Can Anything Replace Good Business Valuation When It Comes To Buying A Business In Canada
OVERVIEW – Information on business valuation in Canada. What makes a good deal when it comes to mergers and acquisitions financing ?
Successful mergers and acquisitions deal making in Canada, particularly in the SME sector (small to medium enterprises) often starts with good business valuation. It’s a bit of art and science quite frankly, and if you don’t have an army of analysts of investment bankers
doing the work for you these tips and advice should help. Let’s dig in.
The proper valuation of a business you are looking at buying or acquiring is often driven by the amount of captial you can either invest or raise financing for. While there are a number of ‘ rules of thumb’ in business valuation nothing makes better sense than… you guessed it… common sense.
In hindsight buying a business or merging with one will seem like a good or
bad deal. Many clients we meet boast they have been able to purchase a business for a great price – with often the reason being poor sales and profitability that they hope of course to turn around.
Knowing the amount of cash you need to both acquire and run the business is critical – and if you’re not supplying equity then its all about the right amount, and cost… of debt.
A good business in Canada, when acquired, can often be financed with bank debt. However our bankers and lenders need to clearly understand the nature of the business. Issues you will want to cover off are seasonality of cash flows, client profiles, revenue recognition and billing issues and the level of financial control that you can demonstrate in running the business.
Cash flow analysis is critical, if only for the simply reason that your bank and other lenders want to know how and when the will be paid back. Here’s where a clean business plan and cash flow forecast matter most. The latter document should show clearly how debt will be covered, and how profits will be generated via asset turnover, etc.
If your transaction has a proposed high debt to equity ratio a non bank lender will often be required to complete the deal. This type of deal can be successfully consummated via a cash flow mezzanine type loan, or even a non bank asset based line of credit. This latter facility simply monetizes their assets to the maximum allows by your ABL asset based lender.
Very few deals in Canada when it comes to mergers and acquisitions can be accomplished without some level of personal guarantee
from the purchasers. What many business owners don’t realize when it comes to the ‘ PG ‘ is that they are often negotiable in size, and can be negotiated to be released based on certain ‘ pivot points’ in the future.
Although generally rare it is possible in Canada to have one bank place less emphasis on the personal guarantors than another bank. One age old technique is to provide a resolution of your directors confirming PG’s of owners aren’t allowed. That forces a bank to consider the transaction on its own merits. Possible, but not probable as we have hinted.
At the end of the day it comes down really to 4 key issues you face when acquiring a business and financing the transaction:
The amount of internal capital you have and the external capital you need
Types of financing that will accommodate your transaction
Distinguishing between working capital needs and long term debt
Cash flow generation
Proper business valuation focuses on benchmarking the proposed deal within industry parameters, understand key operating ratios, and being able to put solid mgmt in place to close a deal and run a business.
For solid business valuation financing advice seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your financing needs when it comes to buying a business.
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