YOUR COMPANY IS BUYING A BUSINESS IN CANADA!
( buying business Canada financing purchase )
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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?
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Buying a business in Canada is the goal of many entrepreneurs in Canada. The financing of that purchase requires some specialized skills when it comes to the strategies involved in acquiring an existing family business, or in some cases capitalizing on the unfortunate circumstances of firms that might be challenged in some manner. In some cases it's a solid way, versus organic growth, to grow revenues and profits via a merger/acquisition type scenario.
Buyers typically want to ensure they have put the right amoutn of analysis and time in selecting a business purchase target . Firms such as business brokers typically have a list of a number of companies for sale . Other key issues such as size of the business, the amount of personal capital that can be committed to the deal, and location of the company are critical considerations. New owners will also want to ensure an appropirate management team and emplyee headcount is in place.
Althought not a hard and fast rule, at 7 Park Avenue Financial we have found that most lenders prefer new owners to have some level of industry or management experience.
HAVE YOUR FINANCING STRATEGY READY FOR YOUR BUSINESS ACQUISITION
We at 7 Park Avenue Financial leave it up to our clients to identify the business opportunity they wish to explore from a purchase perspective. Our focus is on what comes next - ensuring you have access to solid time-worn financing strategies that will work for your success in business acquisition.
Financing a Business Purchase In Canada
One part of the business finance puzzle that is often overlooked is known as the VTB .. AKA the 'vendor take back', if only for the reason that it minimizes the financing you are required to generate to close the transaction. That is not the only reason though! Another term for this strategy by the way is 'owner financing'. Any way you look at it VTB's are a solid strategy that makes it easier to access the other types of financing that you will need to complete the loan, which typically is term loans and business revolving credit lines.
CANADIAN BANKS ARE NOT YOUR ONLY OPTION FOR BUYING A BUSINESS
We forgive business people for thinking that 'the bank' is the only way to acquire financing to purchase a business. That's a logical thought, but of course, there are a number of other options, some of them alternative in nature. However, caution is required if you are unprepared to understand how a bank looks at financing - which can in some cases be an immediate roadblock.
Early on in the business acquisition cycle, you must also agree with the seller as to whether the sale will be a purchase sale or an asset sale. This is a key accounting and legal type issue which is a separate subject in an of itself.
Purchasers can also use the concept of a ' leveraged buyout ' where there is a heavy emphasis on the assets of the target company which will typically involve some sort of valuation or appraisal on fixed assets, inventory and real estate components.
SHARE SALE VERSUS ASSET SHARE
It should be noted that in the SME COMMERCIAL FINANCE area it is difficult to finance a 'share sale' given that shares in small private companies are not liquid. So if financing is required in your purchase most owners are encouraged to choose the 'asset sale' scenario. Naturally larger companies, public companies etc. have a number of ways to finance purchases - they have much more access to capital. Those companies often consider share sales, and also are looking at numerous tax minimization strategies.
FINANCING THE BALANCE SHEET - TANGIBLE VERUS INTANGIBLE ASSETS
In looking at assets of the company you are focused on buying its key to determine the value of those assets. In many cases, in modern times some of those assets might even be 'intangible', and might include patents, contracts, software, etc.
Certainly, a tangible asset is any commercial real estate that the company owns, which is typically corporate premises and often inside a separate holding company. A real estate component can add both complexity and value to any business acquisition .
Tangible hard assets, typically the 'fixed assets' on the balance sheet can easily be valued by appraisals from reliable and experienced third parties.
ADDRESSING THE GOODWILL ISSUE
Goodwill is the excess dollar amount you're paying on top of the assets. Goodwill is typically difficult to finance, which is why our owner financing/vendor take-back strategy is sometimes a good place to start. The seller's financing, often referred to as 'holding the note‘ can allow you to complete a purchase satisfactory to all parties.
VENDOR TAKE BACK / SELLER FINANCING
Both banks and non-bank commercial finance lenders view vendor take backs very positively. Since the seller of the business has a vested interest in making the purchase also successful you often can get very favourable, in fact, below-market financing rates from the owner or owners of the company being acquired.
Sellers are understandably cautious about providing too large a financing component in the deal, given the risk of the purchaser default.
Many smaller businesses in Canada, including franchises of new and existing locations, can be financed with the assistance of the Canada Government Small Business Loan. The government guarantees a large part of the loan to your bank as long as you meet minimum requirements, which we at 7 Park Avenue Financial view as very reasonable.
Owner financing can also be a part of the government loan. Many small and medium-sized enterprises can utilize the Small Business Loan govt program to acquire a business. It works, as we have proved time and time again at 7 Park Avenue Financial.
A typical structure for financing a purchase when you’re buying a business in Canada is the down payment, debt financing, and the vendor take-back/owner financing. You must also consider cash flow needs ' post acquisition ' and how they will be financed. This three-piece solution to buying a company can also be complemented with a number of 'Alternative Finance ' strategies that might include:
A/R Financing
Non-Bank Credit Lines
Equipment Finance Leases
Sale-Leaseback strategies
Inventory Finance
Purchase Order Finance
A typical final structure will be a combination of term loans, operating facilities, and a potential seller finance component. Purchasers should be focused on cost-effective solutions that provide the capital they need to be successful and that deliver on a combination of debt and working capital.
CONCLUSION
There are obvious advantages to buying an existing business, not the least of which is the ability to avoid the tremendous amount of work that goes into starting and building a business that has acceptable levels of sales and profits, along with all the people issues that come up along the way! Businesses that have solid industry reputations are great targets for aspiring entrepreneurs.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success when you're looking for assistance in structuring the best deal and financing for your business purchase of an existing business from a business owner perspective.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop 7 Park Avenue Financial/Copyright/2020
