YOU’RE LOOKING FOR ACQUISITION FINANCING!
SOURCES OF FINANCE IN BUSINESS ACQUISITIONS
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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
Unlock your business empire: Discover how finance to buy a business can turn your dreams into a thriving reality!
"The most dangerous poison is the feeling of achievement. The antidote is to every evening think what can be done better tomorrow." - Ingvar Kamprad, founder of IKEA
This quote relates to finance and buying a business by reminding entrepreneurs that acquiring a business is just the beginning. Continuous improvement and growth are essential for long-term success in business ownership.
7 Park Avenue Financial originates business financing solutions for Canadian Businesses – We offer Business Financing Options 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 FINANCING
INTRODUCTION - HOW TO GET FINANCING TO BUY A BUSINESS
We maintain that financing to buy a business would be a lot easier with some help from the concept of time travel.
It is probably not going to happen, but the idea of 'moving between different points in time using a time machine of sorts' would help pinpoint any issues that arise during the owners'/ financial managers' search for the right sources of finance. Let's dig in.
DOES BUSINESS EXPERIENCE COUNT IN BUYING A BUSINESS
Your ability to assess financing options in business acquisition for a small business is greatly enhanced when you have some business experience in that industry.
That isn’t always the case, though; some great tools exist to alleviate that problem.
IS THERE A POSITIVE BIAS TO THE INDUSTRY
When financing basics for small businesses, a bank or commercial lender may have an extremely positive (or negative) bias toward that industry.
For example, ' franchising’ is fairly hot and seemingly gains momentum daily. A few years ago, however, automotive sector transactions were very much out of favour when it came to sources of funds availability.
WHAT ARE KEY CONSIDERATIONS IN ACQUIRING A COMPANY
Key considerations in purchasing an existing company include :
A positive outlook on the industry,
Your ability to generate real profits from the business,
Most importantly (we’re biased here!), the ability to ensure you understand the financial pitfalls and issues around the acquisition.
In some cases, your ability to manage the business better turns your transaction into a winning deal.
SHOULD YOU MAKE AN ALL-CASH OFFER OR CONSIDER FINANCING
How you pay for a company is integral to overall success.
While making an all-cash offer via personal capital may be appealing, it can also backfire at certain points.
So, balancing the right amount of debt and equity is a strong focus. In certain cases, your lender—e.g., a bank or commercial finance firm—will want to see a minimum amount of ' new equity' in the deal. Taking on debt to raise equity should be avoided if possible.
SHARE SALE OR ASSET SALE
Remember also that sellers will focus on ' share sales' of a business, which are difficult to finance because of the liquidity issues inherent in a private company in the SME Commercial sector. So an asset-based sale is much easier to validate, buy and finance.
HOW TO VALUE A BUSINESS
Valuation plays a key role in buying a business. Accessing (and understanding! ) past and current income statements, balance sheets, and cash flow statements will allow you to get a strong handle on the acquisition value.
We have always recommended that our clients access the seller's bank statements for several months to understand cash inflow/outflow.
Do you need a business plan and solid cash flow projections?
The answer is a resounding yes, as that document will allow the commercial lender to understand you, the company, the industry, and the financial potential. 7 Park Avenue Financial business plans meet and exceed lender requirements.
WHAT ARE SOURCES OF BUSINESS FUNDING IN ACQUISITION FINANCE
Sources of finance in Canada when looking for financing to buy a business include:
Canadian chartered bank loans to secure financing
Commercial finance companies
Asset-based lenders
Government Crown Corp banking debt
The BIL program (Govt guaranteed bank loan)
Equipment lenders
Private equity firms (these pertain only to larger transactions for equity investment)
DON'T FORGET SELLER FINANCING
Using simple common sense to investigate issues such as the ability to source a vendor take back on your deal when you borrow money , as well as spending a lot of time on client receivables ( quality and quantity)
DON'T WASTE TIME ON IMPOSSIBLE SOLUTIONS
Are you tired of determining whether venture capital or angel investors for equity financing are the right solution for your acquisition needs?
The reality is that probably less than 1% of all businesses qualify for such equity funding. at such an early stage - and venture capitalists, of course, demand a significant ownership position in your business.
Remember that acquisition business loans via debt solutions do not dilute ownership stake, as debt is always cheaper than equity when assessing growth potential.
Two uncommon takes on finance to buy a business:
- Leveraging intellectual property / intangible assets as collateral for financing in a business acquisition loan
- Exploring cross-border financing options for international business acquisitions
KEY TAKEAWAYS
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Understanding business valuation techniques enables accurate pricing and negotiation power.
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Mastering due diligence processes helps identify potential risks and opportunities.
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Exploring various financing options allows for tailored funding solutions, including the personal guarantee issue.
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Analyzing financial statements and cash flow projections ensures sustainable repayment capabilities in an optimal financing structure.
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Structuring deals effectively balances risk and reward for all parties involved.
CONCLUSION
Finance to buy a business empowers entrepreneurs to transform their vision into reality by providing the means to acquire established enterprises.
Yes, that ' time machine' would be great for financing a company, but utilizing our tips will give you many of the insights you need to acquire and grow a company in Canada.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor for business advice who can assist you with the financing you need to acquire and grow your new business with eligibility criteria that make sense for your situation.
FAQ
Finance to buy a business sounds intriguing, but what are the main advantages for entrepreneurs?
Financing to buy a business offers several key advantages: immediate cash flow from an established operation, an existing customer base and brand recognition, a proven business model, and the potential for rapid growth through improvements and synergies.
How can financing a business acquisition help me mitigate risks compared to starting from scratch?
By financing an existing business, you benefit from its track record, reducing uncertainties associated with startups. You can assess historical financial data, customer relationships, and market position, allowing for more informed decision-making and risk management.
What types of financing options are typically available for buying a business?
Common financing options for buying a business include traditional bank loans, SBL GOVERNMENT loans from a participating financial institution, seller financing, asset-based lending, banks and credit unions, and mezzanine financing. Each option has unique features, allowing you to tailor the financing structure to your needs regarding monthly payments and business characteristics.
Is it possible to finance a business purchase with limited personal funds?
Yes, it's possible to finance a business purchase with limited personal funds through leveraged buyouts, using the target company's assets as collateral. Additionally, seller financing or partnering with investors can help bridge funding gaps.
How does financing a business acquisition impact my ability to grow the company post-purchase?
Proper financing for an established business acquisition can provide you with working capital for immediate improvements and growth initiatives. By structuring the deal appropriately with commercial lenders and financial institutions, you can ensure sufficient cash flow to service debt while investing in expansion, technology upgrades, or marketing efforts.
What role do business brokers play in financing a business acquisition?
Business brokers for existing businesses can be valuable intermediaries, connecting buyers with sellers and often having insights into financing options. They may help structure deals for a business loan, provide market valuations, and sometimes even assist in securing financing through their network of lenders.
How does the industry of the target business affect financing options?
Different industries carry varying levels of risk and stability, which can impact lender preferences and terms. For example, tech startups might attract financing options that are different from established manufacturing businesses. Lenders often specialize in specific industries that a business owner might be attracted to.
Are there government programs in Canada that support financing for business acquisitions?
Canada offers several government-backed programs to support business acquisitions, including the Canada Small Business Financing Program and BDC financing options. These programs often provide favourable terms and can be particularly helpful for first-time business buyers.
What are some common pitfalls to avoid when financing a business purchase?
Common pitfalls include underestimating working capital needs, overleveraging the business, neglecting thorough due diligence, and failing to consider post-acquisition integration costs. It's crucial to have a comprehensive financial plan that accounts for various scenarios. Solutions from online lenders will also be expensive.
How can I improve my chances of securing financing for a business acquisition?
To improve your chances, prepare a solid business plan, demonstrate industry expertise, have a robust personal credit score, show management experience, and be ready to invest some personal capital. Building relationships with potential lenders early in the process can also be beneficial.
What factors do lenders typically consider when evaluating a loan application for business acquisition?
Lenders typically consider the business's historical financial performance, projected cash flows, industry outlook, buyer's experience and good credit score and credit history, collateral available, and the overall deal structure. They assess the business's ability to generate sufficient cash flow from accounts receivable to service the debt while maintaining operations.
How does the valuation of the target business impact the financing process?
The valuation of the target business is crucial in determining the loan amount and terms. It influences the down payment required, interest rates, and overall feasibility of the deal. Accurate valuation helps ensure you're not overpaying and the business can support the proposed financing structure.
What are some creative financing structures used in business acquisitions?
Creative financing structures can include earnouts, where part of the purchase price is tied to future performance; royalty financing, where repayment is based on a percentage of future revenues; or hybrid structures, combining different types of debt and equity with an appropriate amortization schedule on debt. These can help align interests and manage risk for both buyers and sellers.
