Avoiding The Canadian Tragedy Of Poorly Executed Acquisition Finance

OVERVIEW – Information on acquisition finance in Canada . Mergers and Acquisitions financing .. done right !

Acquisition finance in Canada. Whether the business environment is turbulent or going smoothly savvy business owners and managers are always looking for successful mergers and acquisitions opportunities that… you guess it… require financing. Let’s dig in.

In Canada both traditional and alternative financing solutions lend themselves to a business or merger opportunity, therefore posing the question – ‘ How is this opportunity to be financed to ensure success ‘?

In small to medium sized acquisitions a tremendous amount of creativity on a transaction can come from innovative methods of seller financing. Any form of seller financing obviously lowers the amount of external debt – traditional or alternative, that you are forced to take on.

Here are some common challenge we see that the seller has serious tax ramifications with depending on the type of sale that is in motion. Only two real types of sale exist by the way – ‘ ASSET ‘ or ‘ SHARE ‘. Share sales in Canada are typically difficult to finance in that private companies offer no real liquidity event for the financier. Naturally with public companies that’s a bit of a different story. The seller, unfortunately, is usually very ‘ tax conscious ‘ on the outcome of the deal, which many times makes the going difficult to close successfully and properly.

We point out also that when a motivated seller is open to some sort of Vendor Take Back scenario that also can become a potentially good source of income for the seller based on the interest charged on the VTB.

Smaller transactions in Canada require a commitment from the purchaser in the form of some sort of buyer equity, down payment, etc. Anywhere in the range of 10- 50% is required… and that’s quite a range! Business owners who have to invest their own capital in a deal source those funds from personal funds, savings, investments, etc.

Less money down on any deal is the ultimate double edged sword on any acquisition finance deal. Leverage works for and against you, either propelling greater return on investment or significantly higher risk of failure based on too much debt – or the wrong debt. Talk about a real double edged sword! We point out also that lenders and other investors you may have lined up are generally ‘ impressed ‘ with an owner’s equity commitment to any deal. To paraphrase in the language of the people – you’ve got SKIN IN THE GAME!
While many clients we talk to in the Small business sector think they can approach ‘ VC’s’ and Private Equity groups for assistance, they rarely meet the rigorous demands of those two types of external finance. Suffice to say you’ll be giving up significant equity also, which in general is highly undesirable at a point when you haven’t realized the true financial benefits and returns of a good merger or acquisition.

In the small and SME sectors of business in Canada a great way to finance a business purchase is the government Small Business Loan – aka the ‘ SBL ‘. It offers tremendously attractive terms relative to what you are trying to accomplished, and allows you to retain tremendous upside re your projected financial performance.

Two typical ways to accomplish mergers & acquisition financing are to consider traditional bank financing and ABL (Asset based lending). If you can meet some basic cash flow coverage and debt to equity ratios you’re a solid potential candidate for well priced acquisition finance. Asset based lenders will throw those ratios , generally speaking, out the window and simply focus on the assets you’re acquiring and how they can be margined via term or operating solutions .

Avoid the tragedy of poorly executed financing when contemplating a merger of acquisition .Strive for a good grasp of acquisition financing basics, which can be sought via your accountant, lawyer, or a trusted, credible and respected Canadian business financing advisor with a track record.

Author: Stan Prokop – founder of 7 Park Avenue Financial

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Suite 301
Oakville, Ontario
L6J 7J8
Phone = 905 302 4171
Email = greg@7parkavenuefinancial.com

7 Park Avenue Financial
Canadian Business Financing