Information on buying a business in Canada . Acquisition financing is a large part of a successful purchase of a company . Ensuring the right valuation and financing for buyout funding is critical – here’s why !
We are often asked by clients for assistance in validating the price they are going to pay to purchase a small / medium enterprise. Business people should of course rely on their trusted advisors for professional help in that area, but this article will hopefully give them insight and advice into their challenge.
We also encourage our clients to talk to either their own peers, or in some cases our clients with respect to others experience in this area. This may help alleviate some of the concern around those business people who are ‘ non – financial ‘ in background and somewhat overwhelmed by discussion of terms such as EBITDA, intangible assets, capitalization and discount rates, etc!
We would point out that as technically overwhelming as some of those issues might be, there is even a whole additional layer of complexity around longer term issues down the road. These would include:
– Owner and management compensation
– insurance planning
– estate planning
– exit strategy
With reference to our last point on ‘ exit strategy ‘ imagine the look on some purchasors faces when they have not even completed the deal and are encourage to talk about an ‘ exit strategy ‘!
At the heart of the matter around the final price paid for a business is the concept that both parties feel they have reached a fair deal. As we all know the buyers and sellers perception of the same deal might vary greatly. Ultimately all the technical jargon around buying a business comes down to a term such as ‘reasonable market value’. As common sense as this may sound it also has its challenges since is it only a hypothetical value based on all the difference financial elements related to the purchase of a business.
The most commonly used valuation of a business is know as ‘ value of future earnings ‘.. Accountants and financial advisors often project earnings out as far as ten years and try and then place some value and normalcy around those future profits. Our on piece of advice in this area is simply that owners should not focus solely on future earnings potential, there are other factors to be taken into consideration.
Some of those other factors of course include the true value of the current business assets, such as equipment, real estate, fixtures and leaseholds, etc. We can only say that as critical as those assets are they must be supported by the company’s ability to generate the cash flow to support those assets and grow the business. Buyers and sellers frequently disagree on the total purchase price, with all sorts of psychology kicking in around prices being set artificially high for negotiations purposes, the buyers focus on a low- ball offer, etc. We would also point out the buy/sell challenge is accentuated when it relates to a ‘ service’ firm as opposed to a product firm.
Many experts agree that ultimately the valuation of the business was so far out of whack that this clouded any possible attempts to negotiate a fair price for buyer and seller.
In summary, buying or selling a small to medium enterprise has its challenges. If owners are aware of the key basics around the technical aspects of the matter they can successfully utilize third party assistance ( accountant, lawyer, trusted financial advisor ) to consummate a successful transaction. Buyers and sellers must focus on tangible issues as well as all the intangibles that come into play in order to assist in a proper, ( and a successful ) buy or sell.
Stan Prokop – founder of 7 Park Avenue Financial –
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years – Completed in excess of 100 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing. Info & Contact Details :
7 Park Avenue FinancialSouth Sheridan Executive Centre
2910 South Sheridan Way
Office = 905 829 2653
‘ Canadian Business Financing with the intelligent use of experience ‘
ABOUT THE AUTHOR
Stan has had a successful career with some of the world’s largest and most successful corporations.
Prior to founding 7 Park Avenue Financial in 2004 his employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) He is an expert in Canadian Business Financing.
Stan has over 40 years of business and finance executive experience. He has been recognized as a credit/financial executive for three of the largest technology companies in the world; Hewlett-Packard, Digital Equipment and Cable & Wireless. Stan has had in depth, hands on experience in assessing and evaluating thousands of companies that are seeking financing and expansion. He has been instrumental in helping many companies progress through every phase of financing, mergers & acquisitions, sales and marketing and human resources. Stan has worked with startups and public corporations and has many times established the financial wherewithal of organizations before approving millions of dollars of financing facilities and instruments on behalf of his employers.
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7 Park Avenue Financial
Canadian Business Financing