Let Your Business Acquisition Move In The Right Direction
OVERVIEW – Information on company business mergers in Canada. How does a leveraged acquisition work and what issues need to be avoided or addressed In financing a purchase
Company business mergers or acquisitions have the ability to go in the wrong direction pretty quickly sometimes. What makes a financed leveraged acquisition work, what are the risks, and what needs to be done right? Let’s dig in.
When structuring a deal to purchase a company it helps when the buyer has all cash and the seller wants all cash. Unfortunately the planets never really align on that one, and top experts tell us that over 80% of all deals need some for of financing to close properly.
The reality is, and it’s often forgotten by Canadian business owners and managers contemplating a purchase, is that a solid financing proposal will often get a higher price for the seller.
Business people know that leverage is a two edged sword. As such, an all cash deal often puts the purchaser at risk when things go wrong.
A couple of key issues quickly emerge in business mergers and acquisitions; One is that share sales are difficult to finance, and secondly the buyer assumes all the risk of assets and liabilities in such a deal. Therefore, asset financing in a business purchase is the preferred method for buyers of a business.
What are some typical ways in which a business purchase can be accomplished successfully? One is borrowing against inventory and receivables of the company being acquired. Typical bank margins on A/R are 75%… and inventory tends to be valued on a one-off basis depending on the nature of the asset. It’s important to note that if you use a non bank lender in Canada, for example an asset based lender, you can achieve better borrowing power on current assets, but probably a higher interest rate will come with that.
Earn outs and vendor take backs are a great way to make a deal happen, and if the seller is agreeable an installment scenario is often a key part of making the final piece of the financial puzzle work.
It’s no secret to buyers, or sellers for that matter that a deal almost always comes down to price and valuation ,and the differences therein! That’s where the concept of an ‘ earn out ‘ often works, making the deal contingent on what happens in the future. Numerous things can often go wrong relative to loss of a major customer, product issues, and financial issues such as operating losses
What are some of the issues the buyer in a leveraged transaction should consider? They include sales history, client credit worthiness, asset valuation of fixed assets, quality of receivables and inventory.
When we meet with clients who wish to purchase a business we focus very quickly on the quality of financial statements of the target company in question. Issues such as asset turnover and examination of assets that already might be financed via leasing companies are key.
Who can provide the business owner with the right amount of financing and business guidance in a leveraged deal? Those parties include appraisers, business financing advisors, your lawyer, accountant, respected peers, etc.
The business owner’s ability to assess key issues such as gross margins, cash flow, and inventory turns will ultimately affect the size and type of financing you need.
All business purchasers want their proposed deal to move in the right direction. For company business mergers and purchases seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in a practical manner with leveraged financeable transactions in the SME sector 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
South Sheridan Executive Centre
2910 South Sheridan Way
Phone = 905 302 4171
Email = firstname.lastname@example.org