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YOUR GUIDE TO ACQUISITION FINANCING SUCCESS
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
CONTACT:
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
Direct Line = 416 319 5769
Email = sprokop@7parkavenuefinancial.com
Business acquisition loans fuel entrepreneurial ambitions by providing the financial means to purchase existing companies and expand their market presence.
Unlock your business empire: Discover how acquisition loans can transform your entrepreneurial dreams into reality.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer BUSINESS ACQUISITION LOANS solutions that solve the issue of cash flow and working capital – Save time and focus on profits and business opportunities
7 Park Avenue Financial: “Canadian Business Financing with the intelligent use of experience”
HOW TO FINANCE A BUSINESS ACQUISITION
What is a Business Acquisition Loan: How to Finance a Business Acquisition
Buying a business in Canada. Talk About Temptation!
We’re talking about acquisition financing solutions for private companies and purchasing an existing profitable business or a challenged firm due for a turnaround. In both cases, current owners might be motivated to sell for different reasons!
MASTERING THE ART OF BUSINESS ACQUISITION - FINANCING STRATEGIES REVEALED
A business acquisition loan allows buyers to purchase existing companies by providing capital to fund ownership transitions. Financing options enable buyers to leverage borrowed funds, preserving their personal capital while seizing opportunities for growth and expansion.
Let the 7 Park Avenue Financial team help you demystify the challenge of business acquisition loans.
Various sources of business acquisition funding include traditional banks, credit unions, and SBL -backed loans, each offering unique benefits and eligibility requirements.
ARE YOU CONSIDERING BUYING A TROUBLED BUSINESS?
How do firms for sale get themselves in trouble?
Often, it’s a lack of funding and too much existing debt, as opposed to operating problems, which are a whole different kettle of fish. Using your funds to finance a business acquisition might be an obvious solution.
Those funds typically come from personal savings and investments, equity lines of credit on homes, etc.
Small business acquisition loans are also a viable option for financing the purchase of an established business, opening a franchise, or buying out a business partner.
WHAT ARE THE FINANCING COMPONENTS OF A FINAL BUSINESS ACQUISITION FINANCING
However, as a business purchase grows larger, it is less probable that you will use all or a large part of your personal savings; therefore, a combination of some owner investment, business financing, and possible participation from the seller (seller financing ) will most likely be the route you choose to pursue.
That combination certainly allows the buyer to consider more significant transactions via a third-party finance solution.
Researching business acquisition loan options, comparing loan rates and repayment terms, and ensuring proper finances and credit before beginning the application process is crucial.
With a solid capital structure, the transition post your purchase will position the business for growth a successful acquisition finance go-forward plan.
CAN YOU BUY A BUSINESS WITH NO MONEY DOWN? * SPOILER ALERT - YOU CAN NOT!
At 7 Park Avenue Financial, we often receive queries about the concept of ' 100% Financing ' in financing the purchase of an existing business.
In general, this does not exist in the Canadian marketplace for business acquisitions. (We can't speak for our more risk-oriented friends in the U.S. ! ) Your owner equity/down payment contribution is your proof of commitment to the deal.
Both company sellers and commercial lenders want to see the proverbial ' skin in the game, 'demonstrating the purchaser's commitment to the transaction. Large transactions in Canada use private equity funding and equity financing, but this type of financing is not really applicable to the SME/SMB business landscape in Canada.
THE BUSINESS OF VALUING YOUR ACQUISITION - ESTABLISHING THE BUSINESS VALUATION OF YOUR ACQUISITION TARGET COMPANY
Some immediate issues to look into are arrangements with current lenders. This is often the scenario of working capital is extremely limited due to the current financing structure. There are numerous ‘ valuation techniques ‘ in business acquisition loans when establishing the right price for the business purchase and ways to finance the purchase.
Banks and credit unions typically offer business acquisition loans with competitive rates and flexible repayment terms. They require a minimum credit score and viable financial records.
If a business is already losing money and has poor or negative cash flows, it’s time to examine its assets. There is no perfect method for establishing the value of the business you are buying, and profits are not the same as cash when evaluating financing an acquisition.
A good valuation strategy is to spend the proper amount of time ‘ normalizing ‘ the business’s financials. That process allows you to remove or add in expenses not currently reflected in the industry and examine how revenues are generated and recognized. Review past sales and profits and your ability to estimate reasonable going-forward projections.
Many firms turn to ‘CBVs ‘ - Chartered business evaluators for valuation advice for the right price around the finance to purchase a business for larger transactions. The good news about existing assets is there are numerous financing strategies around the type of financing needed to assist in finalizing a transaction with the right business acquisition loan.
CAN YOU BUY A BUSINESS WITH SBL LOANS? ( YES YOU CAN!)
These solutions include: The Govt of Canada Guaranteed Small Business Loan (It finances assets and leaseholds and has a new maximum borrowing cap of $1,000,000.00 - the interest rate on the government loan, aka the ' SBL LOAN ', is very attractive, as well as delivering on flexible terms via its term loan structure.
Sale Leasebacks - Equipment financing and leasebacks preserve cash and allow you to purchase new or used assets with minimum cash outflows - It is a solid way to match the useful life of assets with cash outflow.
ASSET-BASED LENDING SOLUTIONS
Asset-Based Bridge Loans and Business Credit Lines—Leveraging a business's assets allows the buyer to consider a commercial asset-based lender to facilitate financing the transaction.
Not only does this minimize the number of funds you have to invest personally, but it also allows you to capitalize on the actual value of the business you are looking at; those assets typically able to be leveraged include fixed assets, real estate, inventory, and receivables. This is a proper use of the leveraged buyout concept.
Term loans are repaid through weekly, bimonthly, or monthly payments over 12 to 36 months.
Seller Financing - At 7 Park Avenue Financial, numerous new clients looking to buy a business do not consider the vendor financing scenario.
This is a viable component of your financing package, and the amount of the loan from the ‘ seller note ‘ and the terms can vary significantly. It’s another tool in your financial toolkit to fund and finalize your transaction.
The seller finance component reduces the amount you will have to finance, which is positive from both the purchaser and business lender perspectives. In many cases, the seller will be more open to sharing very detailed and critical information on the business as the seller has a vested interest in closing the deal and preserving the company's legacy and reputation.
Since the seller is not a commercial lender, the terms and rate structure around the ‘ VTB ‘ are often more generous than those obtained from banks or finance companies. It should be noted that traditional banks and finance firms always insist on their financing security ranking ahead of the seller finance component! Nice try, seller!!
It would be unusual for the seller component to be larger than what is financed through external commercial lenders, but it still is sometimes a good portion of the final transaction. We can assume that almost all sellers will want full disclosure from the buyer on credit history, business experience, plans for the company, etc., given that they have a vested interest in you, their ‘ new partner ‘, for at least a period of time.
Naturally, the quality of the assets is key, whether they are fixed ‘ hard’ assets or assets that represent working capital components—i.e., accounts receivable and inventories.
Key point - book values don’t tell the true value of the assets, and in some cases, you might need to invest in new technology - i.e. computers/software, etc. (Equipment Leasing is almost always the best way to acquire tech assets, given their cash outflow flexibility); This area of ‘ assets ‘ should be a top priority in your due diligence.
Service companies with few assets are always more challenging to finance, given their lack of hard assets. While new owners will almost always be required to put some of their own cash into the business, many financing solutions will also dictate the minimum and maximum amount they need to put up.
Asset-based lending strategies will often help minimize owner-equity investment. While Canadian chartered banks are a great source of financing for acquiring existing profitable businesses, they are somewhat more than reluctant to finance firms with obvious financial challenges.
BANK FINANCING
Banks almost always focus on a [business plan](http:// https://www.7parkavenuefinancial.com/business-plan-expert-business-plan-services-canada.html), management experience, the balance sheet, and the owner's personal financial statements.
Most purchasers of an existing business will often experience difficulty accessing total bank financing for the transaction. In a bank transaction to buy the business, the bulk of the financing will usually be a term loan that ranks as the company's senior debt.
Of course, banks will place a large emphasis on financial covenants and debt-to-equity ratios in your acquisition deal via various types of cash flow and ‘EBITDA’ analysis. Bank financing is always the lower-cost alternative if bank lending criteria can be met.
Small business loans for purchasing equipment, setting up office space, and non-SBL business acquisition loans are also available. These loans have specific eligibility criteria, credit score requirements, loan amounts, repayment terms, interest rates, and funding timelines that vary by lender.
Mezzanine financing can complement a small business term loan and operating line of credit structure - it’s very cash flow-based and requires solid proof of historical and present cash flows. Financing is often structured with a mix of senior debt, revolving credit lines, and sub-debt of seller financing, making the final buyout structure work!
While your business plan and future cash flow projections might be impressive, banks focus solely on ‘ assets ‘ and ‘ cash flow. ‘
They will also heavily rely on business experience in the industry in question and look for borrowers who demonstrate good personal credit history combined with a reasonable net worth.
On certain transactions, you may have to, or choose to, assume the debt of the existing company as part of the financing package.
This typically is more advantageous to the seller than the owner for liability-type reasons and should be reviewed carefully if this is a part of your strategy. Suffice to say. Current lenders must also approve the buyer for any assumption of debt. While it is not a ‘ direct ‘ bank loan per se, many purchasers of small businesses should consider the Government of Canada Small Business Loan program.
This program also works extremely well on franchises. While some minimal conditions exist around the loan program administered by Industry Canada, the program offers good interest rates, flexible repayment, and minimal personal guarantees. All of those should be very attractive to the potential borrower.
Prospective purchasers should not forget that a business can be purchased, from an accounting, tax, and legal perspective, as a ‘ share sale ‘ or an ‘ asset sale. ‘
Purchasing a company from a share sale perspective entails certain risks as you may acquire hidden liabilities.
Also, buying a business involves certain legal fees and miscellaneous costs associated with the transaction. These should be included in your cash flow assumptions and might include expenses such as appraisals, legal fees, business advisory fees, etc.
TRANSACTION CLOSED! WHAT’S NEXT? OPERATING THE BUSINESS EFFECTIVELY VIA THE RIGHT TAKEOVER FINANCING STRATEGIES
In the rush and stress of closing an acquisition, many prospective purchasers don’t fully consider financing ongoing day-to-day operations. While a firm can be self-financing if its ‘ cash conversion cycle ‘ is less than thirty days, this is certainly the most unlikely circumstance.
Suppose your firm does not have a positive cash flow. In that case, management can undertake numerous ways to refocus efficiencies, including improving days outstanding sales and improving inventory turnover and better payables management with the risk of alienating key suppliers.
The need for constant working capital and cash flow replenishment often leads the business owner and financial manager to consider a business line of credit, which is the cornerstone of operational financing.
These revolving facilities provide cash as you maintain your accounts receivable and inventory investment. Naturally, service-based industries do not have to concern themselves over the inventory component on the balance sheets of many industrial companies.
SOLUTIONS FOR THE BUSINESS LINE OF CREDIT REQUIREMENT
Various subsets of asset-based lending provide solution funding for ongoing day-to-day operations post the acquisition phase.
BUSINESS PURCHASE FUNDING SOLUTIONS
Asset-Based Non-Bank Lines of Credit - These credit lines are based on all the business's collateral and usually imply a larger amount of financial leverage. These borrowing facilities are generally a bridge to getting a company back to traditional bank financing and don't come with the often more severe covenants and ratio requirements required by our chartered banks.
Invoice Factoring / Confidential Receivable Financing - A/R financing strategies are probably the most popular cash flow solution in current times; they allow a business to cash flow their sales immediately and assist in avoiding the waiting period to collect receivables which can easily run anywhere from 30-90 days - At 7 Park Avenue Financial we will often recommend Confidential Receivable Financing, allowing you to get all the benefits of factoring as well as being able to bill and collect your invoices.
Equipment Financing / Sale-Leaseback leasing and leaseback strategies minimize cash outflows to purchase new and used equipment, including technology finance requirements.
Purchase Order Financing / Inventory Loans - P O Finance solutions allow your suppliers to be paid directly by the commercial lender for large orders and contracts that your firm might otherwise not be able to finance based on the current working capital structure. Inventory financing can be a standalone finance solution or combined with various a/r and working capital solutions such as factoring.
Financing Refundable Tax Credits - For firms in Canada that utilize the federal government SR&ED program, companies can cash flow their refundable credits via an SRED loan, allowing the company to recoup valuable r&d capital through the program refundable tax credits. No loan payments are made for the duration of the Sred loan.
Supplier Credit - Many purchasers neglect to investigate the potential of supplier financing, which generates cash flow given that extended payment terms delay cash outflow.
For purchasers and businesses not focusing on a more significant transaction that might benefit from private equity, mezzanine financing, venture debt, venture capital firms, etc., it is essential to consider all financing options. Various combinations of alternative finance and traditional Canadian bank lending must be investigated.
In any type of business, purchasing leverage is the ultimate double-edged sword. A solid financing package will ensure you are not over-leveraged with debt while assuming you will have operating financing facilities in place to fund the merger or acquisition.
KEY TAKEAWAYS
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Loan structure: Understand how acquisition loans are typically structured, including term lengths and repayment schedules.
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Eligibility criteria: Familiarize yourself with standard requirements lenders use to evaluate borrowers.
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Collateral considerations: Learn about the types of assets often used to secure acquisition loans.
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Interest rates: Grasp the factors influencing interest rates on these specialized loans.
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Due diligence process: Recognize the importance of thorough business evaluation before securing financing.
CONCLUSION
It is challenging to recover from over-leverage in any environment, especially declining sales.
The bottom line? By considering acquiring another company, and when buying an existing profitable or challenged business, have a strong understanding of your opening balance sheet and the proper mix of current assets and debt.
Small business owners often use business acquisition loans to buy other businesses, expand their existing businesses, or acquire new departments or subsidiary operations.
Understand the value of your hard assets, ensure you have a strategic plan and financing in place to cover the working capital needs to finance an acquisition properly, and understand options and the competitive state of the market.
Are you looking for a loan to buy a business in Canada and finance an acquisition?
Call 7 Park Avenue Financial, a trusted, credible, and experienced Canadian business financing advisor, to assist you in obtaining the resources needed and financing to buy an existing business and ensure the company’s management team is positioned correctly with solid funding for the sale of its goods and services with the right business loan.
FAQ: FREQUENTLY ASKED QUESTIONS
How difficult is it to finance an acquisition?
Business acquisition financing can be potentially challenging based on several factors that banks and commercial lenders consider. The overall financial viability of the business, as well as management experience, are vital factors for buying a business successfully with a combination of debt, credit lines, and owner equity.
What happens to debt in an acquisition?
Buyers will typically either assume existing debt with the permission of current lenders or structure new debt and credit facilities. In share sales, buyers are responsible for all debts, even if they are not known at the time of the purchase.
How do business acquisition loans differ from traditional business loans?
Business acquisition loans are specifically designed to fund existing business purchases, while traditional business loans typically finance operations, equipment, or expansion. Acquisition loans often have longer terms and may require more extensive documentation.
What types of businesses can be purchased with an acquisition loan?
Acquisition loans can purchase many businesses, including retail stores, service companies, manufacturing firms, and franchises. The critical factor is the business's financial health and potential for future growth.
How much can I borrow with a business acquisition loan?
The loan amount varies depending on factors such as the business's value, your creditworthiness, and the lender's policies. Typically, you can borrow between 70% to 90% of the business's purchase price.
What are the typical repayment terms for business acquisition loans?
Repayment terms generally range from 5 to 7 years, depending on the loan type and lender. SBL loans often offer longer terms, while conventional bank loans may have shorter repayment periods.
How does the application process for a business acquisition loan work?
The application process involves submitting financial documents for you and the target business, creating a detailed business plan, and demonstrating your ability to manage the acquired company successfully. Lenders will review this information to assess the loan's risk and potential return.
What role does the seller play in the business acquisition loan process?
Sellers often provide essential financial information and may be asked to sign non-compete agreements. Sometimes, they might offer seller financing to complement the acquisition loan.
How can I improve my chances of getting approved for a business acquisition loan?
To increase your chances of approval, maintain a strong credit score, prepare a solid business plan, have relevant industry experience, and be prepared to make a significant down payment.
Are there government programs that support business acquisition financing?
Yes, the Canadian Government (SBL) offers small business loan guarantee programs like the 7(a) loan, which can be used for business acquisitions. These programs can make it easier to secure financing with favourable terms via more flexible business acquisition loan requirements than traditional lenders.
What happens if the acquired business underperforms after the acquisition?
If the business underperforms, you're still responsible for loan repayment. To mitigate this risk, it's crucial to have contingency plans and potentially negotiate performance clauses in the purchase agreement.
How long does the business acquisition loan process typically take?
The process can take anywhere from 30 to 120 days, depending on the deal's complexity, the readiness of your application, and the lender's efficiency. SBL loans may take longer due to additional government requirements.
What factors do lenders consider when evaluating a business acquisition loan application?
Lenders assess the buyer's creditworthiness, industry experience, and financial stability. They also evaluate the target business's financial health, cash flow, and growth potential. The proposed business plan and collateral offered are additional vital considerations.
How do interest rates for business acquisition loans compare to other types of business financing?
Interest rates for acquisition loans are often competitive with other business loans but may be slightly higher due to the perceived risk. Rates can vary based on the loan type, with SBL-guaranteed loans typically offering more favorable terms than conventional bank loans.
What are the advantages and disadvantages of using a business acquisition loan?
Advantages include preserving personal capital, potentially acquiring a business with established cash flow, and tax benefits. Disadvantages may include higher debt levels, personal guarantees required, and the risk of acquiring unforeseen liabilities. Careful due diligence is essential to mitigate these risks.
