Take Error And Controversy Out Of Business Acquisition Financing
OVERVIEW – Information on financing a purchase when buying a business in Canada . Key issues in financial success in a merger/acquisition
Buying a business in Canada is the alternative to growing your existing company ‘ organically ‘, or starting a business from scratch. But how does the business owner/ entrepreneur avoid some of the mistakes and controversy than can arise out of the purchase in business acquisition financing? Let’s dig in.
The attraction to buying a company has probably never been greater – whether it’s finding a company that is (supposedly?) a great bargain or simply fulfilling the dream of entrepreneurial independence it’s all about potential success, and profits.
Financing the purchase of a business is the place where the error, challenge and controversy we have hinted at must be avoided. The reality is that not every bank or commercial finance entity (we’re speaking of debt financing or asset monetization, not ‘ EQUITY ‘) can always meet all the finance needs you require to complete a purchase successfully. And that’s talking about capital to acquire, as well as ‘ working capital/cash flow’ to operate and grow.
So what are the sources for business acquisition loans? In Canada they might include Canadian chartered banks, commercial credit unions, and commercial finance companies via ASSET BASED LENDERS, equipment lessors, and the government of Canada via a SBL /CSBF loan or a working capital term loan via its Crown corporation lending entity.
A very solid route for the SME sector when it comes to acquisition finance is the above mentioned SBL loan. If the business you’re acquiring has less than 5 Million in revenues and has real assets it’s a great way to buy a business.
While our focus is on loans and asset monetization for your business purchase don’t also forget that there has to be some sort of buy equity , in effect your ‘ down payment ‘ for the purchase . While 100% financing might be possible in very unique circumstances never forget that banks and other lenders will want to see some of your personal funds into the transaction. That varies from anywhere between 10-50% depending on the quality and structure of the transaction.
Equity capital is also risk capital and the purchaser should understand that; i.e. mortgaging the home might not be the optimal strategy! Suffice to say though that the amount you contribute to the transaction clearly is a strong measure of your commitment to the venture, and lenders respect that.
Vendor take backs, aka ‘ Seller financing’ can be a solid way to make a transaction happen. It allows you to put a final piece of the puzzle in place one you have lined up your other capital. The seller may wish to help you out in that manner not out of the goodness of their heart, but to realize some tax benefits as well as allow a purchase to happen that otherwise may not have. Naturally large per centage seller financing is optimal… for you… but not the seller!
When you are looking at a vendor take back in structuring a deal remember that there has to be some finance terms around the VTB. Quite often we see interest rates payable by the purchaser, on the VTB portion at or near current bank type rates.
Critical to understand is your ability to convince your lender that the Seller financing part of the deal not be considered debt. That could throw certain ratios and covenants out of the whack which may not allow your lender or lenders to complete a deal.
Remember also ‘share ‘ sales are not really financeable in the SME sector, so a total focus must be around an ‘ asset’ based purchase, even if some of those assets are intangible! By the way, that goes for existing franchises also in the booming Canadian franchise industry.
Putting the right financing in place when you’re buying and financing a business in Canada is a key element of your future success. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with purchase financing that makes sense for your individual deal.
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
South Sheridan Executive Centre
2910 South Sheridan Way
Phone = 905 302 4171
Email = firstname.lastname@example.org