finance, as - as well as intangible assets also - enough said... so your ability to value and understand intangibles is critical when completing due diligence. Firms laden with goodwill can be financed via mezzanine finance solutions if cash flow is strong - they will typically bring a higher interest rate to the transaction given the lack of assets/collateral.
But also don't forget that when it comes to asset finance for a business financing merger, acquisition, company purchase, etc you need to have a strong hand on market and replacement values.
While public and very large corporations continually have multiples of earnings-based performance that is much more difficult for a smaller or private firm. Frankly, those earnings often have to be normalized, which usually means having to take the kids and grandma off the payroll.
KEY TAKEAWAYS
Loan Purpose: Understand the primary goal of acquiring a loan for business acquisition.
Financial Analysis: Conduct thorough financial assessments of both the target business and your financial health.
Due Diligence: Perform comprehensive due diligence to mitigate risks associated with the acquisition.
Collateral Evaluation: Assess the assets you can offer as collateral to secure the loan.
Repayment Strategy: Develop a solid plan for repaying the loan to avoid financial strain.
CONCLUSION - BUSINESS ACQUISITION FUNDING
Whether you are looking at larger companies or smaller companies at the end of the day, it’s about financing assets, cash flows, and profits with a finance mechanism that is appropriate for your ' target company' as it relates to financial flexibility and interest rates on your transaction & acquisition deal - As an example, a bank loan will typically have the most attractive interest rates but might not provide all the capital you need to complete your transaction.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can match financing and business acquisition goals and the optimal financing structure in the right manner as a solid business partner you can trust.
For other types of business loan funding or other ways to finance an acquisition/business purchase/business transfer, call the experts at 7 Park Avenue Financial for third-party advice and solutions a business owner can rely on.
FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION
How do I finance a business acquisition?
A business needs financing to succeed. There are many types of financing out there, but not all work for your acquisition.
One common way people finance their acquisition is with an equity investment from owners who hope it will become profitable to generate profits. Two fundamental methods of financing are used for business acquisitions – lending and equity investment. Loans can include banks, credit unions, and commercial financial services companies that are non-bank in nature. The loans are different depending on the company size, business types, and credit profiles. Most businesses should consider hiring a qualified third-party Canadian business financing advisor when choosing the best structures and types.
What are the typical requirements for obtaining a Business Acquisition Loan?
Business acquisition loans often require a solid business plan, financial statements, collateral, and a strong credit history to secure funding.
How does a Business Acquisition Loan differ from traditional business loans?
Unlike traditional business loans, acquisition loans are specifically tailored for purchasing existing businesses, offering unique terms and conditions suited to acquisition transactions.
Can a Business Acquisition Loan cover all expenses associated with acquiring a business?
While business acquisition loans can cover a significant portion of acquisition costs, additional funding sources or personal investment may be required to complete the transaction.
What types of businesses are eligible for Business Acquisition Loans?
Business acquisition loans are available for a wide range of industries and sectors, including retail, manufacturing, hospitality, and services, among others.
How long does it typically take to secure funding through a Business Acquisition Loan?
The timeline for securing funding can vary depending on factors such as the complexity of the acquisition, due diligence processes, and the lender's requirements. Generally, it can take several weeks to a few months to finalize the loan.
What is the primary purpose of a Business Acquisition Loan?
A Business Acquisition Loan provides funding specifically tailored for purchasing existing businesses, enabling entrepreneurs to expand their ventures through acquisition.
How does collateral affect the terms of a Business Acquisition Loan?
Collateral plays a crucial role in securing favourable terms for a Business Acquisition Loan, as it reassures lenders of repayment, potentially resulting in lower interest rates and better loan terms.
What role does due diligence play in the business acquisition process?
Conducting thorough due diligence is essential before acquiring a business, as it helps mitigate risks and ensures that the acquisition aligns with the buyer's strategic objectives and financial capabilities.
What is a joint venture?
The idea of a joint venture is to combine the expertise and resources of two groups to produce more value for one company. There can be drawbacks, such as risk-sharing between partners or deciding how assets should get split up at completion - but it might prove to be an excellent option if you're looking for ways to maximize an opportunity while minimizing the risks involved.
What is senior debt?
Senior debt is the bulk of any financing package. Senior lenders will provide a loan secured with assets from your firm, but they have stricter repayment terms than other loan participants including an obligation to pay off these debts if you merge or buy them out before the maturity date - Senior debt is the most important type of financing in any merger agreement. Senior lenders provide a loan for an entity to be collateralized with its assets and cash flow.
Senior lenders have stricter repayment terms compared to junior or mezzanine loans - this protects the lender and helps ensure loans are paid back.
What alternative financing solutions exist for businesses unable to secure traditional loans?
Businesses unable to secure traditional loans can explore alternative financing options such as peer-to-peer lending, invoice financing, equipment financing, merchant cash advances, crowdfunding, or seeking investment from angel investors or venture capitalists.
Are there specific tax implications associated with using business acquisition loans?
Yes, there can be tax implications associated with using business acquisition loans. It's crucial to consult with a tax advisor to understand how acquiring a business and financing it through loans may affect your tax obligations, including deductions, depreciation, and capital gains taxes.
What role does industry expertise play in securing financing for business acquisitions?
Industry expertise is vital in securing financing for business acquisitions as lenders often consider the borrower's knowledge and experience in the industry. Demonstrating a strong understanding of the market, industry trends, and potential risks can increase confidence in your ability to manage and grow the acquired business. Startup loans differ from the financing of an existing business.
How can a business valuation expert assist in the acquisition process beyond securing financing?
A business valuation expert can provide invaluable insights throughout the acquisition process. They can help determine the fair market value of the target business, assess its assets and liabilities, identify potential risks, and negotiate a fair purchase price. Additionally, their expertise can aid in due diligence efforts, ensuring that the acquisition aligns with your strategic objectives and financial goals.
What are unsecured business acquisition loans?
Unsecured business acquisition loans are loans provided to acquire businesses without requiring collateral. Unlike secured loans that necessitate assets as security, unsecured loans rely solely on the borrower's creditworthiness. These loans typically have higher interest rates on loan payments for the acquirer to pay interest on and may be more challenging to obtain, as lenders assume a higher risk without collateral. Typical acquisition loans are term loans with monthly payments on a 5-7 year term.
