Avoiding Egg On Your Face Financing Mistakes When Buying A Business

OVERVIEW – Information on loans and cash flow solutions for buying a business in Canada. Acquisition finance involves company financing that matches the balance sheet and prospects for the target company

Buying a business in Canada will often involve looking beyond the numbers when it comes to ensuring proper financing can be in place. It’s not all about negotiating the sale price – it’s also about the necessary finance solutions that must be put in place to ensure business survival and profitability. Let’s dig in.

The pros of course call it ‘ due diligence’. For us it’s a pretty basic common sense premise: ensuring sales, inventory, accounts receivable and accounts payable are all reasonable. Bottom line- the finance solutions tie together your plans for mgmt, mfg or delivering services, and marketing.

The essence of any business, large or small, is cash management. Working capital solutions for financing an existing business include:

A/R Financing/factoring

Bank revolving credit lines

Non bank asset based lines of credit

Inventory Financing

Tax Credit Financing

Small business govt guaranteed loans (maximum 1 Million $)

Firms that are not profitable or that have ‘ challenged’ balance sheets will not qualify for what we call ‘ traditional’ finance. These types of companies can’t comply with the financial ratios and collateral demanded by our Canadian chartered banks. Almost all businesses that sell on credit, large or small, need some sort of business credit line.

Numerous alternative financing solutions are in fact available – but at the same time new owners/mgt must be able to address and talk to items such as gross margins, operating inefficiencies, etc.

Buying a business for ‘ all cash ‘ is almost never the option available to purchasers. Top experts tell us than not even a 1/3 of businesses purchased are done via ‘ all cash ‘. Unfortunately sellers like/want cash! More often than not the final structure of your transaction will be:

Owner Cash

External Financing

Vendor Take Back/Seller Financing (not always, but often)

‘ABL ‘ (Asset Based Lending) is often a solid solution for a business financing strategy. These types of facilities allow you to borrow heavily against inventory, accounts receivable and equipment/fixed assets.

One legal/technical issue often becomes a critical point in acquisition financing. That is the issue of ‘asset sales’ vs. ‘share sales’. From a buyers perspective asset sales tend to make more sense – sellers focus on share and tax strategies for selling their businesses. This can often complicate financing.

We’ve seen there are some critical issues that can make or break the success of financing a business purchase. Those issues include proper valuation pricing, debt load, working capital and cash flow financing challenges.

If you’re focused on a winning deal and financing a business purchase properly seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your funding needs.

7 Park Avenue Financial

South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8