Afraid to Ask Questions About Business Acquisition Financing ?
Business acquisition financing in Canada. When you are looking for a funder for a merger or acquisition of another company or if you’re acquiring a business, remember something we heard the other day – ‘ Genius is often just pointing out the obvious truth that no one else sees.’
So when we recently talked about some critical aspects, you should not overlook this type of financing challenge we remembered … ‘ Wait … there’s more!”
It’s critical when buying a business to ensure you understand that both yourself and the other firm have somewhat separate agendas. No question on that one! Simply speaking, it’s important to step outside those agendas, look inside, and ensure you have the right evidence on assets, cash flow, and valuation.
WHY DO ACQUISITIONS SOMETIMES NOT HAPPEN?
Experts in the field say that trends now show that while there seem to be many businesses available for purchasing and financing, many deals fade into oblivion on a target company. A lot of reasons might exist for that fact when it comes to how to finance an acquisition – Some of them might be:
Poor objectives of buyer and seller
Inadequate financing knowledge of a proper financing structure
As an acquirer, it’s important not to underestimate your capacity to value and finance a deal, as tough as it might seem to admit that.
IT’S ALL ABOUT ASSETS, CASH FLOWS, DEBT!
Many purchasers and sellers have a huge challenge in assessing existing and future debt issues in your deal. Aside from organic growth, the synergy of a merger or acquisition of an existing business has tremendous appeal in the company’s growth of products and services.
Financing is often about the amount of debt that is in fact existing or planned and does not necessarily make or break a deal. Most experts seem to say that it’s all about two things in mergers and acquisitions – hard assets and cash flows. And by the way, that’s future cash flows that you can reasonably predict!
PRIVATE TRANSACTIONS HAVE NO PUBLIC LIQUIDITY, AS DO PUBLICLY LISTED COMPANIES
Remember that unless you’re purchasing a public entity, which certainly doesn’t happen a lot in the SME sector, the liquidity issue around all those assets and intangibles doesn’t really exist. So your challenge is, yes, to understand the value of assets and cash flows, but don’t forget those items such as intangibles! Perceptions of clients and lenders for smaller firms are equally as important.
THE CASH FLOW MULTIPLE IS A COMMON VALUATION PRACTICE
There are, of course, some real basic methods to value your acquisition or merger and assess the financing needs. Businesses in the SME sector will typically be valued at a multiple of current cash flows. The time period in which you will be able to retire and pay back debt is also important.
Oh, by the way, don’t forget those skeletons in the closet! They might include existing financing and credit problems with banks and other lenders, bad publicity, upcoming industry issues, potential loss of major accounts, and overvalued assets.
5 METHODS OF SUCCESSFULLY COMPLETING ACQUISITION FINANCE / TAKEOVER / OR BUYOUT
You do have the financing tools available to make the ‘ right ‘ acquisition. They include-
Government business loan – The ‘SBL.’ = SBL loans will cover acquisitions up to a loan amount of 350,000. Interest rates are very competitive, and repayment is typically over a 2-5 year period, so well-planned SME/SMB transactions should safely cover loan expenses and financing costs.
The federal government guarantee on the program provides a guarantee and safety measures for Canadian banks who in turn can now lend money on acquisitions that might otherwise not meet bank criteria – For qualification under the Canada Small Business Financing Program, talk to 7 Park Avenue Financial.
Down payments/ owner equity range from 10-40% for acquisitions when using this program. However, the borrower must meet the SBL requirements on the size of the business ( revenues must be under 10 Million dollars ), which includes limits on net worth, income and credit score, and overall loan size regarding the 350k cap.
Many borrowers avoid the program due to the ‘paperwork’ and application process, including the need for a business plan. 7 Park Avenue Financial prepares business plans for our clients that meet and exceed bank and other commercial lender requirements.
Asset Based Lending – ‘ ABL’ lending focuses on the balance sheet and the concept of a leveraged buyout – funding for accounts receivable, inventories and fixed assets and real estate
Cash Flow loans / Mezzanine financing –
Mezzanine loans are cash flow loans that are often termed ‘ the middle ‘ of debt and equity financing – Cash flow is the collateral for the loan, and typically no other collateral is required for a mezzanine loan – This financing typically ranks behind a senior lender. It can be a key component of a final business purchase financing.
Bank term loans/lines of credit – Most banks, even those dealing with SMEs, have specific provisions put aside for financing an acquisition, including the government loan program. With interest rates remaining historically low, it is still a good time to avail of a bank option when the price for your transaction is substantial.
Canadian banks will often provide the best terms: aware that your business prospects are looking positive, they’ll be keen to keep your business in-house in a current relationship. It goes without saying that this is an angle that you should leverage when looking for a bank loan for a business acquisition if your transaction meets bank credit quality.
Banks look for strong management and a personal commitment to the business.
A term loan structure is typically the standard bank acquisition financing financial structure- complemented by a lien of credit to augment the purchase. Ongoing and future equipment needs can be achieved via leasing or business equipment loans from the bank or third-party lessor/lender.
Seller Financing – Owner financing is another method to fund an acquisition deal. Also known as “seller finance,” it can add greatly to the creativity around a deal structure. Offering equity to the owner/owners of a target firm to finance a business acquisition can be one way of smoothing the process.
This would involve giving them some equity in the newly merged firm. If that is undesirable for various reasons, creative strategies around a seller note/vendor take-back of debt need to be taken on in your transaction – minimizing the funds that need to be borrowed.
The combination of reduced costs and potential flexibility on deal terms helps minimize funding from a bank or third-party commercial lender.
Many buyers often forget to assess the ongoing operational costs of the business, which may include needs, for example, for new staff, technology, the infrastructure around operations, etc. Purchasers who forget to take into account these points are at risk for the future success of the transaction.
CONCLUSION – BUSINESS ACQUISITIONS IN CANADA
While many entrepreneurs explore private equity or venture capital, these 2 types of solutions are only applicable to the smallest percentage of transactions for an acquisition loan and typically not in the SME sector of the economy. The acquisition process and interest rates will also vary dramatically based on the size and complexity of your transaction.
Favourable low rates in the current Canadian economy make rates for acquisitions easier to achieve and assist in letting a company reach new economies of scale, allow for an increase in the size of the company’s operations and sales revenues.
Hopefully, we have pointed out some of those ‘ obvious ‘ truths that will make your small business acquisition and financing more successful. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success who can assist you with your business acquisition financing and funding needs.
Let’s get started on acquisition loans and solutions and resources to make your acquisition deal work.
FAQ: FREQUENTLY ASKED QUESTIONS
What Is Acquisition Financing?
Acquisition financing allows users to meet their current acquisition aspirations by providing immediate resources that can be applied to the transaction. Acquisition financing is the capital that is obtained to buy another business. A business acquisition loan helps entrepreneurs acquire an existing business, franchise, or buy out a partner or owner.
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7 Park Avenue Financial provides value-added financing consultation for small and medium-sized businesses in the areas of cash flow, working capital, and debt financing.
Business financing for Canadian firms, specializing in working capital, cash flow, asset based financing, Equipment Leasing, franchise finance and Cdn. Tax Credit Finance. Founded 2004 – Completed in excess of 100 Million $ of financing for Canadian corporations.
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