OVERVIEW – Information on purchasing an existing business in Canada requires the right type of loan financing . Navigating the potential minefields in acquisition financing
Purchasing a business in Canada requires the appropriate amount of loan and asset financing. How does the acquirer navigate the numerous issues that quite often can become a minefield when acquiring a company? Let’s dig in.
As business owners and entrepreneurs contemplate buying an existing business they too often are focused on numerous revenue and ‘ people ‘ and price issues, often placing the incorrect emphasis on the proper financing needed to make the acquisition. The negotiation of the offer price itself is an art and requires some solid assistance on valuation.
A key question you should be asking is the amount and type of financing required to make the transaction successful. Any business of some substance will often require external financing in addition to the equity you are putting up yourself.
It goes without saying that any bank or commercial lender will also want you to demonstrate the necessary management skills required to run the new business.
Even the Government Business Loan – aka the ‘ SBL ‘ in Canada which is a great vehicle for acquiring businesses with revenues less then 5M will require you to demonstrate some form of experience and management depth. The key benefit of that program is the government’s ability to guarantee a very large portion of your loan to the bank. Existing franchises in the Canadian franchise industry can also be acquired through the SBL program.
So what are those sources of financing in Canada that will make your acquisition work? In addition to our already mentioned SBL loan other forms of financing can come from:
Canadian chartered bank term loans /operating lines
Non bank Commercial Asset Based lenders
Specialized A/R finance / Inventory lenders
Term loan financing from the BDC – A crown corporation non bricks and mortar bank
Those sources noted above are all ‘ debt ‘ or asset monetization strategies that are used to successfully finance a business. The other method to buy a business is to seek ‘ equity’ financing through angel investors, private equity firms, or on larger deals VC finance partners. Those sources require no debt being taken on, but do require you to give up valuable partial ownership.
Can you fast track loan financing for acquiring a business? The way to accelerate financing success revolves around the following:
Focus on getting some level of pre-qualification for your financing needs
Consider multiple sources – in many cases a transaction works best when a combination of loan financing from different parties is utilized – This lowers the risk of the lender and allows for the right type of financing – for example a term loan and an operating line of credit that fulfills the business needs
Don’t underestimate the need for ongoing working capital via the financing of inventory, receivables, as well as fixed asset replacement needs.
The issue of personal guarantees is always going to come up in this type of transaction in Canada. Also don’t forget that a solid component of an acquisition financing is the ability to get the seller to offer up a vendor take back of some sort. In some cases this might mean having to offer a higher prices but the ‘ VTB’ can often make or break a deal when it comes to any ‘ gap’ in your financing plan.
Other key elements that should be taken into consideration well in advance of an offer are the preparation of a proper business plan, demonstrating your personal credit history, and providing a ‘ net worth ‘ statement to any prospective financing source.
Recent changes in Canada relative to taxation and the current owners exit implications also require some solid advice from your accountant or lawyer.
Remember also that ‘ share ‘ sales, as opposed to ‘ asset’ sales in the Canadian SME marketplace are impossible to finance via external debt financing as there is no ‘liquidity’ for the lender.
If you’re looking to maximize successful purchasing of an existing business with the right loan financing seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can help you avoid the minefields associated with buying a business in Canada.
Author: Stan Prokop – founder of 7 Park Avenue Financial
Originating business financing for Canadian companies, specializing in working capital, cash flow, and asset based financing. In business 10 years – has completed in excess of $90 Million of financing for Canadian corporations. Core competencies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details:
7 Park Avenue Financial
Off. 905 829 2653
Cell 905 302 4171
7 Park Avenue Financial
Canadian Business Financing